Planning to be house poor?

**kork13** · 08-30-2008, 10:03 AM

that advice is very basic and great in theory, but I question it somewhat... the idea is that the market is low, and most homes are undervalued. theory is that the market will rise, and you will be able to reap the benefit later on with a significant return by selling this home for a profit.

However....
1) Is this going to be your primary residence? Do you really want to think of your home as something you plan to sell in the future to profit from?
2) How large of a home do you (a) need (b) want (c) think you can afford? My guess is that each of those will have a different response. Get the home you want, not something that you hope that you can barely afford in order to turn a profit. if that plan goes sour, quite simply, you're screwed.

If you were to purchase as big of a home that you could possibly afford, you'd run into some potential issues:
1) would you really be able to afford the house payments, while still paying your other expenses, saving for retirement, building an EF (you'd definitely need a well-funded one for owning a home), saving for college, and being able to enjoy yourself and your family? Somehow, I think not.
2) when you end up wanting to sell, how certain are you that the market will have increased the value of your home? how certain are you that this profit will offset the costs of maintenance/upkeep, purchasing, selling, insurance, etc.?
3) when compared next to your income, can you really afford a huge home? lenders would look at this. If they question it (likely would, given the tight lending req'ts right now), they'd either deny you or hit you with a high mortgage rate.
4) when you try to sell, would there be a market for your largesse home? If you buy a 5br/3ba, 6000 sq.ft. home, will there be a family out there who really wants to buy something that large?

These are just some concerns of mine.... Personally, I'm wary of buying real estate for investment purposes without some extensive planning. Also, I wouldn't buy an investment property that was overly large, because I don't think there would be a market for it to be rented/sold to when that time came. Average homes are what people want, and what people need, and what people can afford. Yes, while there is potential for gain, you need to be careful that it's really the best thing for you.

Hopefully some others will chime in, real estate is not my forte by any measure.... so take what i've said for what you will...

**disneysteve** · 08-30-2008, 10:26 AM

I agree with kork13. Don't think of your primary residence as an investment property. Think of it as your home. Buy the house that you want that meets your needs and fits your budget.

The advantage of the current market is that the money you have available to spend will buy more house than it would have bought a few years ago. I see nothing wrong with taking advantage of that. So if you were planning to 300K, you can still spend 300K but get a better house.

**Ima saver** · 08-30-2008, 10:31 AM

I don't think anyone should buy a house and plan to be house poor. I would buy only as much house as I could afford right now.

**jIM_Ohio** · 08-30-2008, 11:04 AM

Buy the amount of house you need and feel free to add a want or two. But I wouldn't invest in an 8 bedroom mansion just because a bank will lend you the money.

For 75% of the country (the 75% which is not on east or west coast) houses are terrible investments. Price appreciates by 2-4% per year, and you might pay 2X as much interest as principal (unless you do a 15 year mortgage or pay off a 30 year early and aggressively).

I would use the weak housing market to dictate terms and maybe enter into a 15 yr loan when you otherwise would have had a 30, or move to a slightly better location than you were otherwise planning (or could afford) to move to.

**maat55** · 08-30-2008, 02:32 PM

I'm a firm believer that your house is not an true investment. In very few cases is buying a house as an investment, a wise choice. I would buy what you can afford on 25% of your take home pay on no more than a twenty year note. If you live on either coast, a thirty year note is OK.

You should first make sure you are investing 10 to 15% of your gross and leav some for lifestyle. Buying heavy in house, IMO, is not a good plan.

**Tree0164** · 08-31-2008, 04:40 AM

I don't think that is great advice. Many people who are house poor these days can't even afford their mortgages. Yes there are some deals out there-but stay within in your budget. Do a 30 year mortgage and don't let the monthly payment exceed more than 25% of your net income.

**Ima saver** · 08-31-2008, 05:27 AM

Buying a house young and paying it off early was one of the smartest things I have ever done. Because of that, I have not had a mortgage payment in over 30 years. Everytime I build a new house, I move up in size and value and pay cash for the house.

**bankaround** · 08-31-2008, 06:21 AM

I think you do need to view a primary residence as an investment. Real estate is probably one of the most common way that people become wealthy. That said, don't overstretch yourself because you never know where the market my head or how long it will be down.

Take some of the advice being given and don't spend more than 25% (You may be able to get away with 33-35%) of your net income on a mortgage payment.

**zetta** · 08-31-2008, 08:08 AM

I think a *small* stretch can be justified given the market, especially if this is your first home and you are early in your career (and so likely to increase your earnings as your years of experience grow), but I wouldn't go so far as to be house poor. Stay within the guidelines mentioned above.

For instance, if you are looking at townhouses, you might buy a 3 bedroom instead of a 2 bedroom.

Consider what you will need 5 years from now -- if you don't have children yet, perhaps buy something in a good school district with enough bedrooms for two kids.

**Fern** · 08-31-2008, 09:28 AM

Sleep well at night and buy a house you can afford. A lot can happen between now and years down the road. Do you really want to be saddled with a big mortgage if, say, you lost your job/income? A bigger house just means it's going to cost you more to heat and cool it and property taxes will be higher.

Ignore the "expert."

**homebound** · 08-31-2008, 03:42 PM

I really appreciate all of the responses. I've never heard 25% of net income as a guide for mortgage. I live on Long Island and I doubt I could find much of a house an any area for 1/4 of my net. I am currently single with no children but that will most likely change down the road. I could probably find a 2BR 1BA cottage for 1/4 my net..but probably not even in one of my most desirable areas. I was thinking that 1/2 of my net would a minimum (already saving 17% in taxed deferred retirement plan). I include real estate tax and homeowner's insurance in this number. Homebuying advisor types have consistently pushed at least 3BR 2BA for resale reasons (not sure I fully understand this rationale).

An alternative would be to wait two more years and put down way more than 20% on the home-but I've consistently been told 20% has multiple benefits. I have a lot to learn.

Thanks again for all of the responses.

**maat55** · 08-31-2008, 04:10 PM

If you intend to live debtfree, meaning you take on no CC debt or auto debt. 30 to 35% is not out of the question. There are too many other expenses to tie up so much of your income in house.

**disneysteve** · 08-31-2008, 04:21 PM

Originally posted by homebound View Post

I've never heard 25% of net income as a guide for mortgage.

I was thinking that 1/2 of my net would a minimum

I think 25% of net is conservative, especially if you are in a high COL area. 33-36% is the rule of thumb, assuming you are otherwise debt-free. I would absolutely not advise buying a home that consumes 50% of your net income. Keep in mind that if PITI eats up 50%, you still need to pay utilities, maintenance and repairs which will swallow even more. You'd end up with 60% or more of your income going into your house. Not a good idea.

**MonkeyMama** · 08-31-2008, 05:28 PM

Originally posted by zetta View Post

I think a *small* stretch can be justified given the market, especially if this is your first home and you are early in your career (and so likely to increase your earnings as your years of experience grow), but I wouldn't go so far as to be house poor. Stay within the guidelines mentioned above.

Agreed. A small stretch very early on isn't as big of a deal. A big stretch is never wise.

Planning to be house poor?