Author Topic: Buy now?  (Read 5377 times)

Retireme32

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Buy now?
« on: September 30, 2013, 10:57:10 AM »
Do you think it makes sense to buy if the mortgage is going to be only $200 per month more than my current rent and at the end of the day I will save way more than $200/month just by being able to bike to work?  Not to mention more time back from less travel.  The only reason I ask is  b/c it means more debt obviously.  We own a rental (rental is in another city, living there is not an option) which is not paid off and it is not in the black yet (almost there) and so with that and this house we will have a lot of mortgage debt but everything else in my life would be cheaper - cost of living is expense in the new area, ridiculous in home prices but b/c of the proximity of everything I will save on "getting to things" , the house is around the corner from the library, grocery stores, and my job.  And 95% of my driving should be eliminated.  So, do every day and month to month significant savings trump having a lot of mortgage debt.  My husband looked it up online and he said that we're still under the ration of what the country does for mortage 3.5 x times their household salary on the house and we are 3 x times our household salary but for two houses.   But I'm no longer concerned with what the rest of crazy America does, I'm only concerned with what the Mustachians do.  So you tell me, what would you guys do?

Retireme32

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Re: Buy now?
« Reply #1 on: September 30, 2013, 11:00:36 AM »
Also I forgot to say that "same as rent + $190) includes taxes and insurance, I factored that in.   But of course it does not include any maintenance on the house that could and will  come up but you don't have that with the rental I'm in now.  I just hurts to pay  such a high rent every freakin' month and it's not your house.  But I live in a crazy expensive area - the area I'm moving to has similar rents but at least you can get houses that are attainable, not affordable but attainable.  Where I am now, unattainable at my current and future salaries and no path to early retirement for sure that way.

KingCoin

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Re: Buy now?
« Reply #2 on: September 30, 2013, 11:29:30 AM »
It's easier to comment if we know the cost of purchasing vs the cost to rent a comparable property. Why is renting "closer to everything" not a possibility?

Retireme32

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Re: Buy now?
« Reply #3 on: September 30, 2013, 01:07:54 PM »
The property we r looking at was actually rented out earlier this year and it rented for $90 less than what out mortgage is going to be (assuming they take our offer). Renting in that area is not an option just BC my husband is not on board with that. I'm in a bit of a mustachian vs. antimustachian struggle right now.

Retireme32

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Re: Buy now?
« Reply #4 on: September 30, 2013, 02:04:17 PM »
Also, we are trying to take advantage of the lower interest rates and fear that that is going away son (like next year soon) -given that - does it make sense to move to rent for like 3 months - what's the point.  Just want to move to buy. you know?  And we're on a month-to-month rent right now so very flexible.

Retireme32

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Re: Buy now?
« Reply #5 on: September 30, 2013, 02:08:12 PM »
also, the possibility of renting the house out down the road as a second rental investment seems very promising considering the fact that we already have proof today that rent in that market can support our mortgage payment - and that's today so should be more down the road.  (that's a much longer term possibility but it's still part of the consideration.)

KingCoin

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Re: Buy now?
« Reply #6 on: October 01, 2013, 04:52:43 PM »
also, the possibility of renting the house out down the road as a second rental investment seems very promising considering the fact that we already have proof today that rent in that market can support our mortgage payment - and that's today so should be more down the road.  (that's a much longer term possibility but it's still part of the consideration.)

I'm worried that you're looking at the rent vs buy question in a dangerously simplistic way that may lead to a lot of bad real estate decisions.

For instance, in the case of an investment property, if the rent barely pays the mortgage, how will you pay taxes, insurance, ongoing maintenance, allowances for when the property is vacant or the tenant doesn't pay, potential legal expenses etc.? In fact, an investment property where the rent barely covers the mortgage is likely to be a huge money loser. Most investors invoke "the 50% rule" ("Over time, 50% of your real estate investment’s income will be spent on expenses, not including the mortgage") to gauge whether a property is worth investing in.

Comparing the house you're looking to buy to your current rental is a total apples to oranges. Is the other house twice as big? In a safer neighborhood with better schools? If comparable properties rent for about the mortgage payment, you should be renting rather than buying in that area, unless you're making a play on dramatic price appreciation.  The notion that paying rent is "throwing money away" is absolutely the wrong way to think about things. Why is paying mortgage interest, taxes, and $6,000 for that new roof not throwing money away too?

One thing is almost for sure, even after the additional commuting expenses, continuing to rent will be cheaper for you than purchasing the other home at mortgage payment = rent +$200.

