Ask HN: Is buying a house in 2017 a good idea? | Hacker News Reader

Ask HN: Is buying a house in 2017 a good idea?

29 pointsudkl41 comments

I'm sitting down this week to think about my finances.

One option is to invest in a house.

I'm researching the topic and will appreciate links to related HN discussions, analysis - calculations, past experiences, current market conditions & future predictions (interest rate increases et al) .... keeping duration of holding and investment capacity variable.

(especially in the bay area)

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If you get a fixed-rate mortgage (which I would recommend), the payment is fixed for the length of the loan. This means that long-term inflation will take 2-3% out of your real housing cost every year. It's like rent control for yourself.

If you put down 20%, you are creating 5x leverage. Even if the market value of your house only appreciates at 2.5%, your initial down payment (the cash you actually invested) will experience 12.5% return.

Of course there are the payments too, and maintenance, etc. But you have to pay to live somewhere. So make sure you're doing an apples-to-apples comparison with renting--including the mortgage interest deduction. Make sure you really know what your investment is--the amount you're paying over renting--and calculate your return on that.

Finally, the mortgage tax deduction is not the only tax advantage to a home. Another big one is that you can keep up to $250,000 of capital gains from your home, tax free--a 15% advantage against most other investments. Again, make sure you take that into account when comparing.

All of the above are only really advantages if you live in your house for a while. I agree with the other poster who said it's probably only worth it if you plan to live in that home for at least 5-7 years.

The NYT has a pretty good online calculator for comparing renting vs buying. You just plug in a house price, mortgage details, and how long you're willing to stay in the house, and it will tell you what the better-deal level of rent is.

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...

The NYT one is good. If you need more features, like adjusting for renting a room, the Michel Blue Jay one is great too: http://michaelbluejay.com/house/rentvsbuy.html

>you can keep up to $250,000 of capital gains from your home, tax free

And I'm pretty sure it is $500,000 for married couples: http://www.nolo.com/legal-encyclopedia/the-250000500000-home...

In my opinion, buying a house is never a good idea unless you intend to live in it yourself for at least 5-7 years (usual real estate cycle) AND you have put down at least 20%.

Anything less and you are exposing yourself to higher risks. I am not saying that you should not consider investment capacity etc at all but those should always be secondary motive, not primary unless you are an expert real estate investor (even they struggle in bad markets)

> AND you have put down at least 20%.

I'm not sure how universal this is, but in my area this is also about the point where you're loan repayments will become cheaper than renting the equivalent. And your loan repayments will only go down over time, rent will only go up.

I put down 5% and had to get PMI. But even after that my payments were less than renting an equivalent house. So 20% is definitely not a cut n dry rule.

You sound like the exception, however. Are you taking into account maintenance, taxes, etc..?

Yes mortgage payment did include taxes, insurance, and PMI. (PMI is removed now, more on this below). But it doesn't include maintenance. I am paying almost $200 a month in HOA also which I didn't consider in my earlier comment. My guess is if HOA is considered then renting would be cheaper. (For context, I live in suburbs of Dallas).

Regarding PMI, my wife wanted to get our own house as soon as possible even if we had to pay PMI. I wanted to save 20% down first. It would have taken us more than a year to save 20% downpayment. So in end, wife won.

But that that time I didn't know that you could remove PMI as soon as you have 20% equity in the house. So we did our best, made extra payments, and built up equity to 20%, and removed PMI in about a year.

If we had tried to save for 20% downpayment like I wanted, we would have paid $12,000+ towards rent instead of about $1200 towards PMI (and a little more interests). So I tell all my friends that don't let PMI scare them, as long as they can afford to make extra payment and be able to remove it within a year or so.

For FHA backed mortgages the FHA changed the rules on PMI in 2013 where you are no longer able to remove the PMI after the loan reaches 78% loan-to-value and annual MIP has been paid for at least 60 months. For FHA mortgages finalized after June 3, 2013 the payments are there for the life of the loan. So can be worth considering refinancing once you are in the position to qualify for conventional financing and pay 20% down.

In general if you put down less than 20%, you have to pay for mortgage insurance, which pays neither principal nor interest. That may vary by region and by other things like first-time homebuyer or veteran status, so YMMV. But from first-hand experience I can say that paying 20% makes life a lot happier.

I'm a Bay area home owner. We bought 4 years ago. For us it was a great choice. Our our first child was 2 years old and were looking to find a place to settle down and live. We didn't want to worry about rent going up 30% to re-sign a lease. We wanted a place where she could go to school and not have to move around each time a lease is up.

