The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Memphis Mustache on October 07, 2016, 11:00:18 AM
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I am currently in the process of saving up to buy my 1st house next year (probably during Summer or Fall) but wanted to get Mustachian advice on any mistakes or pitfalls to avoid.
To give a little background: I am 36 years old, single with no children, live in Memphis, TN (which is where I would be buying) and currently rent an apartment here for $1,036.00 per month. Buying a house should actually save me money, in that the mortgage + property tax + HOA fees (if applicable) + maintenance + insurance should be less than $1,036.00. I did a little rough math awhile back and realized that I had spent 50k to 60k on rent over the last decade of my life and I just wanted to vomit, knowing that all that money could have been equity put into a house.
My yearly salary is 86k per year and my monthly take-home pay is $4,800 per month. I have no debt, as my car and student loans are paid off and I pay my credit card balance in full each month. I am currently saving my 20 percent downpayment, as I don't want to pay PMI, plus I will need money to cover closing costs and appliances/furniture (I have furniture in my apartment but not enough for a house). I am anticipating that I will have what I need money-wise next summer (20% downpayment + closing costs + money for appliances/furniture).
I guess that I am worried that I will either be a cheapskate and buy a lower value house in a marginal or sketchy neighborhood just to keep the payment low and allow me to save more money or I will buy too much house to get in a nice neighborhood and have a large mortgage with the property tax bill, HOA fee & insurance that comes with it and then not be able to save enough each month for my retirement.
How did you guys decide on a figure to spend when buying a house? How did you know when it was too much house/too expensive? How did you know when it was too little house/too cheap and not a good enough location?
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Are you looking for a place for an investment or just to live in? Or both (live in one part, rent the rest)?
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It would be a place for me to live in, not rent. Just as examples, I could potentially go cheap and get a 2/2 or 3/2 for 140k in just a decent neighborhood (not great but decent) or get a 3/2 in a good neighborhood for probably 220k or 240k. The savings part of my brain prefers the former type of option, though I know that location has a lot to do with the degree to which a home appreciates (as well as happiness, safety, etc.).
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I did some calculations to show an estimate of what the monthly cost would be here in Memphis for a 140k house, a 170k house and a 210k house. I assumed a 30 year mortgage rate of 3.85% and I only calculated the monthly mortgage payment and the property taxes, since I can accurately assess what those would cost. Obviously, I am missing the insurance costs (as I have no clue how much that would be) and any HOA fees or maintenance fees, since those can vary.
As you can see, there is a difference of more than $375 per month between what I would pay for a $140k house and a $210k house. In my mind, I wonder if just buying a $140k house and putting the difference in a mutual fund to save for retirement is the better way to go.
140k house: Amt
downpayment amt: $28,000.00
loan amount: $112,000.00
30 yr mortgage (est 3.85%): $525.07
prop tax (per month): $226.62
Monthly payment: $751.69
170k house: Amt
downpayment amt $34,000.00
loan amount: $136,000.00
30 yr mortgage (est 3.85%): $637.58
prop tax (per month): $275.19
Monthly payment: $912.77
210k house: Amt
downpayment amt $42,000.00
loan amount: $168,000.00
30 yr mortgage (est 3.85%): $787.60
prop tax (per month): $339.94
Monthly payment: $1,127.54
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I did a little rough math awhile back and realized that I had spent 50k to 60k on rent over the last decade of my life and I just wanted to vomit, knowing that all that money could have been equity put into a house.
I did want to include a couple links, because this is a pretty common misconception... during this time, you would have put very little of that 50k to 60k into equity.
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ (http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/)
http://www.gocurrycracker.com/renters-for-life/ (http://www.gocurrycracker.com/renters-for-life/)
http://affordanything.com/2015/11/24/is-renting-better-than-buying-should-i-rent-or-buy/ (http://affordanything.com/2015/11/24/is-renting-better-than-buying-should-i-rent-or-buy/)
http://lifehacker.com/renting-is-throwing-money-away-is-completely-false-1747050568 (http://lifehacker.com/renting-is-throwing-money-away-is-completely-false-1747050568)
http://www.forbes.com/sites/rogerma/2016/07/12/are-you-really-just-throwing-your-money-away-when-you-rent/#166311031014 (http://www.forbes.com/sites/rogerma/2016/07/12/are-you-really-just-throwing-your-money-away-when-you-rent/#166311031014)
And here's a calculator that is a must-use: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 (http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0)
All this being said, I am not anti-home ownership. In fact, we bought a home in August. I just want to make sure you minimize assumptions going in =)
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I know you didn't mention it, but I think you're in a great position to buy a duplex - which would have the added benefit of likely being more right-sized for you than a 3 bedroom house. Many duplexes are the size of comparable SFHs nearby and therefore are about half the size of a house.
So I say go for good neighborhood, and go for a duplex that has a 1 or 2 bedroom unit for you.
Here's an EXCELLENT article and infographic that shows the benefits of a duplex. MMM tweeted it a while ago.
https://www.biggerpockets.com/renewsblog/2015/08/01/pain-free-way-build-wealth-real-estate/
Disclaimer - I own and occupy a duplex in the Twin Cities MN.
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I know you didn't mention it, but I think you're in a great position to buy a duplex - which would have the added benefit of likely being more right-sized for you than a 3 bedroom house. Many duplexes are the size of comparable SFHs nearby and therefore are about half the size of a house.
So I say go for good neighborhood, and go for a duplex that has a 1 or 2 bedroom unit for you.
Here's an EXCELLENT article and infographic that shows the benefits of a duplex. MMM tweeted it a while ago.
https://www.biggerpockets.com/renewsblog/2015/08/01/pain-free-way-build-wealth-real-estate/
Disclaimer - I own and occupy a duplex in the Twin Cities MN.
