Debt-free: Invest or buy a house next?

[Elbryn]

So what is up with the five year "rule"? Couldn't I just sell the house if I needed to move, or rent it out? I'm guessing you lose money somewhere but I just don't know. I might be able to make it to 20% down if my folks help me out.

when you buy the house you have to pay for closing costs. then when you sell it, the seller pays the realtors, both buyer and sellers. normal cost is 6% of the purchase price. the general 5 year rule goes to home appreciation to "break even".

earlier statement, you say xfer 401k to roth ira. you can go 401k to traditional ira without paying taxes. dont think there is a direct line from 401k to roth. i think you need to go through traditional and then convert (ie: pay taxes) from traditional to roth.
could be advantageous if your short term taxable income goes down from the part time/new business move.

 

[jaedaliu]

You've been living there 4 years with your girlfriend? Is she a keeper? Are you going to marry her?

Asking, because the usual open market methods aren't really that good for you. You can do an owner carried loan and buy from her grandparents (unless they need the money right away.) You can get a small break on your rate, and the grandparents get the interest instead of a bank.

The 5 year thing applies less to you because you already know the owner, and if you decide to buy and need help with the paperwork, you should be able to get a broker to help for relatively little money (instead of the 6% lost in commission.)

 

[Saint Nick]

You've been living there 4 years with your girlfriend? Is she a keeper? Are you going to marry her?

Asking, because the usual open market methods aren't really that good for you. You can do an owner carried loan and buy from her grandparents (unless they need the money right away.) You can get a small break on your rate, and the grandparents get the interest instead of a bank.

The 5 year thing applies less to you because you already know the owner, and if you decide to buy and need help with the paperwork, you should be able to get a broker to help for relatively little money (instead of the 6% lost in commission.)

Heh, she is definitely a keeper but marriage won't happen for a long time probably. I would be the only person "on the mortgage" since she won't be contributing to the down payment. Of course, there could be other legal ramifications if we split up that I'm not addressing.

 

[Spungo]

Owning a home provides a sense of stability like nothing else in the world.

This. I went through the numbers and found that I would only need a net income of 14k/year to maintain my standard of living after my mortgage is paid, which should take about 10 years. Just imagine what that would feel like. The economy could completely crash and I would be ok even if I had a shitty minimum wage job, but this is only true if I own my own home. Renting? No way. I would need more like $40,000/year to stay afloat if renting, and that's only if I cut back on things like food, gas, and entertainment.

With interest rates as low as they are, now is the time to buy.

This is half true. Why are things like housing and education so ridiculously expensive these days? It's because interest rates are low. Imagine the average home buyer (individual or couple doesn't matter) has $1000/mo to pay for a mortgage. Humans are stupid and base purchases on what they can afford rather than what they need, so the buyer will want whatever costs $1000/mo even if it's the size of a football field. A person's income doesn't suddenly move up or down when prime interest rates go up or down, so the only thing that can change is property value. Using some rough numbers and an online mortgage calculator shows that a 1% interest rate would allow someone paying $1000/mo to borrow about $320,000. If the interest rate was 5%, that person paying $1000/mo can only borrow about $190,000. When your parents talk about how their house only cost $40,000, it was that price because the interest rate was probably 10-15% at the time; it's not only because money was worth more at the time.
Interest rates effect everything. Low interest rates drive up the cost of all equity. That includes real estate as well at stock prices.

It's hard to time the real estate market when talking about buying a home rather than buying an investment. Timing investments is piss easy. Wait for the crash, then wait for the interest rate to bottom out as a way of stimulating the economy through inflation, then you lock in that low intestest rate as long as possible. It's also best to shop in summer but buy in winter. Summer gives a sense of what the neighborhood is like (people are walking around outside), but prices are lowest in fall and winter. In theory, buying at that time would have both a low price and a low interest rate. Timing a home purchase is more difficult because that money "burns a hole in your pocket" as you sit on it. You're paying rent and losing money that entire time. You might save $20,000 on the purchase price of a house or condo, but that doesn't help if you lost $30,000 to rent during that waiting period. I was paying nearly $14,000/year in rent before I bought a condo. I thought real estate prices were still going down, but I didn't think they would go down 14k, so I bought a condo before the prices hit the bottom.
Buying at any time other than the bottom is more complicated. Having high interest rates during a period of high inflation would drive housing prices down, so the best thing to do during that period would be a mortgage with a floating interest rate because the interest rate would likely drop in the future, leaving you with low interest and a low purchase price.

