how much money should i spend on a house? I have lots

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  • zagdrobzagdrob Registered User regular
    Enc wrote: »
    In California, $180k might buy you a ruin in a slum.

    If that is the case, and the OP is only bringing in $60k a year, then he probably can't support home ownership in that region with his current income unless he payed off the entire property cash in one blow (which would likely eat up his entire savings).

    Yup.

    If he's looking at $500k+ for entry into the market (as suggested), he's going to have to put most of his cash down just to get the monthly P&I down to a reasonable number. Then he's going to get his ass kicked making up escrow and all the other expenses of home ownership.

    As long as everything went according to plan he could probably do it without too much trouble...especially if he had a second income (significant other) coming into the mix. If things go bad though - he loses his job or has an accident / medical emergency or something there will be an uncomfortably small amount of 'wiggle room'. I'd hate to see someone go from being pretty much set to broke like that.

    I think it would be a bit different if he's getting married with kids on the way...or there is some great bargain of a house he can easily afford...but it just doesn't seem like there is any compelling reason and a lot of risk.

    Essee
  • throwawayjackhunterthrowawayjackhunter Registered User regular
    Yea, good points all around.

    I'm not currently planning to get married or have kids. I understand that can happen quickly, but it's just not in the cards at the moment. Gotta meet someone first!

    Yea, I definitely can't get anything for 180k in a neighborhood that I'd feel comfortable in. For people who are curious, I'm looking in playa del rey, marina del rey, culver city, and westchester. I'm pretty positive those are the neighborhoods I'd be happy to live in for a while to come. You guys can check zillow.com or something and see what the prices are around there.

    Right now I'm thinking harder about a 300k condo. It seems do-able.

    One thing that worries me regarding the market is that the banks are currently keeping 90% of the properties they own off the market to keep the supply low and the prices high. I can't see why they'd flood the market and drop the prices on their own properties, but I guess it's something to think about.

  • azith28azith28 Registered User regular
    Isnt 60k kinda really low given cost of living in LA? My brother lives in LA, making over 100k a year and hes not rich by any means.

    Personally if i was you, i would try and find a cheaper place to live, then consider buying a home there...maybe put that 400k somewhere its going to help you in the long run. 400k with only 5% interest would be 20k a year that could basically pay for your house note without reducing your principle.

    I think your fighting the urge to make a big splash purchase. if you do buy a home, put down the minimum down payment pay your house note for a year not touching the rest of your principle, let it build some interest then start using that interest after a year to pay your note. It takes discipline but will be worth it in the long run.

    Stercus, Stercus, Stercus, Morituri Sum
  • DrFrylockDrFrylock Registered User regular
    edited June 2013
    Hey, I was in a very (very) similar situation and recently bought a place very nearby where OP is looking.

    First off, you can't translate real-estate trends or advice from almost anywhere else in the country to LA, because LA does not work like the rest of the country. Yes, it was hit during the crisis like everybody else, but home prices did not dip that much. Prices are high because demand is - and always has been - high for this area.

    You have to understand a few LA-specific phenomena:

    First, inventory: Right now, inventory is unbelievably low. Looking at Culver City, which is a pretty representative city in OP's preferential area, there are 29 properties for sale - total. In a city of 40,000 people. In 2011, that number was more like 180. So inventory has dropped 84%(!!!) over the previous couple of years. There was a small recovery in inventory after the winter, but very slight. This is keeping prices high and making house hunting a nightmare. You can do it, but you're competing hard for properties right now. We looked at, put in an offer on, and signed a contract on the house we ended up buying within about 48 hours of it going on the market, and ended up paying slightly more than asking to get it.

    Second, geography: In LA, distance = time. If you work in West LA, you can't just move to cheaper suburbs unless you want to be 2 hours away from work and make the commute every day. Also, the 405 freeway is a sharp dividing line. West of the 405 are the desirable, safe, nice places to live. East of the 405 are largely the opposite (although I see some gentrification going on). So, you have the beach, which nobody can afford, a very small strip of land a couple miles wide where you might be able to afford a place in a nice area, and then the 405. Culver City, Westchester, and Playa/Marina Del Rey are in this strip.

