Advice please - first time purchaser

[Inphinity]

Hi all,

My girlfriend and I looking at making the move to purchase our first property, and have been looking around but are a bit unsure of what the main things to be aware of are. I've read a lot through this forum over the past 18 months or so, but I'm still pretty nervous about the idea.

I've just finished university (did not go straight out of school), and my GF is still studying. We have a reasonable deposit saved, and I am currently looking at a number of employment offers (yeah, maybe not what some on this board would recommend, but at the moment it's the way I think I need to go ).

We will initially be living in the property, unless there's some suggestion that an alternate idea would be better?

In terms of the figures, bear in mind this is not in the US and all values are in local currency.

If it helps with any indication, they claim the median house price in our area is currently $530k (regional median $480k, national median $340k). That said, recently there are quite a number of moderate 2- and 3-bedroom free standing houses around the $320k - $360k mark, and some apartment / townhouses showing up as low as $200k now. These are probably more the ranges we'd expect to look in at this stage.

In terms of finances, we have $30k deposit, and expect a combined income after tax of approximately $62k p/a for the immediate future. This is excluding potential income from a number of small projects I am involved with. We currently have approximately $400/month in payments such as cellphone bills, insurance, finance/debt repayments etc (not including living costs like food etc), plus student loan repayments which are calculated as roughly 10% of income (so in our case about $6200 a year). After these two amounts (~$11k) it leaves roughly $51k after-tax income. I'll take another 10% for misc variables in bills, so that leaves say $45k. Is this anywhere near enough, for us to realistically expect to cover a mortgage repayment and day to day living costs?

I've used a number of online calculators from some of our local banks and such, using these figures which try and tell me it's enough for a ~$350k mortgage but something just doesn't seem to add up to me.

We are looking at this not just as accommodation but as a mid-term investment.

What are townhouses in mass developments like, such as this one? We're confident it's definitely affordable for us, but is it more likely to lose us money long term?

I'd be very appreciative of some feedback from some who are more familiar with the desired ratios etc to help me understand just what our situation really is, and any other relevant advice would be more than welcome.

 

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[yveskleinsky]

Personally, if it was me, I would live in the cheapest place I could find while I developed and implemented my plan. Buying a personal residence isn't an investment, especially one that will eat a large chunk of your income when you have no other "plan" income coming in. Buying a mid-high priced home only ensures that you stay in the rat race for a longer period of time, as you put yourself in the position to need a job to pay the bills.
...Are you planning on starting a business of some sort? What is the next step for you two?

Sorry, that was a bit of a tangent. To just answer your question, I like to keep my housing under 25% of my total net income. Which includes utilities and taxes as well.

 

[Inphinity]

Awesome, thanks for the reply. Yeah, I understand what you mean about buying it to live in isn't really an investment - we could rent somewhere for less than we would be paying in a mortgage (but to be honest the way prices have dropped, and around here rents haven't dropped to match, it isn't a big difference we're talking $200/month even taking into account local council fees etc - should I expect the rents to drop significantly in near future?), but most of the other costs would be the same and I guess our view was, at least at the end of the day if it was a purchase not rental, we would likely (I know things can go south, heh) have at least some value out of it.

In terms of the ratio you mentioned, 25%, the property I linked would work out at roughly 28% of our net income if we were to purchase it based on current interest rates etc. Do you think that's a realistic value to look at? I guess it could be a bit rough if things get worse.

In terms of what we're looking at, for the immediate future I plan to be working fulltime, my GF is still at uni and will be working part time, and I am looking once we have a few other things sorted to start a small business, though I'm not comfortable going into the details of that yet. Also, we may look at renting a room out to a friend who is looking for somewhere to stay, which will help further offset some of whatever rent or mortgage costs we wind up with.

 

[yveskleinsky]

If I were in your shoes, and the cost to rent was close to the cost to buy I would probably learn towards buying, however I would take some other factors into consideration:

1. Is this the highest and best use of your $30k? You had mentioned starting a business down the road, would you be better off holding the $30k to invest in the business and renting an apartment?

