Real Estate - Like Buying Used Cars?

My wife and I are looking to buy because A) Want to build equity B) We can afford it.

We're not planning on being here more than 5 years unless both of our jobs get big raises in that time. Our combined income is just barely six digits.

We have differing views of what our first house should be. My thought is that we should buy cheap. It's merely a savings vehicle. Cheaper means less sunk costs. I want to easily be able to afford a mortgage payment on a single income. I also think cheaper will be better for resale, more on that later. If we look at it like a used car, a $1000 used car is affordable to just about anyone. A $50,000 used car has a select market.

My wife wants to get the traditional "good buy", the cheapest house in a nice neighborhood with 3 bedrooms. Even if that house costs $300,000 (which is $50,000 over our budget). She's 29, wants to have kids soon, which to me means higher likelihood of single income paying for mortgage.

Flagstaff doesn't really have "bad" neighborhoods, it just has "dirty" neighborhoods. We're a mountain town that grew as a resort town, there are still nice neighborhoods right next to mobile home parks, and $500,000 houses selling right around the corner from said mobile home parks. I'm aiming for a $175k-$225k single family home, stick or block built, with central heat and some property. Current target neighborhood has some apartment complexes in it as well as some old mobile homes that are gradually being torn down and not replaced. It also has some newly built homes selling for $350,000+.

Here's some stats: "The average hourly wage in Flagstaff was just under $17 in 2014. But when cost-of-living expenses, including housing prices, were factored in, earnings dropped to $14.31 — about $8 below the national adjusted average. The data from the Labor Department and the Council for Community and Economic Research was compiled by Governing magazine."

The Average Sale price in January-October 2015 was $284,000.

These stats tell me this is not a good town to buy a home based on "normal" home buying strategy. Am I thinking about this the right way?

If you are 90% sure that you're not going to stay more than 5 years, reconsider buying unless you can put a lot down. It typically takes 3 years vs. renting just to recoup your closing costs. Unless you're looking at a 15-year mortgage instead of a 30, you're not going to be building a ton of equity in that first 5 years anyway.

Nothing really good too offer except damn housing is exspensive out there! Ohh and the seller paid closing costs on my house.

On my budget $225k we could put down 20% within 4 months.

On her budget $300k it might take us a year or more to put down 20%.

House buying is not like buying a car. 99.8% of vehicles are in a constant state of depreciation, while housing prices can fluctuate both up and down.

What do you think you'll gain out of buying a home you don't intend on living in for very long?

When buying houses, I look at net population numbers, and how that immigration is distributed within the city. Just like with stock investing, buying in a "Blue Chip" neighborhood probably won't net you very much money, but you're unlikely to loose very much either. The money is in gambling in volatile neighborhoods well before they become gentrified.

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

I'd be surprised if buying is the better financial decision.

The used car analogy only really works on houses that need things fixed. In the same way you can get a car with a bad transmission for cheap, a house with 18 year old AC and a roof that is curling and landscaping that looks like Detroit will have the most room for upside.
HOWEVER, this only works well if you can do some of the work yourself. Can as ability and can as you're allowed to by local code/homeowners associations. When you pay someone to improve the property you're lucky (very lucky generally) to raise the value of the property by as much as you spend.
A lot of the people I personally know who are convinced they're real estate geniuses are floating on a rising tide that has nothing to do with them. People in Houston and Austin who would have done as well by doing nothing more than painting and vacuuming and waiting, so I'm a bit jaded.
The hitch is a lot of banks don't want to lend on properties with major problems (where there is money to be made) so you have a hard time making it all work. I agree with the crappiest house in the best area model, but also agree that five years is a short time unless you get lucky and ride the market up.

The problem is we can't rent anything bigger than what we've got easily.

Current rent (2bd/2ba/2nd floor apartment) is $1270+$100 garage so $1370.

Most townhomes or single family homes with garage rent for $1500+

Punch this into the NYT Rent or Buy Calculator and buying makes more sense up to $300,000, where we would break even. $200,000 we'd be saving $400/mnth.

