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The Value of Home Equity (another "Should I buy this house?" post)

Home Mortgages and Home Buying The Value of Home Equity (another "Should I buy this house?" post)

  • Avatar Tim 
    Participant
    Status: Accountant
    Posts: 2590
    Joined: 09/18/2018

    “I know I can “win the game” if I continue saving money, living frugally, and work the schedule and amount I want.”

    There is nothing wrong with being aggressive. Sometimes it’s absolutely necessary. In tennis often one sees big hitters that put away impressive winners. Why don’t they dominate? You win points, games, set and match. Unforced errors! Don’t see any pressure points to try to hit a winner. If it goes awry, it could actually set you back. Just seems like the return doesn’t justify going for it. Playing your game is usually best.

    #190785 Reply
    Avatar adventure 
    Participant
    Status: Spouse
    Posts: 1154
    Joined: 10/24/2016

    Everyone I have talked to keeps mentioning how much “equity” we will be building by renovating this house at this “low” purchase price.

    Click to expand…

    So, we did this.

    Fixing up a house blows unless it is something you like doing.  There is a reason it is cheaper to buy and old house and fix it up.

    Click to expand…

    I do. Is a great mental relief for me.

    It is a lot of work and there is substantial risk that it will cost more then expected.

    Click to expand…

    It will. Double your estimates, and it still will.

    It works for our marriage to live in a not perfect house. Apparently it doesn’t for many. We bought a place, today zillow has it up 81% from what we paid. In that sense, I’ve made more on the house than at my job. I think that’s a bit high, but whatever. We do love the neighborhood. We could have been happy elsewhere too. What we do believe is that we could die happy in this house. We have zero interest in moving/looking  (moving to scandanavia aside…)

    What the calculations overlook is the cash is has taken to get the house fixed up (and the extra 100K we’d still like to spend on new windows, fence, deck, another bathroom, and solar). The NPV of cash is significant.

    #190813 Reply
    Liked by Zaphod
    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 1897
    Joined: 01/15/2017

    I think the reason it was not bought by any flippers was essentially poor advertising. They are an older real estate agent and older seller that were not very motivated and made multiple errors on the listing (wrong number of bedrooms, bathrooms).

    We don’t have a lot of other expenses. I did not count my spouse’s income as I don’t want to be dependent on it for this decision to work in case they ultimately want to stay home or work part-time.

    Regarding other expenses, I have a pretty high savings rate now (around 50%) though I suspect this may change with the baby. That’s why I was able to pay off loans and max out retirement accounts almost three years after residency. We will probably need a new car in the next few years, other than there is nothing obvious upcoming expense I see.

    Regarding the nitty gritty, I am planning to put only 5% down on a physician loan. We are going to arrange a home inspection next week where I can hopefully get an idea on how much is wrong with the property and what it will cost to fix it.

     

    Click to expand…

    Having been through my sister’s three huge remodels in the Bay area, it’s always more than you believe it’s going to be.  The first was a teardown to the studs, the second was a general remodel and the last was gutting the Painted Ladie’s architect inside and rebuilding it. —lots of work

    Bring in a construction renovation guy to get ideas and be ready for a major reno as it sounds like that.

    #190833 Reply
    Avatar wideopenspaces 
    Participant
    Status: Physician
    Posts: 1014
    Joined: 01/12/2016

    How old is the home? If it’s built after 1980 or even 1990, it’s probably got asbestos everywhere. We just went through asbestos abatement in our basement last week after a fun surprise sewer backup into the basement. Spoiler alert: It’s not fun and it’s very expensive. And that shiz is everywhere in older homes- the floor, walls, ceiling, wrapped around the pipes . . . You might also have to deal with lead paint. Making an old house liveable is much more expensive than you realize because you are going to shell out money for boring stuff like plumbing and electrical and structural things to make it safe, but not pretty. And forget doing it room by room because once you get into one room you will inevitably find problems that spill over into other areas of the house. Our sewer backup led to tearing up the main sewer line outside the house, nearly having to renovate the first floor bathroom, along with having to repair several rooms in the basement that were affected. Believe me, you will not want to live through years of renovations. You will only want to go through it once. If you get it inspected, don’t just have a run of the mill inspector, have a plumber, an electrician, etc go over the house. And the last thing to consider is that children ruin everything. I am an organized neat freak but my toddler ruins everything no matter how closely I watch him. We will renovate the rest of our house, when he’s in grade school and isn’t throwing his sippy cup everywhere, covering walls and furniture in chocolate milk. It wouldn’t hurt to stay in a rental a few more years, is all I’m saying 😉

