Author Topic: Home purchase question  (Read 3021 times)

dereleek22

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Home purchase question
« on: January 06, 2015, 11:57:14 AM »
Hey friends, I'm new to the MMM forums, so bear with me if I re-hash some basic principles or have missed some of the concepts of how to approach real estate.

I'm 28 and soon to be graduated with my Masters degree. I'll be finishing school debt-free and with about $80k in my pocket from a combination of frugal living and an inheritance from a relative.

I'm interested in purchasing a home but unsure of the approach I should take with the cash on hand. From what I've read on the MMM site, real estate is a good place to invest, but I want to use the blessing of the cash I have in the best way possible. How should I tackle the process of home buying given my current fiscal situation?

Thanks for taking the time to read this thread and any advice here is greatly appreciated!

MDM

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Re: Home purchase question
« Reply #1 on: January 06, 2015, 12:18:54 PM »
Note that "real estate" and "home purchase" are not identical. 

You might buy a home for its location, but your investment dollars should go elsewhere.  E.g. see http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

Again, this isn't to say you should or shouldn't buy a home - just make sure, if you do, that you are doing it for reasons other than investment returns.

Good luck!

dereleek22

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Re: Home purchase question
« Reply #2 on: January 06, 2015, 12:40:43 PM »
Thanks for the link and the insight, MDM. In terms of "investment," I should clarify that I am looking to settle into where I live (Missoula, MT) and am interested in owning in lieu of renting and using any leftover cash on hand to invest using financial instruments. I'm hoping to avoid some of the "mistakes" others may have made in their first home ownership venture or with the capital that I have currently.

MDM

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Re: Home purchase question
« Reply #3 on: January 06, 2015, 12:58:58 PM »
Looks good.  You could do much worse than starting with http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit and going from there.

MillenialMustache

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Re: Home purchase question
« Reply #4 on: January 06, 2015, 01:33:58 PM »
Is it possible in your area to buy a house with cash with that amount of money? In 2010 (middle of the recession) I bought a home for $57,000 and it was a fixer-upper. We have since paid it off and bought a rental home too. I think a paid off house is the beginning of being FIRE, as it is a huge expense that is eliminated. It is also easier to negotiate and also easier to buy a house a bank wouldn't let you buy if you have cash.

dereleek22

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Re: Home purchase question
« Reply #5 on: January 06, 2015, 04:59:25 PM »
Thanks MillenialMustache. From what I have seen on Zillow and Trulia, most home prices in the area exceed $100k for fixer-up or starter homes. I am sure I could find something more rustic or rural in terms of the area, but that would seem to be counter to MMM logic by living outside city limits and commuting.

I'm just not confident I can find a house with good bones and in need of cosmetic/minor upgrades for sub-$100k. It appears to be more realistic to find something between $130-150k.

In terms of the cash I have, does it make sense to sink all $80k into the home or look at other investment opportunities as MDM suggested?

waltworks

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Re: Home purchase question
« Reply #6 on: January 06, 2015, 11:01:10 PM »
Assuming you have decided to buy a house, you should probably finance as much as possible given the interest rates that prevail right now. If you can qualify for a 15 year mortgage, do that. If not, that's ok - you'll still be looking at rates around 4%. Excess cash can go into other (better) investments of your choosing. That could be a rental property (read up), stocks, bonds, whatever.

-W

dereleek22

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Re: Home purchase question
« Reply #7 on: January 07, 2015, 06:52:07 PM »
Good point, waltworks. Depending upon if the Fed raises interest rates as expected by Q2/Q3, I could still get a favorable rate. Depending upon the condition and improvement needs of the house I buy, I may or may not be up for the additional work and management of a rental property. I guess we will see as the time comes.

From the replies, two strategies have been suggested. A) I could buy a low-price home and attempt to pay the home off quickly, thereby freeing up my debt burden and in lieu of investing more in real estate, stocks, etc., or B) Finance as much of the home as possible, pay the home off in a 15-20 year period and use my surplus income/cash over that time for investment opportunities. With strategy A I am worried that forgoing the compounding interest of stock/bond investment means losing out on exponentially more income 30-40 years down the road.

ShoulderThingThatGoesUp

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Re: Home purchase question
« Reply #8 on: January 08, 2015, 05:02:06 AM »
Fixer-uppers are frequently a money pit even if you can do most of the work yourself. If you could make substantial money on the deal, a contractor would have bought it. That's not to say you can't do a fixer-upper in responsible way, just that quite a bit of your income will be going to, if nothing else, hardware. Expect all your toilets to break and at least one major appliance to simply not work. Expect HVAC ducts to have become separated in the walls, etc. Garage door openers may easily not work. Remember, when somebody isn't even making the payments on the house, they're not likely spending money on regular maintenance, either. In my fixer-upper, there was a giant expanse of mold in between two layers of vinyl flooring in the kitchen.