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Thursday, August 21, 2008
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14 comments:
Not necessarily looking for advice, but would like to get a sample of ideas if possible. Our family is looking to buy a home or TH next spring or summer in Virginia. We’re renting a small apt as I finish up my Masters, and my wife hopes for more space once I graduate. Here are our stats:
Cash on hand: $200K
Expected Wage: $72K
School Debt: $20K (at 6.5% - nowhere near the recently-discussed 2%)
The puzzle pieces? We plan to stay in the DC area for just three to five years. We’ve got two kids and expect two more (factor in mini-van purchase of $30,000). I’ll be working in Fairfax City, so near there would be ideal but further out is probably fine. A “fixer-upper” is not ideal, as I have been known to make matters worse, not better.
Any ideas about TH vs SFH vs renting, along with location recommendations would be helpful. Thanks.
If you think you're going to be here for only 3-5 years, why not rent? My wife and I make substantially more than $72k, and we rent a townhouse (from a rental company, not an individual). If you do that, you'll get all of the benefits of living in a townhouse compared to an apartment, and all of the benefits of renting compared to owning (i.e. it's cheaper to rent now, you're money/equity is safer in the bank than in a house, etc.)
Also, what if you do get a job offer outside the area 3 years from now? Will it be easy for you to unload the townhouse? Would it bother you if you had to sell it for $50k less than if you bought it next summer? What about $100k less?
jn, my opinion is that if you plan to be in the area 3-5 years, it is far less risky to rent than to buy right now. Even in a stable market, you would lose money, since currently it is less expensive to rent than to buy the same place (most of the time), and you would not get any/enough price appreciation to cover the 6% Realtor fee, closing costs, moving costs, etc., let alone carrying costs if your house doesn't sell as quickly as you want, when you sell. And, you are taking the risk that your house price might decline during this period. Houses require outlays for repairs, maintenance, improvements, etc., and you might not get any part of this back when you sell. Over a longer period of time and in an increasing market, these risks are offset by the possibilities of gains, as well as the enjoyment of owning your own place and being able to do what you want to it. But you don't have that luxury.
You wouldn't have any of these risks if you rented.
jn,
A 3 year time horizon is short in anything but an upward bubble market to make your home purchase break-even after transaction costs. Which is not to say you can't buy. For me, for instance, if I buy at 200k, and it drops to 180k, I still win over renting in 5 years, even comparing a small 2 bedroom with a larger TH.
The ginnae mae rent versus own calculator I've found to be very useful in making the financial side of this decision.
I'm not familiar with fairfax city, but you may very well find things below rental parity out there by next spring or summer, if so, I say go for it, get a house big enough for your growing family. But hold out for one that won't need major work, and for one that's within your income budget, not your savings budget. Those are great savings, and I would definitely say to buy your car in cash, and maybe even just pay off the student loan debt to retire a monthly payment, but I'm not sure I would want to put that sizable of a savings relative to your income into a potentially 20% depreciating asset which housing is right now.
So in the rent versus buy calculation stick to apples to apples and set the downpayment low, even though you will actually put 20% down (at least).
I think there's enough carnage that the usual TH versus SFH differences in potential appreciation are out the window right now. Just look for value, and something you love, and go with that. But keep in mind that the higher tiers have not fallen as far yet, and hence have further left to go. A lot of buyers right now are acting as if the $400k-$600k market won't drop any further and that all the hurt is beneath them. Don't believe it.
in - you're surely going to get a lot of response on this question, so I'll keep mine simple - you should rent at least for the time being, and use the year or more to examine the direction of the market, neighborhoods/commutes, and school district choices for your kids (if they're at an age where that's relevant). Even if your heart is set on buying eventually, a year of renting and getting to know the local market will surely pay off in a more informed choice in the end. Good luck.
jn:
Many families look for the best schools for the kids to attend, and make their housing choices based on that. Fairfax schools are good, but some are better than others, so that may be a factor to consider.
I agree that renting is probably better than buying. Realtor dot com does show rentals (there is a tab on the top of the page) and browsing those results would give you a good price gauge. Maybe you could try renting with an option to buy for the best of both worlds?
Good luck with the master's degree and new home shopping.
JN - Assuming you can afford it, the issue here is a matter of your comfort level personally and monetarily.
MONETARILY, threre is a better than average chance you will lose money. In 3-5 years I think there is
(a) a slim chance the market will be up 5%;
(b) a good chance the market will be flat;
(c) a good chance the market will be down 5%; and
(d) a slim chance the market will be down significantly
So all in all, my view is it likely will be flat to slightly down. However even under my most optimistic view (+5%), you will likely lose money due to the transaction costs (realtor fees, transfer & recordation tax), etc. Thats the monetary side of the equasion.
PERSONALLY, you have do decide for yourself how much it is "worth it" for you to quit renting. I personally hated renting. So much so, that even if I KNEW I would lose 10K in 5 years of ownership, I probably still would have bought.
Again, this is just me though. There are plenty on this board who will not buy if they "knew" they would lose even $1 on the transaction. Conversely, there are probably some who place even a higher premium on it than I do. The question is where do you (and possibly your wife) fall on that spectrum?
So monetarily, its likely a loser. Personally, you will need to answer that one yourself, and decide if its still "worth it".
