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Equity vs. Cash Flow, which is better?

Discussion in 'Garage / Workshop' started by maxboostcore, Jun 30, 2010.

?

What should I do?

Poll closed Jul 30, 2010.
  1. Buy the house w/ the upgrades and wait for equity (4-5 years)

    5 vote(s)
    26.3%
  2. Buy the condo and rent it out after 3 years

    1 vote(s)
    5.3%
  3. Keep looking around for a better deal

    6 vote(s)
    31.6%
  4. Houses will continue to drop...don't buy at this time

    7 vote(s)
    36.8%
  1. Jun 30, 2010 at 8:46 AM
    #1
    maxboostcore

    maxboostcore [OP] Well-Known Member

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    Tough question today. I am having a hard time deciding what I want to do and I need your guys' opinion. The question is, which is better? Equity or Cash flow?

    Situation:
    Should I buy a condo for a $100,000 live in it for 3 years then rent the condo out for $1,300 or buy a house for $345,000 and live in it for 4-5 years? Wait for the equity to go back upthen move out to a house I really want.

    Background:
    The condo is located in the same city where I live right now. The bad part about it is that it does not have a garage. It comes with two parking spaces(one parking spot has a car port). My mortgage + HOA fee would be about $1,000 a month. The location doesn't look too bad. It doesn't look ghetto but it doesn't look like Beveryly Hills. There are some apartments around the area. 2 bedroom 2 bath. 1,054sq feet. Lot is 2601 sq foot.

    The house is on the city next over but it is remodeled and a foreclosure. The city the house sits on is in a more desirable area and there are also no apartments. Farther drive for work (approximately 15-20 minutes more). I currently drive 60 miles to work but put in for a transfer which could make work about 15 miles away from my house. However, that could take up to a year before they grant me the transfer. Mortgage will be about $2,200. 4 bedroom and 2 bath. Sq foot is 1404. Lot is 8,580 foot.

    Quick Background about me:
    I take home roughly about $3,500 a month. I have 1 car payment left which shouldn't be a factor. I'm going back to school to get a degree which is roughly $1,000 per class every 3 months (ex: 2 classes=$2,000). I am single with no kids.

    I've just been looking for about 2 days for a house but the price on the condo looked like an opportunity for that price but I my parents said it wouldn't be that big of a tax break and also it's not the best area. The condo has a market value of $180,000 and probably needs less than $5,000 in repairs. The house in question sits in the neighborhood where the houses are roughly $385,000-$400,000 and needs repairs which is less then $5,000. I only got pre-approved for $350,000 so anything over would force me to eat crackers and water. :)

    Should I buy the house and wait for equity to go up? Should I buy the condo and rent it out for $1,300 in three years? Should I keep shopping around and wait for a better deal on a house?
     
  2. Jun 30, 2010 at 9:07 AM
    #2
    Janster

    Janster Old & Forgetful

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    Holy Crap!! $345,000??

    Move out of California!!! :D

    What are you living in now?

    I would wait and shop around for another house and save up for a bigger downpayment. I wouldn't commit to buying a house while you have a full time job plus going to school. You need your free time to study :D Buying a house will require time, effort, & $$ to maintain (there's always something you'll wanna do after you move in), decorate, put furniture in it, bla bla bla.

    Then after you're in the house for a few years and are comfortable with your financial situation - you can then think about buying a condo and renting it out as a hobby (because - again - it'll belong to you and you have to maintain it).

    You don't wanna stress yourself out financially or mentally. Take your time....
     
  3. Jun 30, 2010 at 9:09 AM
    #3
    scocar

    scocar Scouting the perimeter for weakness

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    Back to square one after the 2001. So...
    Equity is relative. Cash is king.

    Keep looking for a house in a decent area that is within your means (loan approval limit). Do not overextend yourself. Lots of other things will come up with the house. First year property taxes, adjusting to monthly cost of property taxes and home owners insurance on top of the mortgage, then furniture, fence repairs, water heater, paint, plumbing issues, and stuff you just want to do to make it yours. It is endless. If it is a foreclosure, other hidden issues may come up. Get a very thorough house inspection, and not by an inspector recommended by an agent (bias, in cahoots). Find your own inspector. You will not have extra money, especially if you are going to school.

    This is a historical time for buyers in a historical buyers market, especially in California. Don't rush, get the right fit. If you are a soundly qualified buyer, you have the upper hand.

    Also, aim for houses located between the neighborhood you wish you could afford to live in, and the neighborhood you do not want to live in.

