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I really hope that you and your friend's attitude is not that common. People complain about the banks but part of the real estate trouble was caused by people who knowingly bought more house than they could afford. Then when they couldn't afford it they just walked away like your friend. Maybe they got away with it once, but there is no guarantee it will work again and again. (I speak as a homeowner who has put down 20% on properties and has never taken out any equity.)
LOL, of course someone from the "moral hazard" brigade decides to speak up. Without some kind of wholesale change in bankruptcy and/or foreclosure laws (and to my knowledge nothing has come out of the housing crisis), there's nothing to say someone can't do this in the future.
Listen, hate the game, don't hate the players. Fact of the matter is this country has done all it can to foster policies designed to favor home ownership. Real estate is the only asset an average joe can purchase where he/she can lever up like crazy, keep the gains, or (usually) have the option of walking away from the losses. Factor in the lovely tax advantages as well, and it's a no-brainer.
It's not an either/or proposition. This kind of "game" and its "players" are making our economy very unstable and helping to turn the US into a 3rd World country (with a 3rd world mentality to go with it). Immoral behavior is immoral regardless of who is doing it...and for good reason....it ultimately hurts everyone (except maybe a very tiny elite).
Last edited by mysticaltyger; 10-15-2013 at 10:09 PM..
Your are renting and have accepted a certain quality of life base on what you are renting. How much per month , mortgage , tax , insurance, would a similar lifestyle cost. Now take these numbers to your accountant and ask them to do a projection for you to see what you will net after taxes. This is your true buy versus rent. But chances are you are going to buy something "more", would you still be able to save as much as when you were renting?
Based what you have posted I wouldn't recommend FHA.
Don't follow free advice about your deductions, except for this ,seek a professional to educate you if you aren't familiar with how exactly they work.
You might also get more information in the mortgage area under real estate.
The New York Times has an excellent rent vs. buy calculator that factors in the most important numbers, like tax deductions, maintenance costs, rent inflation, opportunity cost of not investing the down payment, house appreciation, and so forth. You just have to plug in the right numbers. A very simplistic rule is the "20x rule", which says it is better to buy if the price is less than 20 times the yearly rent. Following that, it would make sense to buy your rental if you could get it for 2k x 12 x 20 = 480k or less. That may be a little conservative though, given interest rates are historically low.
Surely if there is anything we should have learned over the past few years, it's that the house you live in is an expense, not an investment. It MIGHT be worth more when you sell it, or it might not. Meanwhile, it's guaranteed to cost you money every month - probably more than you are paying in rent. Buy a house if you want one and are in a position to afford it, but don't neglect real investments (such as retirement savings) in order to do so.
By the way, "you need the tax deduction" isn't a great reason to buy. Yes, you will be able to deduct your mortgage interest, but you will get to pay property tax, so it's more or less a wash from a tax standpoint.
You will also get to pay for repairs and maintenance, which I can say from firsthand experience can be quite a lot more than you ever anticipated! Make sure you have an ample cash cushion after the downpayment and other closing expenses.
I bought a condo and sold it 3 years later for 100,000 more than I paid. It was a GREAT investment. However, like most investments, you actually have to investigate and figure out what makes sense.
I bought a condo and sold it 3 years later for 100,000 more than I paid. It was a GREAT investment. However, like most investments, you actually have to investigate and figure out what makes sense.
And that means that *everyone* will make a $100,000 profit, right? I think you see my point. Your second sentence tells me you understand that. I'm not sure that everyone does realize that some properties are profitable but not all of them.
And that means that *everyone* will make a $100,000 profit, right? I think you see my point. Your second sentence tells me you understand that. I'm not sure that everyone does realize that some properties are profitable but not all of them.
Certainly, there is no golden rule to real estate that applies to every situation.
However, I do want to reiterate that the money you spend renting is gone, and there is no prospect of getting it back.