From the patchwork numbers you've offered up, your best option is to rent near your place of work, getting the best of both worlds (cheapest housing and low commute cost), even if it means sitting down with your husband and a calculator to prove it.

« Last Edit: October 02, 2013, 08:53:36 AM by KingCoin »

Retireme32

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Re: Buy now?
« Reply #7 on: October 02, 2013, 09:08:15 AM »
King Coin - you live in manhattan and you retired at 30, is that right? That's what it said in your column on the left.  If so then you can probably trouble shoot with me better on the issue of living in a higher cost of living area (DC -DMV).   The house I already own is in a college town - much cheaper cost of living and I kept it because I wanted rental income for my future investement portfolio and I didn't trust our ability to own something else in the future.  That house is not in the black yet.  I made a lease with people I knew in order to ease my way into the landlord business and I made deals such that I pay utilities and rent is below market value on both sides (duplex top and bottom) however I feel very confident that both situations will be rectified before the end of next calendar year so I think that by the end of 2014 I will be in the black.  Of course this doesn't include any unforeseen maintenance but so far the maintenance has bee minimal. 

I also have been doing the math on changes I can make to my life to make it more mustachian (my side anyway -married).  and I truly believe that I have the earning and savings potential to pay off that house entirely within the next 5 years - even if I continued to rent in the red as it stands today.  And if I could accomplish that then that's a new flow of significant passive income I've created for myself from that day on.  I'd only be paying taxes ($1200/year) and insurance and maintenance.  Do you think that makes it worth keeping?

As for future home - it would be bigger, it would be near my current job, it is not in an ideal school district - I don't have kids yet, but I do plan on it so this house may have a time frame on it.   It would put me within bike riding distance to my job.   Until this year,  the only major driving I ever did on my car was the first year I bought it - 10 minutes to my job and  I was in a long distance relationship so every other weekend was a long trip.  After that, I always walked to work.   This new job has meant that both me and my husband travel a total of 120 miles each day.  I realize renting in this area would also solve this problem.  But my question then is - when do we buy?  If we wait to have more savings and the rental in black, we will miss out on the low interest rates, and the houses in this area will inevitably be more expensive.  And will savings compensate for the higher interest rates.  Houses in areas nearby - have better schools-but they have no towns - no libraries, or grocery stores or anything within walking distance -you must drive everywhere -inefficient - and I hate that life.   


If I move and rent - when do I stop renting?

I'm sorry if I'm all over the place in this post but I feel like I am all over in my head the place and I can't decide which way to go.  Bottom line - I am trying to set up a plan of FI as soon as possible - BUT it will be one-sided - I'm trying to increase my stache and eliminate my debt and lean up my lifestyle on my half anyway and set up a situation where "I'm covered" and can quit working regardless of what he wants to do on his side.   I just can't figure out the best next real estate move to make -and of course if I make the wrong one then all those little Mustachian decions really don't matter.  I mean if you pay a mortgage on a $600k house you can bike all you want but you still have a $600k mortgage, right? 

So, help with whichever part of that nonsense you can.  I appreciate any help you have.  :) 

CatamaranSailor

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Re: Buy now?
« Reply #8 on: October 02, 2013, 09:51:22 AM »
Debt is never your friend, even if it's a low interest mortgage. If I were in your situation, I would sell the rental property. You're not there to manage it and like you said, it's not paid off.
I would rent someplace close and use the proceeds to start building your FI plan as quickly as possible. But two mortgages...one being in another town...doesn't sound appealing IMHO.
Renting gives you breathing space and I know, the rates are great right now, but from the tone of your post (which I admit I could be misreading) you sound like you want a peaceful settled life and managing a mountain of mortgage debt won't get you there.

Hope it all works out! :)

MsSindy

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Re: Buy now?
« Reply #9 on: October 02, 2013, 12:46:29 PM »
Buying a house is a long-term commitment, esp these days because there is so little appreciation.  The transaction costs to get in and out of a house are high, so if you think a new house would have a time limit on it due to a marginal school district - I wouldn't do it, just from a financial standpoint.

A house ties you to a location and takes away your freedom/flexibility to leverage opportunities in your careers - which you should be doing early on in your career.

Also, a house tends to cost more than just PITI and maintenance.  A strange thing happens when you own - you want to fix it up exactly the way you like it and you start doing DIY projects....that all costs money.  Then of course you want curtains and furnishings.....more money.  Of course you need a lawnmower and other landscaping gadgets.....the list goes on, so you can't just compare rent vs PITI.