    Avoid the condo in a less desirable area. In the future, when the market changes, the less desirable area will be even less desirable, and you could have trouble selling. Also, you need to come home everyday and feel like you belong there.

    And are you buying a whole house, or just a garage, because you put this in the garage forum.:D
     
  4. Jun 30, 2010 at 9:13 AM
    #4
    scocar

    scocar Scouting the perimeter for weakness

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    Back to square one after the 2001. So...
    That same house was probably $500k 3 years ago. Of course, it was was not ever worth that much...
     
  5. Jun 30, 2010 at 9:19 AM
    #5
    PB65stang

    PB65stang Well-Known Member

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    I get paid to examine loans like the one you're about to make and decide whether or not they are "good". If I saw that mortgage payment plus that take home pay, that loan would be garnering some extra attention quickly. You're talking about wrapping up 63% of your take home pay in your mortgage alone. How you got approved for that is beyond me and just goes to show that some banks still are risky in their lending practices.

    However, it's also scary to me to think that you would be buying a condo with the intention of renting it later. What if you can't rent it? What will you do then? Then you're stuck in a condo with no garage that's also a less desireable area. That's not an enviable situation. If the condo is "worth" $180,000, why is it being sold for $100,000? Again, to me as a bank examiner, that means the condo has a market value of $100,000.

    Buying the house on your income is a MUCH scarier idea, though. Like I said, you're wrapping up 63% of your take home pay in a mortgage alone. Factor in utilities, increased gas, food, insurance, etc. and will you really be able to survive? I would imagine all that could add up quickly to $1,300. And if you can pay your bills, will you have any left to pay the most important person, yourself? If you're not saving anything for retirement right now while you're young, you will regret that later.

    Bottom line: I'd probably do neither. I'd try to save up for a down payment, and try to find a house that's more in line with where you want to be for a while, especially if it's your first place. I wouldn't be the one to be buying investment properties before I had my own primary residence, but then again, I tend to be what they call "risk averse".

    My opinion is going to be on the more conservative side. That's what I get paid to do, and that's how I've been trained to look at these things. I see a person with limited cash flow compared to debt (I'm not dogging on you, I'm just stating what I see), and little to no real net worth. For a comparison, I'm looking at buying my first house, but I'm trying to keep my house payment around 35% of my GROSS income, which is before taxes. Even with that, things are going to be considerably tighter for me than they are now, but it should be manageable. I couldn't imagine having 2/3 of my salary go to my house. Best of luck in whatever you decide, and feel free to PM with any questions.
     
  6. Jun 30, 2010 at 9:26 AM
    #6
    maxboostcore

    maxboostcore [OP] Well-Known Member

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    I didn't know which section to put it in. I saw that there was some housing questions in this sections so I decided to put it in here. Haha.

    If I get the condo I wouldn't sell it after 3 years. I think I would just hold on to it and get rent out of it.

    I don't have to pay for school at this time. I am taking a FAFSA loan and I won't have to pay for it until after 6 months after graduation. It will only cost me $11,500 to get the whole degree. It is also done completely online. I'm hoping to have that money saved by the time I graduate and pay off the loan.
     
  7. Jun 30, 2010 at 9:29 AM
    #7
    hendooman

    hendooman The Stroker Ace

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    3500 a month take home does not deserve that kind of pre approval. I am not being critical, but this is the exact reason socal and the rest of the housing nationwide is screwed up. You are digging yourself a huge hole having that much payment, relative to your take-home. Not knowing your total salary structure I figure with that take-home pay you make a little under 60k a year. 300+ house are you kidding?
     
  8. Jun 30, 2010 at 9:32 AM
    #8
    maxboostcore

    maxboostcore [OP] Well-Known Member

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    Gross income it is about $6,000 a month but I put 15% towards my retirement so I only take home after taxes is roughly about $3,500. I can adjust the contribution to my retirement to take more money home if i need to. My thinking behind the 15% is that I have no tax write-offs so I might as well put my money towards retirement instead of giving it to the government. The condo is currently price at $180,000. The price of the condo when it is sold to me will be $180,000 but I will only be liable for $100,000 and the other $80,000 will be paid by the program. Sorry for leaving some important factors out.
     
  9. Jun 30, 2010 at 9:32 AM
    #9
    Its_Taco_Time

    Its_Taco_Time Well-Known Member

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    Does the $2200/month on the house include PMI, homeowner's insurance and property tax?

