Buy or wait?

User Forum Topic
Submitted by Panderso on August 2, 2016 - 6:35pm

Hello,

My husband and I are at a crossroads and just can't decide if now is the time to buy a home.

The deets: we are both 30 and would like to start a family in the next few years. We know we want to stay in San Diego (he's in tech). We currently live in a tiny condo that we own and plan on keeping as a rental. We have more than enough saved to put 20 percent down on our forever home ($800k max).

If it were you, would you buy or wait a few more years? Prices are high, but with minimal new builds of SFHs, I don't see prices prices coming down anytime soon. Yes, I know they will eventually, but who's to say when? And if prices go up another 20 percent then drop 20 percent, was it really worth waiting?

Thoughts?

Submitted by Rich Toscano on August 2, 2016 - 7:08pm.

Some thoughts here that might help, I know it's from last year but the situation hasn't changed a whole lot since then: http://piggington.com/shambling_towards_...

If it's your forever home, in a sense it doesn't matter if prices drop. As long as you are happy in the home and the amount you pay (considering both down payment and monthly payments) is within reason, the market price isn't that big a deal in theory. There's a question of whether you could have gotten more, but as you observed, that's not such a straightforward question.

But if you are worried about home prices dropping, and/or you believe (correctly in my view) that home prices are high, why keep the condo? If you buy an 800k house and keep the condo, you have an awful lot of exposure to SD real estate, for better or worse.

Submitted by an on August 2, 2016 - 8:39pm.

As a home, I think as long as it's cheaper to buy than rent of comparable home (P+I vs rent), I would buy. Tax deduction will about cancel out the property tax and insurance. So, if you foresee yourself staying put for 5-10+ years, there's no reason not to buy. Especially if it's cheaper than renting a similar place.

Submitted by Hobie on August 2, 2016 - 8:43pm.

this is a no brainer. $ in bank, gainfully employed, pick a location and make a family.

location of condo would be helpful, but not really. if you can swing house+condo+kid go for it.

you are in it for the long game

Submitted by La Jolla Renter on August 2, 2016 - 9:12pm.

What areas are you considering?

What's the condo worth, equity and what is the net cash flow ea month?

Submitted by Panderso on August 2, 2016 - 9:29pm.

Thanks guys.

Rich - I read your linked post and TBH it sounded pretty indecisive. Pretty similar to where I am right now!

Re: the condo - you make a good point about a concentration of assets in SD real estate. Right now we don't need access to the equity and the condo seems a good place to park it and make some return ... Maybe not better than putting it in the market though.

Hobie and La Jolla Renter - the condo is in UTC (La Jolla Colony), worth about $360k, we've got about $250k left on the loan, cash flow from renting would be $300-$400 per month assuming 100 percent occupancy. We're looking to buy a SFH in Scripps Ranch.

Submitted by bewildering on August 2, 2016 - 9:44pm.

My house just appraised for 40% higher than when i bought it in 2014. Seems a bit crazy to me, but I think it is driven by two factors: the rental market is insanely expensive and interest rates are ridiculously low.

The rental market is a mystery to me, have rents ever fallen? Do present rental prices provide a floor for house prices?

For interest rates. If interest rates rise then house prices might go down, but you will be paying a higher payment because of the higher interest rate.

If interest rates fall then house prices will go higher.

One left of field factor: have you factored in child care prices? Can get pricey.

Submitted by Panderso on August 2, 2016 - 9:59pm.

Edit to my last comment: I just checked the Zillow rental estimate again and apparently cash flow would be $100-$200 a month, not $300-$400.

Bewildering - yeah, we've considered child-care in our budget. That's why we have a cap on what we'll buy. It is expensive and unfortunately we don't have immediate family in the area so no free day care. :(

Submitted by harvey on August 2, 2016 - 10:05pm.

You used the term "forever home."

That's your answer.

Submitted by scaredyclassic on August 2, 2016 - 10:12pm.

scaredy is nervous.

Submitted by bewildering on August 2, 2016 - 10:16pm.