Harriet,
I think we have a roaming robot problem here. Can you delete the 2 comments to this post with the incredibly offtopic link? The second one I recognize as a cut and paste from the other day...
Thanks everyone for your input, your opinions have been helpful. We’ll be stewing over this for the next school year and appreciate your insights. My wife abhors renting and, sharing that with CRT, she’s willing to take a loss – particularly if we were to find a nice TH we could buy with cash. But a TH managed by a good rental company could be a good option, particularly at some of the prices I see on realtor.com, and would allow us more flexibility to leave the region when the opportunity arises. Contrarian, I remember your comment on US Treasuries from a previous thread, but the reminder was timely. Thank you all.
Interesting spam...
Taking the google adwords approach I guess.
jn,
I'll stick my nose in for a bit and offer some ideas or advice :-).
1st off, congrats on having that much cash on hand, not many people can say that. Most either can't force themselves to save that much, or if they do inherit it or have some lucky strike, they p@#$ it away quicker than they got it. So by the fact you have that much on hand shows discipline.
A general rule is debt != wealth, debt can be used to obtain wealth (as long as it is used to enhance future productivity), but debt is not wealth. The biggest killer on debt is interest. Unless you can get some arbitrage on your student loans (i.e. low-risk at 8%-like a CD, debt at 6.5%-which is really unlikely). I'd pay of the student loans pronto. Student loans are also generally like mortgages, i.e. you pay the interest 1st. It therefore behooves one to pay off the student loans quickly at first to get rid of the interest. If you have a 10 year loan by year 5-7 you've already paid most of the interest, so it is in your favor to stretch out the payments. But if you start paying down the principle up-front from year 1 (i.e. double payments or pay it off in full), the total amount you pay drops dramatically.
Same with a car, unless you can get arbitrage or an exceptionally low interest rate ( :-) . . . I have to smile, I just bought a vehicle after my wife's pontiac crapped out at 0%, talk about perfect timing-even though I HATED buying a vehicle), it is best to pay it off in full.
Side-note: Buying a family vehicle (i.e. 2 adults, 4+ kids) is a pita, you've got 3 options, big cars (only like 4 models out there), mini-van, or SUV. Cost-wise mini-van is the way to go (decent models ~18-20k), except I won't need the mini-van for like 10 years -younins . . . so I got the big car, sigh.
Also, I personally will not buy things on what I "expect" to make. I can "expect" to make 120k+ sometime in my life, but I'm sure not going to live my life today like I make 120. Too many variables exists in order for me to plan my life on my future expected income. Job market, economy, location, etc. It's a fools game to live off of your expected income. I live on (actually below) my current salary and then I plan for the bad what-ifs (i.e. job loss, medical, etc).
Lastly, there is no way in hell that I will ever buy a TH/condo. I will rent thank you very much. If I buy a place, I want all the walls I look at to be MINE, and I want the grass in front to the side and behind me to be MINE. If I can't buy a SFH detached, I'll rent for the rest of my life. In addition to the live in it for a while, etc, I will buy a SFH when it will cost me more to rent vs. buying. I've rented for long enough and lived in enough condos/TH that I will NOT buy one so I can pay for the privilege of living in a glorified apartment.
The only way I would ever consider a TH/condo is if I could use it for cash-flow (i.e. be a slumlord myself)-but I won't live in it.
If I were in you situation (always dangerous :-) ). I would immediately pay of the loans, find the cheapest, rattiest, safest place I could find to rent and feel comfortable, and save-and I mean a lot, like 30%+ take-home. I would also not buy the mini-van until absolutely necessary.
I had tossed out the idea that we could just go with one car with my wife, but she looked at me like as if to say if you're at work and I'm at home and the infant has a problem what am I supposed to do-good point honey?
Wait at least till I have a steady income before considering buying. As for the 180k left . . . . hmmm, personally I want asset preservation. I'd have at least 6-12 months cash on hand in a high -yield account. And I'd prob. put the rest in silver/gold. Yes, yes I am the resident Austrian school of economics, silver/gold nut :-). Even with the recent fall in silver/gold I've done quite well over the past 3 years, much better than the stock market that's for sure. You want to conserve the 180k, and the stock market ain't it . . . it's a risky market, if you put money in the stock market consider it lost. If you gain some . . . great . . . if you lose some . . . fine. You can not count on stock market money (as sooooo many boomers, 401kers, etc are finding out).
If you've got 180k, say take-home is 50, save 18k, in about 4-5 years you would have ~250k, enough to purchase out-right a decent SFH home.
Anyways, that's my thoughts, good luck on whatever you do, just remember a fool and his money are soon parted and nobody cares more about your money than you do.
Congrats. on the Masters (I'll be done w/ mine in Dec :-) ).
jn,
Don't buy a house outright with all cash unless absolutely necessary.
The general recommendations I've read have suggested, make a substantial down payment to reduce your borrowing costs if need be, but wait until you've been in the place 2-3 years before paying it off.
Several suggested reasons for doing this:
1. You buy a lemon - it's not all "your" money tied up in the house.
2. You stay much more liquid in your ability to get at your cash.
3. Home equity borrowing costs could potentially be higher than primary mortgage borrowing costs. (Again, this sort of relates to point 2 if you are suddenly illiquid and need access to that cash.)
Just an observation.
My $0.02
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