Opinion for my situation

[Louie]

Its very (very) rare that a house is a good investment vs renting.
For example:
Lets assume that a decent house in your area costs:
$300k.
The total PITA (all in payment) would be $2800.
Thats assuming you were to buy FHA w/ 3% down.
Add to that the usual upkeep stuff. New homes or used homes
all will consume money annually.
So, after 12 months your $300k condo/ house will cost you:
$67k.
After year one your annual housing expense will be around $37k per year.
If you stay in the place for 5 years...your total expense will be:
$215,000.
For you to just BREAK EVEN that condo would have to appreciate close to 10% per year.

That same $300k house/ condo will cost you maybe $1k per month
$12k per year all in.

Lets assume you rent for 5 years...total housing expense would be around $60k.

You do the math.

As far as the 'tax deduction' of owning a home. Thats a joke. Don't spend money because you will save money on taxes.

In some mid-west markets the rent vs own thing actually makes it a toss up.
I only buy real estate that will cash flow in the event we want to rent it.

Everytime I share this info with my home owning friends who think their home in an investment...they always get pissed.
But, those are the numbers.

Buying a home is 100% emotional NOT financial. Financially buying a home is almost always a bad decision.

Oh, we own many homes....none we live in! All rented.

[tcnohead]

Originally Posted by Louie

Financially buying a home is almost always a bad decision.

I can't disagree more. Sorry, but there is more data FOR buying a home than AGAINST it.

[EliseSC]

Why, when I was your age...(just wanted to say that!)...I was faced with the exact same question and I bought a Porsche. Over the next several years I pumped more money into the car - insurance, repairs and tires and sold it five years later for much less than I had originally paid for it. In the same period I had friends who had purchased property and their money went into building equity (i.e., classic depreciating asset vs. appreciating asset situation).

I would strongly recommend (since you asked) that during your twenties you work to establish a solid financial base with the idea of eventually having your money work for you instead of the other way around (compound interest is your friend). The time to buy a luxury item like a Lotus is when you know you can afford it and when it will not cause you undue financial stress.

[bolt]

Earlier this morning:

Originally Posted by bolt

Condo first. And even if you do decide to get the car; i'd suggest waiting for a little longer after the introduction of the 09 and to see how the economy does.

Personally this "recession" doesn't seem to have any impact on me and i've been oblivious to it all, but i'm becoming a bit cautious now.

Early afternoon:
Dow 9,627.19 -698.19 (-6.76%)
NASDAQ 1,791.63 -155.76 (-8%)
S&P 1,017.82 -81.41 (-7.41%)

I never knew my confidence in the economy had such an impact....

[Bleu Omdurman]

Ok, rewriting my post here.

First, Louie is totally wrong. I'd be happy to explain more in person on the phone, and I am in Zürich now!

Second, some advice on life. no one here can get across to you, even though you seem to want to make the right call, the pain that is buying a car and watching it depreciate rapidly. Far and away the better financial decision is investing in the future. The house would likely fit that bill nicely.

Third, you may just decide that you need the car now, so let me offer some advice if you go that route. First, don't buy now as the winter is setting in and the cars will fall in value as winter comes in. Second, though the lotus can be driven daily, it is very expensive to repair body damage which will happen if it is driven daily. I would buy a beater that you can stuff in a ditch and walk away from. Then once you have that car sorted out and trust it, buy the lotus. Keep it in the garage and bring it out when ever you feel the need. In the winter, put it back and change the insurance to cover theft and damage only. Don't drive it. Repeat yearly.

You will save a bunch on maintenance and insurance. Even enough to pay for an occasional track day. Get a V1, you will likely be glad you did.

In the end, I think you should buy a beater, and the condo. Put a poster up on the wall of the lotus. When your net worth (assets minus debt) is at or above 4 times the cost of the car, buy it. That way as the car depreciates you are happy, until you buy it.

Again, happy to explain the time value of money thing that Louie missed.

Cheers,

[speedneed]

so...basically Lightning..they have decided that you'll not be driving lotus in near future...go buy expensive property and park your bicycle on it

[Vampyre]

If you have to ask, you are unsure about the purchase of the car....