In the end it turned into a great decision for us. The house went up 350k in 4 years and we are looking to cash out and move to a cheaper area where I can take my remote job and pretty much buy a house in all cash and not worry about a mortgage anymore.

So it really depends on your situation.

Are you willing to stay in a house for 5+ years. If you want to sell.. can you ride out a dip in the market?

That's such an awesome position to be in.

We got super lucky. Bought a house at the lowest rates possible and pretty much have been living house poor for 4 years now.

What was the original price of the house?

it was on the market at 660k we bought it for 700k. This is way out in the East Bay of SF

Is it common for places to go over ask in the East Bay/SF? I'm assuming there were multiple offers at ask which is why you went over by 40K?

Almost all property in the Bay Area for the past few years has multiple bids over asking price. Many of them are also all cash from foreign investors. Rich Chinese are trying to move money out of their country. Many are also investors looking to rent it out or flippers. Many times, flippers sell to other flippers, so a property will have gone through multiple bad "lipstick remodels" in a few years, and each flipper will want to make a profit. You'll get a $1m 1800sqft single family house on a block next to a bunch of rundown POS properties that's been sold once a year. It's crazy and idiotic.

So this insanity is going on everywhere. I mentioned something about real estate being the new Swiss bank account in another thread. I wonder how long this can continue?

Is there no flip tax there? Or maybe the flip tax is insignificant compared to the profit made in flipping the property?

When we bought it was the peak time for oversea investors coming in with all cash.

When I was at the open house there were a few Chinese people that were alone that you could tell were buying houses for people in China.

We looked for 18 months before that and were outbid 12 other times. So we overbid on this one. If I remember there were 18 other offers on the house with at least 20% down.

The market has cooled down in the Bay area a bit where you aren't seeing 30-40 bids on a house but they still move fast if priced right.

Houses don't make particularly good investments.

While it's true that you can sometimes come out ahead compared to, say, investing the same amount in the S&P 500, it's very rare that the S&P will need you to put a new roof on it or spend the better part of every weekend pulling weeds and doing DIY. The S&P will just wait until you ask for your money back, then give you lots more money back than you gave it. Houses make you work for that money.

Now, lots of people enjoy DIY as a hobby, so if you're looking to include "maintaining a house" as a new hobby then by all means buy a house. They're also quite pleasant to live in when compared with crappy apartments that are the usual alternative.

But only buy a house if you want to own a house. Buying one just because it's a good investment or what you're "supposed to do" will only leave you unhappy and wondering what happened to all your free time. If you don't believe this, pick any one of your homeowner friends and ask them what they did this weekend.

Buying a house since 2008 has always been a great idea. So To answer your question - yes.

If you're coming with only %20 down in the Bay Area, you will turn cash poor, unless you're a millionaire. So think about that first, buying a house is the best mid-long term investment in life. But property tax here on a $1 million house is $10-12k per year. Home owner insurance is about $2-3k per year. So you're at about $12-15k extra per year (+$1000/month) just for the fact that you own a property. Now, the property itself will cost you about $4500/month at %3.8 APR for a $1 million house with %20 down.

Total of about $5500 net per month. Basically a bit below the average salary of an experienced software engineer in the bay area. And for $1 million, you don't get much here...

It depends on the market in that area. Some markets are growing over the long term, others over the short term. Just talked to a lady a few months ago who bought a home in Boulder, Colorado for about $400,000 and sold it 3 years later for $900,000. She got out of there fast as property taxes were increasing constantly. In other places, you can buy a home for $250,000 with low property taxes but the neighborhood is going downhill, more crime, schools are worsening, and their home is losing value. It's going to be hard to sell in the future.

This is what you have to think about when buying a home. Is the area you are in good or bad right now, and will it be better, the same, or worse in the future. If you're not sure about a location's future. Rent.

Buy one cheap and rent it. That's my plan anyway. Already have one. Our current one will be our second. And I've already begun eyeing the third. But do your homework and never pay more than it's worth. So yes. Buy one but only as an investment because it's a huge money pit regardless but at least when renting it you can write off a lot of it on your taxes and others are building the equity in the home for you.

>>you can write off a lot of it on your taxes

Can you explain this please? Excuse my ignorance of the US tax system.

