Need your guys' opinion... (Renton: real estate, apartment, to rent)

[CAPGuy]

Hi everyone,

So my wife and I are a new couple, and we have moved here recently to the Renton area in one of "nicer" parts of Renton. We currently live in an apartment. In the next year or so, we will have enough saved up to put down a decent deposit on a small townhome, sized to a little more than the square footage of our current apartment. It is our goal that in around 5 years, we will have enough money to put down a large deposit on a house valued at around 300-400K and start the mortgage payments there, etc.

Unfortunately I am a.) very new to the whole home loan process and b.) very new to this area. So I don't exactly know what to look out for. We are currently debating whether or not we should stay in the apartment for the five years and just save up for the deposit on the house, OR move into a townhome as fast as humanly possible so we can start 'investing' the money in a place that we can flip later for a deposit on the house.

My question is, what do you think is the preferred action? Will we lose too much money in the town-home buying process (fees, taxes, etc.) to make it not worth it? Should we just stay in the apartment (which would be around $300 less per month) than the townhome?

Thanks for your help guys. You're the best.

Loving it here in Washington ,

-CAPGuy

[Ira500]

The course of action you're proposing( buying a townhome in a year, then buying a house in five years) is somewhat risky.
When you buy a house or a townhome, the buyer's closing costs are usually about 3% of the purchase price, and when you sell a home or a townhome, the seller's closing costs, real estate commissions, and real estate excise tax usually add up to about 9%.
So let's say you buy a small townhome for 200,000. Make that 206 with closing costs. Nobody can be really sure if prices are going to be higher in five years, maybe they will, maybe they won't. Let's say in five years you can sell the place for 210. Minus the 9%, that leaves you with 191. In those five years you will have lowered the amount you owe, so maybe you'll end up owing nothing or not gaining anything. Plus moving really sucks. I don't suggest just staying in your apartment for five years, but maybe find something else to rent, unless the townhome is so cheap that it would cost less per month than your rent. But you don't want to work hard saving money and then just spinning your wheels owning a townhome that costs more and isn't increasing in value. It might increase in value, and a lot of so called real estate "experts" will tell you that it's a great time to buy and you can't lose, but they were saying that 6 years ago, and people lost a ton.
If buying a house will make you happy, and you can do it without tremendous financial strain, then do it. Just make sure you know the risks going in.

[CAPGuy]

Thanks for your reply IRA! I appreciate your input.

I am just concerned that the money we're currently spending on the apartment is "going down a hole"; that we might as well put our money into something like a townhouse and, even if we get only 80% of it back during the sell, it would be better than paying into an apartment from which we won't get anything back. I'm just not sure if I'm missing something important in my line of logic...

[Blindtom]

Don't forget taxes, insurance, repair, maintenance,(or HOA fees). etc. if you own. If you rent, you are not responsible for all of that. There is insurance, but renter's insurance is not comparable to house insurance.

[Ira500]

Originally Posted by CAPGuy

Thanks for your reply IRA! I appreciate your input.

I am just concerned that the money we're currently spending on the apartment is "going down a hole"; that we might as well put our money into something like a townhouse and, even if we get only 80% of it back during the sell, it would be better than paying into an apartment from which we won't get anything back. I'm just not sure if I'm missing something important in my line of logic...

I guess you have to factor in the difference between what the rent is and what the mortgage would be on a townhome, but you're spouting the standard real estate agent line about renting simply flushing money away.
But let's look at two scenarios here:
Scenario A- You buy a townhome for 250,000 in Renton( yes, it's doable), put 10% down, and make payments of about 1350 per month, including taxes and insurance. They'll add about 7000 in buyer closing costs.

Scenario B- You rent this same townhome in Renton for 1200 per month, you invest the 25,000 down payment in a 5 yr CD in a bank paying 2% interest, and you put away 150 per month( the difference between rent and mortgage).

In scenario B, after 5 years, you have 9000 saved( 150 per month X 60 months)+25000, + 2500 in interest on that 25000 at 2% per year, total=36,500. That ain't nothing.
In scenario A, if you sell it after five years, and the prices have remained the same, you'll still owe something like 227,500 (9% in seller closing costs, but factoring in 7500 in buyer closing costs in top of the 250, but then subtracting something like 7500 in principal paid down, and what do you end up with?
Zero. That's not set in stone. Prices could go up. And if you held it for more than five years, you'd be paying more of the principal down and that would make more sense.
But what would help the most if you want to buy a house in five years? scenario B, where you can actually have saved more money.
Of course, if you can find a townhome where the mortgage payments are less than the rent, then ignore everything I've said and consider making the purchase. I just think buying something for only five years presents too much of a risk.

[Blindtom]

From the other point of view:
If inflation and home price rose at 2%/year (not unreasonable), after 5 years the home value would be ~$276,000 ( increase of $26,000). You would have had taxes and interest payments to deduct from your income for tax purposes.
Your rent would have probably increased over this period of time.

[David Aguilar]

This isn't really a Washington topic. OP, if you want to re-ask this question in the appropriate Real Estate forum (or sub-forum), feel free to do so.