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Housing from scratch
Old 07-09-2010, 05:04 PM   #1
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Housing from scratch

I've got a long time to go till I hit FI, and I'm currently renting. It seems like many people have paid off houses as part of their FI plans. Anybody have suggestions for figuring out the right path when you've got a fairly long time horizon to go?

Psychologically I've wanted to buy a house, but it is fantastically expensive in Silicon Valley. I've got the possibility of doing it as a group thing with friends if I want to try and organize that, which might manage to bring the individual amount down to something I can make monthly payments on.

So, does continuing to rent just make sense? I've seen the arguments that CA has the rent to mortgage ratio heavily in favor of renting ever since I first started looking into it. I could cut my renting expenses by moving into a bigger house with more people if my current housemate (good friend) moves away. I'm social enough that that likely wouldn't bother me, and I'm old enough that I'm relatively mellow as a housemate.

So, continuing expense of paying rent, with the freedom of not being tied down to a house? Is the building equity so valuable that I should be doing everything I can to make that happen despite the apparent much higher cost to purchase a house?

If buying a house is the one true path, should I raid my 401k/Roth for a house downpayment? I view that money as untouchable and my models say that is a huge setback for my FIRE goals, but houses are one of the things they let you have access to money in those accounts for, and I have enough for a small downpayment. It is really frightening that hitting a 20% downpayment in Silicon Valley can cost more than buying a nicer house outright in Pittsburgh PA.

I'd love to be able to take my $1000-1500 a month for household expenses in FIRE and turn that into something smaller, though frankly, for many houses, just paying taxes around here can be $200-600 a month never mind the maintenance and other monthly bills my renting estimate rolls together...
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Old 07-09-2010, 06:20 PM   #2
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I purchased a house in california two years ago, so I understand where you are coming from on the large amount you will need for a downpayment, etc. I also used to live in the San Jose area, so I know prices can be high.

First of all, I would never raid a 401K or Roth for anything. If you decide buying a house is the way to go, then you just have to start saving and maybe lower retirement contributions for a bit. You did not say how old you are, but I did purchase with my boyfriend, and you may eventually have a significant other or someone to make this purchase with. That can make the payments work.

With that said, even though my mortgage is probably higher than rent would be today, it is fixed! As rent prices continue to rise, my monthly mortgage will appear to get smaller and smaller over time until eventually it is paid off and that expense goes away completely. Also in cali we have prop 13, so for now property tax can only rise a certain percentage a year, which over time keeps it relatively low compaired to inflation.
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Old 07-09-2010, 07:38 PM   #3
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Oh, one of the things that comes up is that I know that anything over a 30 minute commute starts wearing on me, and so while I'm perfectly happy to drive an hour to visit friends, driving 45 minutes to get to work is a huge drain from my day. I do have the advantage that I can keep my commute short by changing where I live when I change jobs. I work in the computer game industry and we tend to change jobs more frequently (often when a game ships), every company I've worked at in the last 16 years has been for less than 4 years.

I'm 38, and hoping to get to an FI state as soon as possible, ending up tied to a job to cover a mortgage isn't high on my list of happy states to be in, but of course it takes a job to pay my rent too, so perhaps that's a wash.
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Old 07-09-2010, 10:17 PM   #4
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The real risk for you owning a home is the job change that requires a move and sell. The transaction costs in real estate are a killer.

RE prices in the Valley and Renton have stabilized. If you could find a 'fixer' in a neighborhood that you would like to live in once you are FI you can always rent it out for a year or two to accommodate a job change.
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Old 07-10-2010, 07:53 AM   #5
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There is nothing magical about owning a house vs. renting. You get control over the asset and don't have to put up with landlord issues, but you are on the hok for everything and in many areas it is net-net a lot more expensive. If renting works for you, do it. You can always buy later if you wish.
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Old 07-10-2010, 09:30 AM   #6
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There is nothing magical about owning a house vs. renting. You get control over the asset and don't have to put up with landlord issues, but you are on the hok for everything and in many areas it is net-net a lot more expensive. If renting works for you, do it. You can always buy later if you wish.
+1

The first house that DH and I bought ended up being the best financial decision we've made. The second house was by far the worst financial decision we've made. Unless you're really sure you want to stay somewhere long-term, I'd keep renting for now.
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Old 07-10-2010, 10:43 AM   #7
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There is nothing magical about owning a house vs. renting. You get control over the asset and don't have to put up with landlord issues, but you are on the hok for everything and in many areas it is net-net a lot more expensive. If renting works for you, do it. You can always buy later if you wish.
+2 (and this is from a long-time home owner - and yes I perfer owning, and I am a retiree with a paid-for retirement home)...

As a certain poster says on BH's "there are many roads to Dublin..."

What works for me/DW may not work for you and your situation. Am I right and you wrong? No. Are you right and I'm wrong? No.

As in all things, it all depends.

Good luck to you, regardless of your decision...
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Old 07-10-2010, 10:03 PM   #8
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The real risk for you owning a home is the job change that requires a move and sell. The transaction costs in real estate are a killer.
Yep!

Originally Posted by brewer12345
There is nothing magical about owning a house vs. renting. You get control over the asset and don't have to put up with landlord issues, but you are on the hok for everything and in many areas it is net-net a lot more expensive. If renting works for you, do it. You can always buy later if you wish.

Yep!

I own my home, have owned rentals in the past and probably again in the future. Real estate can be an excellent investment and sometimes not.
Buying shares of ownership with friends has a lot of potential to turn ugly.
Transaction costs can really hurt if you have to move. Not sure about the numbers today but when I was in CA the rent vs buy numbers were shock, shock, shocking. I couldn't understand why anybody would buy.