The other thing that strikes me is your reasoning for wanting to purchase a house.  You seem to want to purchase NOW because interest rates may go up - that's not a good reason to take on massive debt.  Other things to consider are how close are you to family (too close or not close enough if you start a family?), or how secure are your jobs, or how much do you like your job and do you see a change in either future?

Another thing to consider is how much does interest rates have to go up in order to really make a difference - if it's on a $600k loan, then it makes a big difference.....but then again, that's a lot of debt to take on and makes it much harder to get to FI.

You really need to decide on your goal.  Is your goal FI as quick as possible - if so, run the numbers and see what really gets you there faster (I'm betting it's rent close to where you work).  If your goal is to start a family, settle down, etc.....then maybe buying a house in the right neighborhood would be the right thing to do....but that's not the sense I'm getting from your post.

Retireme32

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Re: Buy now?
« Reply #10 on: October 03, 2013, 06:08:16 AM »
MsSindy - thanks for you thoughts.   As for your questions about family - I live on the east coast - my in-laws live within driving distance (4 hours) and my family is in the midwest and long story short - moving closer to them is not going to be an option right now. 

but back to the house,  we are attempting to get a house at a price about $75k less than what they are asking - b/c that is all we are willing to afford (not what the bank says we can do) and our thought is that if we get in to the housing market now - then we're "in the market" - as opposed to being forever priced out of the market -which has already happened to us in DC.  If we just move and rent cheaper than we are now - we could get priced out of that market as well and be forever renting.  Interest rates will go up and houses will go up and the only people that will be able to afford them will be much higher earners.  We watched this happen in DC.   It's not a guess of what will happen - it's a fact.

The other thing.  And I'd love comments on this.  I think I don't really understand how FI works if you're still renting?   You're FI but you never own a home?  And I feel like it'll be worse to work towards FI now and then in 8 years buy a house right at the very moment I am FI - effectively making me start over - as opposed to buying the house now - saying "this is my total debt" - and then working from there on paying it all off.   

Thoughts?

zinethstache

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Re: Buy now?
« Reply #11 on: October 03, 2013, 03:22:59 PM »
Even if you buy a home you still have "rent" for life in the form of property taxes. (Insurance once you own the home is your option.) I guess the absolute cheapest housing I can think of is a multi where someone else pays for your property taxes... and you net some income to live on. other than that there will always be "rent" per se. I am thinking a mustachian renter in FI has moved to a LCOL area, even

I think you should determine if you really want to be a home owner. I bought a home at a young age, and love it. We are DIYers. We've bought, fixed up, sold and bought again 3x now and own a really nice home for a pittance compared to renting. This is 18 years later. We took this last home from being a 1961 dive to being a lovely home.

Questions that folks are asking need to be thought through. Where is a long term place you want to live? if it is near schools for your children be sure to accommodate that. Are you able to maintain the home? if not are you ready for the cost of paying someone else to maintain it? Be sure to factor in fluctuating property taxes. Mine are down right now, by many hundreds from years past, but I can see that they will be on their way up again.

Today, owning a home for the short term is not a winner. Gone are the days where you can buy a 3 year home and count on it "appreciating" so you can sell for a profit when you want to move for whatever reason.

I am never going to rent, it is not in my make up, but I can see where it makes sense for many folks. I invest in cash flowing rentals, and at most one day I might move into one unit and let other pay my housing bill:)it really depends on how FI I end up in the end...

You have a tough road ahead of you to make the rent/buy decision. I urge you to not rush it, do your research, make your pros/cons list, this is a huge decision to make.

Retireme32

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Re: Buy now?
« Reply #12 on: October 04, 2013, 09:37:51 AM »
zinethstache,

Thank you for your thoughts. I guess I need to get better at stating my info when I post.  :)  It will make for better communication.  I have owned a home before -still own it and rent it out.  I agree with you about the nature of a person and the nature of me is to own not rent - but I just hate all the debt that comes with it - at least initially. However, I've done some more analyzing of the budget and using Mustachian calculator and Mutilateyourmortgage spreadsheet - I figured out that we could pay off both properties in the next 8 years (5 for the rental) 

The other side of this - rents and mortgages (I know -that is rent too) are tremendous in this part of the country (DMV) and so neither is getting any better but at least you can say mortgages stay at a fixed rate - and yes I hear you about the taxes.  I do believe that if I get this house at the price I am asking I will have higher taxes now than maybe later only b/c the house is values (by the city) way higher than what I'm paying -so it may adjust.  And I have dealt/budgeted for that fluctuaton before (other house).  I do no mind DIY - I actually like it - so that's not a major issue - I do hope to increase those skills.  And as for short term versus long term - I guess it depends on everyone's definition - I am going to stay at this house a MINIMUM of 8 years  - is that short term?  I don't think it is.  All of the research we've done and what we've seen in actuality -shows us that this area is going to do nothing but go up in value - a lot - so I think having a fixed mortgage and paying it down makes more sense than continuing to rent - at a rate this is equal to the mortgage now (including taxes and insurance) and will continue to go up.   