2. What is the market doing in the area? You mentioned prices going down. You also mentioned that "at least at the end of the day if it was a purchase not rental, we would likely (I know things can go south, heh) have at least some value out of it." Not true. If the market is going down there is a solid chance that you will be very quickly upside down on this property and owe more than it's worth.

3. What is your plan with your girlfriend? If you guys are pooling money to buy a house, even if it is your down payment and she is helping out with rent, things can get ugly if you guys break up. ...If you do go this route, get a clear understanding of what happens to the down payment money, the equity and the rent money; meaning, who is entitled to what if you guys split. ...Trust me on this one.

4. Turning the home into a partial rental. I like the idea of you renting a room or two out to friends to help cover costs. I did this myself and it helped put me through college. The downside is you are a landlord and have to be the bad guy once in awhile. Just something to consider.

Again my .02 (so take it for what it' worth), would be to see you guys move into an apartment you can easily afford on your own, that way if you break up you aren't up a financial creek, and put the money aside to start your business. After you start your business and you start seeing some profit then buy a home that you can easily afford.

I know I may be a kill joy on the whole affordability thing, but I tell ya, nothing kills creativity, concentration or relationships faster than a lack of money. So just know that going in and plan accordingly.

 

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[TaxGuy]

4. Turning the home into a partial rental. I like the idea of you renting a room or two out to friends to help cover costs. I did this myself and it helped put me through college. The downside is you are a landlord and have to be the bad guy once in awhile. Just something to consider.

Roomsharing FTW!!!

I understand that most buy a house for privacy(or investment), but if you can do a good job of property manager/landlord then why not get some cashflow out of your own property :smxB:

That way you can stick it to RK when he says that buying a house is a "liability" and not an "asset"

 

[Sid23]

Seven Questions Every Home Buyer Should Ask

What you really need to know about a home might not be visible to the eye.

No house is ever perfect, and features that delight one buyer may send another into fits of dismay. This conundrum means you need to know your own preferences and find out as much as you possibly can about a home you may wish to purchase. Here are seven tough questions you should ask:

Q: Has this house ever been damaged in a fire or a disaster such as a flood or an earthquake?
Like a car that has been involved in a major accident, a home that has suffered extensive damage may not have been repaired up to the original standards. Such poor-quality repairs might not be discernable to the average buyer so it’s a good idea to ask this question. Be sure to ask about structures other than the main house such as a detached garage or swimming pool as well.

Q: Is this property governed by a homeowner's association, tax assessment district or any other entity?
Local boards, homeowner's associations and assessment districts can have extensive powers to collect dues, charge fees, set fines and otherwise dictate or limit how owners can use or modify their property. Some entities can even levy taxes in some states. Find out who's in charge and what the rules are before you buy a home that's governed by a quasi-private board or association.

Q: Have you experienced any nuisances such as noise or other problems in the area or among the neighbors? Many homeowners enjoy the sounds of city life, but others consider garage bands, barking dogs, loud parties, motorcycles, gasoline-powered leaf-blowers, childcare centers, helicopters, ambulances and the like to be nuisances. To assess the level of noise and other disturbances, visit any home you may want to buy at different times of the day and night, as well as during the week and on the weekend.

Q: Have there been any crimes committed in the neighborhood such as burglaries, car thefts or violent crimes against people?
Few populous areas are completely free of crime, yet some neighborhoods are plagued by specific types of crimes that may be of particular concern to you. Trespassers might suggest the neighborhood wouldn't be safe for young children while a place that's known to attract car thieves might preclude converting your garage into a workshop, to take just two examples.

Q: Has this home been remodeled and if so, was the work done with or without permits?
While many older homes may have been attractively remodeled, un-permitted modifications or additions might not comply with local building codes. Some authorities can force homeowners to bring improvements up to code or even dismantle those that were made without the proper permits. If the home was remodeled with permits, ask for copies of the permits and any inspection reports or approvals.

Q: Has this home been vacant or occupied by tenants and if so for how long?
Homes that are vacant or occupied by renters may not be as well maintained as owner-occupied homes. Repairs and amenities may be of lower quality in such homes as well. You may also want to ask whether any nearby homes are vacant or tenant-occupied.

