But she doesn't plan on a mortgage.while having income that is "pretty low right now". Yes, I did read it. And my advice remains the same: do not make a huge purchase when you have a low income. Unless, of course, you happen to have vast wealth already accumulated. A few dozen times the purchase price of the house in question. If that is the case, if Minoosh is a multi-millionaire, then income doesn't matter and I withdraw my advice. If that is the case then Minoosh probably wouldn't be asking for any advice in the first place, as even a house would be a trivial purchase to someone possessing the kind of wealth to make income a nonconsideration.
I realize homeowners are frequently desperate to reassure themselves their gamble was a wise investment powered by their sheer financial genius but that doesn't mean they should encourage others to plunge into tremendously precarious financial positions like buying a house when they have a pretty low income.
That wasn't the exact issue in 2008. One issue was people taking cash out of their equity in the form of new mortgages. Lenders were encouraging people to over-extend themselves with the planned increase in the housing market, aka assuming increasing equity that didn't happen. So they got underwater.Buying a house when they have a pretty low income was what people were encouraged to do before 2008 ...
Holding on to your existing investments and paying rent instead is just as much of a risk as exchanging them for a house.And my advice remains the same: do not make a huge purchase when you have a low income.
But she doesn't plan on a mortgage.
I don't think your concerns fit the situation.
So what you are saying is be careful how low your accessible cash is. Sure, you can't sell a house quickly if you need access to the equity. But the general rule of not over-extending yourself with a house really falls apart here with the exception of no quick access to the equity.
She's paying rent now. How is that any different from paying homeowner expenses?
There are always credit cards to get you past a low cash situation.
There are a lot of things to consider. I guess I found your blanket warning: "Do not make a huge purchase if your income is low right now," to not apply here for the reasons I stated.
When you have a low income and you are renting, the landlord is responsible for upkeep. When you have a low income and you own a house, you are. When that AC fails or the roof leaks or some other mini-disaster happens -and it will- that low income may mean that the repairs have to wait. At least in a rental situation, the landlord is obligated to fix the problem.
Credit cards to cover emergency situations, for the vast majority of people, is not a viable solution. That’s why there’s such a debt problem in the US.
All of this depends on the complete financial picture for Minoosh. No way we can truly answer her question with our understanding everything.
1. How much liquid savings? Not retirement accounts.
2. What exactly is her income and what are other outstanding debts? Is she living paycheck to paycheck barely making it?
3. Would she put her former rent payment (or what’s left after insurance) into a savings for repairs/taxes or would she have other things she needs to put that money into or would she perhaps tend to spend more on lifestyle upgrades?
4. If she pulls money out for the house (and 10% penalty and 20% ish income tax), how much longer will she wait to retire and will she be able to/want to wait that long?
These are the big questions, in my mind, and they need answers. She needs the advice of an independent financial planner, not an Internet forum, lol.
ETA: Just realized I’m assuming that the investments are retirement related. But that’s exactly the problem, we don’t know enough to advise.
But she doesn't plan on a mortgage.
I don't think your concerns fit the situation.
So what you are saying is be careful how low your accessible cash is. Sure, you can't sell a house quickly if you need access to the equity. But the general rule of not over-extending yourself with a house really falls apart here with the exception of no quick access to the equity.
She's paying rent now. How is that any different from paying homeowner expenses?
There are always credit cards to get you past a low cash situation.
There are a lot of things to consider. I guess I found your blanket warning: "Do not make a huge purchase if your income is low right now," to not apply here for the reasons I stated.
You are just repeating yourself now. You haven't addressed the issue of collateral loans nor the relative merits of holding on to depreciating stock vs exchanging it for a house.My advice is to not make a huge purchase from a position of financial weakness.
You are just repeating yourself now.
You haven't addressed the issue of collateral loans
nor the relative merits of holding on to depreciating stock vs exchanging it for a house.
The housing boom may be leveling out as higher prices push some buyers out of the market.
While low housing inventory continues to pose a problem for homebuyers, rising mortgage interest rates appear to be dampening demand and leveling out home prices in select regional markets, according to a new report from Realtor.com.
"Many would-be buyers are being priced out of homeownership as higher mortgage rates mean more expensive monthly housing payments," the report reads. "But when there are fewer buyers competing for homes and bidding them up, prices typically go down."