Chiron

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Re: Buy now?
« Reply #13 on: October 05, 2013, 04:52:45 PM »
Purely from a financial perspective, the rent v. buy decision is fairly simple.  There are numerous calculators online (google rent v. buy calculator) that can tell you what's better to do in your area.  If you get other intangible benefits from owning, then you have to weigh those as well.  I'd be careful in assuming the area you are looking to buy will definitely appreciate in the long term.  For the most part, sellers in your area will capture anticipated future appreciation in their price - there is some lag and inefficiency in a non-liquid asset class like real estate, so it won't be as efficient as the stock market, but if you think the area will boom just because it has in the past, you may want to check your expectations.

For your other rental house, I would view it as an investment - nothing more.  Don't be in a rush to pay off the debt on it if you have favorable terms because your cash has other opportunity costs.  If the numbers don't work on the rental (it's not in the "black" as you say), then sell it and deploy your equity in it into more profitable investments.  Make sure you are accounting for everything when determining whether you are making a profit - vacancies, maintenance, long term cap-ex expenses, taxes, insurance, and management. 

Also, be careful with being too debt-averse.  This is obviously a personal decision, but I believe 30 year mortgages are beautiful things and will take advantage of one almost anytime I can for real estate.  A low rate over 30 years is a great inflation hedge and there is often better use for your cash than paying it down.

meadow lark

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Re: Buy now?
« Reply #14 on: October 09, 2013, 05:37:44 PM »
Everyone seems very much against you buying.  I think it is probably fine for you to buy.  I, personally, like to own my house.  I don't feel settled in a rental.  I don't want to worry about my dogs or my kid making noise, etc.  Since it really sounds like you want to buy, I think the question needs to be how to buy most efficiently. 

Retireme32

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Re: Buy now?
« Reply #15 on: October 10, 2013, 06:20:49 AM »
Meadow Lark - Thanks for your comments.  I actually lost the bid on the house I was looking at and so now I'm hoping to see if something else comes on the market.  I agree with you - to me FI must include owning a home not renting so I need to "get started" on that if my FI date is to be set anytime in the near future.  I am struggling with finding a home in a good school district.  I don't have kids right now but I anticipate starting that portion of my life soon so definitely the next house need to be near good schools and I really can't fathom paying for private school in elementary school.  But on the other hand the expenses of living in a suburb with good schools seems like over time it could add up to the same amount as private school bc the lifestyle will be to "drive everywhere" so the gas to commute and wear and tear on cars can come out to the same I think in addition to a lesser quality of life in my opinion b/c I do not like living in areas where I can't walk to things that I like to do.  It never occurred to me that I would have to choose between the two.  Now I'm really torn.  I'm also very nervous about interest rates going up b/c we are already almost priced out of these neighborhoods so just a little more increase would be enough to knock us out of the game completely.  Then I will have no choice but to rent.  Decisions, decisions........

SunshineGirl

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Re: Buy now?
« Reply #16 on: October 10, 2013, 09:37:36 AM »
Generally, when interest rates go up, house prices go down, so don't get too discouraged. Having said that, I cringe anytime I hear someone say they're afraid of getting priced out of the housing market, because that comment has echoes of the early 2000s, and that belief caused a lot of grief for people come 2008.

Retireme32

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Re: Buy now?
« Reply #17 on: October 10, 2013, 10:40:37 AM »
Sunshine Girl don't worry - I would never buy more house than I can afford no matter what the market is doing and I am trying to find a house that I can stay in for at least 15 years which I hope gives me enough buffer to weather the storm of whatever the real estate market has in store for the future.  But I moved to DC in 2010 and at the time we could have afforded a townhouse in our neighborhood, expensive but doable - today those same townhouses sell for 800k-1 million dollars in one week from the time they go on the market. Ridiculous.  -That is what I'm talking about when I say priced out.