I would say you should buy a home with a fixed rate instead of investing at this time. Alarm bells should go off when you hear about the DOW or NASDAQ hitting record highs. Hitting a record high means a crash could be around the corner. Things go up then down, not up then up again. Every boom is followed by a crash, and crashes usually happen every 5-10 years. The last crashes were in 2001 and 2008, so we should be due for a crash in the near future. Another thing to look at is the bond index. The bond market is much much larger than the stock market, so it makes sense that the bond market is the dog and the stock market is the tail. What are bonds doing right now? not good. If you expand the graph to 10 years and apply the MACD technical, you'll see that the bond market is currently in steep decline. If you google "bond market crash" you'll find hundreds of articles where people are expecting a crash. The bond market is almost entirely held up by the fed printing money and using that money to buy US treasuries. Bernanke merely hinting that the fed might slow (not stop) QE caused a steep drop in the bond market. The fed will need to taper QE eventually, which will crash the bond market which then crashes the stock market.

 

[IronWing]

I did try zillow but it just seemed... wrong. The assessor's site says 149k, zillow says $205k

Edit: WTF. I changed zoom levels on the Zillow map and gives me two different prices ($143k and $205k) depending on how far I zoomed in -_-

When using zillow, ignore all their estimates and ignore the asking prices for properties currently on the market. What zillow sometimes gives you that is useful is actual sale prices for surrounding properties. Look at these prices and any info on square footage or other building details that allow you to get an idea of what the property you are interested might be worth. More recent sale prices will be a more useful guide than older prices.

 

[Svnla]

I am in similar situation as OP but I do have other investments such as 401k, my index funds, pension and such.

I only spend about 1/2 of my take home pay and I wonder if I want or need a house. I have excellent credit score and 20% down payment already.

If I buy a house, then the expenses will go up about 75% of my take home pay. But 30 or 15 years is a long commitment.

 

[fstime]

Owning a home provides a sense of stability like nothing else in the world.

With interest rates as low as they are, now is the time to buy.

That is laughable.

Single family owner occupied homes are enormous liabilities. That just sounds like housing-bubble era brainwash that every American should be a home owner and it is the natural course of the American Dream.

Instead of one steady rental check every month, it will be a mortgage payment, property taxes, home insurance, landscaping, repair bills, and so on.

OP has to calculate what it will cost him with all this in mind every month compared to paying rent to see if it is worth it. I wouldn't even bother considering a mortgage until death (30 years) when figuring that out, only a 15 year.

 

[AViking]

The mistake people make, including in this thread, is thinking of housing as an investment. It's not. Housing was an investment briefly and then the bubble burst and it destroyed lots of people's financial lives.

Buy a home because you want to live there. So if you have even the slightest inkling of moving in the near future continue renting. You only have $20,000 in savings which is not enough to be a future home owner. I suppose you could scrape by somehow but you pretty much need 20% down and a little extra to cover 6 months worth of bills. If you're only putting 10% down you should be in a financial situation in the near future to pay off the second mortgage you'll need. Housing repairs and maintenance will probably cost you thousands a year so don't look at this lightly. Something always breaks.

Honestly, do some reading and make the best decision possible. Those telling you there's never a better time to buy, interest rates are low, it's the American dream, and that it's the best investment money can buy....be very skeptical about their advice. Just because one generation made a killing on real estate does not mean you will. You should only buy because it makes financial sense with respect to rent and you plan on living there for a bunch of years.

Lastly what happens if you lose your job, prices continue to fall, and you suddenly have to sell you $110,000 house for $90,000 because you want to move in 3 years? Plan on staying put. Plan on interest rates rising. Plan on housing not increasing like it did for the baby boomers.

 

[Saint Nick]

Are my friends stupid for buying homes with little down and no savings? I have a lot more in savings than some (not all) of my friends, but they're all buying houses!

 

[onza]

Are you going to follow them if they all jump off a bridge?

There is some good advice in here..

 

[Saint Nick]

No of course not... but I'm just wondering how people buy and live in houses when nobody around me really has any money. Lol.

I realize there is good advice in here. I'm going to plan on buying the house, however, I am going to save more money before I do it.

 

[overst33r]

Are my friends stupid for buying homes with little down and no savings? I have a lot more in savings than some of my friends, but they're all buying houses!

Maybe not stupid, but I would hate paying PMI for the remainder of the loan. IMO, if you don't have 20% to put down on a home, you shouldn't be buying a home in the first place. Obviously I'm being general and it does not apply to all markets.

Just to echo what others have been saying, homes generally don't really make good investments.

http://www.tortoisebanker.com/2013/05/your-home-is-not-good-investment.html

 

[MrDudeMan]

Its all dependent on the purchase price of the house. I recently ran the numbers for a $279K multi family 2 weeks ago. I beleive the interest rate was under 4%. The monthly PMI payment was $300.

You will want to consult with a mortgage broker who can prepare FHA loans.

I can't emphasize this enough: DO NOT GET AN FHA LOAN.

If you qualify for a conventional loan, you would be an idiot to get an FHA loan instead. If you're interested, I'll provide more details, but that's enough of a warning that I can feel like I tried at least.

