I Want To Invest In Real Estate #2: I’m Too Emotional to Buy a House
Remember Post #1? I shared one of my biggest financial goals: to own and invest in real estate. It is still my second biggest priority (after getting out of debt), but I think I need to admit to myself that I am just not prepared yet. Let’s say I get approved for a mortgage, find a place that would make sense as a rental property and come up with 10-20% down. If I do that, I would have probably 45 cents left to my name following the closing of the house and zero slush funds to take care of buying appliances, maintenance, repairs or anything else. And then what? Well, shoot, we need a washer and dryer, so it’s off to Home Depot for the zero-percent interest card! And Macy’s! And Lowes! And Bed Bath and Beyond (just kidding, I hate that place)! I would be back to growing my debt in a heartbeat.
There are a lot of other things I need to consider before buying my first place:
1) I need to reduce my credit card debt: I have a horrible confession. I realized last month that while my overall debt has been going down, my credit card debt has stayed almost exactly the same from when I began tracking it last June! I have four debts, two being credit cards and taking up two-thirds of my total debt and the other two being my student loan and car which are less than $10K combined. I’ve brought my Discover card balance down somewhat, but I need to attack the remaining $4,300. It needs to be gone in less than six months. Being down to three accounts and that much less in credit card debt will make my repayment a lot more manageable and a mortgage a lot more obtainable
2) Additional, dedicated house funds: I need at least a $5,000 slush fund just for the house (separate from the down payment) for unexpected closing costs, appliances/stuff for the house and funds to cover at least two mortgage payments in case I became unemployed. Current amount: Um, $10?
3) Who’s living here: me or tenants? I asked Money Mamba the question a few weeks back: do you buy real estate investment property when you rent your own home? He made some great points as did the other readers and it doesn’t come down to any hard and fast rule, but what makes sense for you. On the one hand, the area I want to buy in is not bad at all (it’s in Orange County and all of the OC looks idyllic compared to LA, where unless you’re in Brentwood, it can look like one endless strip of dingy corner stores and broken sidewalks), and I would be 100% comfortable livng in the place I eventually plan to rent. But does it make sense to make a move from LA down to OC, relocate, set up the condo with appliances and whatnot, just to move out in 6 months to rent to a tenant? And will we have another 20% down payment ready for a second place or will we go back to renting? I haven’t decided at all because I’m so hell-bent on just getting a place, which brings me to the title of this post…
4) I’m Too Emotional to Make Rational Decisions in Real Estate: Maybe it’s our culture (I’m Iranian), but I grew up around a lot of real estate talk and near-real estate worship. I know more real estate agents in the Southern California area than seems reasonable. I’ve spent many a weekend house-hunting with friends, family, heck even acquaintances if they invite me (I love open houses). So I have always, always, always wanted to buy a home, or maybe lots of homes, or maybe an apartment building, or a mall or a parking lot, or JUST SOMETHING, damn it. Sometimes it feels like I have a “To Do” list for my life and it looks like this:
It’s true. I put the pressure on myself and I let it get to my head. I think I am way behind in everything because I don’t own any real estate yet. But it’s not a small decision. It’s not something you just jump into because it seems like the right thing to do and everyone else is doing it. More importantly, I chose to live a different, non-traditional life for a couple years and made no effort to save money or stay in one place. I loved it and will never regret it. So why do I beat myself up over something I chose? It’s irrational. It’s emotional. Its like PMS, but worse because it’s in my head every day like some grating video game background music that loops over and over and over again because you didn’t shut off the Xbox. What I am trying to say is that I can’t trust myself to make reasonable decisions that aren’t intricately tied up with my expectations of lifestyle and perhaps wanting to impress people or show them I’ve made it when it comes to real estate. I don’t like that part of my thinking and I need to get it straight on my own about why I am buying a place and why it makes sense. And I have to understand that owning real estate with a mortgage is not going to magically solve all of my financial wants/needs and keep me from worrying about money ever again. It’s more stuff to think about and new stuff to take care of. I think a good next post in this series will be getting past my more immature expectations of real estate.
The market in Southern California has started to recover, but interest rates remain low and there is still plenty of inventory in Orange County and Los Angeles (not so much in San Diego). So if I really want to buy that house and not just dream about it, I need to get serious about paying off my credit card debt, separating out savings for a house fund, and not getting rushed into something for “fear of missing out”. That’s been one of my biggest flaws in my thinking, which is worrying just a little too much about what others are doing and how I compare to them. I loved Mo Money’s post on that idea, that sideways glance (how did he get that?) and she has some great advice on getting over it and living your life or, to put it in a more annoying way, “do you”.
I still dream and obsess over real estate. But I need to develop patience. I’ll continue to read and stay current with the market. I’m just getting my head in the game so I can do this thing right.
Do you guys have any great real estate first-time experiences to share? Is there something you wish you had known before you purchased your first property? Would you buy a property to rent if you didn’t own the home you live in? Or if you already do that, does it still make sense for you?
