Buying house w. mortgage to sell within 3 years

D.P. · 12 Sep 2013 at 06:48

Due to changes in circumstances I am thinking of buying a house with my wife. It is very unlikely we will stay in the house less than 2 years but we probably won't be in it for more than 3-4 tops, I hope.

Most web pages seem to warn against buying a house over the short term due to costs. But I don't really see that being true. Mortgage + tax +insurance rates are going to be at least $500 less than renting a smaller worse house. Our mortgage might be about $1500 a month with $400 on the principle, rent would be $2000.

We can vary quiet widely our house budget but are trying to be conservative so only one of us can afford to pay off the mortgage without breaking a sweat. It is very likely we will be able to pay significantly more than the monthly rate, overpaying by a factor of 2-3 potentially. however I might loose my job soon so the overpaying would be reduced, still easily possible to put in a few hundred a month extra.

We also will be putting down a deposit of 40-60% dependent on house value.

Given these values I don't see how the closing charges can be so large as to dwarf the savings. Even at parity (rent = mortgage) we will be paying off at least $500 of loan a month and more likely much more. When renting that money is lost. Over 2 years that is 12k of money minimum we will be saving cf. renting at equal cost, more likely we are looking at saving 25K etc.

There is also the fact that interest rates are rising fast in the US and house prices are on the way up. We have already missed the trough and are on the up slope. Getting on the property ladder now we secure us a fixed rate mortgage at a lower rate. We might hopefully win on raising house prices, we will have improved our credit rating and ability to remortgage in the future, and will have increased our equity.

Things might go wrong, house prices could fall but I am trying to see what the more likely outcomes are. Am I correct in effectively ignoring these warnings for short term purchases since we will effectively have a much less demanding mortgage? I mean if you can get a mortgage for ess thn te rental race and still pay off plenty of loan then it won't take long to cover closing or selling costs?

The next set of questions are related to maximizing our chances of an easy and profitable resale within 3 years. Although we don't need a good cool district we will prioritize that in order to ease selling.

Kemik · 12 Sep 2013 at 09:04

D.P. said:
x

If you know your capital payments (rather than total mortgage payments) for the three years then sum them up, deduct solicitors fees, mortgage arrangement fees, selling fees, etc and look at the net. If it's positive, I don't see why it would be a bad idea.

Note: that ignores the risk house prices could fall.

krooton · 12 Sep 2013 at 10:08

All things considered, house prices don't even necessarily need to rise in order for buying to be better than renting.

As long as:
Cost to buy + mortgage repayments + cost to sell < cost to rent (for the same time period)

As an example, renting our flat would cost twice as much per month than the total mortgage repayments.

This means that if the property loses some value, and factoring in money lost on mortgage interest, it can still be possible to be better off than having rented for the same period of time. Totally depends on the disparity between rental costs and house prices for the area.

Orch · 12 Sep 2013 at 10:12

What do you intend doing in 3-4 years once the house is sold? Renting again or buying another place?

Dr House · 12 Sep 2013 at 11:46

also you have you think about the fact that your deposit would have given you some sort of return wherever you normally invest your money.

So say you normally get 5% p.a and you have put a $200k deposit thats $10k lost income. Many people seem to forget this when they say buying is cheaper then renting.

On the other hand if you are in the US the interest part of your loan is tax deductible.

Is its really worth the trouble for a couple of years, you probably will not save any money after all the unexpected expenses (fixing this and that) and reselling costs....

Orch · 12 Sep 2013 at 11:52

Dr House said:
So say you normally get 5% p.a and you have put a $200k deposit thats $10k lost income. Many people seem to forget this when they say buying is cheaper then renting.

*potential lost income.

Conversely, you could have saved yourself even more if the markets turns sour over the same period.

PiKe · 12 Sep 2013 at 11:57

Don't forget, solicitor fees can add up to nigh on £3k alone. Some mortgages have £999 setup fees and surveys typically cost around £250 quid.

Orch · 12 Sep 2013 at 12:00

I'd say £1k is closer to the average for solicitor costs.