The tough part about buying a duplex in Memphis is finding one for sale in a good neighborhood. Probably 90 percent or more of them in Memphis are going to be in rough neighborhoods, which is obviously something that I wouldn't want to do it. Now, if I could find a duplex in a good neighborhood that wasn't in bad condition, then that is something that I might consider.
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I know you didn't mention it, but I think you're in a great position to buy a duplex - which would have the added benefit of likely being more right-sized for you than a 3 bedroom house. Many duplexes are the size of comparable SFHs nearby and therefore are about half the size of a house.
So I say go for good neighborhood, and go for a duplex that has a 1 or 2 bedroom unit for you.
Here's an EXCELLENT article and infographic that shows the benefits of a duplex. MMM tweeted it a while ago.
https://www.biggerpockets.com/renewsblog/2015/08/01/pain-free-way-build-wealth-real-estate/
Disclaimer - I own and occupy a duplex in the Twin Cities MN.
The tough part about buying a duplex in Memphis is finding one for sale in a good neighborhood. Probably 90 percent or more of them in Memphis are going to be in rough neighborhoods, which is obviously something that I wouldn't want to do it. Now, if I could find a duplex in a good neighborhood that wasn't in bad condition, then that is something that I might consider.
Look for the other 10% of them, then! Or, see if any of those "rough" neighborhoods are actually in the early stages of gentrification.
Also consider triplexes and quadplexes.
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buddy of mine was stationed in Memphis for a few years.... she had to wear body armor from the armory to the range because in some areas the locals would take pot shots as the Humvees drove through... the same happens here in Baltimore with medic units occasionally.... the term "rough" to describe some areas is being kind...
Memphis is a tough city. It is one of the two poorest cities in the country and it is pretty much always listed as one of the top 5 most violent cities in the country. So, yes, buying here is a challenge because there are entire sections of the city that you would never want to even consider. I was being kind when saying at least 90 percent of the duplexes here in Memphis would be in unacceptable areas. It probably is closer to 98 or 99 percent. Really, duplexes don't tend to exist in the neighborhoods in Memphis that would be acceptable. The closest thing would be townhouses or condos but obviously that is different than a duplex.
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If you a first time buyer, I would strongly recommend you to hire a real estate agent. The agent will help you to find homes that meet your needs and are in your price range as well as will view those homes with you. Beside, he can help you to negotiate not only the price for house, but also entire purchase process, including completing paperwork.
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Here's another good biggerpockets.com first-time-homebuyer article: https://www.biggerpockets.com/renewsblog/2016/07/02/first-time-home-buying/
If you can't do strategy #5 because you can't find a duplex in a good neighborhood, at least you can shoot for strategy #3 or #4.
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I'd seriously consider a 15 year mortgage. Do you really still want to be paying a mortgage on the place when you are 66?
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I know you didn't mention it, but I think you're in a great position to buy a duplex - which would have the added benefit of likely being more right-sized for you than a 3 bedroom house. Many duplexes are the size of comparable SFHs nearby and therefore are about half the size of a house.
So I say go for good neighborhood, and go for a duplex that has a 1 or 2 bedroom unit for you.
Here's an EXCELLENT article and infographic that shows the benefits of a duplex. MMM tweeted it a while ago.
https://www.biggerpockets.com/renewsblog/2015/08/01/pain-free-way-build-wealth-real-estate/
Disclaimer - I own and occupy a duplex in the Twin Cities MN.
The tough part about buying a duplex in Memphis is finding one for sale in a good neighborhood. Probably 90 percent or more of them in Memphis are going to be in rough neighborhoods, which is obviously something that I wouldn't want to do it. Now, if I could find a duplex in a good neighborhood that wasn't in bad condition, then that is something that I might consider.
Look for the other 10% of them, then! Or, see if any of those "rough" neighborhoods are actually in the early stages of gentrification.
Also consider triplexes and quadplexes.
It was definitely tough finding a reasonably priced duplex in a good neighborhood for me. For our price range, there was basically just this one duplex that was on the market at the time and made an offer. Refinished the floors, I'm redoing the main unit kitchen now, many other odds and ends as well. It's been fun.
We were able to find one on a busy street - getting to know my neighbors, the busy street seems to be the trade off many working class families are willing to make to be in a good neighborhood.
Good luck!
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I'd seriously consider a 15 year mortgage. Do you really still want to be paying a mortgage on the place when you are 66?
Well, the math suggests that the better approach would be to do the 30 year mortgage and take the difference between the 30 year and 15 year mortgage and invest it in a mutual fund with a history of strong growth. You (or I in this case) would almost certainly come out ahead, particularly when you take into account today's pretty low interest rates.
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Primary Residence
FIRST
Think of your housing costs as a major monthly expense. (Like a car, major appliance purchase, or choice of vacation destination)... not an investment.
Your primary residence is usually held for many, many years, and you can not get out of that expense unless you sell (to rent) or sell (to move away / downsize). People are therefore "trapped" in their homes or exhange them for similar "traps" over the years.
The nicer the neighborhood and an increase in size of home, will drive how much it costs you. It is a personal trade off.
Based on it as an expense, which option makes the most sense for you, your commute, lifestyle, values, etc? This is your choice alone.
Next, double check that you can easily afford it. Then, do not be too worried about investment value. Like artwork, the value is in the use that you, personally, gain from it. Whether it increases a lot in value before you sell, compared to other properties, or not, is hard to control or predict right now.
Lastly, negotiate the heck out of the purchase price, the mortgage rate, and look for "sale" discounted prices.