Hmm…do you qualify for FHA financing? If so, you could always finance a home with the FHA minimums of 3.5% down, live in it for two years, then move out an rent the property while keeping the awesome owner-financing on it.
FHA will allow you to buy a piece of real estate with up to four units. So, you could find a 4-plex that’s 3/4ths rented, and move into the remaining unit all the while financing it with only 3.5% down. This obviously doesn’t solve the rainy day fund issue, but it does give the the chance to get in on a big cash flow positive property while paying probably nothing to live in the remaining unit. That’s pretty cool. This is something I’ve been thinking about…need some W-2 income, though. :-/
There’s a world of opportunity out there. I really doubt real estate is going to make a massive run in the next 2-3 years – so no reason to let it stress you out. I think you’re absolutely right when you say that a piece of real estate isn’t the universal solvent to money issues, but it is a start. Building equity in your own home (and maybe even bringing in some serious cash flows from other renters) is better than throwing the cash away renting from someone else.
P.S. – I totally just realized that you were a woman. I had no idea. (Not really relevant to the topic of real estate, but whatever.)
We were very much like the “typical” American and felt the need to buy real estate early. We still had/have a lot of debt and I wish I would have been more responsible before we bought.
The biggest mistake has surely been getting a 30-year mortgage and not going with a 15 (because we couldn’t fit it in our budget). If you get a 30-year mortgage the amount of equity you build up is pathetic. IF the real estate value isn’t going up then you’re simply not making a lot of headway. I think out of our $1022/month payment, about $190 goes to equity. The rest goes to interest, taxes, and insurance.
I’d encourage you to wait until you can put at least 10-20% down AND get on a 15-year fixed mortgage.
It sounds like I’m in a similar position to you. I really want to get owning real estate, but I would also let my emotions get into it too much. I’d say first worry about paying off your credit card debt. Then try to save the 10-20% down payment. You don’t want to rush into it and end up having no money for extras or no wiggle room.
@JT: I am definitely planning on going through the FHA process as well to be eligible for financing and possibly down payment assistance. The agents I talk to have said the market is not such where FHA financing throws you out of the game. 4-plexers would probably be out of my income range, but duplexes are definitely within reach. Great points as always. Seems like most people do not realize I’m a woman at first! I’m fine with that
@WorkSaveLive: Your example really makes me think. A friend of mine bought his condo last year and refinanced to a 15-year loan after 10 months. His payment is slightly higher but with a 1.5% interest rate reduction, it definitely made sense and he’s committed to paying it off in 15 years. I want to do a 15-year if I can, if the difference between the two is $200-$300/month, then it’s feasible.
@Modest Money: Yes, I agree. It’s a new position for me because I finally have job stability and plans to live here for a while or at least have some interests here in LA/OC long-term. I also have a 10-15% down payment right now. But I know that not rushing the process will result in a much better purchase. Maybe I should just block Redfin and Realtor.com from my internet browser for a few months…
With the idea of moving closer to a potential new job in the fall, I find myself browsing trulia and fantasizing about owning a house. But I too have a lot of debt that has to go before buying a property. If we have to move, I’m hoping to rent a house or perhaps find a rent to own option. I’m surprised more houses aren’t for rent considering the economy. I live in NH so it’s much different than LA.
This is exactly the same thought process the BF and I went through when we decided that we wanted to look for a condo to buy. We had to get everything in order and we had to plan accordingly. It took us a year to just figure all of this out and then another 1.5 years to save for the down payment. Once we finally had 20%, we realized that lenders prefer 25% down (for conventional). We have been looking at properties in San Diego (where we live now) but the market is just filled with investors who keep offering cash offers above list price, and it’s frustrating when the listings go contingent after 2-4 days.
We had to pay off our credit card debt first, and then we felt safe about saving for the down payment. Once you start bulking up the savings for down payment and an e-fund, you’ll feel more comfortable about it. And trust me, the anxiety doesn’t go away after that. We’re still feeling it now just hunting for listings. Submitting offers are also the worst..I hate working with lenders and doing all the paperwork!
You mentioned that interest rates are low, so pressure is on. But it’s always something, isn’t it? Before 2007, it was “prices will only increase!” If interest rates rise, consider how high they’ll rise before buyers begin to be priced out of the market. When that happens, home prices will cease to increase. Then the pressure line will be “home prices are low, buy now!” Not to mention, a low interest rate doesn’t help one out much if they have virtually no down payment.
WorkSaveLive has a great point – he pays a lot and very little goes to equity; buying a house might not get you ahead, esp. after paying for maintenance.
We go back and forth all the time w/ buying a house (and already own 2 rentals!). I don’t think rates and home prices are going to rise incredibly fast and that the net cost of a house will remain relatively level over the next year or two at lest. But that’s just based on logic and a hunch – no data.