Seems like you are asking here, in hopes of people pushing you towards the car..

In that case..

Ask this on a home owners forum and you will get pushed towards the house / condo

[DarkLotus]

Originally Posted by Louie

Its very (very) rare that a house is a good investment vs renting.
For example:
Lets assume that a decent house in your area costs:
$300k.

ok $300,000 for a house.

Originally Posted by Louie

The total PITA (all in payment) would be $2800.
Thats assuming you were to buy FHA w/ 3% down.

what? In my experience I have closing-costs + downpayment. That is pretty much it. Closing costs are usually incorporated for you into the loan, so you really only have to put the down payment up. However, for the sake of argument, lets include the 2,800 + 3% of $300,000 for a total of $11,800.

We didn't lose 9,000 though, the house is still worth $300,000.

Originally Posted by Louie

Add to that the usual upkeep stuff. New homes or used homes
all will consume money annually.
So, after 12 months your $300k condo/ house will cost you:
$67k.

What the hell? How did we go from $11,800 to $67,000?

Water, Sewer, power, trash, and natural gas are my recurring monthly fees. I'd put them, altogether, around $200/mo. The mortgage payment /mo on $300,000 with a decent rate would be around $2,400. You've got an annual land-owning tax owed to the city/county where you live, as well. lets call it $2000?

$2000 + $200x12 + 2400*12 = $33,200

$33,200 + $11,800 = 45,000 for the first year. So that is $22,000 less than your initial quote. Not sure where that extra money is going?

Originally Posted by Louie

After year one your annual housing expense will be around $37k per year.
If you stay in the place for 5 years...your total expense will be:
$215,000.

$37k is reasonably close to $33k, so I'd say that we both agree on that one. Yes, the cash-outlay for living in your $300,000 house in a nice neighborhood for 5 years would actually be around $177k not $200-$215k. How did we get this figure? $45k(first year) + 4years*33k = 177k

Originally Posted by Louie

For you to just BREAK EVEN that condo would have to appreciate close to 10% per year.

You are mostly correct. However, to BREAK EVEN in RENTING is IMPOSSIBLE, because it is always a payment with no gains. In addition, at any time the owner can leave, and they only owe the bank the $291,000 from the initial mortgage. To be honest, your 3.1% figure is off base by a bit. House are increasing around 7-8%, when factored across a long range of years (5+)

Any equity, at all, is better than no equity. So lets keep your abysmally low 3% figure, and say the house appreciated 3% each year, for 5 years:
Year 1: 309,000
Year 2: 318,270
Year 3: 327,818.1
Year 4: 337,652.6
Year 5: 347,782.2

Holy ****, look at that! Even at a truly unrealistic 3% per year (in 2006, for example, houses were going up by 32% per year, an order of magnitude greater), for 5 years results in a total gain from 291,000 (owed) to 347,782.2 (value). A total of $56,782.20. Compounding interest is a wonderful thing, isn't it? Especially at realistic numbers like 7-8%.

However. You have spent $45k + 4*$33k for those 5 years, so your net result is a whopping $177k -$56k = -$120,000.

Originally Posted by Louie

That same $300k house/ condo will cost you maybe $1k per month
$12k per year all in.

Hmm. Not where I live. If you wanted to buy a house, or rent a house, the price is the same. So by renting, you're simply ass-out $200,000.00 in 5 years for your fancy crib. In all markets, the value of the rental is based on the value of a purchase-able house. People who rent are paying 90-95% as much as mortgage-payers to live in an equally sized house. In addition you are still paying utilities and stuff when you rent, there is no savings there either.

So you can buy, with a result of -$120,000.00
Or you can rent, with a result of -$150,000.00

Originally Posted by Louie

Lets assume you rent for 5 years...total housing expense would be around $60k.

You do the math.

I did... it doesn't quite come out to the same numbers you're quoting. You're comparing a $300,000 mortgage to a $1000/mo rental to make your numbers look good. Who owns that $300,000 condo that you're renting for $1k/mo? How are they able to afford it if they're losing $1,400 every month? Your numbers don't make any logical sense.