    Within this narrow strip of land in between the unaffordable beach and the undesirable east-of-405 neighborhoods, you have a mix of stuff - a few neighborhoods with big houses, some condos, and a good amount of SFRs (single family residences - traditional houses that aren't connected to anybody else's). Most of those SFRs were built in the 1940s-1950s and are fairly small - many need updating, and most are small (800-1000SF or thereabouts) unless they've been upgraded with additions. Many additions in LA have been done without permits, which are a big risk if you need to get any construction done later.

    Third, prices: How much for those little SFRs? Let's take Culver City, and look for SFRs on the market right now. The cheapest one is $539,000 for a 3br/2ba and 1380SF, it was built in the 40s and has an illegal bedroom/bath instead of a garage. You could probably put another $30-40K into that house just to get it up to snuff and modernize it. Cheapest in Westchester is $479,000 for a 2br/1ba 945SF place - a bargain (not!) at $507 per square foot. So, basically, if you want to live in that area in any kind of a traditional house, you need to be ready to spend $500K at a bare minimum (probably $550-600K would be more realistic).

    Condos are less expensive (Probably around $300K), but of course you're still paying property taxes (1-1.25% per year, so $3000 on a $300K place) and of course high HOAs (figure $400/mo so $4800/year).

    ~ ~ ~

    So, should you buy? It's an option, but I think you are definitely being realistic looking at condos instead of SFRs. The difficulty, as others have pointed out, is your income compared to the home prices. You've got to figure out what you're comfortable paying per month including a potential mortgage, taxes, insurance, and HOA. You'll get some amount of money back at the end of the year in terms of being able to write off your property taxes and mortgage interest, but I wouldn't run on such a thin margin.

    I ran your numbers through this mortgage calculator, assuming you make $60K/year, put $300K down (leaving $100K to fix the place up and as a liquid nest egg for a rainy day), assuming a $400/mo HOA and $3500 tax/year. This says you could afford a $532,000 condo - so you've got some breathing room down around a more reasonable level like $350K.

    You might also want to not buy a place for all-cash right now because interest rates are very, very low. Money is cheap, and taking on a small mortgage will help you build credit and keep resources liquid for all the unexpected stuff that happens in home ownership and life. You'll eventually want to furnish the place, paint, fix all the stuff that's wrong with it, and so on. In a condo, you've always got to be ready if the association decides they want to put new roofs on everybody's place or tent the place for termites and you'll get hit with a big-dollar assessment.

    The downside of cheap money is that if interest rates go up again (and where else could they go?) that will push prices back down. People that bought in the 80s with usurious interest rates at least got the benefit of refinancing when rates plunged later (which also sent their house prices up). You (and I) will have no such boon.

    With inventories as low as they are, you might want to start looking now if you want to buy anytime in the future. We allocated about 6-7 months to find a place, buy it, close, and move in before my lease ran out, and we made it JUST under the wire. In this climate, coming in with a big down payment and pre-approval can make you an attractive buyer if you get into a multiple-offer situation (which is likely when there are like 4 homes for sale). This is a reason to actually consider an all-cash offer, since those are even more attractive - no financial contingency.

    ~ ~ ~

    To everybody saying OP should just move to where it's cheaper, that's certainly an option. LA isn't the nicest place in the world - it gets smoggy and there's lots of people and traffic and the houses are crazy expensive. The sun does shine about 360 days a year here, though, and if your favorite band is playing, they will make a stop in LA for sure. Last week a little indie movie was coming out that I wanted to see - limited release. About 4 theaters in the country were showing it. One of them is 20 minutes from my house, so I went. Oh, it was also basically the premiere and the cast was there doing Q&A. It's kind of cool to do stuff like that.