 

[NetWareHead]

I can't emphasize this enough: DO NOT GET AN FHA LOAN.

If you qualify for a conventional loan, you would be an idiot to get an FHA loan instead. If you're interested, I'll provide more details, but that's enough of a warning that I can feel like I tried at least.

Nothing wrong with an FHA loan. The only cons are needing to live there for 1 year and PMI (which you can get rid of later on when you refinance). The big plus is not needing to put down 10 or 20% (like a conventional loan dictates) of the purchase price. Even with PMI factored in, I can still make money off the rent on a multi-family unit. If the numbers add up, why not?

 

[DrPizza]

Are you going to follow them if they all jump off a bridge?

There is some good advice in here..

If I was on a bridge and my friends suddenly started jumping off the bridge, then without hesitation, I'd probably follow them. I tend to hang out with smart people. If they're jumping, there's probably a good reason. E.g., Godzilla running across the bridge toward us.


Anyway, if the house is REALLY worth 140k, and you'd only have to pay 110k for it, then the five year rule really doesn't apply. Someone a few posts ago said that real estate isn't an investment. It isn't - when you're purchasing at full value. There are plenty of companies who make a fortune off finding cheaper than it should be real estate, then selling it for what the market price should command. This is probably more true of retail property than residential though. But, there are all sorts of exceptions. E.g., my former neighbor found out the girl scouts had owned a hunk of land for a couple of decades. Rather than go through a real estate agency, the scouts sold it independently. They calculated an appreciation rate on the land, and sold the land for $200k. (This area, 1k per acre isn't unusually low.) The neighbors bought it. The scouts had pretty much nailed the value of the land. They neglected to realize that when the timber company came through, my neighbors made a quick $180k.

Anyway, I digress - residential property isn't generally an investment, but when you can buy it for $110k today, and sell it for $140k tomorrow - your closing costs certainly aren't going to be 30k. It's an investment.

That is laughable.
That is laughable.

Single family owner occupied homes are enormous liabilities. That just sounds like housing-bubble era brainwash that every American should be a home owner and it is the natural course of the American Dream.

Instead of one steady rental check every month, it will be a mortgage payment, property taxes, home insurance, landscaping, repair bills, and so on.

No, it's not laughable. I agree with Texashiker, unless you're the type of person who buys more house than you can actually afford. I.e., "house poor." Unless you're an idiot (and many are), you factor repair bills into the cost of the house. Taxes and insurance are generally held in escrow, so that's generally considered as well. Landscaping isn't much of an issue, except perhaps for the first year - and even then, except in an HOA, your landscaping costs are completely optional. (Unless you're talking about mowing the lawn - which if you rent a house, you generally responsible for anyway.) In fact, even in this thread, those other factors have been mentioned in the purchase of a home. And, "steady rental check"?? You mean "the rental check that steadily increases *for the rest of your life.* Of course, taxes go up year to year. But that's not much of a big deal. Nonetheless, let's say 1/3 of the year through a 30 year mortgage - your mortgage payments are going to be the same as they were the first month. Do you know anyone's rent that doesn't change for 10 years?

Think of the people who at age 21 can purchase a house with a 15 year mortgage. At the age of 36, they will be done paying for their home. Think about that - if you live to be 80 years old, and move out from your parents house at 21 years of age, that means you'll only have a mortgage or rent payment for 15 out of your 59 years living independently. But, people who see it as a huge liability will be paying for all 59 of those years. (Of course, a lot of home owners, for whatever reason, always seem to be compelled to keep trading up, perpetually keeping a mortgage payment.)

 

[Red Squirrel]

Way I see it is buy a house as soon as you can. At least the money is going towards something you own that appreciates in value. I bought as soon as I moved out of my parent's. I staied a few extra years after college to save up money so I can buy. I don't regret it at all. It's nice to be properly established in a place that you own and have control over.

 

[cheezy321]

Maybe not stupid, but I would hate paying PMI for the remainder of the loan. IMO, if you don't have 20% to put down on a home, you shouldn't be buying a home in the first place. Obviously I'm being general and it does not apply to all markets.

Just to echo what others have been saying, homes generally don't really make good investments.

http://www.tortoisebanker.com/2013/05/your-home-is-not-good-investment.html

This has got to be the stupidest article I have ever read. He assumes a couple things
1. The stock market, year in and year out, will always give you an 8% ROI. Every. single. year.
2. That you don't pay property taxes or homeowners insurance either directly or indirectly (through your rent payment).

Then he blows the entire purpose of this article with this:

Critics of this article by now are shouting "WHAT ABOUT THE MONEY YOU SAVED PAYING RENT!" I respond by AGREEING with these critics, and suggest purchasing a home to any individuals that would otherwise be paying rent.

