Financial advice for 27 year old

[recycler]

oh and to give you guys an example:
Here is what 900k gets you where I live:
redfin.com/CA/Los-Angeles/11363-Chenault-St-90049/home/6827776

Not exactly a mansion.

[jpg7n16]

oh and to give you guys an example:
Here is what 900k gets you where I live:
redfin.com/CA/Los-Angeles/11363-Chenault-St-90049/home/6827776

Not exactly a mansion.

So it sounds like homes in your area are overpriced. If I told you that boxes of cereal in my area cost $10/box - you'd probably say, 'that's too expensive, so don't buy cereal. Get something different. The price will come down eventually'

And yet you think it's different cause my box has cereal and yours has furniture?

Don't buy things that are priced too high. That includes homes.


(cereal doesn't cost $10 by the way. I'm just making an example)

[jpg7n16]

Oh and if you looked at the bottom you'd see the price history:

Property History for 11363 CHENAULT St
Date Event Price Appreciation Source
Jan 12, 2011 Price Changed $900,000 -- CARETS #F1853698
Nov 16, 2010 Price Changed $939,000 -- CARETS #F1853698
Oct 19, 2010 Price Changed $949,970 -- CARETS #F1853698
Sep 27, 2010 Price Changed $1,000,000 -- CARETS #F1853698
Sep 02, 2010 Sold (Public Records) $1,122,500 6.8%/yr Public Records
Aug 25, 2010 Price Changed $1,050,000 -- CARETS #F1853698
Aug 24, 2010 Price Changed $1,100,000 -- CARETS #F1853698
Aug 19, 2010 Listed (Active) $1,122,500 -- CARETS #F1853698
Apr 30, 1999 Sold (Public Records) $535,000 9.2%/yr Public Records
Dec 20, 1996 Sold (Public Records) $435,000 -2.4%/yr Public Records
Mar 03, 1989 Sold (Public Records) $525,000 -- Public Records


Looks like the value has fallen about $220,000 in the past 4 months. Is that an investment worth having??

[recycler]

Oh and if you looked at the bottom you'd see the price history:

Property History for 11363 CHENAULT St
Date Event Price Appreciation Source
Jan 12, 2011 Price Changed $900,000 -- CARETS #F1853698
Nov 16, 2010 Price Changed $939,000 -- CARETS #F1853698
Oct 19, 2010 Price Changed $949,970 -- CARETS #F1853698
Sep 27, 2010 Price Changed $1,000,000 -- CARETS #F1853698
Sep 02, 2010 Sold (Public Records) $1,122,500 6.8%/yr Public Records
Aug 25, 2010 Price Changed $1,050,000 -- CARETS #F1853698
Aug 24, 2010 Price Changed $1,100,000 -- CARETS #F1853698
Aug 19, 2010 Listed (Active) $1,122,500 -- CARETS #F1853698
Apr 30, 1999 Sold (Public Records) $535,000 9.2%/yr Public Records
Dec 20, 1996 Sold (Public Records) $435,000 -2.4%/yr Public Records
Mar 03, 1989 Sold (Public Records) $525,000 -- Public Records


Looks like the value has fallen about $220,000 in the past 4 months. Is that an investment worth having??

that Sept 02, 2010 sale looks like an error. Since They first listed it for 1.12 million back in Aug 19, 2010 and then kept lowering the price until its current price of 900k.

The real previous sale is 1999 when it sold at 535k. Back in 1989 it also sold for 525k. If it sells for 900k, that means it only went up an average of 2.5% per year since the 1989 sale. That's less than inflation.

[jpg7n16]

that Sept 02, 2010 sale looks like an error. Since They first listed it for 1.12 million back in Aug 19, 2010 and then kept lowering the price until its current price of 900k.

Yes. It was an error on the part of whoever bought the home.

Regardless. The price in Sept must have been based on comparable homes in the area. Meaning that homes in the area have fallen 20% lately. This is what happens when prices are too high - they eventually fall back to reality.

Unless they had significant income, by following the advice in this thread, they would have saved nearly a quarter million dollars.

But still look at the price history. This person is trying to sell. And keeps lowering the price cause no one wants to pay it. That could be you - stuck in a house you don't want, with no buyers cause your price is too high, constantly lowering the price and losing money.

With unemployment rising in Cali - where are all these buyers who will push your home prices up from where they are??

The real previous sale is 1999 when it sold at 535k. Back in 1989 it also sold for 525k. If it sells for 900k, that means it only went up an average of 2.5% per year since the 1989 sale. That's less than inflation.

You're comparing overpriced prices to overpriced prices.

The original buyer in 1989 wound up losing $90k in 7 years. (17% of purchase price) Indicates that the 1989 price was too high.

Rate of growth since 1996 price: 5.33%/year
Since 1999 price: 4.84%/year

Both are higher than inflation.


1 out of every 203 homes in California is foreclosing. That's the 3rd highest percentage of a state in the nation. And it's trending upward.

News Headlines

Because housing prices are too high. And people are taking out mortgages to buy homes that cost more than 3x their income. And aren't able to make the high payments. And money isn't circulating in the economy cause too much of everyone's money is going to mortgage payments. Which keeps sales low. Which is keeping unemployment high. Which is leading to more and more foreclosures.

All because people say, "well that's just what houses cost in this area."

[snafu]

OP, there is no guarantee that interest rates of today will hold at today's rate until you're ready to buy a $million house. What % has your condo increased in value since you took possession? Your home is an illiquid investment, it's mostly a place to live since often just when you want to sell, no one wants to buy.

Since you have a 5 yr. time frame, why not watch for opportunities in lower COLAs? Perhaps use vacations to see your country, explore employment opportunities and leisure activities you enjoy.