Run the numbers. I don't know what rates are where you're at right now, but lay out the case for borrowing $200k for us. Payment per month. How much of that is principal, what are taxes and PMI. No add on improvements.
A back of the envelope calculation says it would be really really hard to be spending less on a house that is in the price range you're looking for. Google also tells me someone is eating the 6% fee when you sell, so something in the neighborhood of $15k on a $250k house.
Lay out the numbers you're predicting on a $250k house for us and let us pick them apart. It's a fun and sobering game for all parties.
I still think buying a home is a good idea, mostly because of stability and gain over the very long term.

Worst case scenario on middleground budget max - Staying for 3 years only $252k Home Price 10% down - $25,200 4% Interest 30/yr - $1603 Monthly Mortgage Payment

0% Home Value Increase 2.5% Rent Increase (although we've already been threatened with a %6 increase) Property Taxes - Arizona - .669% Marginal Tax rate - 16% 2% closing costs First year maintenance 2%? Homeowners insurance .5%? We currently cover all utilities except water/sever/trash (about $60 per month).

Our current place had a non-refundable security deposit of $600.

I feel like I'm not getting good numbers on taxes.

Does this help with property taxes?
http://www.villagelandshoppe.com/taxes.html

If you're only putting 10% down you'll be in for MI. Looks like FHA is quoting 80 basis points (0.8%), so add another .8% to the quoted interest rate and plug it into a mortgage calculator to see what that will do. Also, you'll need to take 6% out of the sale price when you sell to pay real estate agents.

mtn wrote: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 I'd be surprised if buying is the better financial decision.

Ding. Housing is not a savings vehicle unless someone else pays for maintenance and mortgage interest.

Buying in that time frame can be a way of fixing rent costs if that's what you want.

Five years is rough. We owned our last house for five years, had no major mechanical failures, one upgrade project (re-did the 1.5 baths myself), and sold it for more than we bought it for, but still lost money.

Using your house as a savings account isn't a great idea. Buying for stability, enjoyment, etc is. Factor in repairs and you eat up any equity accrual really quickly. A roof can cost $20,000 pretty easily. Just a water heater is a grand installed. You can easily put away money right now given your low cost of living and (relatively) high incomes. You could quite easily save 50% of your take-home. My wife and I do that already and we don't live like misers and don't make a ton more than you guys. Save that money and come up with 20% down in a place you're going to stay a long time, is my main advice.

On the property taxes, mazdeuce's link looks good. But look up a couple example houses on your county auditor's website to see what the property taxes on them are. Just a reality check to see if the figures you come up with seem right.

My gut instinct is to say - don't do it. I'm certain that there are other and better rentals out there for you, have you actually looked or called any real estate agents that handle rentals?

But in the end the only one that can answer this question is you and your wife.

Like many things in life, it's all about how you frame it.

Most folks use the "renting is just throwing money away" argument, and that's a pretty basic way of looking at things. Sure, you're not building equity, but you're also not paying for upkeep, or property tax, or mortgage interest.

More to the point, you're paying for the freedom to walk away. Relationship goes sour? Get laid off? Current town becomes radioactive? Pay your fee, pack up and walk away. You can't do that with a mortgage.

http://assessor.coconino.az.gov/assessor/web/

There is the link for the Flagstaff real estate taxes. You can pull up a few properties online and look and see.

I'm one of those experts that made money in Austin real estate. I'll tell you though, It wasn't till about year 3-4 that I really started turning a profit and honestly, it's a push. The only reason I have any equity at 10 years in is because of land appreciation and not really paying off the loan. It wasn't till last year when I refi'd to an 11 year note did I really see my balance move.

One thing to remember is you lose 6-8% of your equity when you sell too. That is something that a lot of people forget about on the back side. Selling a house isn't free.

My gut says 5 years is too short but who knows, you may find in 3 years that you really love flagstaff and never leave.

Not much to add, other than that I'll be watching this thread myself.

I've been searching for a new rental for ~3 months now and turned up basically nothing in my price range that will allow a hyperactive one year old aussie shepherd/lab mix AND has a decent enough yard for him to romp in AND isn't a disgusting 40 year old double wide trailer (forget about having a garage .) The place I'm in right now, while kind of a POS, actually suits my needs quite well, however my roommate's GF is planning to move in by the end of April, which means I need to be out by then.