    #190882 Reply
    Liked by hatton1, Zaphod, Kamban
    Avatar NWMD 
    Participant
    Status: Physician
    Posts: 11
    Joined: 07/15/2018

    I had a long talk with my wife tonight. She was concerned about how stressed out I have been this week over just the dilemma of buying this house. I’ve been getting bad sleep, been more easily flustered, and otherwise just not acting like my normal self . We both agreed that this project is probably over our heads and could easily make us house poor and miserable. We are really happy in our rental and I’m not sure that this house will increase our happiness enough to justify the crazy price and stress. I think the house would ultimately be a good flip or investment opportunity for someone, but is probably not for us right now.

    I can get out of the deal after the home inspection next week. It gives me a little more time to consider my options but I’m leaning towards letting it go.

    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 1897
    Joined: 01/15/2017

     I’ve been getting bad sleep, been more easily flustered, and otherwise just not acting like my normal self . .

    Click to expand…

    Sweat equity can be priceless, but it comes at a cost.  Many marriages don’t survive custom home builds, let alone a renovation project.

    IMHO – you’ve answered your own question with your last post .  multiply that out x 9 months while living in it.

     

    #190902 Reply
    Avatar fasteddie911 
    Participant
    Status: Physician
    Posts: 296
    Joined: 05/31/2016

    I think going with your gut is the smart thing to do, if you feel like this now it’ll only get worse when you buy it.  Many would ignore their gut and just look at potential dollar signs.  You can do very well continuing to rent for the next few years while padding your accounts.

     

    #190908 Reply
    Liked by Zaphod
    Avatar fasteddie911 
    Participant
    Status: Physician
    Posts: 296
    Joined: 05/31/2016
    All that said, WCIs rules about incomes vs mortgages (2-3x) simply don’t apply to HCOL / vHCOL areas…I think going to 3-4x income in HCOL areas can be done while still minimizing risk. 

    Click to expand…

    I fully disagree with this and it is becoming one of my biggest pet peeves.  Why do people think they get a “pass” on real estate debt simply because they choose to live in a HCOL area?  Regardless of where you live or what you make, if you go into massive levels of housing debt (3-4X annual income is definitely MASSIVE), then you are making yourself house poor.  You are signing up for debt that will take you a long time to pay off and/or rob you of the opportunity to save more for retirement in your critical early working years. This will likely result in delayed FI and delayed retirement.  That doesn’t change just because you’re in an expensive zip code.

    As I said above, I feel for those who live in these areas and want to own a home, because it basically means you have to choose: save more for retirement or sign up for massive housing debt.  Now, if you love your job and you want to work until you’re 70.  Fine, it probably doesn’t matter if you’re house poor.  But if you want the option to retire at 55-65, signing up for 2 million dollars of housing debt on a 500k salary is going to make that more difficult.  Especially when you consider that everything is more expensive in those areas, not just the housing.

    Click to expand…

    I live in a HCOL area.  I live here because that’s where all my family lives and these areas need doctors too.  We all need someplace to live, we can either rent or buy.  Certainly renting can work out very well and it’s a viable option.  I’ve run the math for my situation and renting and investing the difference can work out slightly better or at least break even.  However, I’m considering buying a house that is 3x income and while certainly not as lovely as 1x-2x income, it’s not the end of the world.  Take a doctor at age 30, no debt, living in seattle (no income tax), earning 400k, buying a 1.2M house with zero down.  PITI and maintenance is say 7500/mo for 30yrs at 4%.  After taxes, 401k and housing expenses, there’s maybe 200k or so left to spend on expenses, savings, school, etc.  That’s still a lot of money to have the option of retiring in your 50’s.  Of course if you live the high life, send kids to private schools, private college, etc. that’ll delay retirement.  Certainly it’s not as financially ideal compared to a cheaper area and it’s not the fastest way to FIRE, but it’s not dire working until 70 either.

