Debt-free: Invest or buy a house next?

[Saint Nick]

So I'm officially debt free.

I recently switched to part-time at my developer job so I could also have time to start a company with a friend (more programming related). I had been putting money into my 401k, but I don't have that anymore.

Should I invest my money somewhere or should I buy a house? FWIW: I am able to buy the house I'm living in (valued now at around 149k) for 110k. I would sort of be treating the home as an investment, but mostly as a place to live. If I didn't have this opportunity, I probably would focus on investing.

I haven't invested a day in my life so I need some tips on how to get started. Thanks in advance everyone.

 

[NetWareHead]

Do you rent now?

 

[AViking]

With real estate prices that low you might just buy to own a home free and clear in a few years. It all depends on rent though. To make an obvious example the answer would be to rent if it's costing you $50 a month. The new york times has a calculator for you to figure this all out.

 

[Texashiker]

Owning a home provides a sense of stability like nothing else in the world.

With interest rates as low as they are, now is the time to buy.

 

[onza]

Buy house, finance for 15yrs. Profit for yrs 16+

 

[xeemzor]

Tons of variables before you can make a decision. For example:

Do you plan on moving in 5 years? How stable is your job? What kind of rate on your mortgage can you get? Are you OK spending free time maintenance and repair?

Remember, the cost of a home is more than just the monthly mortgage payment. You still have to pay taxes, repair costs, HOA fees, etc. All these add up very quickly. Houses are also poor investments that tend to track inflation. The true value in owning a home is being able to do whatever you want whenever you want.

 

[nehalem256]

FWIW: I am able to buy the house I'm living in (valued now at around 149k) for 110k

Why would you turn down this opportunity?

 

[z1ggy]

If the mortgage will be less or equal your rent right now, then buying is a good option. Also, as you said it's technically an investment right now, too.

 

[EagleKeeper]

If you are planning on staying in the area for a while; your purchasing that house using those numbers means a 40% return on your money being used as a down payments.

you will not find that elsewhere.

Questions: where did the two numbers come from; are they slanted by anyone?

Be aware that you need to plan on 100-200 per month for upkeep;

Does your rent come with utilities; if not add another 200-300 to that.

Home ownership takes time and extra $$ that most do not plan on.

 

[Ken g6]

How much of a down-payment can you afford? If I were you I'd probably buy the house, but my financial and living situation may be different than yours.

Also, don't forget to invest in an IRA, either traditional (if you're in a high tax bracket) or Roth (if you're in a low tax bracket) or both (especially if investing in the traditional IRA pushes you into a lower tax bracket). Also, if you happen to hit a year where your tax bracket is much lower than usual, e.g. because of unemployment, you can roll (at least part of) that traditional IRA or 401K over into a Roth, pay the taxes that year, and not worry about it in later years.

 

[Ancalagon44]

I'm actually in the same boat now (although in South Africa). Thanks for the advice.

In my case, I'm also looking to buy because my current landlord has decided to sell, which means we need to move again. It would be tempting to buy her place, but its too expensive for me. So, I'm looking a medium sized house in a good area.

My plan is to buy a 3 bedroom house and then rent out 2 of the rooms to pay off the bond faster (I am 28 and single). I will make sure that I can afford the entire mortgage myself, and that renting out rooms will provide extra income to pay off the mortgage quicker.

This also means I will have my own lawn, so I can have my own pets.

 

[HardcoreRobot]

unlike many purchases, buying a house = investment (real estate)

thats what i'd do if I expected to be in the area for 5+ years

though if you are not investing for retirement I'd prioritize that first. Particularly the tax advantaged accounts (IRAs). As far as investing, I think you can't go wrong with low fee index funds.

 

[Mermaidman]

If the mortgage will be less or equal (your rent+property tax+maintenance+repairs/upgrades) right now, then buying is a good option. Also, as you said it's technically an investment right now, too.

As the cool kids say, "fixed." I don't think you should buy unless you know you're staying put for at least a few years.

edit: My brother was essentially living "free" because he bought and lived in a house and picked up a two renters to cover the monthly mortgage. However, he moved to another city, and now it's very inconvenient being an absentee landlord.

