Starter Home? Financially smart?

bookworm10

Mon, Apr 08 2013, 10:32 pm

My husband and I right now are living in a neighborhood where rentals are a fortune and only going up. There is no such thing as a good deal anymore, and mortgages are almost at the same level as rent.

We cannot afford our "dream" home right now, detached, with more than 4 bedrooms, etc in the neighborhood that we want. We could afford it if we try to be pioneers in newer neighborhoods, but we have a shul that we really like, and a rav who is very involved with us, etc.

Is it financially smart to look into starter homes- IE Two families, attached, etc and then eventually plan on moving to a bigger and better when we can afford? We can afford the down payment on these smaller homes and the mortgage. Or should we just wait it out, cough up the ridiculous rent for another 6 or so years until we can afford a better home?

amother

Mon, Apr 08 2013, 10:37 pm

I would look for a starter home. Rent is almost as much as a mortgage and if you can put it together it is smart to do. I myself live in a starter home and iyh when we can afford it, plan on buying a bigger home. It isuch smatter to own and pay into tour own home than to rent.

Maya

Mon, Apr 08 2013, 11:07 pm

In most areas, it's a myth that a mortgage is as much as rent, especially when you factor in taxes, maintenance, repairs and the extra fees of buying a home, such as the closing, which I've heard is an extra $10K. Also, you need the money for the down payment.

Make sure that the amounts really are comparable before you look into it.

ETA: I overlooked the part where you wrote about having the down payment. Never mind.

Last edited by Maya on Mon, Apr 08 2013, 11:16 pm; edited 1 time in total

MaBelleVie

Mon, Apr 08 2013, 11:12 pm

It depends where you live. Rentals where I live are a fortune, too, as are full size houses. We found a great deal on a starter home, and it was definitely worth buying. The mortgage, utilities and insurance comes out to a lot less than we would pay for a rental; with maintenance and related fees we still come out slightly ahead. Given the market here, rentals will always be in demand so we can get a good price for it if we rent it out once we move to a bigger place.

amother

Tue, Apr 09 2013, 4:04 am

I agree with previous posters. If you can afford the starter for now, go for it.

I live in Jerusalem which may be a bad example because housing here is a fortune, but in my area, old, run down, tiny apartments, about 18 years ago, you could get a small 2 or 3 bedroom for $150,000. By the time my husband and I bought our apartment 5 years ago, they were going for $300,000-$350,000. They are now reaching $600,000.

Now someone who could not afford an apartment at $350,000 so waited around will find themselves fresh out of luck. As they waited the prices climbed and climbed. When they finally find themselves in a position to afford the $350,000 , the asking prices had grown to $650,000. Had they bought a smaller place for, $250,000, at least that price would have climbed as well with the rest of the area. They could now sell that for $500,000 and have a large chunk to go toward their dream home.

Obviously, I don't expect your area to jump hundreds of thousands of dollars. But you say rent is high which is often indicative of a desirable area, and if you find housing prices climbing, by something now! That's the only way to have something to sell at a higher price later on for your dream home.

amother

Tue, Apr 09 2013, 4:14 am

Depends where you live. In Israel, it's usually better to buy a starter home than to rent. Renters pay property taxes (arnona); buyers don't have any major extra taxes.

Of course, this also depends on area. A friend of mine bought a new penthouse in Netanya worth around 3 million NIS. He rents it out for about 10 000 NIS a month. He and his family live in an older attached house in Ramat Aviv Gimmel, which he rents for 12 500 NIS. So he's not adding a lot for rent. However, the house in Ramat Aviv Gimmel (Tel Aviv) is actually worth 9 million NIS. He originally wanted to buy something in his neighborhood, but it's just not worth it financially. On the other hand, the purchase of the Netanya penthouse was a good deal financially.

Even within the same country: Location, location, location.

You need to compare purchase price to rental price.

Think1st

Thu, May 22 2014, 10:37 am

bookworm10 wrote:

Rent Moves in 1 direction UP Sad

, mortgage in most cases is flat for a long time. Carefully calculate taxes maintenance etc. You may benefit from mortgage interest & closing cost tax deduction, living in the smaller part of 2 fam may bring in more rent. Maybe some tax benefit by depreciation of investment portion. you may later decide to do cash out refinance for down payment of 2nd house or sale with possibly no capital gains tax, I am NOT your CPA make sure he works hard for your $ Smile

tryinghard

Thu, May 22 2014, 10:45 am

It really depends on your area - in my town, taxes are the same as (or more than) the mortgage - So even though our mortgage itself is slightly (around $150) less than our rent was, the taxes mean that our monthly bill is just about double our rent - so in the end, all we are doing is paying rent to the town! In that case, if you don't need the space, you may as well save on closing costs.
Then again, my county has the 5th highest rate in the country of property taxes in proportion to home value.

amother

Thu, May 22 2014, 12:10 pm

we just purchased a co-op as a starter home. it's a large 2 bedroom, bigger and a nice upgrade from our rented 1 bedroom. we anticipate to be in it for 5-10 years. we put down a very large percentage for the down payment, since it was an apartment rather than a house. so, that means our monthly payments are very low, which allows us to save a lot for when we are ready to buy a bigger house. we could have bought a house but couldn't really decide where we wanted to be more long term, so this was a good solution for us. maybe this would be something to look into.