Q: Are you aware of any other information that you would want to know about this house if you were going to buy it yourself?
This catch-all question may help you find out adverse facts about the home that you wouldn't otherwise be told. A seller or realty agent might be forthcoming in response to this type of direct question. You may also want to familiarize yourself with any state laws that require disclosure of material information about for-sale homes.

 

[GettingThere]

Money items aside, my suggestion is to keep the emotions to a minimum. Don't let excitement or emotional justification sway your decision or force the "logic" to work...speaking from experience.

Good luck!

- John

 

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[biophase]

Just wanted to commented on your initial statement that rent and purchasing differences are about $200.

Remember that it's not only a $200 difference. But if you purchase you also had to put down $30,000 upfront. You are responsible for a major repairs, HOAs and taxes. As a renter you pay less, keep $30k in the bank and have less responsibility.

 

[Inphinity]

Again thanks to everyone for the feedback. No, I won't let emotion make the decision - that at least is one of things I've always been pretty good at

As to if it's the best use of the savings, well, I guess that's one of the big reservations I have. I do want to make sure we make the best decisions in that regard, so will have to think on it a bit more.

We have also considered what would happen in event of a relationship breakdown, and have discussed possibilities at length. At the moment, though, things are good, we have been together 6 years and expecting our first child part way through next year (which may have an impact on things, too, though we've tried to take this into account in all planning so far).

The market has been dropping, but it looks like it is going to bottom out pretty soon, and a number of people I've spoken to who have been involved in the real estate industry in this area for 20+ years tend to think it will be at it's lowest in about 2 - 3 months, and begin to rise again shortly after that. Of course, that's a handful of people's opinions and I simply don't have the knowledge or experience to decide if they are correct or not.

In terms of renting, I guess we both have a bit of a mental blah about the idea of it - and I know a lot would disagree with this view - but we both feel it's kind of like throwing money away for nothing. At the end of a year we may have paid $15k in rent and, move out and have nothing to show for it. yes we'd have had housing for 12 months but, I don't know, it just feels weird. I've never been a rental / hire type person for anything other than one-off type things (e.g. maybe hire a trailer if we need it once to move something, but if we were semi-regularly using it I'd buy one). Maybe we should reconsider this view, but I'm not sure I could persuade myself otherwise.

Yeah, we've looked at the differences in expenses / responsibility etc between renting and owning, at length, as with the use of savings it's something to very much consider.

At the moment the savings is just sitting in a moderate-interest bank account. We should probably look at alternative options here, too, but not very confident in that regard.

 

[biophase]

In terms of renting, I guess we both have a bit of a mental blah about the idea of it - and I know a lot would disagree with this view - but we both feel it's kind of like throwing money away for nothing. At the end of a year we may have paid $15k in rent and, move out and have nothing to show for it. yes we'd have had housing for 12 months but, I don't know, it just feels weird.

Please explain to me what you think you will have after 12 months of owning vs renting. I think you'll find that it's not that much if not less.

 

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[Inphinity]

Please explain to me what you think you will have after 12 months of owning vs renting. I think you'll find that it's not that much if not less.

Regardless of change in value, because I fully understand (especially the way things are at the moment) it's entirely possible the property will be worth less than when we purchased, would we not still have ownership (again, yes, I understand that there will be a mortgage etc) of the property?

If you're suggesting we'd be better off renting - and bear in mind we are not looking for a short-term home - I'm more than happy to hear your recommendations. I know you mentioned above responsibility and use of the $30k - you're suggesting there's a better use for this?

And don't take that as me saying there isn't, I *know* there are, but I don't know what would be a better use for it, that either myself or my gf have the knowledge to take advantage of.

However, that is also one thing we've considered - renting while at least exploring ideas or educating ourselves on a better use of the money... just without any specific plans on what at this stage. The business opportunity I mentioned briefly above, should not need anything like that sort of investment from us.

Should we rent somewhere, and try and educate ourselves on share trading or something? Sorry, I'm not really that familiar with the best ways to utilise these funds, so any suggestions on that front would be fantastic.