 

[Saint Nick]

Thanks for the responses everyone. I'll try to answer some questions...

Tons of variables before you can make a decision. For example:

Do you plan on moving in 5 years? How stable is your job? What kind of rate on your mortgage can you get? Are you OK spending free time maintenance and repair?

Remember, the cost of a home is more than just the monthly mortgage payment. You still have to pay taxes, repair costs, HOA fees, etc. All these add up very quickly. Houses are also poor investments that tend to track inflation. The true value in owning a home is being able to do whatever you want whenever you want.

My job is pretty stable. I talked with my boss about switching to part-time so I could start a software company with a friend. We are in infancy, but I still have a solid 25hrs a week at my corporate gig. They offered to try to bring me back on to full-time if I need or want to, and I can pretty much stay part-time as long as I want.

I was pre-approved earlier this year at 3.75%. I'm guessing if I did the pre-approval process again today, I'd probably get a higher rate since home demand has been going up? I am okay with repairing the home as I have been taking care of it the past few years already. I can't say if I'll want to be in the area in five years, I may or may not. My life is relatively volatile right now as I'm essentially between jobs and also working as a musician. All of my money comes from software development.

If you are planning on staying in the area for a while; your purchasing that house using those numbers means a 40% return on your money being used as a down payments.

you will not find that elsewhere.

Questions: where did the two numbers come from; are they slanted by anyone?

Be aware that you need to plan on 100-200 per month for upkeep;

Does your rent come with utilities; if not add another 200-300 to that.

Home ownership takes time and extra $$ that most do not plan on.

The two numbers came from "the horses mouth" so to speak. The home value was pulled from our county's assessor's website. The sale price was verbally communicated to me from the current home owners (gf's grandparents). Our rent does not include utilities. The home price may be negociated further down, but I would need to talk to them first. They approached us and asked us "how much we could pay for it". I never really gave an answer and this is what they came up with.

How much of a down-payment can you afford? If I were you I'd probably buy the house, but my financial and living situation may be different than yours.

Also, don't forget to invest in an IRA, either traditional (if you're in a high tax bracket) or Roth (if you're in a low tax bracket) or both (especially if investing in the traditional IRA pushes you into a lower tax bracket). Also, if you happen to hit a year where your tax bracket is much lower than usual, e.g. because of unemployment, you can roll (at least part of) that traditional IRA or 401K over into a Roth, pay the taxes that year, and not worry about it in later years.

How much can I afford? Hmm... right now I could probably put 10% down on the house, which would probably only leave me about $5k in the bank. I have right around $20k in savings.

I should be able to move my old 401k from my company over to a Roth IRA?

 

[xeemzor]

The county assessor website is not a reliable source of information. Use tools like zillow and look at recent similar property sales to determine the true market value.

Before you buy the house make sure you have an emergency fund of 3-6 months of expenses in a separate account. Nothing worse than losing your job or being unable to work and losing your house. Especially if your job is part time or in a start up.

 

[NetWareHead]

If you rent, you can qualify for an FHA loan which allows you to put down a ridiculously small amount as a down payment: 3.5%. A conventional home mortgage usually needs 10% or 20% if its a multi-unit dwelling.

This is a loan from the fed designed to get people out of renting and into homes. You can purchase up to a 4 person home.

You will need to live there for one year to qualify. The only con other than that is the fact that you need to carry PMI for the duration of the loan. However, you can refinance later on and get rid of PMI.

Play your cards right and you can get a mortgage for 3.5% down for low interest rate on a multi-dwelling unit that pays the mortgage and profits from the beginning.

 

[Saint Nick]

The county assessor website is not a reliable source of information. Use tools like zillow and look at recent similar property sales to determine the true market value.

Before you buy the house make sure you have an emergency fund of 3-6 months of expenses in a separate account. Nothing worse than losing your job or being unable to work and losing your house. Especially if your job is part time or in a start up.