Still, these smaller price decreases "don't portend another crash" like the 2008 housing bubble that spurred the Great Recession. Some of these dips can be attributed to fewer larger homes on the market and an increase in new listings.
Both of these are the main considerations if one is trading stocks (more liquid) for a less liquid home asset....
ETA: a straight-up cash purchase is a whole other can of worms. A home is not as "liquid" as investments.
But I still almost always come around to the bottom line that rent on a property just can't possibly be less expensive (ongoing expense) than owning unless the lessor is really bad at math.
But I still almost always come around to the bottom line that rent on a property just can't possibly be less expensive (ongoing expense) than owning unless the lessor is really bad at math.
But I still almost always come around to the bottom line that rent on a property just can't possibly be less expensive (ongoing expense) than owning unless the lessor is really bad at math.
Usually but not always. I rent a condo i bought 45 years ago at about 40% below market. Current typical payments on a mortgage would be about 5k/mo plus another 1.5k/mo for HOA fees and property taxes. Far over their rent.
I make a really good income from it since my property tax is only about 1/10th what it would be for a new owner. And I have no mortgage. I value a tenant that reliably pays their bills through covid (when they didn't have to) and keeps the place up.
It's a double negative. I don't think you understood it. Or maybe I don't understand your post?Why would someone pay more to rent a house than they could pay to own it? It defies common sense--ownership grants more rights in real estate than tenancy. I recommend you go down to a local realtor's office and tell them you want to buy a house and rent it out for twice the mortgage. Be a good sport when they start laughing....rent on a property just can't possibly be less expensive (ongoing expense) than owning...
Key points
The average monthly rent increased by around 14%, outpacing inflation, which rose 7.5% the past year.
According to FreddieMac, the number of starter homes is at a five-decade low.
The housing crunch, booming demand for rentals, and high inflation have contributed to rising rents.
....
I'm put in mind of this by another thread in which MinnesotaBrant casually mentions that his wife is finishing painting the house! My wife is a good roofer, but refuses to paint the house one more time.
Exceptions prove rules.
Also, there's some quantifiable value to "keeps the place up" which is a private understanding you and your tenant have outside of typical statutes that say property maintenance is the owner's responsibility (otherwise an expense that would be factored into what to charge).
I acknowledge your...restraint? Gracious consideration?It's a condo. HOA fees take care of all external maintenance. I take care of major things like plumbing, appliance repair/replacement. But they keep the place decent and clean. And, of course they know they are getting it cheap and value that. In a sense we both benefit. Which is the essence of any good contractual/financial relationship.
Brainster: it is a vicious cycle that high rent prevents accumulating the downpayment necessary. It can also push people into other credit burdens due to the same lack of expendable income for unplanned emergency expenses.It's a double negative. I don't think you understood it. Or maybe I don't understand your post?
Rent is more (can't be less) than home-owning expenses.
And on that note: MotleyFool: Why Your Rent Is Going Up
Unless you have at times exercised the option to live in a trailer park home (or even a tent) during times of hardship it is not terrific advice.That's my advice, and by following it myself all I've gotten is a comfortable lifestyle with ever-increasing financial security. But by all means, everybody do their own thing.
Unless you have at times exercised the option to live in a trailer park home (or even a tent) during times of hardship it is not terrific advice.
Whether you are renting or paying a mortgage, you will always need a roof over your head. So the real issue isn't guessing which investment gives you the biggest bang for your buck but your relative mobility.
That is a poor attempt to construct a strawman argument.I don't follow that. Because I haven't been extremely poor that means my advice on financial matters isn't valid? If anything the fact that I've kept out of extreme poverty might be a point for my advice, not against.
I take it back. THIS is a poor attempt to construct a strawman argument."Everyone needs a roof over their heads" is not a license to purchase a mansion..
That is a poor attempt to construct a strawman argument.
The fact remains that you are either paying a mortgage or paying rent. At least, in a rental situation you have the option of moving to a lower rental accommodation without much cost if your circumstances demand it. If you are forced to sell a house you are buying to move then the costs could be much higher.
If you haven't been forced to downsize then for all of your arguments, this is just an academic exercise for you.