    #190910 Reply
    Avatar Dont_know_mind 
    Participant
    Status: Physician
    Posts: 883
    Joined: 11/21/2017

    Everyone I have talked to keeps mentioning how much “equity” we will be building by renovating this house at this “low” purchase price.

    Click to expand…

    So, we did this.

    Fixing up a house blows unless it is something you like doing.  There is a reason it is cheaper to buy and old house and fix it up. 

    Click to expand…

    I do. Is a great mental relief for me.

    It is a lot of work and there is substantial risk that it will cost more then expected. 

    Click to expand…

    It will. Double your estimates, and it still will.

    It works for our marriage to live in a not perfect house. Apparently it doesn’t for many. We bought a place, today zillow has it up 81% from what we paid. In that sense, I’ve made more on the house than at my job. I think that’s a bit high, but whatever. We do love the neighborhood. We could have been happy elsewhere too. What we do believe is that we could die happy in this house. We have zero interest in moving/looking  (moving to scandanavia aside…)

    What the calculations overlook is the cash is has taken to get the house fixed up (and the extra 100K we’d still like to spend on new windows, fence, deck, another bathroom, and solar). The NPV of cash is significant.

    Click to expand…

    A question for you adventure. Say you had bought the place, not improved it.

    1. How much (%) would you be up from what you paid

    2. How much would you be up (%) with with improvement from what you paid : (current value-initial cost-improvement costs)/(initial cost+improvement cost) ?

    #190922 Reply
    Avatar Dont_know_mind 
    Participant
    Status: Physician
    Posts: 883
    Joined: 11/21/2017

    I had a long talk with my wife tonight. She was concerned about how stressed out I have been this week over just the dilemma of buying this house. I’ve been getting bad sleep, been more easily flustered, and otherwise just not acting like my normal self . We both agreed that this project is probably over our heads and could easily make us house poor and miserable. We are really happy in our rental and I’m not sure that this house will increase our happiness enough to justify the crazy price and stress. I think the house would ultimately be a good flip or investment opportunity for someone, but is probably not for us right now.

    I can get out of the deal after the home inspection next week. It gives me a little more time to consider my options but I’m leaning towards letting it go.

    Click to expand…

    Have you put down a deposit – if so how much ? How much would you forfeit ?

    Here is what I would do:

    If you haven’t (put down a deposit), you can walk, and say this is too stressful, and when they ring you back in a week or 2, offer 800k.

    But I am possibly the worst negotiator ever so don’t listen to me.

    Don’t worry about renos though, I just live in it. Would depend on your spouse being happy with living in a dump. My wife wouldn’t let me do it, but I have a burning desire to. Then sell it for 500k profit, CGT free. Or so that is the plan. Good luck ! Just make sure you don’t sell it for a loss though.

    #190923 Reply
    Avatar hightower 
    Participant
    Status: Physician
    Posts: 1448
    Joined: 12/07/2016
    All that said, WCIs rules about incomes vs mortgages (2-3x) simply don’t apply to HCOL / vHCOL areas…I think going to 3-4x income in HCOL areas can be done while still minimizing risk. 

    Click to expand…

    I fully disagree with this and it is becoming one of my biggest pet peeves.  Why do people think they get a “pass” on real estate debt simply because they choose to live in a HCOL area?  Regardless of where you live or what you make, if you go into massive levels of housing debt (3-4X annual income is definitely MASSIVE), then you are making yourself house poor.  You are signing up for debt that will take you a long time to pay off and/or rob you of the opportunity to save more for retirement in your critical early working years. This will likely result in delayed FI and delayed retirement.  That doesn’t change just because you’re in an expensive zip code.

    As I said above, I feel for those who live in these areas and want to own a home, because it basically means you have to choose: save more for retirement or sign up for massive housing debt.  Now, if you love your job and you want to work until you’re 70.  Fine, it probably doesn’t matter if you’re house poor.  But if you want the option to retire at 55-65, signing up for 2 million dollars of housing debt on a 500k salary is going to make that more difficult.  Especially when you consider that everything is more expensive in those areas, not just the housing.