I did try zillow but it just seemed... wrong. The assessor's site says 149k, zillow says $205k

Edit: WTF. I changed zoom levels on the Zillow map and gives me two different prices ($143k and $205k) depending on how far I zoomed in -_-

 

[Saint Nick]

If you rent, you can qualify for an FHA loan which allows you to put down a ridiculously small amount as a down payment: 3.5%. A conventional home mortgage usually needs 10% or 20% if its a multi-unit dwelling.

This is a loan from the fed designed to get people out of renting and into homes. You can purchase up to a 4 person home.

You will need to live there for one year to qualify. The only con other than that is the fact that you need to carry PMI for the duration of the loan. However, you can refinance later on and get rid of PMI.

Play your cards right and you can get a mortgage for 3.5% down for low interest rate on a multi-dwelling unit that pays the mortgage and profits from the beginning.

Maybe this is something we should try to get. Is PMI expensive? We have lived in this house for almost four years now.

 

[rcpratt]

Sounds like you have more than enough money for a down payment + plenty of buffer. I'd lean towards the house.

 

[Saint Nick]

In addition: We rent the home at $900 per month and split the rent. I think our mortgage would be higher. I am a little up in the air how much longer I will be in Omaha though. I can say that I'll probably still be here in two years, but after that, I'm not sure.

 

[NetWareHead]

Maybe this is something we should try to get. Is PMI expensive? We have lived in this house for almost four years now.

Its all dependent on the purchase price of the house. I recently ran the numbers for a $279K multi family 2 weeks ago. I beleive the interest rate was under 4%. The monthly PMI payment was $300.

You will want to consult with a mortgage broker who can prepare FHA loans.

 

[xanis]

Sounds like you're better off renting at the moment and investing in other ways IMO. I was in a somewhat-similar boat a while ago when I moved, and decided to rent and dump the extra money into savings and the 401k. My girlfriend and I were thinking about moving somewhere and checking out another part of country in a few years, so buying didn't make sense at the time.

 

[jagec]

In addition: We rent the home at $900 per month and split the rent. I think our mortgage would be higher. I am a little up in the air how much longer I will be in Omaha though. I can say that I'll probably still be here in two years, but after that, I'm not sure.

The monthly payment for a 30-year $110k mortgage would be $509.43, plus HO insurance and property tax.

If you put 20% down that drops to $407.54.

If you're not going to be in the area for at least 5 years, you probably shouldn't buy. But use this calculator and see what you think.

I would avoid PMI, as it's not as easy to get rid of as people claim and is just more money out of your pocket. If you have good credit but can't come up with more than a 10% down payment, you can try to get a piggyback mortgage (regular mortgage for 80%, 10% down payment, 10% piggyback mortgage). The interest rate will be higher on the 10% loan, so pay it off quickly.

Buy house, finance for 15yrs. Profit for yrs 16+

With these low interest rates, 15-year financing doesn't make much sense unless your income stream is VERY reliable (govt job, etc). Better to get the 30-year mortgage and either make extra payments or invest the difference, leaving yourself the option of going to the lower payments if times get tough.

 

[Saint Nick]

So what is up with the five year "rule"? Couldn't I just sell the house if I needed to move, or rent it out? I'm guessing you lose money somewhere but I just don't know. I might be able to make it to 20% down if my folks help me out.

 

[jagec]

So what is up with the five year "rule"? Couldn't I just sell the house if I needed to move, or rent it out? I'm guessing you lose money somewhere but I just don't know. I might be able to make it to 20% down if my folks help me out.

Neither selling the house nor renting it out are guaranteed or worry-free.

And even if the house DOES sell quickly, don't forget to add closing costs, taxes etc. from the price that YOU paid, and subtract the 6% agency commission from the sale price. So, you would need the house to appreciate by a good 10% or so before you sell just to break even. Typically this takes a few years.

As for renting, a quick-and-dirty rule of thumb is that the monthly rent should be 1% or more of the home value to be profitable. Remember that in addition to paying the mortgage, the rent has to cover maintenance, repairs, advertising costs, the times the property is vacant, and possibly eviction/legal costs as well.