Take your time – And I’d pay off the debt first too (although I’m buying before paying off my student loans… long story).
This is a really interesting post, particularly because you and I are VERY different. I don’t consider myself ready AT ALL to start looking at real estate. I just got out of credit card debt, and I want to make fewer debt-related payments, THEN build a down payment fund. It sounds like you’re coming at this from a completely different angle.
Who doesn’t love the potential for real estate. I’m saving up my down payment and “cushion” fund as we speak. I’ll probably make the plunge in 2-3 years realistically, but I’d like it to be sooner.
My first house was bought at the height of the bubble. While the price has dropped, I’m not anywhere as bad as most. I’m not renting out that house and living with my girlfriend. I’m excited to buy another investment property soon.
I’m not sure what homes are like in CA, but could you maybe find a duplex? That way you could live in one side and rent out the other.
Lately I’ve been interested in seeing if I could flip a house per year, making small profits until I have enough to pay cash for a rental. I want to get rid of the PMI on my house first, though.
I maintain a list over 150+ houses in my local area on one of the real estate sites. I check it every day to see what has sold, and at what price. When it drops to below 150, I add more houses to it. I love going to open houses.
At the same time, I hate the escrow process- HATE IT. After we bought our current house, I swore I would never go through that again. And now, I find myself looking at all the good deals around us and wishing we weren’t underwater.
But I would never recommend rushing into buying a house. Wait until you are ready, emotionally and financially. The opportunity costs are not great that you won’t be better off waiting.
I agree with you 100% on the slush fund for the house. My husband and I have our current home on the market, and are searching for a new house at hte same time. We want to put down as much as possible on our next house, but want to make sure we don’t leave ourselves destitute by putting down TOO much; especially since, no matter how “move in ready” a house appears, there are always expenses associated with moving somewhere new!
@Rachel: Live Free or Die!! I think the rental supply is often lower in a tough economy, as more people choose to rent since owning represents many more costs. I have heard that there is a 96% occupancy rate for rentals around here (but that stat is a couple years old).
@Shopping to Saving: Wow, thanks for sharing your experience! My friend in SD has been in the same position as you, putting in offers and getting outbid by investors. I know the paperwork is a pain, but it still is great that you are getting the experience and know what each offer entails. You are ahead of a lot of other house hunters!
@kim: So true. I remember that pressure in 2005-6, but it was more for people around me. My parents condo basically tripled in value. It was crazy. They felt a lot of pressure to sell and upgrade to something bigger. But I’m glad they didn’t. They would have probably been in foreclosure or way underwater by now.
@Nick: I think you’re right, it will remain relatively stable, and I definitely look to your example for when it makes sense to rent your first property and not live in it. You might get questions from me next year
@Frugal Portland: I know, it’s irrational. I feel antsy. But I shouldn’t even think of any moves until I pay off most of my credit card debt.
@Corey: Definitely a plan and who knows, something might come your way sooner and you will have already prepared with the majority of your down payment and cushion fund!
@MoneySmart: Yes, the duplexes are a possibility. A lot are overpriced, but there are some good ones out there. Did you refinance at all on your house?
@John: I want to do that too, but there are definite risks involved that a good cash fund would be necessary. The PMI thing is really good to know about, did you do FHA financing?
@erin: Great points! Honestly, writing about it and reading your guys’ experiences is making me a lot more rational. I want to have the confidence of knowing how much cushion I have when things don’t go exactly as planned, and we know that happens a lot. I think I also need to make a plan for the next 12 months, if I’m not trying to buy a place then what? I want to have another financial goal besides paying off debt.
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I would echo the wisdom of putting a minimum of 20% down and getting a 15 year mortgage. Real estate is only valuable if you can own it completely in as little a time as possible. Otherwise, the bank makes a killing from you.
I will never move to a new house until I pay off most of our debt. You don’t realize how much money your new place requires until you move.
I’ve owned my house for 5 years now, and I can tell you that it is significantly more expensive than renting. There are always upgrades and renovations that you can do. The actual maintenance is fairly steep if you want to make sure that things last. And with the extra space you tend to accumulate more “crap” than you do in a rental. There are obvious upsides, but I would also consider what happens if you “miss” the bottom of the housing market? You end up paying 10% more a year later? What if a year from now it’s 10% less? I think Nick’s right, things will bounce up and down for a while now. Best of luck!
You couldn’t pay me money to be a landlord or investor of real estate. NO thank you! Lol. I’ve been a renter, a homeowner and a landlord. It’s definitely no small feat. While I do think investing in real estate is a good idea, you’re on the right track thinking you’re too emotional to buy a house right now. A lot of people will tell you whatever your “housing repair” budget is, multiply it by 20% and it’s so true! Unless you’re lucky to find a good tenant, they can be nightmares. I also do taxes for people who invest in real estate, and I have yet to see them actually make a profit. It’s sucks too much time versus any money I might make.
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