Panderso wrote:

Bewildering - yeah, we've considered child-care in our budget. That's why we have a cap on what we'll buy. It is expensive and unfortunately we don't have immediate family in the area so no free day care. :(

Our daycare/preschool bill is about the same as our principal and interest. It would be great to have any family around.

Submitted by Panderso on August 2, 2016 - 10:34pm.

Really? My understanding was that daycare/preschool is $10k to $15k a year, is that about right? I'm early on in the research process.

Submitted by scaredyclassic on August 2, 2016 - 10:38pm.

low overhead.
low stress.
freedom.
happiness...
or massive debt...

Submitted by njtosd on August 2, 2016 - 10:59pm.

Panderso wrote:
Really? My understanding was that daycare/preschool is $10k to $15k a year, is that about right? I'm early on in the research process.

That seems about right - for one child. If you have two - there's no bulk discount. It's like paying college tuition. FWIW - I have known many women (MDs, lawyers, etc.) who were sure they'd be ok with leaving their child at daycare or with a nanny, only to find that it was a completely different decision once the child(ren) came along. Some were OK, but some weren't (in a big way). It's a deep dark secret, especially among those who put a lot of time and $ into preparing for their careers. Babies mess with your brain - even if you're sure they won't.

When buying a house, if you and your husband can leave yourselves some room to work that issue out (i.e. have a budget that leaves the possibility for one of you take some time off) you will avoid the feeling of having your back against the wall and you will both be happier. If, when the time comes, you find that you have a child care solution that works well for you, you'll be able to put some extra cash away for college - which comes at you much faster than you will ever imagine.

Best wishes.

Submitted by scaredyclassic on August 2, 2016 - 11:19pm.

njtosd wrote:
Panderso wrote:
Really? My understanding was that daycare/preschool is $10k to $15k a year, is that about right? I'm early on in the research process.

That seems about right - for one child. If you have two - there's no bulk discount. It's like paying college tuition. FWIW - I have known many women (MDs, lawyers, etc.) who were sure they'd be ok with leaving their child at daycare or with a nanny, only to find that it was a completely different decision once the child(ren) came along. Some were OK, but some weren't (in a big way). It's a deep dark secret, especially among those who put a lot of time and $ into preparing for their careers. Babies mess with your brain - even if you're sure they won't.

When buying a house, if you and your husband can leave yourselves some room to work that issue out (i.e. have a budget that leaves the possibility for one of you take some time off) you will avoid the feeling of having your back against the wall and you will both be happier. If, when the time comes, you find that you have a child care solution that works well for you, you'll be able to put some extra cash away for college - which comes at you much faster than you will ever imagine.

Best wishes.

yep. dont count on working with the baby. technically, women can go clinically insane after a baby arrives. men on the other hand are excellent at day care drop offs. i used to drop off a 2 mo. old 1st kid and felt nothing but, see ya later, buddy, almost proud that he was up for a day at day care, selfsoothing, sort of. while my wife would weep big salty tears. she could not self soothe as well.

later she had to stay home. couldnt "miss out" ...of course, staying home also drove her nuts.

its really too expensive to have a bunch of kids. you figure itll work out cause others make it.

but others are nuts.

this is part of why scaredy is nervous,again.

how tiny is this tiny condo? maybe it is big enough

Submitted by Coronita on August 3, 2016 - 3:55am.

Panderso wrote:
Edit to my last comment: I just checked the Zillow rental estimate again and apparently cash flow would be $100-$200 a month, not $300-$400.

Bewildering - yeah, we've considered child-care in our budget. That's why we have a cap on what we'll buy. It is expensive and unfortunately we don't have immediate family in the area so no free day care. :(

I would not count on your condo being cash flow positive 100-200/month, at least for the 1-3 years. In fact, I would consider that you count just breaking even at least when you first start out as a more realistic outcome.

