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My parents have advised me to buy a home, as residential real-estate is still "cheap" (or what's considered cheap in my area). My parents have valid points, especially from an economic/investing perspective. However, I really do NOT want to rush into a huge wall of debt prematurely. Also, my parents may want me to have a house in case we can't save the one we (my mom and brothers) all live in.

I am 26 years of age. I have a stable career and have been employed since before graduation. I recently completed my degree debt-free and just pay rent, auto insurance (no car payment), gas and food. I earn about $75,000 per year.

I have 2/3 of my cash in a 0.23% APY Money Market account at a local credit union, and the rest in a regular checking account. I also have about $10,000 in a 401k to which I contribute 5% of my paycheck, but I'm not fully vested yet so my employer still owns half for a few more years since they matched it.

I pre-qualified for an ~4% APR, no closing costs, $3000 down, max $1000/mo ($160,000) mortgage from N.A.C.A. However, I feel uneasy about it since most houses I am looking at would require me to buy down the APR points so that the mortgage amount actually reaches the purchase prices, which are around $180,000 - $200,000.

Is this a bad investment idea for me at this time? My parents say I should look at it as an investment, not as being tied down. If it's an investment just for me to build equity and I can sell the house later if I want to, why would I want to spend lots of money buying down points? Should I wait and save more money for a down payment, closer to 20% to avoid PMI etc.?

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    Buying house "as an investment" is generally a lousy idea. Do the math, if it is cheaper to rent and save than to buy and pay mortgage - rent. – littleadv Oct 10 '14 at 8:50
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    @littleadv that very much depends on the location. Property as an investment is often a very good idea even when it costs more than renting because in a lot of places land/building values are rising far quicker than other investments could earn as well as being lower risk. So you need to qualify your advice otherwise it is bad advice. The US got burnt with overborrowing and has a low population to land ratio, that doesn't apply so much elsewhere. – JamesRyan Oct 10 '14 at 16:15
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    General rule of thumb, be wary of taking economical advice from someone about to lose their home. And, I suppose, strangers over the internet. =) – corsiKa Oct 10 '14 at 22:17
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    How likely is your career to benefit from a change of location in the next 10 years? – Patricia Shanahan Oct 10 '14 at 23:08
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    Buy your parents home and rent it back to them. – picciano Oct 12 '14 at 0:09
37

The biggest red flag is the fact that your parents may lose their house.

There are multiple parts of the decision.

  • The first is pure math. Given your income, expenses, and savings, how much can you afford, and does that get you the living quarters you need?
  • Economically does it make sense based on the local economy and housing prices to buy now in that market?

The red flag comes in because you are stretching your finances to the max to afford the house you are interested in. Buying down the interest rate makes some sense depending on how long you plan on staying, but not a a way to afford house X. Of course a bigger down payment will also influence the size of the house.

You are also buying something in case your parents need a place to live. What happens if that never occurs? You now have something bigger than you need.

You are mixing investments and housing. There is no guarantee that you will even break-even on the house as a investment. It can take several years to make back the closing costs involved in buying and selling a house, based solely on stable price and your monthly payments. If the price drops you might never make the money back.

You might be better off renting what you need now or waiting until the current house is lost and then renting what you need then.

  • He did say no closing costs, so he has that going for him. However, there are other costs associated with moving (moving vans, time off work, if you have to hire people off craigslist to help you move, cleaning it if necessary both move in and move out time...) so even if you're not feeding the banks there are a lot of moving parts. (pun intended, as always.) – corsiKa Oct 10 '14 at 22:20
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    @corsiKa No closing costs is shorthand for 'we upped your interest a bit and refunded you the closing costs in exchange', isn't it? All of the 'no closing costs' mortgages I saw when I was on the market in 2011/2012 were really just negative points (typically negative 1/2 point or so for the types I was looking at). 3.5% NCC or 3.35% + closing costs. – Joe Oct 11 '14 at 19:31
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    @corsika: I worked in the mortgage industry for several years. "no closing costs" means that the costs are buried elsewhere in the transaction. The various entities involved still get paid. – NotMe Oct 12 '14 at 18:35
  • The NACA mortgage product (which is thru BoA or Citi) does say no closing costs... but it's been a long process to "qualify" – overanalyzer Oct 13 '14 at 3:05
17

This solution obviously wouldn't work for everyone, and is contingent on the circumstances of your parents' finances with regards to their house, but... Have you considered buying your parents' house? This way your parents' desire for you to get a house as an investment would be satisfied, they wouldn't have to worry about losing their home, and you might even be able to work out a financing/rent deal that is beneficial to everyone involved. There are definitely fewer costs going this route anyway, for instance, your parents won't have any marketing costs associated with selling the house and could pass this savings along to you. Also, having lived in the house for a large part of your life you will also know what you are getting in to.