You could sell a house at a loss, and still come out ahead over renting (if only because you lost less money buying than you did renting). Also, rent goes up every year, your mortgage stays the same, when you first buy a house, the majority of your payment is interest, which is a write off, etc, etc...
OK, since you asked...
The easy answer is to just say 'you're throwing away 2k a month, buy now!' but that's not always the case and buying is not always a good idea.
You'll have to do some math based on the answers to questions like: How much will your home cost you per month? How long will you be there for? How much do you reasonably hope to get back out of it? You'll have to do some degree of speculation but the math itself won't lie. Don't forget to factor everything in that you can. On the one hand, you have a tax write-off, principle equity, and potential market gain over time, but on the other hand you'll have things like repair/upgrade costs, possible HOA dues, insurance, and plenty of other costs from your realtor (if/when you sell) and lender(s). And what about bills? Are there some bills that your landlord covers like water, sewage or trash? If so, factor those in too.
As a general rule, the longer you stay in one place, the more sense it makes to buy, but there are also things like location and your ability (or lack thereof) to maintain/improve your own property that can greatly affect how firm of an investment you'll be making over time. Since you're already paying 2k for a 1BR apartment and have 150k saved you will have some good buying options with real investment potential. But I believe that it's a mistake to think of housing in terms of investment (unless you're an experience developer or something). Rather, try to think of it in terms of the lifestyle you want or need at this time. That way, if it ends up making you some money, great, but if it stays flat or even sees a net loss, you won't care because you will have had the lifestyle you wanted which is something worth paying for.
If your lifestyle preference is your own home with a yard and a family, then by all means buy something. A condo or small townhome for now, with a view to something bigger later. But if your lifestyle choice is simple living with financial freedom ahead, then I'd say move out of your 2k apartment, get a 1k one and put that and all of your extra savings/stock/rent money into some short-middle-and-long terms funds with a range of conservative placement for the short term stuff and really aggressive for the long term. Then sit and wait and eventually you'll have the cash to buy whatever you want outright without worrying about whether or not it will make money.
One question I have for you though: You mentioned having 150k SAVED, but then you mentioned something about your company's stocks doing well. Are you considering whatever you money you have available from your ESPP or other stock plan the same as savings? Because it's not. Figure out whatever you need as savings and take it out of the stock market right now. Also consider taking the rest of it out if you've already seen some good gains on it. There's a fine line between patient investing and greed. You should never leave money sitting in general stocks unless you can afford to lose it.
Last edited by otterprods; 10-16-2013 at 12:39 PM..
Thanks a lot for the detailed response. This is really helpful.
I have only recently researched on some investment options beyond 401k, and will experiment on some funds, but I am a conservative person, so not sure whether I'll be comfortable to put all savings into funds. The house/condo provides some sense of security because I'll be living in it and it is something tangible. I know it is not entirely sensible to think of it this way, but sometimes it's difficult to convince myself.
Honestly I don't fancy the house lifestyle. My intention to buy is solely because rent continues to rise and it just seems landlords here always try to take advantage of you. They are in the mentality that all your raises should go into their pocket rather than yours. They can do this because many young kids move here every year. They are young, have nothing to lose, think they are making big bucks and don't know they are ripped off. I've watched the tech salary trends and the rent trends in recent years, and honestly speaking, the salary increase does not keep up with the rent, meaning if we all rent, the average living standard is going down not up, no matter how the media portraits the tech bubble. A pet-friendly apartment with washer/dryer in unit and AC is all I care about. But you really have to look hard for something like that below 2k$ at this side of the Bay.
Of course there is the potential upside of the housing. The way I view it, a house/condo is the only thing you can consume and increase in value at the same time. I am not saying it will surely appreciate but at least there is a chance. Stocks/funds etc. are not necessarily riskier, but they don't provide daily usage. Also you don't need to deal with landlords but potentially you'll have to deal with HOAs. But this view is before I researched on the fund management angle. I'll do some experiments and see whether that is a valid path to pursue.