People move, things break, property taxes/hoa/insurance goes up, rent might come down in the future. No one ever assumes 100% occupancy. Also, you and your husband might not want to deal with being actively involved in it's management so add another 5-8% in management fees if you want someone else to do it. Also, unless you and your husband plans on doing the maintenance yourself, anytime something breaks, in all likelihood, you will end up running negative that month. Calling a handyman to simply replace a leaky faucet will set you back around $100-200, including the cost of the faucet itself.

On one of my condos, the A/C just went out. I got lucky. The repair bill was only around $200. It could have been way worse. On another SFH rental, the dishwasher went out. And a few months ago, another condo the fridge went out. And last month, I got a $200 repair bill on something that broke on a condo that is managed by someone else. I personally don't mind dealing with all this, because I like being a landlord, and across all my rentals, the numbers still look really good. I wanted to give you a realistic picture right when you are starting out, and you need to consider a cushion in your budget for this. This is not to scare you into deciding to not keep the condo, but I think you need to consider a worst case scenario, and plan for that to see if you are willing and able to juggle being a landlord and if it fits into your family's financial goals.

Keep in mind also, that since it's your primary home right now, capital gains will be totally exempt for you guys (up to $500k for joint filers) if you do sell. That's a pretty big gift from the IRS. And with that nice chunk of cash, you could (in theory) invest it elsewhere. Plenty of ways to skin the cat. You could also try renting it out first and then decide to sell and still get your capital gains tax break, if you do so within the rules regarding the timeline...

Submitted by Panderso on August 3, 2016 - 8:42am.

Thanks all for your thoughts. This is exactly why I like posting on the internet -- folks have no qualms about telling it like it is and exploring worst case scenarios, which is important to hear.

Flu, I totally get what you are saying and luckily we've considered all those factors. To clarify, I don't expect 100 percent occupancy, I just said that to give some frame of reference to the cash flow numbers. I expect negative cash flow the first few years. I'm not thrilled about becoming a landlord and that's weighed on our decision to keep the condo. The thing is, where would we invest that capital if we sold? We ran the numbers and, assuming 2 percent annual appreciation on the condo and averaged cash flow of only $100 a month, we're still way better off compared to having it in the stock market at a 5 percent annual return.

I do like diversified investments though ... If folks can suggest a better place to park the cash I'd love to hear it.

Submitted by Coronita on August 3, 2016 - 10:03am.

Panderso wrote:
Thanks all for your thoughts. This is exactly why I like posting on the internet -- folks have no qualms about telling it like it is and exploring worst case scenarios, which is important to hear.

Flu, I totally get what you are saying and luckily we've considered all those factors. To clarify, I don't expect 100 percent occupancy, I just said that to give some frame of reference to the cash flow numbers. I expect negative cash flow the first few years. I'm not thrilled about becoming a landlord and that's weighed on our decision to keep the condo. The thing is, where would we invest that capital if we sold? We ran the numbers and, assuming 2 percent annual appreciation on the condo and averaged cash flow of only $100 a month, we're stillwont way better off compared to having it in the stock market at a 5 percent annual return.

I do like diversified investments though ... If folks can suggest a better place to park the cash I'd love to hear it.

I am not going to recommend where you should park your cash because what works for me might not work for others. And it's always something I ask myself anyway.

Sometimes the best investment is no investment if it just doesn't feel right imho.

I personally don't think we will see 2% appreciation each year for the next few years unless the banks start to relax lending standards imho. But who knows.

If I were in your situation, I like dealing with rentals so I would probably keep the condo as a rental because for me, all else being equal, I get more satisfaction with money earned from a tangible asset than on paper so I wouldn't mind the pita factor. But I am weird.

If you are going to be starting a family, there's probably things you'll want to do there, and plus you'll also want some emergency funds in cash there's ever a job loss in the future(knock on wood). You probably have already thought about it so I won't go there that's your business.

It is probably ok if you have to wait for the right investment to come along too. So you just need to figure out if you want to be a landlord or not.