    Click to expand…

    I live in a HCOL area.  I live here because that’s where all my family lives and these areas need doctors too.  We all need someplace to live, we can either rent or buy.  Certainly renting can work out very well and it’s a viable option.  I’ve run the math for my situation and renting and investing the difference can work out slightly better or at least break even.  However, I’m considering buying a house that is 3x income and while certainly not as lovely as 1x-2x income, it’s not the end of the world.  Take a doctor at age 30, no debt, living in seattle (no income tax), earning 400k, buying a 1.2M house with zero down.  PITI and maintenance is say 7500/mo for 30yrs at 4%.  After taxes, 401k and housing expenses, there’s maybe 200k or so left to spend on expenses, savings, school, etc.  That’s still a lot of money to have the option of retiring in your 50’s.  Of course if you live the high life, send kids to private schools, private college, etc. that’ll delay retirement.  Certainly it’s not as financially ideal compared to a cheaper area and it’s not the fastest way to FIRE, but it’s not dire working until 70 either.

    Click to expand…

    Agreed it’s doable if you start with good numbers, no debt, and are very, very careful about spending elsewhere.  Though if you make 400k per year, I doubt you’re going to have 200,000 left over after taxes, 401k and house expenses.  I usually assume we only get to keep about 60% of what we make after all the taxes, SS, etc.  It’s a rough estimate, but gets you in the right ball park.  Which would put you at 240k, then subtract 90k/year in just PITI (doesn’t factor in anything for unexpected repairs, maintenance, etc) and you’re at 150k for everything else in life other than your house and you still have to save from that pool of cash.  150k doesn’t go that far in a HCOL area, especially if you’re like most docs who spend like there’s no tomorrow.

    Also, the situation you describe is pretty rare (a 30 year old physician with no debt and making 400k/yr).  Usually it’s 34+ years old, 300k of student loans, 40k of car loans, 20k credit cards, little or no retirement savings and just started working making 350k per year and wanting to know if they can by a 1.4 mil house.  Someone like that should not even be thinking of buying a house at all until their debt is gone and they have some savings in hand.

    I don’t know, maybe I’m thinking too conservatively.  I think I’m just very debt averse because I’ve been digging myself out of debt for the last several years (student loans mostly).  So when I think of how I’d feel taking out a 3-4X mortgage (which for me would be somewhere in the $900k-$1.2 mil range), it just makes my head spin.

    #190925 Reply
    Avatar StarTrekDoc 
    Participant
    Status: Physician
    Posts: 1897
    Joined: 01/15/2017

    If you had a good realtor with the smarts, a contingency of home inspection would have been in place for no cause, no fee cancellation.    Really hope no ‘as-is’ clause in there.  Many bay area fixers do have them.

    #190927 Reply
    Avatar NWMD 
    Participant
    Status: Physician
    Posts: 11
    Joined: 07/15/2018

    We have both a home inspection and financing contingency. We can walk away after the inspection with only the cost of the home inspection as a sunk cost.

    #190939 Reply
    Avatar fasteddie911 
    Participant
    Status: Physician
    Posts: 296
    Joined: 05/31/2016

    All that said, WCIs rules about incomes vs mortgages (2-3x) simply don’t apply to HCOL / vHCOL areas…I think going to 3-4x income in HCOL areas can be done while still minimizing risk.

    Click to expand…

    I fully disagree with this and it is becoming one of my biggest pet peeves.  Why do people think they get a “pass” on real estate debt simply because they choose to live in a HCOL area?  Regardless of where you live or what you make, if you go into massive levels of housing debt (3-4X annual income is definitely MASSIVE), then you are making yourself house poor.  You are signing up for debt that will take you a long time to pay off and/or rob you of the opportunity to save more for retirement in your critical early working years. This will likely result in delayed FI and delayed retirement.  That doesn’t change just because you’re in an expensive zip code.

    As I said above, I feel for those who live in these areas and want to own a home, because it basically means you have to choose: save more for retirement or sign up for massive housing debt.  Now, if you love your job and you want to work until you’re 70.  Fine, it probably doesn’t matter if you’re house poor.  But if you want the option to retire at 55-65, signing up for 2 million dollars of housing debt on a 500k salary is going to make that more difficult.  Especially when you consider that everything is more expensive in those areas, not just the housing.