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    On the other hand, I don't think I'd want to deal with the headaches involved in having my parents rent from me. – Brendan Long Oct 10 '14 at 20:33
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    But this does make the most financial sense, they will lose far more than you will possibly gain in doing something else (and if not for them, isn't that your inheritance dissapearing?). – JamesRyan Oct 11 '14 at 3:12
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    If they're losing the house, and it's predictable, then it's probably under water, so there's no inheritance to disappear (as it's a negative-value asset) and the bank wouldn't let you buy it except at over its current value (again, a losing proposition). While you can't account for personal feeling etc., buying the house your parents are about to lose is almost certainly a bad investment. – Joe Oct 11 '14 at 19:29
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    I would have thought it would be helping them with payments rather than an actual sale. The value will go back over what they borrowed eventually, they just need to not lose it before that happens. – JamesRyan Oct 12 '14 at 1:04
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    @Joe is right. The mortgage is very underwater. It's mess that I think even if I wanted to throw money at, the bank would probably not let me buy the house once foreclosed, since I've heard there's an "at-arms-length" rule or something that close relatives cannot buy shortsales or foreclosures from each other. – overanalyzer Oct 13 '14 at 3:09
10

For the vast majority, "buying" a house via a mortgage is not an investment. I use quotes around buying because from a technical perspective you don't own anything until you've paid it off; this is often an important point that people forget.

It's highly unlikely you'll make more on it than the amount you put into it (interest, repairs, etc). Even with relatively low interest rates.

The people who successfully invest in homes are those that use actual cash (not borrowed) to buy a home at well below market value. They then clean it up and make enough repairs to make it marketable and sell it shortly there after. Sometimes these people get hosed if the housing market tumbles to the point that the home is now worth less than the amount they put into it. This is especially problematic if they used bank loans to get the process going. They were actually the hardest hit when the housing bubble popped several years ago. Well, them and the people who bought on interest only loans or had balloon payments.

Whereas the people who use a mortgage are essentially treating it like a bank account with a negative interest rate. For example, $180k loan on a 30 yr fixed at 4% will mean a total payout of around $310k, excluding normal repairs like roofs, carpet, etc. Due to how mortgage's work, most of the interest is collected during the first half of the loan period. So selling it within 2 to 5 years is usually problematic unless the local housing market has really skyrocketed.

Housing markets move up and down all the time due to a hundred different things completely out of your control. It might be a regional depression, weather events, failed large businesses, failed city/local governments, etc. It could go up because businesses moved in, a new highway is built, state/local taxes decline, etc.

My point is, homes are not long term investments. They can be short term ones, but only in limited circumstances and there is a high degree of risk involved. So don't let that be a driving point of your decision.

Instead you need to focus on other factors. Such as: what is really going on with the house you are currently in? Why would they lose it? Can you help out, and, should you help out? If things are precarious, it might make more sense to sell that home now and everyone move into separate locations, possibly different rentals or apartments. If they are foreclosed on then they will be in a world of financial hurt for a long time.

If we ignore your parents situation, then one piece of advice I would give you is this: Rent the cheapest apartment you can find that is still a "safe" place to live in. Put every dollar you can into some type of savings/investment that will actually grow. Stay there for 5+ years, then go pay cash for a nice home. Making $75k a year while single means that you don't need much to live on. In other words, live extremely cheap now so you can enjoy a fantastic living experience later that is free from financial fear. You should be able to put $30k+ per year aside going this route.


edit: A bit of support data for those that somehow think buying a home on a mortgage is somehow a good investment:

Robert Shiller, who won a Nobel prize in economics and who predicted the bursting of the housing bubble, has shown that a house is not a good investment. Why? First, home prices (adjusted for inflation) have been virtually unchanged for the past 100 years. (link 1, link 2)

Second, after you add in the costs of maintenance alone then those costs plus what you've paid for the home will exceed what you get out of it. Adding in the cost of a mortgage could easily double or even triple the price you paid which makes things even worse. Maintenance costs include things like a new roof, carpet/flooring, water heater, appliances, etc.

