Ask the Readers: Buy a Home, or Max Out Retirement Savings?

@Mike – There are comps though. Like I bought my house last year for $175K when the same house across the street sold a month later for $190K. I would call that a deal.

The key difference though being:

A.) I bought my house from a private owner, not a bank. They just wanted to sell it quickly, thus they set it at a price that was better than the comps. A bank SHOULD NOT AND WOULD NOT do that.
and B.) I don’t think of the value of my house to be the bigger number of that of the comps, even if I could pay an assessment company to write the bigger number down on a piece of paper to show to people because I don’t think of it as an investment — its where I live. Its value will be what I sell it for in 5-10 years.

You can indeed still get deals in RE, this particular case doesn’t strike me as one though.

Wow, that’s a tough one. On the one hand I agree that owning a home is a vital step towards financial independence, but on the other hand you don’t want to overextend yourself so you’re house poor. I would make sure your total housing costs don’t exceed 25% of your gross income (for a 30-year fixed mortgage) and then work to save as much as possible for the down payment/closing costs. If your savings are depleted after buying, work to build up an emergency fund ASAP because if something happens with your job/income, you don’t want to be stuck with mortgage payments you can’t afford.

I’ve also read that 15% is the MINIMUM one should save for retirement, so you don’t want your housing costs to be an excuse to stop saving.

Finally, I’m not sure what housing market we’re talking about, but generally condos don’t appreciate as quickly as houses and can be harder to sell/rent if the market goes south.

I just wanted to add a few more comments. To the person who said the bank wouldn’t discount the price it it was truly worth more – you also have to consider the time-value of money. because the bank surely is. They are making the calculation that selling that property now for $190k is better than getting $240k for it 6 months (or whenever) from now.

As for all the folks talking about equity in the property, Justin should be cautious about depending on this. As many have pointed out, real estate is in decline right now, so even the discounted $190k price may not give him any equity in the unit. Unfortunately, the only way to tell exactly how much equity you have in a property is to actually sell it. Until then, you can only estimate. Once when house hunting, I had a salesman at a development tell me that the builder was discounting prices which would provide me with “instant equity”. My BS alarm went off! Let’s see, yesterday, the price tag was $300k but you couldn’t sell, so today you are willing to sell to me at $250k and claim that gives me an instant equity of $50k? It seems to me that would only work if I could find a buyer willing to pay $300k, and if that was easy, why would they lower the asking price? Just be very careful about using this kind of shaky math.

Dave @ 58:

Let’s see, yesterday, the price tag was $300k but you couldn’t sell, so today you are willing to sell to me at $250k and claim that gives me an instant equity of $50k? It seems to me that would only work if I could find a buyer willing to pay $300k, and if that was easy, why would they lower the asking price?

Exactly. It’s not that the buyer of a $195k condo suddenly has $45k in “instant equity.” It’s that the previous buyers who paid $240k suddenly have -$45k “instant equity.”

And they won’t be too thrilled about it when they find out.

I agree with all that said about renting being mathematically better than buying. I do this since I left college, so far the benefits are much better than any possible problems (for my lifestyle, married without kids). The first ten years of investing will be decisive to your financial security later.

A couple of quick notes: if buying will take a piece of your investment, plot the two scenarios over a couple of decades. The difference will be significant, and so will be your regret later if you don’t find this decision to be the best for you (OTOH if you absolutely think it’s the best go for it). Also remember that money in the bank is money but a house takes time to be sold and become money again. I suggest you should extend your emergency fund to be safer if you purchase a house, because if you find yourself unemployed and unable to find a job quickly the mortgage alone will devour your fund.

“…I agree that owning a home is a vital step towards financial independence…”

Say what!? Incurring a massive, massive debt is a step towards financial independence? Um, NO — especially when you are talking about property the owner lives in. If you are talking about buying a rental property, then *maybe.*

Yes, if someone plans on staying in a house until they die, they will have lower home-related living expenses when the mortgage is fully paid off. However, they will still have to pay for maintenance, property taxes, and perhaps homeowner dues (for condos).

Owning property does not mean that one day (poof!) you’re financially independent. It merely means you own where you live.

Financial independence is about having enough money to live as you wish to live. It is not about whether or not you own the property you live in.

SR, that’s not true.
A house is an asset, but the mortgage is a liability. ‘Investment’ is not an equivalent accounting term to either asset or liability. Kioyaskai should have been whipped by his CPA for abusing these terms to create dichotomies where none exists.

Also, as everyone who is young knows, their investments are appreciating, but currently provide no “regular return on the principal”. That’s why we all have jobs.

As for Justin, others have pointed out that he needs to decide if he wants to buy because he wants to own or if he simply doesn’t want to rent and his friend is buying. I’ll assume he wants to buy.

