Wednesday, April 16, 2008

What I emailed a friend about real estate

He asked if he should buy a specific house, knowing he had roommates but might leave that city in a year:

Here is my standard advice I would give to most anyone in that situation:

Short answer - I only buy houses that are easily rented out well above the mortgage payment. Without even knowing anything about the one you're talking about, the fact that it's two bedrooms suggests it's likely not profitable. Also, a rental payment on a similar house is likely lower than a mtg payment. Tax breaks and the "building equity" arguments are far exaggerated, while the hassles of home ownership are underemphasized. And there are very high transaction costs.

Also, the outlook for the market is still bad. The downside risk outweighs the upside potential.

So short answer I would hold off right now.....but I often give that advice and ppl buy anyway.....there's a certain emotional appeal to owning a house that people are willing to make an unwise financial decision for, so I understand if you buy anyway....


Anonymous Kyle Cherrick said...

A friend of mine is graduating NAU in May. She will be working as an elementary P.E. teacher at a private school, which if I recall are notorious for paying teachers below public school wages.

She and her fiancee are getting married at the end of May. He will be in school until August or December.

They started looking for a place to rent but were encouraged by her parents to look at foreclosures/inexpensive homes to buy in the area.

When she mentioned that they are looking to buy using an interest-only mortgage, I thought basically the same thoughts. But I don't know her well enough to discourage, plus her family was right there.

I wonder how long people will still try to get into houses without significant down payments by using alternative lending techniques.

I personally have a goal of a 30% down payment before I get into a house. Until then, I'll happily throw my money away renting inexpensively.

Is it possible to add an "Email This Article" feature to your blog?

2:37 AM  
Blogger Ryan said...

You sound like you have a straight head on your shoulders. I would keep that goal of putting 30% down (or at least 20%), and try to get a 30-year fixed mortgage to prevent any wild swings in the interest rate.

Interest-only isn't a terrible thing in and of itself. It just means you don't automatically pay down any equity, but you still can if you want. It's bad when, as is usually the case, it's also on an adjustable rate mortgage and is used to buy more house than someone might ordinarily afford.

Your friend sounds like she's going to be stable in one place for awhile. If that's the case, she has a better reason to buy a place than mobile people like myself who will likely move every couple of years. If she buys a place she can afford (which may not be as nice as one she really wants given the teacher wages) with a fixed rate and plans to stay multiple years, she should be able to weather any problems in the market.

Still, if I were her I would rent something for considerably less than the mortgage payment would be and just wait as the market goes down. It might still be awhile, and it won't turn on a dime so she can just be waiting for when some signals finally start to portend a better future. We're not there yet.

Not sure about adding an email this article feature on here. If you know a way I'd be happy to.

9:15 PM  

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