    If OP buys in LA and wants to live here for a while, it's not like that money is gone - he can sell the house later and move out to the flyover states and live in luxury. Odds are if there is another depression in house prices, a home here will retain more value than a home there anyway, and he'll make out well. There is some question as to whether it would be smarter to invest in a blended set of mutual funds and wait it out, but honestly if OP wants to live here for a while and is buying the house as a place to live and not an investment, it's not a bad place to put money.

    DrFrylock on
    Pheezer wrote: »
    I would strongly recommend reading DrFrylock's post thoroughly and considering all of his points individually.
    throwawayjackhunterbsjezzCelestialBadgerzepherinkrapst78
  • throwawayjackhunterthrowawayjackhunter Registered User regular
    DrFrylock, that was amazing! Thanks for taking the time to write so much!

    I suppose when it comes down to it, the conclusion I've come to is the same as yours. I shouldn't buy anything over 360k. That leaves me firmly in the condo territory, and not even in the particularly fancy condo territory.

    Now, you're saying that with inventories as low as they are, I should buy soon? I'm in a month to month renting situation, so I can leave anytime I want, but doesn't it make more sense for banks to release some of the inventory they're holding? Or wait till interest rates go up and drive prices down? It's not really fair to expect you to know the answers to that because obviously no one can really know what the market is going to do...

    One more question: Did you work with a buying agent? If you'd recommend them, could you PM me their name? Or does it make sense to do this alone?

  • zepherinzepherin Registered User regular
    DrFrylock, that was amazing! Thanks for taking the time to write so much!

    I suppose when it comes down to it, the conclusion I've come to is the same as yours. I shouldn't buy anything over 360k. That leaves me firmly in the condo territory, and not even in the particularly fancy condo territory.

    Now, you're saying that with inventories as low as they are, I should buy soon? I'm in a month to month renting situation, so I can leave anytime I want, but doesn't it make more sense for banks to release some of the inventory they're holding? Or wait till interest rates go up and drive prices down? It's not really fair to expect you to know the answers to that because obviously no one can really know what the market is going to do...

    One more question: Did you work with a buying agent? If you'd recommend them, could you PM me their name? Or does it make sense to do this alone?
    Banks are not incentivised to release their inventory. Their incentive is to maximise return on the houses they have forclosed on, which means they will let houses out at a steady trickle because the prices are high and they want to keep them high. They are more likely to sell a house or participate in a short sale if the market is bad because if the house get's boarded up they can't sell it.

  • schussschuss Registered User regular
    DrFrylock, that was amazing! Thanks for taking the time to write so much!

    I suppose when it comes down to it, the conclusion I've come to is the same as yours. I shouldn't buy anything over 360k. That leaves me firmly in the condo territory, and not even in the particularly fancy condo territory.

    Now, you're saying that with inventories as low as they are, I should buy soon? I'm in a month to month renting situation, so I can leave anytime I want, but doesn't it make more sense for banks to release some of the inventory they're holding? Or wait till interest rates go up and drive prices down? It's not really fair to expect you to know the answers to that because obviously no one can really know what the market is going to do...

    One more question: Did you work with a buying agent? If you'd recommend them, could you PM me their name? Or does it make sense to do this alone?

    You should work with a buying agent unless you are doing a FSBO deal.

    For buying, start looking at places. Go to open houses. Get a feel for the market and the locations available. Once you're comfortable saying "I really want a place here or here, on one of these streets, at this floor, facing this direction" etc., you're probably ready. Then you wait, and pounce when the deal is good. If it isn't, walk away. CA real estate is kinda ridiculous right now, so I wouldn't be surprised if there's a market correction in the next few years.

  • DrFrylockDrFrylock Registered User regular
    As for what you should do based on low inventory, all I'm saying is that, if you do decide to move, you will be looking longer and harder than at any time in recent history. If inventories stay low, you may be looking for months (or a year+) to find a place you like. You may find the perfect place and get outbid. You may have the perfect place pop up and get snapped up before you have time to even go look at it.

    We were looking in the winter when inventories are at traditional lows (amidst the already-historic lows). There was some speculation that inventories would pop back up in the spring/summer, and they have, but only a very small amount - nothing like what was expected.