Buy if it's right for you but don't believe it's a mandatory move in order to win.
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Old 07-10-2010, 11:22 PM   #9
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In the Valley buying a home is a decision to set an anchor. If you plan to live there into your 60s buying a home in your 30s can make sense. What I see is that the communities are unwilling to change zoning to accommodate higher density which means that there is enormous pressure on housing. The other factor, which is unique, is that many homes are purchased with redeemed stock options. So long as the Valley is the home of start-ups housing prices do not compute based on salaries.
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Old 07-11-2010, 07:34 AM   #10
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In my un-expert opinion, unless one lives in a highly unusual area, one should plan on being in a house at least 10 years before selling. This is only the 4th house I have owned. The first house (a townhome) we tried to sell in 1982 when interest rates were something like 12-14 percent. We had to rent it out for 3 years before selling. Lost money. The second home we had to sell in a soft market for a job relocation. Lost money and were lucky to sell at all. My third home (sold in early 2004) was not as bad...sold it myself for double the purchase price having lived in it for 11 years. When I say double, though, I did not deduct out the considerable money we poured into the place in renovations. I think I would be hard-pressed to sell my present home for what I paid for it six years ago. I have heard that lots of deals in my area are taking a long time or falling through due to buyers not being able to get financing. And buyers are demanding a bargain, too. I sometimes wish that I had just rented instead of buying in 2004 but the rental options around here at the time were not too attractive. I have to stay put until I retire from my job and will likely move to a second home in FL that I own (currently lived in and maintained by a cousin). I won't even open up the can of worms on this second home...It sounds like the OP lives in an area where getting roommates to subsidize a purchase would be no problem...such is highly unusual here for people my age.
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Old 07-13-2010, 08:48 AM   #11
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Well, I'll be honest with you. We've been on the fence time and again regarding that.

In our case, we bought at a decent time, and after 2 refinances, we have a short term (15 yr) low rate (4.625%) mortgage, with only 12 years & 8 months left.
After that, it'll just be $8,500-$9,000/yr or so for property taxes (state of NJ is the highest property tax state in the nation).
For that, we'll need about $225,000 saved up so that we'll use the interest to pay for the property taxes.
The 30 year mortgage didn't cut it for us because we wanted to have it paid off before I was 60 years old. That is still our goal.
I can't see rents in our area going for anywhere near $750/month in another 12+ years.
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Old 07-13-2010, 09:02 AM   #12
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I think that buying a home can have some advantages in one's 30s as a way of forcing you to save money, via the repayments and subsequent accumulation of equity. It also depends on how flexible you want to be in your job and whether or not houses are generally easy to sell on in your part of the world. Being caught between the rock of having to sell quickly in a place or time where the market isn't very interested, and the hard place of a possible bridging loan and/or paying rent and a mortgage at once, can be a killer for family budgets.

In my current situation I probably wouldn't buy unless I found somewhere which was an absolute bargain. But then, my home is not the most important thing I own/do/etc. If you absolutely have to have your home "just so" then you've got much less chance of finding happiness in renting.
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Old 07-14-2010, 04:21 PM   #13
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I live on the other coast, but I can understand the underlying urge to buy. I own my townhouse outside of DC, but only bought (10 years ago) because I knew I'd be here for a while. Even with the market slump, they sell for twice what I paid for it back then.

My SO bought a condo 2 years ago and is completely underwater; luckily, he doesn't feel the need to sell as he is renting it out right now. We figure he'll have to hold it for 8-10 years just to break even.

So, it really depends. You can't rely on appreciation; it's more about plans to stay in an area and your retirement goals. What if you plan to retire to small-town mid-America? What if you plan to just rent in retirement? There are many options for the future that might not lead to the decision to buy in Silicon Valley.
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Old 07-14-2010, 07:14 PM   #14
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I asked my DD about the Times article on foreclosures in Los Altos (where she lives). One house looked familiar, she said it is the one kitty-corner from where the kids play T-ball, it is listed with an unfamiliar RE agency. The house on the hill is actually in Los Altos Hills, a different but adjacent area.

She said that several of these home 'owners' purchased those houses with the belief that they could sell them easily with some minor upgrades if for financial or professional reasons they want to move. These same folks don't have strong ties to the community.
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Old 07-14-2010, 11:12 PM   #15
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So, it really depends. You can't rely on appreciation; it's more about plans to stay in an area and your retirement goals. What if you plan to retire to small-town mid-America? What if you plan to just rent in retirement? There are many options for the future that might not lead to the decision to buy in Silicon Valley.
In my case I expect to stay in California when I retire, I really do love it here, and many of my friends are here. Renting in retirement seems reasonable, I just worry that given how many FIRE folks have paid off houses that perhaps I am missing something important (all my research says buying the house isn't something I can manage here by myself without a big hit to retirement savings).
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Old 07-15-2010, 05:40 PM   #16
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Retch The Grate: my DD's first home was in Sunnyvale. From the look of her house it was built in the late 60s-early 70s, split level typical of that era. Except for the homes that folks have remodeled extensively most are small by today's standards. BUT if you can find a well located sound small house in that area an addition to accommodate a family would make economic sense. The schools are decent.

The property tax structure favors long time residents, better to remodel than sell. Because of that tax structure many stay in their homes when in other communities seniors would 'down-size'. Were I you I would start to study target communities and put yourself in a position to pounce when/if opportunity strikes.

My take is that 'Tino homes don't offer the values of Sunnyvale. Mt. View's are in-between.
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Old 07-16-2010, 12:46 PM   #17
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I rent in retirement. Many people think I am crazy. But the rent is only $1/sq.ft. a month and the purchase of a comparable property is $1000/sq.ft. so you can see why we do it.

If the economics changes, I would have no trouble purchasing. We own our winter property. But we were able to buy it for $180/sq.ft.
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