MY girlfriend isn't interested in moving out of her current townhouse until she/we buys a place, but moving there isn't an option because dog, so I'm looking at basically A) paying ~$1200+/month in total housing expenses on my own to get what I want B) making compromises I really don't want to make to stay in budget or C) doing an FHA min 3.5% down mortgage buying a ~$100k place of my own (double that budget if GF is involved.)

Option C is looking increasingly attractive because it opens up SO many more viable properties and is vastly less expensive month-to-month to get what I need/want, with the trade off of being a bit of a stretch for me to cover all of the upfront expenses. I could do it, but would really prefer another year of savings to pad the blow first. In any case, I don't think buying makes sense without GF on board, which opens up its own set of complications, some of which the OP has already hit upon. FWIW, plan is for GF (of 6 years) to become fiance in the not too distant future, but that's another discussion.

Anyways, not so much looking for advice or to threadjack as much as I'm just taking this opportunity to gather my own thoughts in writing. I'm struggling a bit to convince myself sufficiently of any of the options to really start moving in one particular direction, which needs to happen sooner rather than later.

I would encourage properly wifeing her before buying a house. Having said that, I did not follow my own advice.

I still think buying is a good idea for a lot of people, but most people buy way too much house. The thing that is supposed to free you from the tyranny of landlords ends up trapping you in your mortgage/taxes/upkeep. If you spend what you can afford then you take away the option of dropping to one income or taking a lower paying job. It's better to be the rich guy in a poor neighborhood than the poor guy in a rich one.

Never buy a house that your not willing to be stuck in for decades, ask me how I know.....

A house can be a great investment, but remember no investment is guaranteed, and anybody that says otherwise is not looking out for your best interests. A house is first and foremost a place to live.

Unlike a used car, you can't just send a house to the scrap yard and wash your hands of it when turns into a super lemon.

Maybe I should have dumped that in rant of the day, and I hope you never experience the home owning problems that I've had, but the scary thing is, I know others that have had worse problems than mine. I gave a realistic chance of breaking even despite the problems with my house, many will never.

Oh, and my real estate agent and mortgage broker both said that I was foolish and under buying. Thanks to SWMBOs chronic health problems over the last decade I've been forced to run the house on a single income about half the time that I've owned it. I surely couldn't have done that if I had taken thier self serving financial advice.

Totally agree with you Mazdeuce on both accounts. I only followed the second about not buying too much house. I look at a lot of the places around and it's nuts what people pay.

For example, When I was in HS we had a 2300 Sq Ft finished house with a semi finished basement for basically 3 of us. It was insane. Now I live in a !600 SQ Ft. place and have for the last 10 years and never felt like I needed more room. In fact one room is never used outside of my cat sleeping in there. Of course, I bought the house when I was in sales and only wanted to factor in my base salary and not any commissions just to be safe.

I'd plug in numbers in one of the calculators that people have put up links for it. It might make more sense just to keep renting if only going to be there for five years max.

What about the idea that your losing money when you rent? For instance, if I rent for 5 years, I'm spending $84,000, none of which I get back.

If I buy during the time, and even if I lose money to interest, closing costs, maintenance, and maybe even a little bit when I sell, does that really equal anywhere near $84,000 in money down the drain?

budget 3-4% of the house value, annually for maintenance.

some years you won't need it but roofs and HVAC type stuff will tip the averages.

In reply to PHeller:

In the first five years of a 30 year loan you are paying very little principle. The overwhelming majority of it is interest. I'd need to lay out a payment schedule to figure out exactly what it is, but if your payment is that same $84k you did not buy $84k in house during those five years. Spitballing, it's closer to $20k in house and the rest in interest. That's how you lose money. You pay more in taxes and closing costs on each end of the transaction than you gain in equity making payments.

PHeller wrote: What about the idea that your losing money when you rent? For instance, if I rent for 5 years, I'm spending $84,000, none of which I get back. If I buy during the time, and even if I lose money to interest, closing costs, maintenance, and maybe even a little bit when I sell, does that really equal anywhere near $84,000 in money down the drain?

Plus the time value of the $60k (20% down) you can sink into some sort of investment.

3-4% annually sounds pretty accurate actually. A lot of those calculators use something like 1% which is nuts. Also, whether you want to or not, you'll spend a lot of your own time on the house. Assign a value to that.