Hi all, I learned some great information reading through the forums. So I wanted to ask the knowledgeable people here some advice on a dilemma I’m having. Should I buy an cheaper house in iffy part of town or moderate priced more desirable house in good part of town?
I like having my own garage, my own yard, and not sharing having walls with other houses/families I have no control over. I’m looking at buying a SFH, 1800-2200 sqft, newer built after 1990, ready to move in. The potential houses I’m looking at in the East Valley of Phoenix, specifically Mesa/Gilbert/Chandler area falls into 2 camps. I’ll give 2 pretty typical examples homes for sale that fall into the differing 2 camps:
Scenario 1: smaller house in iffy neighborhood
~$200k price, $919 annual taxes, no HOA, $600/insurance
Newer 2000 home, 1767 sqft 3br/2ba, 2 car garage.
http://www.zillow.com/homedetails/950-E-9th-Ave-Mesa-AZ-85204/7629646_zpid/Pros:
- Much lower cost, PITA only $856/month, 3.625% 30yr fixed mortgage. Lower property taxes and no HOA fees.
- $46k out of pocket home purchase costs. (20% $40k down, ~3% $6k closing)
Cons:
- When I toured the house, I got impression it was the relatively nicest house in the below average neighborhood. Most other houses in neighborhood much older, not as nice looking, with shoddy cars street parked or in driveway.
- Located in downtown Mesa with slightly above average crime rates, below average schools, average to slightly lower average income neighborhood.
- No HOA means many neighborhood houses run down and many eyesores.
Scenario 2: Slightly bigger house in good neighborhood
~$300k price, $2010 annual taxes, $87/mo HOA, $750/insurance
Well maintained and updated 1992 home, 2231 sqft 4br/2ba, 3 car garage.
https://www.redfin.com/AZ/Gilbert/1201-E-Sandcastle-Ct-85234/home/27942808#mainPros:
- Nice, very attractive updated house that fits my ideal house I can see myself living in long term. A nice house in a very good neighborhood where many houses are big lakefront homes valued at $500k-million. So opposite of scenario 1 house, now it’s relatively below average house in above average neighborhood.
- HOA fee includes access to big ritzy Neighborhood clubhouse with gym, tennis/racquetball/volleyball courts, 3 swimming pools etc. Clubhouse is often rented out for Weddings and Events by HOA and the event fees go into the HOA budget so event fees effectively subsidizing the HOA fees I’ll pay.
- Located in Gilbert with below average crime rates, highly ranked public schools, high end neighborhood
Cons:
- Higher cost, PITA $1427/month after I put 20% $60k down, 3.625% 30yr fixed mortgage.
- $69k out of pocket home purchase costs. (20% $60k down, ~3% $9k closing)
- Bigger than I need. I’m open to renting out part of house to roommates though it might be risky since I travel frequently… what happens if I get a crazy roommate that trashes the house or steals things?
- No kids in horizon, not sure if I even want kids eventually yet so paying the higher prop taxes for the top ranked public schools are a waste.
My profile:
A little bit more about myself. I’m 30 and I have been working overseas on an expat assignment for my large consulting company for the last 2 years and in 5 months, Oct 2015, my firm will be moving me back to the USA and transferring me the Phoenix office. So I’m in the early stages of house hunting.
The work experience and chance to save most of my salary while living off my Expat package has really helped me progress on my career and financial goals.
My finances:
No debt
$117k in 401k/IRA (I plan on doing a backdoor ROTH IRA for 3 years $16.5k non-deductible IRA contributions early next year)
Invested in 90/10 equities/bonds (100% Vanguard Target Retirement 2050 Trust Plus)
$105k in after tax brokerage invested 80/20 in equities/bonds
$40k 33% stake (joint investor with parents) on an investment rental condo in Tempe, AZ a mile from ASU.
$10k liquid money in checkings/brokerage cash
$2.5k gold in my parent’s safe (2x 1 ounce bullion)
Salary of $135k/yr, target bonus of 8-12%. Average $150k last 2 years.
Due to my Expat assignment I get tax equalization benefits (I’m taxed/subsidized at the USA Arizona rates) and my employer has been paying for my foreign housing.
Currently with my lower Expat expenses, I’m able to save on annual basis:
- $27k 401k (18k with 50% employer match)
- $70k year after tax ($6k/month)
- $3.35k HSA contribution
After I buy the house, my annual after tax savings would be reduced by my new house expenses, so lessor savings rate of $60k ($70k - $10k) or $53k ($70k - $17k) based on whether I buy the $200k or $300k house.
Bonus question:
Now that my parents have saved up more money, they are giving me the option of them buying me out of my 33% stake in the Tempe investment condo for 1/3 the current market value. Below are the stats. It doesn’t quite meet the 1% rule. Looking net profit of 5.5% ($7.2/$130k), should I let my parents buy me out and I reallocate this money to my equities or my own future house down payment?
Investment Condo Stats:
755 sqft, 2br/1ba condo
Market Value: $128k-$133k based on Zillow and Comps
Original Purchase price: $120k June 2014
Original Mortgage Amount: (Paid Cash)
Gross Rents: $1000/mo
Principal and Interest (the P&I of your PITI - should match with the above info): $0
Taxes and Insurance (the T&I of your PITI): $920/yr prop tax
HOA costs: $220
Deferred maintenance notes: 1%, $1200/yr
Net profit after expenses of $400/month is $600/mon