    Click to expand…

    I live in a HCOL area.  I live here because that’s where all my family lives and these areas need doctors too.  We all need someplace to live, we can either rent or buy.  Certainly renting can work out very well and it’s a viable option.  I’ve run the math for my situation and renting and investing the difference can work out slightly better or at least break even.  However, I’m considering buying a house that is 3x income and while certainly not as lovely as 1x-2x income, it’s not the end of the world.  Take a doctor at age 30, no debt, living in seattle (no income tax), earning 400k, buying a 1.2M house with zero down.  PITI and maintenance is say 7500/mo for 30yrs at 4%.  After taxes, 401k and housing expenses, there’s maybe 200k or so left to spend on expenses, savings, school, etc.  That’s still a lot of money to have the option of retiring in your 50’s.  Of course if you live the high life, send kids to private schools, private college, etc. that’ll delay retirement.  Certainly it’s not as financially ideal compared to a cheaper area and it’s not the fastest way to FIRE, but it’s not dire working until 70 either.

    Click to expand…

    Agreed it’s doable if you start with good numbers, no debt, and are very, very careful about spending elsewhere.  Though if you make 400k per year, I doubt you’re going to have 200,000 left over after taxes, 401k and house expenses.  I usually assume we only get to keep about 60% of what we make after all the taxes, SS, etc.  It’s a rough estimate, but gets you in the right ball park.  Which would put you at 240k, then subtract 90k/year in just PITI (doesn’t factor in anything for unexpected repairs, maintenance, etc) and you’re at 150k for everything else in life other than your house and you still have to save from that pool of cash.  150k doesn’t go that far in a HCOL area, especially if you’re like most docs who spend like there’s no tomorrow.

    Also, the situation you describe is pretty rare (a 30 year old physician with no debt and making 400k/yr).  Usually it’s 34+ years old, 300k of student loans, 40k of car loans, 20k credit cards, little or no retirement savings and just started working making 350k per year and wanting to know if they can by a 1.4 mil house.  Someone like that should not even be thinking of buying a house at all until their debt is gone and they have some savings in hand.

    I don’t know, maybe I’m thinking too conservatively.  I think I’m just very debt averse because I’ve been digging myself out of debt for the last several years (student loans mostly).  So when I think of how I’d feel taking out a 3-4X mortgage (which for me would be somewhere in the $900k-$1.2 mil range), it just makes my head spin.

    Click to expand…

    I’ve lived in HCOL areas as well as MCOL in the middle of the country.  Outside of housing, my expenses weren’t drastically different between the 2 areas.  We’re talking about a place where housing is 1x-2x salary.  Coming from a HCOL area, I’m astounded by how cheap housing is and I wonder how can a doctor not be FI in short time, yet the average doctor even in these areas spends too much, saves to little, etc.  Whether they’re in low, medium or high COL the story is the same.  We can play and manipulate my example and our assumptions to our hearts content, but my basic point was living in expensive housing isn’t necessarily an awful situation.  A financially astute individual will make it work out ok and at worst delaying FI by X years.  A financially inept person will likely always have difficulty no matter where they live.

    Having said that, I too hate debt and would even consider doing a bigger downpayment, despite its cons. I often get envious looking at new home prices in seemingly nice LCOL areas that I could see myself enjoying, if it just weren’t for family.

    #190954 Reply
    Avatar Kamban 
    Participant
    Status: Physician
    Posts: 2332
    Joined: 08/01/2016

    We can play and manipulate my example and our assumptions to our hearts content, but my basic point was living in expensive housing isn’t necessarily an awful situation. A financially astute individual will make it work out ok and at worst delaying FI by X years. A financially inept person will likely always have difficulty no matter where they live.

    Click to expand…

    Agree, with some exceptions at the outer ends.

    A financially astute person can make much more and become FI much early if the extra money he spends on housing ( and it is an obscene amount for the same square footage) and its upkeep and taxes is instead invested in an index fund earlier in his career. After 20-30 years the LCOL / MCOL will come out way ahead. The only way the HCOL will even come close is if the house continues to appreciate and he is able to sell it and move into a low cost rental or move to LCOL or MCOL. Something I see in my area when I see patients who have moved from NY/NJ area.

    At the other end the inept person is digging a shallower hole with housing costs in a LCOL or MCOL area and should be able to extricate from it easier / faster.

    Noting wrong with living in HCOL areas. Just go in with your eyes open.

     

    #190959 Reply
    Liked by hatton1, Zaphod

Reply To: The Value of Home Equity (another "Should I buy this house?" post)

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