To answer your question. The 150k I saved is cash, excluding 401k. I said company stock is doing well because it affects my future income, as I have RSUs vested each quarter. I consider that part of my income unstable.
Quote:
Originally Posted by otterprods
OK, since you asked...
The easy answer is to just say 'you're throwing away 2k a month, buy now!' but that's not always the case and buying is not always a good idea.
You'll have to do some math based on the answers to questions like: How much will your home cost you per month? How long will you be there for? How much do you reasonably hope to get back out of it? You'll have to do some degree of speculation but the math itself won't lie. Don't forget to factor everything in that you can. On the one hand, you have a tax write-off, principle equity, and potential market gain over time, but on the other hand you'll have things like repair/upgrade costs, possible HOA dues, insurance, and plenty of other costs from your realtor (if/when you sell) and lender(s). And what about bills? Are there some bills that your landlord covers like water, sewage or trash? If so, factor those in too.
As a general rule, the longer you stay in one place, the more sense it makes to buy, but there are also things like location and your ability (or lack thereof) to maintain/improve your own property that can greatly affect how firm of an investment you'll be making over time. Since you're already paying 2k for a 1BR apartment and have 150k saved you will have some good buying options with real investment potential. But I believe that it's a mistake to think of housing in terms of investment (unless you're an experience developer or something). Rather, try to think of it in terms of the lifestyle you want or need at this time. That way, if it ends up making you some money, great, but if it stays flat or even sees a net loss, you won't care because you will have had the lifestyle you wanted which is something worth paying for.
If your lifestyle preference is your own home with a yard and a family, then by all means buy something. A condo or small townhome for now, with a view to something bigger later. But if your lifestyle choice is simple living with financial freedom ahead, then I'd say move out of your 2k apartment, get a 1k one and put that and all of your extra savings/stock/rent money into some short-middle-and-long terms funds with a range of conservative placement for the short term stuff and really aggressive for the long term. Then sit and wait and eventually you'll have the cash to buy whatever you want outright without worrying about whether or not it will make money.
One question I have for you though: You mentioned having 150k SAVED, but then you mentioned something about your company's stocks doing well. Are you considering whatever you money you have available from your ESPP or other stock plan the same as savings? Because it's not. Figure out whatever you need as savings and take it out of the stock market right now. Also consider taking the rest of it out if you've already seen some good gains on it. There's a fine line between patient investing and greed. You should never leave money sitting in general stocks unless you can afford to lose it.
Last edited by fashionguy; 10-17-2013 at 01:11 AM..
To answer your question. The 150k I saved is cash, excluding 401k. I said company stock is doing well because it affects my future income, as I have RSUs vested each quarter. I consider that part of my income unstable.
OK. Good. A lot of people tend to think that vested stock = cash and that the longer they leave it in the more it will be. So they're basically gambling in ignorance.
Normally I would say just keep renting if you're not into owning a home. But at 2k a month (and climbing) you're probably better off just buying a little condo or something. Just be careful to not get lured in by a bunch of stainless steel and other finishings and wind up over-paying.
As for general investments, there are plenty of mutual funds and CD's which are hardly any more risky than savings, as long as you have some time to let them mature. As for the long-term stuff, you can do what you want, but it often makes sense to leave them really aggressive as long as you don't plan on needing them within 10 years or more. Many of my funds went way under in 07-08 and are now back up higher than ever. It was a little scary to look at for a while, but a little patience saved me a lot of money, as opposed to just flushing them out of panic and then putting them in something less likely to bounce back quickly. If you look at your house as a way to make a bunch of money, you're setting yourself up for disappointment. That's not to say that it definitely won't, but it's just a slow-moving market right now. On the other hand, if you look at it as a nice place to live for a fair price, you cant really lose. It's been said before on here, but I'll say it again: Housing is primarily an expense not a source of income.
Last edited by otterprods; 10-17-2013 at 09:10 AM..
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