Originally Posted by Louie

As far as the 'tax deduction' of owning a home. Thats a joke. Don't spend money because you will save money on taxes.

Sigh. Yes it does. The government is helping you build equity in your house by not charging you for the interest on your mortgage. in the first 5 years of house ownership, the mortgage payments are basically 99% interest, very little principal. To not own a home is foolish.

If you factor in the fact that the gov't will cut you a break on your mortgage payments. "You can deduct interest on up to $1.1 million of loans used to buy or build or improve your first or second home and secured by the property. Up to $1 million of such debt is called acquisition debt, which must be used to acquire or improve the property, and up to $100,000 more is called home equity debt, which an be used for any purpose."

So your 2,400/year you're paying since you own the home, reduces your annual income by $33,000/year. If you were making 68k/year, that drops you down to 35k, and you basically are in the 25% bracket taxes. the $$$ you were making between 35k and 68k would have been taxed, progressively higher, at 28%. So you saved, each year, 33,000*28% = $9,240. Over 5 years that was $46,200. If you were RENTING you'd still OWE the GOVERNMENT that TAX. In addition there are a number of other tax deductions that only home-owners can take. (see link below).

Net result buying: -74,017.78
Net result renting: -$150,000

Cash in hand after selling your home 5 years later: $56k , basically you were paying about half as much per year due to equity + tax savings just to live in the house.
Cash in hand after renting for 5 years: $0

Deductions for Homeowners - Kiplinger.com
Tax Brackets (Federal Income Tax Rates) 2000 through 2008

[speedneed]

holy s***...simple question has sparked noble prize level discussion
gentelmen..prices of housing are dropping..economy goes to sh**..
enjoy life..drive a lotus now.....i sure do every day

[Louie]

Fun conversation....
I did some of my math wrong in the previous post so...I will try to make the
intent more clear.

1) In most of the US you can rent for far less than owning. In SoCal you can rent a $1 mil house in Laguna Beach for $2900 per month. If you were to buy that home with 10% down you would be paying easily $8K per month PITI. So, you would save $5k per month...or $60k per year using that as an example.
Now, I know that same math wont work the same if you live in the midwest. In the midwest you can rent for roughly the same as owning.
2) Homes (for the most part) are NOT appreciating. And the average historic national rate of appreciation is 3%...or less. In some markets even in the hot housing market of yore real estate appreciated less than 3% if at all. We have several great homes in Ohio that have barely appreciated over the last 10 years.
3) Any home...new or used...is a cash suck. Assume 1% of the homes value..at least.
4) Did I mention the housing crash/ depression that will (most likely) cause real estate to continue to depreciate well into 2010?
5) Real Estate is no longer local. What happens in Cali does effect what happens in Ohio. Part of the reason we are in a global recession.
6) Math. Ok, so the order of this post is a little random but...this really does come down to math. I am estimating and rounding up:
Buy:
$300k
PITI = $2500 per month/ $30k per year.
Down = 3.5% ($10,500 + closing costs and inspections..maybe $12,500) First year only expense.
Upkeep = $3k per year.
HOA..who knows. I will leave this at 0.
So, every year the house will cost you...$33k. Year one the house will cost $45,500.
Every year there after the house will cost you..$$33,000.
YES , the downpayment IS an expense. Its money spent that you don't know if you will get back. Not to mention the opportunity cost of the money.

VS
Renting.
Same house for $300k would rent for (lets assume) $1200. Look on craigslist in ANY major metro area and you will find loads of deals. Sellers who cant sell are flooding the housing market with super cheap rents. I hate this as I am a land lord and own units in different states.
So, $1200 per month = $14,400 per year.

Taking this to the next level....total cost after 5 years:
Owning: $177,000.
Renting: $72,000.

NOT owning saves someone $100k over 5 years.

Those are rough numbers. I am doing this on the fly.

(remember, I own many units...so none of what I am telling you makes me all that happy)

YES, I am assuming no or low appreciation. Thats the reality in this real estate market and probably will be for many years.

Homes will depreciate (reading the tea leaves on this one) through 2010. Once they values level off then there will be low to no appreciation for several (3-5) years then expect 3-5% appreciation. Thats the cycle. Seen it before.
From today it will probably take 7 years for homes to actually start appreciating again. Don't bank on 5%+ appreciation anytime soon.