One thing I'll bring up too is about passive losses on real estate. You might already know, but if you have a rental loss , you may or may not be able to deduct the complete amount. If your household modified agi is greater than $100k ( which it probably is if your husband is a techie) , how much you can write off of your rental losses against income you have elsewhere will get limited, with the write-off completely gone if your modified agi is $150k or higher I believe. The exception would be if one of you guys are a "real estate professional" as defined by the IRS. If you can't write-off your losses, it gets carried over to the next year to offset any rental income gain that year and/or offsets your gain when you sell the property. I am not a tax guy or accountant, just an engineer...so talk to an accountant or read publication 925 I think from the IRS regarding passive activity.

Submitted by TeCKis300 on August 3, 2016 - 10:00am.

I was in your shoes not too long ago. Personally, I think it's a good time to drop anchor.

Sure, there are some great points and considerations above, in regards to moneys. But there's also the intangibles of building stability and a nest in preparation for the next phase of your journey.

These are all worth the moneys spent. I've seen many a stressed mom/family, 7 months pregnant, trying to tackle a huge move. Settling on a house, as there's no guarantee the house that you want will be available if you wait. At least now, time is on your side.

With respect to rentals/housing. As long as you have a reasonable exit strategy without risking equity (which doesn't sound like the case at all). Again, you can make those decisions when and if things change.

Also, you're early in your career. Sounds like you already have your budget well laid out, with consideration for the big ticket items at your current household income. Your take home is likely still on a steep curve so you'll continue to gain elbow room.

Go for it!

Submitted by mixxalot on August 3, 2016 - 10:44am.

In same boat and have decided to wait. Prices are sky high right now and inventory supply poor. I don't see much under 800k in decent areas.

Submitted by bewildering on August 3, 2016 - 10:59am.

mixxalot wrote:
In same boat and have decided to wait. Prices are sky high right now and inventory supply poor. I don't see much under 800k in decent areas.

From your post history you seem to have waited for the past 6 years, which in hindsight seems a mistake. We can get caught up with monetary value too much forget about life. The OP wants a bigger place for a family, can afford the new place easily, and will be settled.

It is hard to time the market unless there is an really obvious overvaluation (2005-2007). And we are homeowners, not investors. As Rich has pointed out, the market might be 10% overpriced at the moment, but it is nowhere near like 2005-2007. If the OP is staying forever then 10% extra today is meaningless over 15-30 years.

ps To the OP. We have two kids. It is about 1000/month for each child. San Diego is actually very cheap for daycare/preschool. My friends in Boston are paying 2000 for one child.

Submitted by sdsurfer on August 3, 2016 - 11:14am.

I'd have to agree with Harvey and recommend you go for it based on your "forever" comment. I think the timing will never be absolutely perfect. If prices are low then rates are higher if rates are low prices tend to be higher so there is always give and take.

As far as the condo...I really hate to disagree with Rich since he's probably waay smarter than me, but I'd probably keep that too as an investment if it's in coastal SD as long as it's breaking even. I'm still curious what rents might do with this correction that seems to be coming at some point. My gut says that as long as demand stays strong if prices did start to fall then rents would get even more crazy from a demand standpoint because less people would be able to or want to buy. With more people choosing/being forced to rent it would push prices up (my opinion of course). The only curveball in my opinion is if demand starts to fall due to some circumstance. Could happen I guess, but does not seem to be happening now or anytime in the recent past.

In addition to my belief that rents might increase over the next couple years regardless of prices I'm not sure where I would put the money if I sold. Say the rents go up only 3% per year (past few years have been waay more than that as you know) then at least your keeping up with inflation. There was some talk about daycare and kids and maybe the cash flow from that condo ends up paying for one of your children's college education someday 18-20 years from now in exchange for managing the property until then. Then when they are done with college it goes back to you each month.

Just my opinion and what I'd do...good luck to you!

Submitted by mixxalot on August 3, 2016 - 11:44am.

I disagree. Renting allowed me to move to Bay Area and work there a few years to rake in a lot of cash before moving back to SD. It's way less expensive now to rent than buy. It's another bubble.

Submitted by FlyerInHi on August 3, 2016 - 11:52am.