Think1st

Tue, Jun 03 2014, 9:35 am

amother wrote:

im the amother above.. I should also add that our monthly payments are less than it would have been to rent a 2 bedroom in the same area. I think we put down 60%

Nice to hear you made a good move, but a large downpayment is not an option for most.

Barbara

Tue, Jun 03 2014, 9:45 am

doodlesmom wrote:

Definitely starter home, all the monthly payments will go to yourself instead of the landlord, and you can use that money you get from selling the starter house towards your dream home!!

I agree with your conclusion that a starter home is a good idea.

What I'm not sure is why everyone thinks that mortgage payments "will go to yourself instead of the landlord." They actually go to the bank. If you were to take a $250,000 mortgage today, in 6 years, your balance would still be more than $226,000, and you would have paid something like $86,000 in interest.

What you're really doing is betting that the home value will go up.

mummiedearest

Tue, Jun 03 2014, 9:50 am

I think you should look at starter homes. we bought a "starter home." (semi attached, 2.5 bedrooms.) I always said I'd never want to live in an attached house. well, I calculated we could technically fit six kids in the 1.5 bedrooms. it would involve three bunk beds, but it's doable. we have three kids, and we fit the house comfortably. we have space for shabbos guests, a small backyard, a deck. we were never able to have our own sukkah until we moved here. we have a parking space (shared driveway). assuming we don't have too many kids for the bedrooms, I can't see upgrading unless we move to a different area entirely. we do hear the neighbors through the walls if they're loud. we also hear all conversations in the driveway, which are frequent. another aspect to think about: we moved here from an apartment with three tiny bedrooms. when we moved to our current house, we had just the right amount of furniture. we have since added a couple of pieces as needed, but we didn't have any immediate furniture costs. when you move into a larger living space, you end up spending a lot on necessities for the house. if it's important to you to have enough couches, beds, dining room chairs, etc. right away, try to factor that in when looking at homes.

amother

Tue, Jun 03 2014, 10:14 am

Its not always.

We bought a starter home when we were first married for about 300,000 in a large Jewish community.
Unfortunately the street has become much busier and the market fell a lot (we bought at the height of the market about 10 years ago). Our house was recently appraised for significantly less then when we bought it, plus we put some money into it (we enjoyed immensely what we did so its not a full loss).
Our mortgage, insurance and taxes are about 1400 per month, which is probably in line with what we would be paying for rent. Our utilities are definitely more then we would pay for an apartment and our repairs are minimal (dh does almost everything anyway).
We no longer fit in our home and I"m not sure were we will go from here.
I do love living in my own home, having space, having a nice backyard for my kids to play in and having privacy.
I wish we had bought a 2 family home or home with a basement and lived in the smaller half for a while and rented the larger house and then switched and rented the smaller house out. I think it would have covered itself better and worked out better financially in the long run. but hindsight is 20 - 20.

amother

Tue, Jun 03 2014, 10:21 am

I'm the amother above. To add to what Barbara said:

barbara wrote:

What I'm not sure is why everyone thinks that mortgage payments "will go to yourself instead of the landlord." They actually go to the bank. If you were to take a $250,000 mortgage today, in 6 years, your balance would still be more than $226,000, and you would have paid something like $86,000 in interest.

paying "86,000 in interest" over 6 years (ours is less then that because we had a large down payment), you also have to look at the taxes, I have some family members paying up to 60,000 taxes over 6 years. In our case that is another 30,000 over 6 years. And our taxes are considered on the low end were I live.

the total amount that never touches the equity of your home is high. So it isn't always wiser to own then rent.

Frumdoc

Tue, Jun 03 2014, 11:04 am

Barbara wrote:

But if you have a repayment mortgage, you are buying back part of your house from the bank little by little, as well as paying interest to the bank, which I agree is no different from paying rent. I just checked out how much of our home we had bought back, a whole $15,000 worth! Of course we have paid plenty of interest for that.

I guess it depends on the type of mortgage, the terms, house price trends, ijterest rates (esp on a variable rate mortgage), and the tax differencebetween renting and buying. Among other factors.

saw50st8

Tue, Jun 03 2014, 11:40 am

Barbara,

The interest you pay on your mortgage is also tax deductible. If rent and mortgage are the same, you come out ahead (usually).

ETA: Property taxes are federally tax deductible too.

Last edited by saw50st8 on Tue, Jun 03 2014, 11:51 am; edited 1 time in total