I take it back. THIS is a poor attempt to construct a strawman argument.
When Minoosh contemplates buying a "mansion" I will give the same advice as you.Advice can be taken or not.
When Minoosh contemplates buying a "mansion" I will give the same advice as you.
In the mean time, I will deal with the situation as given in the OP.
Then it's the price of the house that matters? What's the cutoff? What's the dollar amount at which your advice flips from "buy a house now" to "don't buy a house now"?
Or is it a percentage of the current valuation of the stocks proposed to sell to fund the purchase? (If the latter then I'd agree -- if the house can be purchased for 25% or under of the total portfolio value then perhaps it might not be a bad move.)
Lacking much information, it would be unwise to specify the cutoff, but I think there certainly would be.
I don't think it's been specified what the investments are, what they yield or contribute to current income, etc. There's a big difference between, say, a block of dividend-paying stock in Pfizer, and a cash inheritance sitting in a bank CD.
Are you serious??? Do you really think that comparing renting a modest house to buying a mansion is comparing apples to apples? Of course price matters. Unbelievable!Then it's the price of the house that matters?
These are all the wrong questions. The questions you should be asking are:What's the cutoff? What's the dollar amount at which your advice flips from "buy a house now" to "don't buy a house now"?
Or is it a percentage of the current valuation of the stocks proposed to sell to fund the purchase?
Are you serious??? Do you really think that comparing renting a modest house to buying a mansion is comparing apples to apples? Of course price matters. Unbelievable!
These are all the wrong questions. The questions you should be asking are:
That is just the mathematical aspect. If your life doesn't take a disastrous turn then in time, you will own your own home free and clear and the peace of mind you get from not having to pay rent or deal with a nosy landlord is immeasurable.
- How does rent compare to paying a mortgage and other owner related costs? (Remember that rent goes up with inflation but mortgage payments don't).
- Can I still afford the mortgage if interest rates go up?
- How does the return from my existing investments compare with the rent I would otherwise save?
- Is the value of my existing investments likely to increase at a faster rate than the value of my home? (stocks tend to be more volatile than housing).
- Is is still worth it if there are capital gains taxes to pay if I sell my existing investments?
The stock market is down, the housing market is on fire and I need a place to live. I can rent month-to-month, but for the first time in my life having a paid-for home is really sounding like something I want. Housing prices probably aren't going to go down in my market (desert Southwest).
I know the answer depends on several factors, but what would you do in this situation? I'm hoping to pay cash and that means pulling money out of investments. Of course if the stock market *really* tanks maybe I'll be congratulating myself on my wisdom, but I'm thinking it probably won't. I can't imagine housing prices going up much because I don't understand how people are affording the prices sellers are already getting for just about anything with four walls and a roof.
Is there any reason to think of this as "selling stocks"? (I mean, apart from the fact that that is what Minoosh would be doing.)
Wouldn't it be easier to think of it in terms of: what should I do with this amount of money that I have - buy a house? Or buy stocks?
If looking purely at the objective, quantifiable nature of it, you are almost always better off with a house to live in.
Rent is typically 2x the mortgage on the same property (in my area). While "market timing" may not be the most ideal it could be, it is almost never an outright bad move.
That shows that you didn't read the bullet points.Are you skipping posts? The point was that the OP isn't getting a mortgage, it's a question of cashing in current assets and spending the money all at once on a house.
That is bad advice.If you want to reframe it as OP having no assets at all but suddenly coming into a lump of money, sure. Say OP wins the lottery or their Great Uncle Dracula dies and leaves them $X amount of cold hard cash. Should OP use it to buy a house outright?
My advice would be no, unless $X is at least four times the purchase price of the house. Why? Because OP has at the moment a "pretty low income" and thus shouldn't blow too great a percentage of a windfall.
Is that the price you paid for the flat?The opposite is true in large parts of the UK.
Our flat in Bristol is valued at £400k-£450k. A £400k mortgage would cost a little over £2,000 a month, we rent it out for £1,250 a month.
The opposite is true in large parts of the UK.
Our flat in Bristol is valued at £400k-£450k. A £400k mortgage would cost a little over £2,000 a month, we rent it out for £1,250 a month.