Yes, a home might cost you $100k and you might sell it for $200k after 15 years. However during that time you'll likely replace the roof ($10k to $20k), replace appliances ($2k to $5k), water heater ($1k), carpet/flooring ($5k to $20k), paint ($3k to $6k), and mortgage related costs (~$60k - assuming 30 yr fixed @4%). So your "costs" are between $180k and $200k just on those items. There are many more that could easily escalate the costs further. Like a fence ($5k+), air conditioner ($5k+), windows, etc.

The above is assuming the home actually appreciates in value faster than inflation: which they historically haven't over the long term.

So you have to consider all of the costs ultimately paid to purchase and maintain the home vs the costs of renting during the same time period.

Point is: do your research and be realistic about it. Buying a home is a huge financial risk.

  • Talking about owning vs. renting where a person lives independently (i.e. in parents' house): "a home might cost you $100k and you might sell it for $200k after 15 years. However during that time you'll likely replace [...] and mortgage related costs [...]. So your "costs" are between $180k and $200k just on those items." Well, so you might break even. But renting for 15 years at $1000-$1500/month for a place of comparable size/quality, that's $180K-$270K you will not get back 15 years later. Seems to make more sense to break even than be out upwards of $200K? What am I missing in this math? – A.S Mar 4 '15 at 15:03
  • @Aymor: "But renting for 15 years at $1000-$1500/month for a place of comparable size/quality, " I never said the OP should rent a place of comparable size/quality. Rather the OP should rent the smallest, cheapest place they can work with while putting the remaining dollars aside to pay cash. Then they'll have a much better likelihood of coming out ahead. – NotMe Mar 4 '15 at 15:11
  • I guess I would argue that renting for less than $1000/mo for the next 15 years for a 26 year old effectively rules out having a family, all for the sake of landing in his early 40s in a paid-for house. There is always more to personal finance than pure math, which is why advice based on pure math may not work...but yes, if you are in a place where you can live in a place like that, and spend virtually no disposable income for the sake of stashing cash savings, and call that a life worth living...then sure ;) – A.S Mar 4 '15 at 15:33
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    @Aymor: He wouldn't need to for 15 years; maybe 5 if done right. As the saying goes, "live like no one else, so you can live like no one else." Essentially, don't buy/rent the fancy house/car/etc and in a very short time you'll pay cash for that fancy house/car and not have to worry about making the bills. – NotMe Mar 4 '15 at 15:41
9

If you think that your parents' home is in danger, you might want to check what it would take to make sure their house is safe, and what the financial situation actually is. You are paying rent, there are brothers who may or may not be paying rent. We don't have the information, you have. Saving that house might be a worthwhile investment.

I assume that if you moved out, either rented or by buying a house, they wouldn't get any rent from you anymore and whatever the situation is, it would be much worse.

6

House as investment is not a good idea. Besides the obvious calculations don't forget the property tax, home maintenance costs and time, insurance costs, etc. There are a lot of hidden drains on the investment value of the house; most especially the time that you have to invest in maintaining it.

On the other hand, if you plan on staying in the area, having children, pets or like do home improvements, landscaping, gardening, auto repair, wood/metal shopping then a house might be useful to you.

Also consider the housing market where you are. This gets a bit more difficult to calculate but if you have a high-demand rental market then the house might make sense as an investment if you can rent it out for more than your monthly cost (including all of those factors above). But being a landlord is not for everyone. Again more of your time invested into the house, you have to be prepared to go months without renting it, you may have to deal with crazy people that will totally trash your house and threaten you if you complain, and you may need to part with some of the rent to a management company if you need their skills or time.

It sounds like you are just not that interested right now. That's fine. Don't rush. Invest your money some other way (i.e.: the stock market). More than likely when you are ready for a house, or to bail your family out of trouble (if that's what you choose to do), you'll have even more assets to do either with.

5

Plus, there's the feeling my parents want me to have a house in case we can't save the one we (my mom and brothers) all live in.