[PMMM]

Rent don't buy. Especially in that market. California is one of the worst hit states for depreciating value and repossessions. Now is just not the time to buy. Especially if you are buying a depreciating asset as others have pointed out.

I think that is the prudent thing to do. Invest your money in other instruments for real wealth building opportunity.

[yellow heel]

What is motivating you to buy this million dollar house?

I think we are pretty much in the same boat. I also live in a high COL area. House costs 700k+. However your plan is very risky. My plan was to put as much downpayment as I can to increase my monthly cash flow even with the mortgage. Unfortunately, this plan also has a problem. Diversification. I will have all my liquid eggs in one illiquid basket which is not a comforting thought.

I would think long and hard about why you want to buy a house. Use a rent vs buy calculator to see what will happen in 30 years. How much are you paying for rent? Are there any other areas that you can consider buying that is cheaper?

I am still thinking all the scenarios out in my head but these are some of the stuff I am going through.

[scfr]

So 1 million is probably too much, but what about an 800k house?

$800K certainly sounds more sensible that $1M.

Since you are talking about a goal that is 5 years away, not next month, why not pencil it in as a goal for now? In the meantime, continue to look at where buying a $800K house would fit in with all of your goals (how much you want to have saved for retirement, whether you want to have children and if so if you or your wife will quit work for awhile, etc). Also dig in to others financial stories and choose a few you would like to emulate (this is why I suggested reading The Millionaire Next Door). Consider what other options you have (for example, could you make your current condo or a smaller home feel larger & livable ... Lauri Ward has a great book called "Downsizing Your Home With Style" that you may want to check out). If you still think an $800K house is really & truly what you want, ask yourself if you are willing to make the tradeoffs necessary (whether it's taking public transit or driving a beater car, not having children, delaying retirement, selling your condo NOW and moving in to a super cheap apartment to be able to put away even more for the downpayment, etc.).

You may decide to go for a house that is even less than $800K, or you may figure out a way to make the $800K house work for you.

[thomsoad]

I totally understand where you are coming from. Im sure they are nice homes (for a Mil they better be)but think with your head and not your heart.

California real estate will always be high and always be volatile. Just remember that when that house goes up in value so does property taxes. And you are in a state that is cashstrapped to put it mildly.

That 2.5 to 3 times annual income is a HORRIBLE measurement. Base it instead on how much of your take home pay do you honestly want to spend on owning and maintaining a home?

Homes have a very fast way of becoming prisons when you bring emotions into it. Be smart and dont go more then 25% of your take home pay. That will give me money to do things instead of sitting in your million dollar home with the lights and cable cut.

[justinblake]

Honestly, I wish I was near your financial condition when I was 27! So great job you guys.

[disneysteve]

That 2.5 to 3 times annual income is a HORRIBLE measurement.

dont go more then 25% of your take home pay.

The 2.5 to 3 times is a perfectly good measurement. It is just another way of stating the exact same thing that you are stating.

Let's say you earn $100,000.
You take home $70,000 or $5,833/month.
25% of $5,833 is $1,458.

Now let's say you spend 3 times income, $300,000, on a house.
You put down 20% or $60,000.
You borrow $240,000 at 5% for 30 years.
Your payment will be $1,288/month. Add in taxes and insurance and you'll be right around that 25% mark.

So saying 25% of income for the payment or 3 times income for the purchase price is essentially the same thing.

[jpg7n16]

The 2.5 to 3 times is a perfectly good measurement. It is just another way of stating the exact same thing that you are stating.

Let's say you earn $100,000.
You take home $70,000 or $5,833/month.
25% of $5,833 is $1,458.

Now let's say you spend 3 times income, $300,000, on a house.
You put down 20% or $60,000.
You borrow $240,000 at 5% for 30 years.
Your payment will be $1,288/month. Add in taxes and insurance and you'll be right around that 25% mark.

So saying 25% of income for the payment or 3 times income for the purchase price is essentially the same thing.

Yay for posting the exact calculation I wanted to show

For the 3 years rule, using the calculator available at Calculators - Mortgage estimator you'll see that DS's 3x example comes out to $1703.46/month (using the 1.5% tax and $481 annual premium). This figure pushes the boundary of the 28% rule. (29.2%)

Which is why 3 years is the max.

Using the 2.5 year's rule (same calculator) change the home price to $250,000 and downpayment to $50,000 (20%). Same terms. Answer: $1,426.23 - which is almost exactly what DSs 25% came out to.


SO you can either try to take:
(take-home income) * 25% minus (taxes and homeowner's insurance) = monthly mortgage payment
Then time value of money calcs on monthly mortgage payment at 5% to determine value of loan
Then divide by 80% to figure out what the total purchase price should be.


Or... you can just take 2.5-3x income. Sooooo much easier. Gets virtually the same answer.



And now that I actually am doing the calculations, I noticed a trend. 2.5x income almost equaled 25%. And 3.0x income almost equaled 30% (it was 29.2%). So it looks like if you're trying to figure out what percentage of your income your housing costs will be, just figure out how many times your income the home is worth, and move the decimal 1 space to the left!

2.0x income = 20% monthly take-home (actual 19.7%)
2.5x income = 25% monthly take-home (actual 24.45%)
3.0x income = 30% monthly take-home (actual 29.2%)
5.0x income = 50% monthly take-home (acutal 48.2%)

This gets you really close without all that extra work!

[LivingAlmostLarge]

Depends on interest rate and length of mortgage. When we bought we made $120k/year and had a mortgage of $460k/4.25% $575k home with 20% DP. Refi recently for $417k @ 3.625% for 5 years. Keeps us in line. And we make more now but keeping fixed expenses low.