I find it very interesting that there is no talk of a regular recession or a Fed induced recession as many would call it, where there are job losses and rent decreases like we saw in the 90s.

I too believe that the economy is on solid grounds. I would buy. AN put it well on his post.

But whatever happened to the cries of a huge recession is coming because of debts and Fed manipulation?

Submitted by treehugger on August 3, 2016 - 1:26pm.

We own a rental condo and my husband and I file taxes separately, so I take the house he takes the condo, he makes a nice chunk on tax deductions from the rental, we pretty much break even with the renters.

We are toying with selling the condo and putting money into a SF that we could eventually downsize into once kids off to college, but everything is sooo expensive the more I think about it the higher the prices get, gets so bad I wish I had done it last month and each month gets worse and then I get scared that this insane cycle must end....and I hesitate some more.

Just had house appraised for refi and value has doubled over what we paid in 2012, absolutely amazing!

How are people affording this?? I felt like we were reaching in 2012!

Tough decision, Good luck!

Submitted by FormerSanDiegan on August 3, 2016 - 4:12pm.

If I were you I would sell the condo within the next 2 years to qualify for tax free gains.

Buy your home this fall.. prices are typically flat from midyear through December historically in San Diego.

Sell your rental in before Spring of 2018 or hold it forever.

Submitted by Rich Toscano on August 3, 2016 - 4:26pm.

FlyerInHi wrote:

But whatever happened to the cries of a huge recession is coming because of debts and Fed manipulation?

What the fuck does that have to do with this topic?

Submitted by Rich Toscano on August 3, 2016 - 4:36pm.

sdsurfer wrote:

As far as the condo...I really hate to disagree with Rich since he's probably waay smarter than me

I wouldn't be too sure about that...

sdsurfer wrote:

but I'd probably keep that too as an investment if it's in coastal SD as long as it's breaking even.

Just to be clear, I don't really have an opinion on the condo. I just didn't understand why the OP wanted to keep the condo in addition to a new house, given that her concerns about SD housing valuations were serious enough that she posted this in the first place. I just meant it as something to think about.

Similarly, OP, I realize that the article I pointed you to didn't have any clear answers. It's all meant to just be food for thought as everyone's situation is different.

Take this with a grain of salt, as I don't know much about your situation, but I think it makes sense to buy a forever home right now. Rates are so low that the monthly payment is very reasonable despite high prices. What I think makes less sense is to get in a situation where you depend on appreciation, or would be in trouble if the price went down. But in a forever home, that's not the situation.

At the same time, it's not like it's crazy to rent, by any stretch. Either can make sense depending on the situation. So, take your time and look for places, and if you find something you love, go for it... but if not, keep looking and taking your time. That would be my generic thinking, again, without knowing the nuts and bolts of your situation.

Submitted by Myriad on August 3, 2016 - 8:49pm.

Panderso wrote:

I'm not thrilled about becoming a landlord and that's weighed on our decision to keep the condo. The thing is, where would we invest that capital if we sold? We ran the numbers and, assuming 2 percent annual appreciation on the condo and averaged cash flow of only $100 a month, we're still way better off compared to having it in the stock market at a 5 percent annual return.

I do like diversified investments though ... If folks can suggest a better place to park the cash I'd love to hear it.

I would agree the major factor to owning a rental is work associated with becoming a landlord. As for where to invest otherwise, the stock market with dividend reinvestment is higher than 5% historically. Of course who knows what it will be in the future.
Another factor to consider is concentration in real estate (and in SD for that matter) as well as taxes.
401k, Roth IRA, and After-tax 401k defer your taxes out until you retire (or none for roth). Also 529 can be a good investment for a future kid.

treehugger wrote:

Just had house appraised for refi and value has doubled over what we paid in 2012, absolutely amazing!

Where the heck has house prices doubled in SD since 2012?

Submitted by Coronita on August 4, 2016 - 3:06am.

treehugger wrote:

Where the heck has house prices doubled in SD since 2012?

near SDSU

Submitted by treehugger on August 4, 2016 - 10:26am.

Oceanside

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