This sounds like a pretty shitty thing for the government to allow, giving existing home-owners a huge advantage to build up property portfolios over people not yet orable to get on the ladder. (similar to negative gearing in Australia where I live)

Interest on a mortgage is tax deductible in the USA. According to Wikipedia, in 1913 "the reason for the deduction was that in a nation of small proprietors, it was more difficult to separate business and personal expenses, and so it was simpler to just allow deduction of all interest" https://en.wikipedia.org/wiki/Home_mortgage_interest_deducti...

It is insane, and yes you can "expense" mortgage interest against your taxes, and in the case of a rental, a portion of everything else too. Incentivizes owning houses.

(Again excuse any ignorance of the tax laws in the US)

In a fair world, this would only be allowed on the first buy-to-let property. Anything above that is just not in the interest of society in general, especially in cities like SF and Sydney that are running out of space to and/or NIMBY behaviour.

Rental properties are essentially just treated like businesses. You invest in a capital asset and take depreciation on it. You pay taxes on earnings, which means you can deduct business expenses from revenue.

The detailed reality is a bit more complicated of course (there are rules specific to real estate) but that's the essence.

You can write 100% of the interest on your primary or secondary residence in the US. You can not write off the interest on a house that is strictly an income property.

http://homeguides.sfgate.com/irs-rules-mortgage-interest-ded...

The intention is the incentivize people to own their own home, it is not to incentivize them to build up property portfolios. Indeed that would be perverse.

I'm sure you can show a loss on an investment with real estate just like you can with any investment but I think continuing to buy subsequent houses and showing losses on all of them as part of your personal tax returns might raise some flags.

> You can not write off the interest on a house that is strictly an income property.

That is not correct. The article you posted seems to imply it, but it is absolutely not true.

Pure rental property is treated as a business property, and mortgage interest on business properties is an expense that is deducted from rental income before determining tax liability. You can even carry a net loss over to your personal return (subject to some limits).

Details in IRS pub527: https://www.irs.gov/publications/p527/ch01.html

Oh sorry that sentence was meant to be "you can not write off 100% of the interest that is an income property."

For instance if you have bought a property as a pure investment property and the total mortgage + interest is being covered by the tenants monthly rent. You can not then write off that interest at 100% since you are not actually incurring that interest payment yourself correct?

Incorrect. Interest expense is a line item that is deducted from the company's tax burden. It's the same with a rental regardless if everything is being covered.

>"Incorrect. Interest expense is a line item that is deducted from the company's tax burden."

We weren't discussing a company though, we were discussing one's personal income tax filing.

100% of mortgage interest on personally-owned rental properties is deductible.

Mortgage interest is itemized just like any other cost incurred, e.g. maintenance, utilities, advertising, property taxes, etc.

The net profit/loss on the Schedule is then applied to your personal return. You might be limited in the size of loss you can apply, but that's an unrelated calculation.

You can write off the depreciation of the home on a 29.7 (?) year basis, mortgage interest, most improvements are fully written off if not amortized over time, but I think there's a limit of 25k or so in max real estate losses one can accrue in a tax year. Yes it's a huge advantage. Fair? I don't know. Probably a discussion for another thread.

> Buy one cheap

Can you elaborate ?

Most of you are well paid software developers? Or have been living under your means and saving some money? If you are willing to make improvements and "get your hands dirty" buying a foreclosed home (probably not too many left) or other homes on a short-sale is the way to go. I think as long as you can pay as close to or fair market value for a home (less would be ideal obviously but nobody is going to give away a home for cheap unless it's a bank that's just wanting to cut their losses) you'll be ok AND within your budget. Don't go bankrupt buying too much home to find ou there's a huge problem with it or you bought in an area where people won't want to rent it.

If you are thinking strictly of investments, using a house as your first may not be the wisest. Portfolio theory suggests that it's not ideal to have lots of your net worth tied up in any single asset or asset class. "Real Estate" is one such class (specifically the combo of a permanent structure with land underneath, buying a mobile home doesn't count because they are usually on rented land).

Crystal Ball on Bay Area Real Estate says...

- Bay Area Projected to Lead U.S. for Home Price Gains in 2017 > http://blog.pacificunion.com/bay-area-projected-to-lead-u-s-...

- Bay Area Home Sales Projected to Decline Again in 2017 > http://blog.pacificunion.com/bay-area-home-sales-projected-t...

What to do? Find the ugliest place that needs tons of work in a solid neighborhood, that most retail buyers won't touch. That gives you a good margin of error. You can make $30-50K worth of fix-up fluff & buff go a long way.

Find the shittiest house you can on the best piece of land and hold it for 30+ years and you should be fine.

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