    We did work with an agent who is a family friend who normally works out of Orange County, so wouldn't be a good fit for you. A big difference between LA and OC is that every house in LA it's its own unique snowflake. In OC, if you miss a house you like, you can wait for a very similar house in the same tract to come open. In LA, there's no such thing - you really have to treat each house as a unique opportunity.

    What this also means is that going to open houses is not as helpful as in other areas. You do want to go to learn about what's important to you, and what general areas/neighborhoods you like. But the configuration and condition and features of one place may be vastly different from one right next door.

    Condos may be slightly different. But, with such low inventory, if you fall in love with a particular complex or area and miss out, you may be waiting a long, long time for a place there to open up.

    Also a reason to find a good local agent is that they will let you see places that are not on the MLS yet (and may never be). There's something vaguely shady about this, but with low inventory there are lots of "pocket listings" that they will find out about that don't show up on Redfin.

    Speaking of Redfin, sign up (it's free) and set up some alerts for the places you're interested in. You will get a feel for what is available, the rate at which properties are listed and sold, and find out about open houses. You can do that even before you have an agent and it's a good way to get a feel for the market and focus in on things that interest you.

    Pheezer wrote: »
    I would strongly recommend reading DrFrylock's post thoroughly and considering all of his points individually.
  • NanaNana Registered User regular
    edited June 2013
    I live in Orange County, CA and my husband and I make just over 100k a year. We just got qualified for a 400k loan. I think that an 800k house would be out of your price range with a 60k a year salary.
    Even with 50% down, you would be looking at $2,000.00+ monthly mortgage payments not to mention home owners insurance and taxes on a 800k home (ouch).

    If I was in your position I would go for a home that was under 550k (Ideally a home or condo under 350k), don't be so eager to get into debt. There are a lot of perks to renting, and $700 a month is a pretty sweet deal. A lot of people say that renting is "throwing away money" but that isn't always the case. In your current situation you can probably save more money and have a better quality of life than if you bought an expensive home.

    Rental Perks:
    You aren't responsible for costly repairs if the roof leaks, the water heater breaks and floods your garage, etc.
    You aren't paying home owners insurance, or property taxes.
    You probably aren't paying for water, trash, or landscaping.

    There are of course perks to owning a home as well, such as tax write-offs and building equity. (but these aren't really perks if you have crushing debt that forces you to scrape by.)

    I really agree with Zagdrob's advice:
    Either way, make sure you know what you want to do before you go and buy a house. A house is a big freaking purchase, and it shouldn't be something you do just because you don't know what else to do with your money or think it's the natural 'next step'. Having a home is a lot of work, it's a lot of money; when you look at the money, don't forget to consider property taxes, homeowners insurance, home-owners fees, lawn / maid service, repair fees, seasonal maintenance, even utilities that your apartment might pay for now in your costs. If you want to spend less money, you have to spend more time - mowing, repairing stuff, painting, etc...if you are in LA, consider also the amount of time it may add to your commute. If you're commuting an hour each way every day, you not only lose that time from your day, but you also have to pay for your car, a lot of extra wear and tear and gas, etc.

    DrFrylock mentioned Redfin - which is awesome, I've also been using Trulia to browse listings. My experience in Orange County so far has been very similar to how DrFrylock has described as well. It is a total sellers market in the areas I've been looking at (and I imagine the areas you listed in LA may be the same way). A few condos that have caught my eye already have 4+ offers when I've inquired about them. Getting a Real Estate agent is very helpful, the lady I've been working with is sending me leads on condos before they are listed. Don't expect to get into a house quickly, or without much effort. I've been watching listings and checking out leads like a hawk for the past 4 months and haven't even been able to put a serious offer in.

    Best of luck to you!

    Nana on
    3DS Friend Code: 3823-8688-4581
    throwawayjackhunter
  • schussschuss Registered User regular
    Also, in the city areas of CA, you only rarely make back in equity what you would have saved by renting, so don't sweat it. It's no like Utah or the midwest, where mortgages are usually cheaper than rent prices.

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