First, stop maxing out the 401k. You talk like $200k is a lot of money (it is for most people, so i’m calling your normal) and the problem with a 401k is that you can’t use your money you’ve put into it without penalty. So stop maxing out your 401k. Go 401k to company match, then max out an IRA, then put money in a regular taxable investment account for a few years if the IRA is not enough.
Why? You can pull your principal in an IRA without penalty if you get in a tight spot, and you can pull everything from a taxable investment account if you need to, with 1 years’ worth at your marginal tax rate and the rest at 15%. That’s money you can use.

So if a month gets tight, you have several sources to pull bucks from, and you can sleep at night and enjoy your condo.

Gosh. Be careful in buying condos. In the last great real estate crash, which happened during the S&L bust, condos lost even more than single-family houses…and that was A LOT. It was harder to unload condos, and when a condo development started to lose value, it could turn with astonishing speed.

I speak from experience, having watched my Significant Other lose $40,000 on a condo as neighbors who couldn’t sell walked away when they were transferred or needed to move for other reasons, leaving their places to be sold at fire-sale prices to people who…well, let me put it this way: The guy who moved in across from Our Hero’s mother, who lived in the same complex, used to stand on his front porch with a gun at his hip and a knife in hand and threaten the neighbors…including said 82-year-old mom.

We ended up having to move her to a senior citizens’ trailer park to get her out of the place. Meanwhile, her son (my S.O.) worked a deal to transfer his own condo to the lender deed in lieu. The lender promptly went into receivership, and the receiver sold the abandoned condo. He had paid 40 grand for the charming, quiet, & roomy place; it sold for $12,000.

In a chancy real estate market, I wouldn’t take a condo if you gave it to me.

Because we tend to conflate “house” with “home,” we all feel a degree of emotional overlay about real estate. But it’s important to remember: A HOUSE OR CONDO IS A FINANCIAL INSTRUMENT, not your security blanket. Crucial to purchasing is clarity of vision: try to keep your wits about you as much as you would in buying any other kind of investment.

I’m with the dad quoted above, who said “you should never fall in love with your house because you may prevent yourself from seeing great opportunities if you are too ‘in love’ to move.” Truer words were never spoken.

There is not enough information in the article to figure out if it is right or wrong. How much is Justin paying for rent? How much his payments will be including common charges and property taxes? Is heat included in common charges? If not, what type of heat they have – electric, gas or oil? Given tax deductibility of mortgage interest and whether or not heat is included in common charges or rent, how would his payments after tax deduction compare to his rent? People keep talking about paying mortgage and being able to afford it, but they seem to forget that one has to pay rent too. Maybe he will not pay that much more after he takes taxes into consideration. On the other hand, if owning this condo is considerably more expensive than renting a comparable property, this could be a sign the prices are likely to come down more. Personally, I don’t think we’ve seen the bottom yet, but it is different for different areas.

Also, Justin should read condo by-laws to see if everything is acceptable; also check the financial statements to see the amount in reserve, pending assessments, when the place was built, etc. I’ve lived in a complex once where they haven’t raised common charges in several years, and I’ve lived in another complex where they raised it a few times.

“I am not sure what the appeal of a condo. is, but I would prefer to buy a small single, family home over a condo because there are strange fees associated with condo. life, and it’s basically an apartment.”
The appeal of a condo is not to have to worry the roof or to cut grass. Not everyone needs or wants a backyard. “strange fees” associated with the condo go to take care of the grounds, to cut grass, to clean up the driveway after the snow storm, to repair walls or roof. You are normally responsible for everything inside, but not for walls or outside structure. For example, when the bees made a nest in the attic, I called the management company, and they took care of it and repainted the ceiling. Same when there was a leak in the ceiling on the top floor (if it were between the rooms, I’d be responsible, but if the problem is with the roof – the management takes care of it).

Most condos have a pool, so common charges go toward it as well. In some condos – usually not in the townhouses, but often in one level apartments, the heat may be included in common charges. Some condos may be newer than most houses, so there may be less repairs. The flipside is that if the majority decides to replace the siding even if you think the old can last a few more years, you may be faced with an assessment for a remodeling project you don’t want. So there are advantages and disadvantages. Childless couples and single people often prefer condos because they don’t want extra hussle.

“you’ll have many homeowner-related expenses including insurance, utilities, ”
Condos normally have a common insurance policy that covers fire, storms and the like, the premiums are paid from common charges. This is usually enough for most mortgage companies. You can optionally buy additional insurance to insure your own belongings and whatever improvements you made, but this is usually relatively cheap. Heat is sometimes included in common charges, other utility costs are same as with renting.

“In the last great real estate crash, which happened during the S&L bust, condos lost even more than single-family houses…and that was A LOT”
True. But you can rent your condo out. The interesting thing about this crash was that more expensive condos lost more in absolute amounts than the cheaper ones, so it was great time for upgrading. This was when I moved from my one bedroom into a townhouse, rented out one bedroom, than sold with a nice gain in early 2000s. Easiest money I’ve ever made. Crash is only matters if you really need to sell. So it is important to investigate the condo rules about renting, also how much the rent is for these condos and how easy they are to rent out.