First, you should not be forced to buy a home because your parents are telling you to. You should have your own life. Period.

That said, while you are doing well from a salary perspective, your savings are somewhat borderline for a purchase if you ask me. Meaning your savings would essentially be the full downpayment & then your whole paycheck basically becomes payments on the mortgage.

Not a good situation to be in.

My advice would be that if you can invest in something smaller—like a small apartment for yourself—that is what you should purchase. That would allow you to invest in something but not be completely financially drained by the prospect. And then in a few years, you can sell that apartment & move onto something else. Perhaps a house at that stage?

But right now, a full home purchase would be a fairly massive risk.

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    How is buying an apartment to live in an investment when he lives at home rent free today? – JoeTaxpayer Oct 11 '14 at 16:59
  • @JoeTaxpayer He pays less for an apartment than a full home. And since housing prices do go up—this is dependent on where he is of course—in a few years, he can earn some money from selling that apartment. – JakeGould Oct 11 '14 at 17:14
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    Much of the return of a home or apartment purchase is the "imputed rent," i.e. the money saved by not renting. He lives at home. Zero rent. – JoeTaxpayer Oct 11 '14 at 19:22
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    @JoeTaxpayer Unless I've missed a comment somewhere, the question specifies that he 'rents' and lists 'rent' as an expense, so I assume he pays rent to his parents for living at home. – Joe Oct 11 '14 at 19:28
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    "the one we (my mom and brothers) all live in" - I guess he pays the parents rent? – JoeTaxpayer Oct 11 '14 at 19:57
2

Real Estate has historically been the most sound investment of all times. Not only does property consistant increase in value (which is what you want every investment to do), it does so at the highest rate with the lowest risk.

Most return on investment (like a stock in the market) the potential rate of gain is proportionat to the potential loss. The more secure an investment, the lower the potential gain.

But, with Real Estate, property typically doubles in value every 10 years.

Our overall R.E. economy is on an upward turn, recovering from a time where values tanked. to jump in now, is probably better than waiting for any amount of time, be it 1 month, or 1 year.

You concern about being "tied in" to this investment is a valid concern, however, since the market is in an upward turn, you should be more and more able to turn around and sell it later on.

The best thing that you could potentially do would be to invest in a rental property where your cost of investment (your mortgage note) is paid by the renters. However, being a landlord is always a risky business (hence, the higher rate of return, which considering your investment is ultimately zero, the return rate is huge :-) The trick would be to take the reters payments to you and keep it in an account that you use to pay for any repairs, upgrades, or marketing in between when the unit is vacant.

But, with your parents losing their house, this may not be possible - unless you take their home and then keep the living arrangments the same as they are now.

One possibility to help you get your foot in the door of being a property owner (not necessarily "investor") and help your parents keep their house (if that is what they would like to do) is re-finance with them... if you can't afford the entire mortgage, but they are capable of filling the gap between what you can afford and what their property costs, then you become partnered with them, and when/if their circumstances change, they can always buy you out.

  • Recent history contradicts the claim in your first paragraph. Some of the other answers also contradict your claim that it's a sound investment or that a house will appreciate in real value so you should probably add a source for those claims. I also wouldn't recommend refinancing a house when the mortgage is already underwater despite the OP contributing 700$ a month. – Lilienthal Oct 13 '14 at 11:26
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To be honest, if it's a home all of you share you should try and save the home for your parents. your 26, you will have plenty of time to make 30k again.

Having a home headquarters will bring some security to the family. Not only that your parents are old now, it could be hard for them to get another home. They have sacrificed for you, so maybe you should sacrifice for them?

Thank god i have no family.

-2

You earn $75,000 yearly and saved $30,000 while living at home, for two years, rent-free.

I am assuming you have been making good money for at least 2 years. How is it possible you only put away $30,000 on $150,000 of income? Were you giving something to your parents each week as rent, so they don't lose their home?

Second, if you're not sure if you will be relocated in a year or two it makes no sense to buy. House prices won't spike like they have in the past any time soon. In one year, you can save another $30,000 without suffering since you live rent free. Many couples don't even make $75,000 and they got a mortgage, 2 kids and car payments.

protected by mhoran_psprep Oct 12 '14 at 9:53

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