So he suggests you buy a home instead of renting. What is option C here? Live at home with your parents, who most likely bought their house? Mooch off of friends? For the majority of people, its either buy or rent. There is no option C.

What a waste of internet bandwidth.

 

[MrDudeMan]

Nothing wrong with an FHA loan. The only cons are needing to live there for 1 year and PMI (which you can get rid of later on when you refinance). The big plus is not needing to put down 10 or 20% (like a conventional loan dictates) of the purchase price. Even with PMI factored in, I can still make money off the rent on a multi-family unit. If the numbers add up, why not?

You're right except for the fact that you're totally wrong... FHA is absolutely not the same.

1) PMI rates are higher and guaranteed to be paid for a minimum amount time
2) Interest rates are, on average, are 1.35% higher
3) MIP is required on FHA loans, which is currently 1.75%. It's also usually rolled into the loan, which means you're paying interest on a bullshit fee. That's fantastic.

Also, you can put down 5% on a conventional loan if you really think that's a good idea, which it usually isn't, but that's another discussion. PMI on a conventional loan can be removed at the request of the homeowner at 80% equity or it will automatically be removed at 78% with most banks.

A quote I heard on NPR describes it perfectly: "FHA only makes sense when there's no alternative."

 

[jaedaliu]

A quote I heard on NPR describes it perfectly: "FHA only makes sense when there's no alternative."

That's a good way of looking at it.

And in OP's case, FHA should not be considered. And unless the grandparents need a pile of cash right away, he can do an owner carried loan, and start the purchase immediately. Otherwise, sounds like he's okay with waiting a few months to save an extra $10k for 20% down.

 

[Attic]

Personally I'd avoid the house path at this point. Focus on your job and new company and other areas of life.

Good that you're debt free. Lower other expenses in your life as much as you can.

Invest in something very conservative that is going to build wealth long term. Use it's earnings if needed, but try and reinvest the earnings 100% for at least the first 3-5 years.

After you get married and if you want kids you can start to look at a place to settle down. I'd caution against looking at a home as an investment, and simply look at it as a place to live. They are more expensive than you would imagine if you've never owned one. The housing market is a racket right now, i'd be cautious if you decide to enter it.

Building wealth means avoiding the big inning. By that I mean you don't want to get screwed on any one investment. Housing could f you in the a right now.

 

[Saint Nick]

The good news is that they aren't in a huge rush to sell. They offered to let us buy the house without a mortgage and just keep paying them monthly and no interest. I think they meant to say an owner carried loan.

Do interest rates work the same on these loans?

I'll have to talk to them more about it because we haven't really had any sort of serious discussion on the matter, aside from what they would sell it to us for. We never discussed payment options.

 

[slugg]

I am able to buy the house I'm living in (valued now at around 149k) for 110k.

Buy it immediately.

Once you've bought it, you can decide what to do with it later. An opportunity like that is worth acting on impulse. You already live in the house, so there is no moving expense and no hassle, plus you'll instantly have $35k+ in equity as soon as you close.

Buy it, then decide what to do later. But seriously, buy it.

 

[jaedaliu]

The good news is that they aren't in a huge rush to sell. They offered to let us buy the house without a mortgage and just keep paying them monthly and no interest. I think they meant to say an owner carried loan.

Do interest rates work the same on these loans?

I'll have to talk to them more about it because we haven't really had any sort of serious discussion on the matter, aside from what they would sell it to us for. We never discussed payment options.

Legally, they have to charge you interest. And the IRS has guidelines on their website for the minimum and maximum percentages allowed. However, they could also gift back your interest to you tax free.

I'm pretty sure you're going to run into trouble if you try to buy it from them in your name only. They're trying to give their granddaughter and future grandson an easy path to owning a house in an area they want to live.

 

[Saint Nick]

Legally, they have to charge you interest. And the IRS has guidelines on their website for the minimum and maximum percentages allowed. However, they could also gift back your interest to you tax free.

I'm pretty sure you're going to run into trouble if you try to buy it from them in your name only. They're trying to give their granddaughter and future grandson an easy path to owning a house in an area they want to live.

You're right -- I will have to see what their expectations are when we talk about it.

 

[SagaLore]

So I'm officially debt free.

I recently switched to part-time at my developer job so I could also have time to start a company with a friend (more programming related). I had been putting money into my 401k, but I don't have that anymore.

Should I invest my money somewhere or should I buy a house? FWIW: I am able to buy the house I'm living in (valued now at around 149k) for 110k. I would sort of be treating the home as an investment, but mostly as a place to live. If I didn't have this opportunity, I probably would focus on investing.

I haven't invested a day in my life so I need some tips on how to get started. Thanks in advance everyone.

Buy your house. You would be able to run your business out of it, you wouldn't be paying rent anymore, you would get a tax break by owning the house, if your business takes off and you need more funds you would have equity you could borrow against, and you haven't invested before so there is risk involved there.