I don’t really know from the information what Justin should do. I wouldn’t buy right now, but in my area prices are still too high.

The_Overdog: Perhaps I should clarify — in, for example, my 401k, most of my funds pay dividends, in addition to the money earned as the stock/bond values rise.

Also, even though the house is an asset, with a (of course) liability as mortgage, the home price could drop dramatically — especially in the current housing market. As such, buying a home now won’t necessarily make it a viable short-term asset.

While my definition of investment is something that provides money, obviously most people are not tapping that income on a regular basis, and are instead allowing the interest and earnings to compound. You seem to have missed the meaning in what I wrote. You write:

“Also, as everyone who is young knows, their investments are appreciating, but currently provide no “regular return on the principal”. That’s why we all have jobs.”

You misunderstand and are incorrect. I’m not saying that when someone is young, their returns are likely to provide them with enough living income, because young people generally don’t have that kind of principal. Also, if investments aren’t providing a regular rate of return (aka earnings), it’s likely to be a wise move to change investments. If the investments *are* earning money, then they are (it seems obvious) *earning a regular rate of return.* Maybe the return is 4% one year, and 12% the next. Regardless, that is a return and can be used as present day income.

My point is that (good) investments appreciate, and that if someone so chose, they could *at any time* cash out some or all of the earnings (obviously not an IRA or 401k — unless penalties are paid). So, if my current portfolio goes up 10%, I could take that out *as income* and leave the remainder to continue appreciate. Thus, if I if were to do this on a quarterly/yearly basis, I would be getting a “regular rate of return” on my money. Obviously, the rate is highly likely to be variable, but the regularity and return still exists.

My logic is not wrong. The phrase “regular rate of return” is meant to convey what all investments should be doing — earning money for the investor. This seems pretty clear to me.

Obviously, not all investments will earn money. Thus, they are called “bad” investments. Pursuant, houses do not always appreciate, and as they provide no income (unless as rentals) or tangible and accessible money (based on their current value) to the owner, they are not an investment. (Yes, I understand you agree houses should not be considered “investments.”)

Condos – important things to know before you buy. 1) Unlike houses condo homeowners fees continue to rise. Mine has gone up 400% since I first bought. 2) Because of the rising HO fees, new buyers are harder to find because they have to be able to handle the HO fees as well as the mortgage – that is the reason condos are not usually seen as an investment along with unstable values. As mentioned above values keep changing. My condo has roller-coastered in value recently. In the past 2 years it dropped 30K in value, after rising 30K for one year only, prior to that 1 year increase it was stable in value (no real increase/decrease) for 12 years. 3) Condo homeowners share liability with their neighbors – example, if an person dies on the property such as drowning in the pool, and the death is found to be a wrongful death, the hoemowners share financial responsibility and must pay the judgement. This is not covered in HO fees. You must individually buy extra insurance to protect yourself. If you can find a way to buy a house, you will build equity and limit liability. 4) You must be sure your personally purchased HO insurance covers damage to your neighbors units if something goes wrong in your unit. I had condo insurance from State Farm for the past 20 years, when I called this year to make sure damage to my neighbors would be covered in the event a water hose breaks and floods my units and my neighbor’s unit – they laughed! [really!] That should be standard in condo insurance – but not for this company. I had to change insurance companies to get this important coverage. My neighbor whose toilet overflowed faced $20K in repairs for damages to her unit nd her neighbors. 5) Make sure you like your neighbors before you buy – go meet them and see what they have to say about the HO association. Best wishes

JD – I’d love to see this post revisited to get the perspective of time. Funny how time provides a perspective. I’m not sure if this post will get any visibility but I’d love to hear from all the folks that advised him to buy. I imagine if Justin moved ahead with the deal he is in waaayyy over his head and holding a mortgage that has him deeply underwater. Too bad so many folks ignored the signs or downplayed the signs of the failing markets mentioned by a few posters above.

By the way, in almost EVERY market renters come out ahead. People tend to dramatically underestimate the costs of maintaining a home. Face it, if you have to do just ONE major repair or maintenance item (painting, siding, roof, furnace, etc., etc., etc.) and then pay a 6% commission to sell you are already very DEEPLY in the hole if you move within the typical 7yr span of most home owners. The freak market we experienced with 10%+ appreciation is long gone! When the markets finally stop spiraling downward the appreciation will be lucky to keep up with inflation – much like it was for all the decades previous to the wacked out early 2000′s.

That said, as long as you realize you are paying for the experience of owning a home it does have its advantages over renting. For many people the financial advantage is the forced saving approach that a mortgage brings. Of course during the past decade most people pulled all the equity out and blew it on depreciating assets so they lost out on the forced savings benefit anyway.