Was just about to bang on about stamp duty but realised this guy is in the US. So everything mentioned may be a load of rubbish

PiKe · 12 Sep 2013 at 12:01

My solicitor fees included stamp duty...

But yeah, America, haven't a clue.

Orch · 12 Sep 2013 at 12:04

Ah ok cool, that makes more sense

Tenuous · 12 Sep 2013 at 13:38

The other thing to consider is how much flexibility you need at the end of the 3 years. Will it be a problem if you can't sell the house quickly?

D.P. · 12 Sep 2013 at 16:56

Kemik said:
If you know your capital payments (rather than total mortgage payments) for the three years then sum them up, deduct solicitors fees, mortgage arrangement fees, selling fees, etc and look at the net. If it's positive, I don't see why it would be a bad idea.

Note: that ignores the risk house prices could fall.

It is difficult to find the exact costs and these will vary with house price, mortgage provide and terms of the sale. Most of the costs seems to be 200-300USD. Using a few online calculators it looks like total closing costs are going to be in the $6-8,000 range. Thing is it is very normal to ask the seller to pay most of these costs as part of the price negotiation. The other thing we can do is add the closing cost to the loan, our loan will then increase in rate form 4.5-5.0%, but over a period of 5-7 years roughly it would still be cheaper than paying the fees.

Then there is the realtor fees which are about 3% each for buyer and seller, but these are always both paid by the seller without question (seller realtor gets 6% from seller and splits it 50-50 with the buyer's realtor, strange system they have over here)

There are no taxes on buying a house (stamp duty) but there are property taxes which are akin to council tax, at around 1% of the country appraised house value (typically way less than the true value). This is akin to council tax in the UK, except if you rent you don't pay it. This will amount to around 3,000 USD per year.

The way I see it the worst case for costs (assuming roof doesn't collapse etc.) is 20K's worth of fees and taxes over 3 years cf. renting. At the minimum, e.g. worst case, there will be about 18-20K of equity paid off the loan. So at the worst it looks to be about even.

We aim to buy a house that is in excellent condition so the chances of repairs should be low.

D.P. · 12 Sep 2013 at 16:58

Orch said:
What do you intend doing in 3-4 years once the house is sold? Renting again or buying another place?

Ideally we want to move locations to a different part of the US. In doing so we would want to buy a new house at the new location but that would be contingent on selling the first property, which is one of my main concerns.

The worst case is we will have to rent in the new location for some time. With any lucky we could rent out our property if it doesn't sell.
There is also the possibility of re-financing the mortgage on the first property and releasing significant equity to allow purchase of a new property in n a new location. I don't know how easy it would be to get a second mortgage on second property, but I guess if individually my wife and I can each afford the mortgage on one of the properties alone then there shouldn't be a reason why we couldn't have 2 while we await sale of the first property.

D.P. · 12 Sep 2013 at 17:45

Dr House said:
also you have you think about the fact that your deposit would have given you some sort of return wherever you normally invest your money.

So say you normally get 5% p.a and you have put a $200k deposit thats $10k lost income. Many people seem to forget this when they say buying is cheaper then renting.

On the other hand if you are in the US the interest part of your loan is tax deductible.

Is its really worth the trouble for a couple of years, you probably will not save any money after all the unexpected expenses (fixing this and that) and reselling costs....

Yes, but interest rates in the US are basically zero. I get 0.25% interest rate on my savings account! I loose money when factoring inflation!

Even for my UK assets interest rates are horrible for savers, I get 2% on my ING bond.

Stocks shares I do not want to touch with a barge pole, I have lost thousands and thousands on multiple occasions even with conservation risk. E.g., in 2001 I invested 18,000GBP in a low risk investment, I am cashing it out now 12 years later for 16,000GBP. Great investment!

It is a buyers market really. The way I see it buying is by far the best option financially if you have some assets at income. I am paying $1200 a month in rent and still saving around $2000 unless I buy a big toy or fly to Europe. A mortgage at $1500 a month for a great house, $1000 of that is interest payment but if I shove the rest into paying off the principle then I stand to gain much more than trying to play with the stock market.