 

[White8]

3. What is your plan with your girlfriend? If you guys are pooling money to buy a house, even if it is your down payment and she is helping out with rent, things can get ugly if you guys break up. ...If you do go this route, get a clear understanding of what happens to the down payment money, the equity and the rent money; meaning, who is entitled to what if you guys split. ...Trust me on this one.

Excellent point. You may want to spend a little money with an attorney and set up an LLC for your property(ies) for your protection from outside forces as well as letting that 'mean' attorney define the legal terms of the business relationship you have with your girlfriend rather than doing it yourself. (it would sure beat sleeping on the couch for the next week)

You may want to look at duplexes or smaller multi family (4-6 units) Worst case your neighbor would be paying for your place to live, best case it would throw off some cash flow.

As GettingThere mentioned, keep emotion out of the purchase and don't over manipulate the numbers trying to get a purchase to work. I watched someone do this and they dug themselves a $2M hole that they can't dig out of.

 

[yveskleinsky]

Regardless of change in value, because I fully understand (especially the way things are at the moment) it's entirely possible the property will be worth less than when we purchased, would we not still have ownership (again, yes, I understand that there will be a mortgage etc) of the property?

If you're suggesting we'd be better off renting - and bear in mind we are not looking for a short-term home - I'm more than happy to hear your recommendations. I know you mentioned above responsibility and use of the $30k - you're suggesting there's a better use for this?

And don't take that as me saying there isn't, I *know* there are, but I don't know what would be a better use for it, that either myself or my gf have the knowledge to take advantage of.

However, that is also one thing we've considered - renting while at least exploring ideas or educating ourselves on a better use of the money... just without any specific plans on what at this stage. The business opportunity I mentioned briefly above, should not need anything like that sort of investment from us.

Should we rent somewhere, and try and educate ourselves on share trading or something? Sorry, I'm not really that familiar with the best ways to utilise these funds, so any suggestions on that front would be fantastic.

...Yes you would have ownership of a property with potentially negative value. Lucky you. I suppose I have two questions for you: 1. Why would you want to have ownership of an albatross around your neck? and 2. You really can't think of a higher and better use with $30k than to invest in a property that is losing value?

Here's some friendly advice: Do nothing with the money for the next 4 weeks. During that time read a minimum of 400 threads on this forum. That's 100 a week, 20 a day (taking off weekends.) Focus your energy on the "Building Businesses- Internet", "Building Businesses- Bricks and Mortar" and "Residential Real Estate" threads.

After you do that, then I think you will find the answers to your questions.

 

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[biophase]

Regardless of change in value, because I fully understand (especially the way things are at the moment) it's entirely possible the property will be worth less than when we purchased, would we not still have ownership (again, yes, I understand that there will be a mortgage etc) of the property?

What I mean was that you said,

"In terms of renting, I guess we both have a bit of a mental blah about the idea of it - and I know a lot would disagree with this view - but we both feel it's kind of like throwing money away for nothing. At the end of a year we may have paid $15k in rent and, move out and have nothing to show for it. yes we'd have had housing for 12 months but, I don't know, it just feels weird."

I asked what you think you would have at the end of 12 months of owning. This is what I was looking for.

Paid $17,400k in mortgage payments
Paid down $1,000 in principle on your loan
Spent your $30k on a down payment
Become responsible for all home maintenance

If the home does not increase or decrease in value in 12 months. You have spent money just for the feeling of homeownership. You can always buy a home in 12 months.

 

[Inphinity]

Well, another option that I had been considering looking in to, and I have only been able to find a handful of posts about it on here, is purchasing an inner-city apartment (a single apartment, not a block/etc which seems to be what most discussions about apartments on here have been that I can find) and renting it out.

Two that I have looked into recently, both appear to have a positive cashflow of about $100/month taking into account loan repayments, bodycorp fees and council fees. However, I have not taken into account any maintenance etc - in an apartment block would this work normally be covered by the bodycorp / building management or individually by each unit owner? Is this path even worth looking at?