I just turned down a bulk REO buy of 300 homes in Vegas...they were priced 50% less than peak market....they emailed me 2 days after I said no and offered to lower the bulk price.

Like it or not, we are all in for a nasty ride.
Guys...anytime YOU are making the payment its an EXPENSE not an investment. I keep my rentals because the tenants are (slowly) paying them off. Several will be 100% paid off and then producing nice cash flow.

[EliseSC]

The reason the stock market is going wild right now is because people are reacting with emotion and panic. This is the greatest stock and property buying opportunity in our lifetimes. Housing prices are now extremely low. Now is the time to take advantage of the situation and [intelligently] buy an appreciating asset at a low price (BUY LOW - SELL HIGH).

[Valenz]

Originally Posted by EliseSC

... BUY LOW - SELL HIGH ...

Darn, That's what I've been doing wrong all these years. No wonder ......

[EliseSC]

Originally Posted by Valenz

Darn, That's what I've been doing wrong all these years. No wonder ......

Common mistake...

[Bleu Omdurman]

Louie, you are forgetting to sell the house at the end of the math you draw out. Remember that a portion of the PITI is indeed P. For those that don't know:
P= Principle=equity addition
I= Interest payment
T=Taxes
I= Insurance

You are also leaving out the tax code. that is not a safe assumption.

On the house to rent thing, your just off the mark. The fact that you miss these simple financial aspects of the decision is probably why you are recommending the renting. or perhaps you have a rental available?

If you could rent a $1m house for $1k a month that's a very scary situation. The reason it is scary, which no one has brought up, the landlord can raise the rent in that market in a big way. In fact, having rented homes out before, this is one of the most important things to do. If you are not renting at a market rate, Lemon's Law (Akerloff 1966) comes into play. Essentially, states that if they are selling it so cheap, do you want to buy it? Maybe its a lemon.

Kudos for the poster above for taking the time to line out the aspect of buying a home.

Speedneed knows I love him, but the OP and He are very different. One has a home, a business and several cars, the other (the OP) is in a very different situation. This is why I always say, "talk to your financial adviser". This needs to be an adviser that you trust and that you feel really knows you.

[blacklotus]

Do you see yourself getting a promotion and payraise in the next two years? Buy the car, the real estate market is really tough right now anyways, and prices on luxury type cars are way down. You might be making more money in the future, and it won't be a problem to buy a condo also.

[Noisycow]

Don't buy a condo either. Housing is still priced way too high. It will soon be retreating to 2001 levels. Housing Crash Continues, Bubble Pops

[EliseSC]

Nothing beats a strong cash position.

[Noen]

I have to agree with the advice to NOT buy property now in the Seattle area.

The real estate agencies here are still trying to prop the home values in the face of a pretty big bubble burst. Seattle is one of only a handful of metro areas not participating in the recent Coldwell Banker real estate sales incentives.

I am in the market for buying a home and have been very closely following the housing trends up here, especially on the west side of king county. The home values keep dropping by higher and higher percentages, the number of listed properties is pretty flat because a LOT of homes are being taken off the market. Sales are rising, because prices are falling dramatically, and now we are entering the sluggish part of the yearly cycle.

I wouldn't be at all suprised to see avg home prices in our area dip another 8-10% by March of next year, but I do think that next summer will likely be the end of the slide.

[Kiowapilot]

I bought my house in 05. got it for 190,000 then it was valued at 240,000 now it is 210,000. OUCH!! I got my car in july 08 and cant be happier. Now I can easily afford both so it is not a big deal for me. Right now I think either option is a losing situation. Housing prices are falling so your probably gonna lose money there and car values are falling so your going to lose money there. House prices will come back eventually but who knows how long.


For me, I would rent for a year or so. wait for the bottom to completely fall out then buy a house. Then when I could afford it I would get the lotus. Until then, Geo metro with 380,000 miles on it.

Just an opinion. Probably not sound advise. My financial discipline sucks. lol. I just have enough money to screw it up and learn from it. Wish you the best.

The lotus is a lot of fun though.