Plus I want to build up equity in a house while interest rates are low an manageable, in 10 years time rates might be 12-15% etc and it is at that time when savings and bonds become more viable.

The_Abyss · 13 Sep 2013 at 00:13

If the norm is to ask the seller to pay the 'closing costs' (I'm not familiar with the US market) then won't you have to pay the same costs yourself when you sell?

Like all investments, property has entry and exit costs.

I'd be very hesitant to compare house cost ownership as an investment vs. shares over such a short period. Are you really investing over the next two - three years, or are you simply looking to manage costs effectively before moving on to something else. Rates might well be 12 - 15% in 10 years, but that's no indication that other investments will suddenly magically becoming more viable.

I won't quote your other investment experience (loss) here, but this really shows the value of having a joined-up holistic plan for your finances and your future. Allowing your finances to be deployed independently with different goals and expectations is a high risk strategy, no matter what you choose to invest in.

Scuzi · 13 Sep 2013 at 00:25

What part of the US? Beware insurance costs if you live in a flooding, tornado, storm or hail prone area. Our insurance bill (house + car) in New Orleans was $13k per year.

D.P. · 13 Sep 2013 at 04:39

Scuzi said:
What part of the US? Beware insurance costs if you live in a flooding, tornado, storm or hail prone area. Our insurance bill (house + car) in New Orleans was $13k per year.

Wow

No, house insurance is about $700 where we are looking, no floods, earthquakes, hurricanes or volcanoes....

D.P. · 13 Sep 2013 at 04:49

The_Abyss said:
If the norm is to ask the seller to pay the 'closing costs' (I'm not familiar with the US market) then won't you have to pay the same costs yourself when you sell?

Like all investments, property has entry and exit costs.

I'd be very hesitant to compare house cost ownership as an investment vs. shares over such a short period. Are you really investing over the next two - three years, or are you simply looking to manage costs effectively before moving on to something else. Rates might well be 12 - 15% in 10 years, but that's no indication that other investments will suddenly magically becoming more viable.

I won't quote your other investment experience (loss) here, but this really shows the value of having a joined-up holistic plan for your finances and your future. Allowing your finances to be deployed independently with different goals and expectations is a high risk strategy, no matter what you choose to invest in.

Yes, some of the costs we will be responsible when it comes time to sell like realtor costs but if we sell privately then these charges are halved. But other costs are negotiable, so the title fees, inspections, legal paper work etc. you can ask the seller to pay for in the same way you may submit an offer under the asking price, there is no obligation for the seller to agree. So we would have control over that at selling time but it might be beneficial to sweeten the deal etc.

TBH, I am not really looking for an investment. The bottom line is I will be moving in with my life and we will need a bigger apartment than what she currently rents. We also want to have a more secure housing without the risk of renting (at end of contract renter decides to sell up). Renting is an option for us though but we would have far less choice, will get smaller housing and will be paying substantially more for it than the monthly mortgage on a far bigger, nicer house.

We've both been renting for the last 13-15 years and now really want to own our own place and stop paying rent, we both earn a reasonable salary, we both have reasonable assets to pay a large deposit of up to 65% of the house value so LTV is not to bad.

Rich_L · 13 Sep 2013 at 05:13

It'll probably be worth it to buy - don't forget to include in your calculations that you'll get the mortgage interest deduction on your tax returns which you won't get renting which is a big old benefit too.

With that much equity, worst case scenario you could rent the house out and easily cover the mortgage payments and some and then use the equity in that house as security against your next house.

You're lucky, here in SB the house prices are so completely ridiculous that it's so much cheaper to rent - a 2-bed condo here is minimum $500k to buy so even if you can get together a deposit of $200k (lol!!) then with 4% mortgage you're paying $1,950 in rent and $700 a year in property tax....we rent that same place for $1,950 a month...

*unless one of both of you are self-employed and can claim part rent as an expense.