    If it doesn't that can add about another $1000/month.
     
  10. Jun 30, 2010 at 9:39 AM
    #10
    maxboostcore

    maxboostcore [OP] Well-Known Member

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    Yes, everything is included in that price.
     
  11. Jun 30, 2010 at 9:39 AM
    #11
    hendooman

    hendooman The Stroker Ace

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    Yeah that was some important info, but still at 70K a year I stand by my original statement. Ge the 100K condo and keep socking your money away. Good Luck to you.
     
  12. Jun 30, 2010 at 9:40 AM
    #12
    V-TRAIN

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    i would buy a cheap house, to hell with the home owners dues, if you are going to rent, that is going to hurt your bottem line. it is tough to imagine that home prices will jump alot. you have to realize, that the values of houses that are being forclosed on, are overvalued to begin with. i would take time, and look to build equity, it can help you in alot of ways. you can use it to buy another house, buy a car and deduct interest, buy a rental house, on and on.
     
  13. Jun 30, 2010 at 9:42 AM
    #13
    PB65stang

    PB65stang Well-Known Member

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    I would not decrease my retirement amount. Good job on starting that.

    What program is that, just curious? I've never heard of one like that in the Midwest. I'm sure you're right, I'm just intrigued.

    My thoughts still hold true. I'd look for a nice primary residence before I started getting into the real estate market, but that's me.
     
  14. Jun 30, 2010 at 9:44 AM
    #14
    maxboostcore

    maxboostcore [OP] Well-Known Member

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    My plan is after this house is to buy another house in the city that I want. The city where I want to live in are all priced over $500,000 which I can't afford. What do you guys feel is the best way to go about accomplishing that? Either equity or having a rental? I also need some type of housing for a tax break.
     
  15. Jun 30, 2010 at 9:47 AM
    #15
    maxboostcore

    maxboostcore [OP] Well-Known Member

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    It's a program that they offer at my work. It doesn't work for every house. They have a list of houses that qualify for the program and that is how I found the condo.
     
  16. Jun 30, 2010 at 9:51 AM
    #16
    PB65stang

    PB65stang Well-Known Member

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    That's a pretty cool program.
     
  17. Jun 30, 2010 at 9:55 AM
    #17
    maxboostcore

    maxboostcore [OP] Well-Known Member

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    I didn't know about it until yesterday. The requirement is that I need to live in the place for 3 years or else they won't pay the $80,000. I have to sign contract which states I will be living in there as a primary resident. After 3 years I can do whatever I want and whatever profits I make will be mine. I had to make sure I read that. If I don't live in there for 3 years then I have to pay back the $80,000.
     
  18. Jun 30, 2010 at 9:57 AM
    #18
    luk8272

    luk8272 Poodoo

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    I am like PB65stang, don't like the risk. I earn more than that a year and was only approved for a $165k loan, and I bought a $30k dollar home. Now that my house and truck are almost paid off I am very happy and have more money to live with. You are single, what would be the point in having a 4 bed 2 bath house? Honestly I think it would be a waste for you and spread you way to thin.
     
  19. Jun 30, 2010 at 10:07 AM
    #19
    maxboostcore

    maxboostcore [OP] Well-Known Member

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    Unfortunately we don't have $30k homes in CA. I was thinking about getting room mates if I was to buy the house to help ease the pain of payments :) . I do have 6 months of payments reserved in my bank but I don't know if that helps and my credit score was high enough to get a 4.6% interest rate. I don't know how I got approved. I just asked if I can get approved for $375k but they said $350k is the most they'll approve me for.
     
  20. Jun 30, 2010 at 10:21 AM
    #20
    T@co_Pr3runn3r

    T@co_Pr3runn3r XXXXXXXXXXXXXXXXXXX

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    My suggestion for your particular situation would be to lease a decent house somewhere between where you don't wanna live and where you would like to buy later on. This way you get the perks of living in a house and having a garage, you don't have to maintain the structure the landlord does, better than living in apartment/condo where you have to deal with other people's inconsiderateness, you can save the difference in rent vs. mortgage payment until buying a house becomes practical, more free time to study or go have fun rather than doing house projects & not being your house to mod will help save money too. BTW, one of the perks to having a wife with an education and a job is that you effectively double your purchasing power........IF SHE HAS A REASONABLE HEAD ON HER SHOULDERS AND YOU CAN DEAL WITH EACH OTHER ON A PERMANENT BASIS. A fabulous tolerant of your hobbies teammate of the female persuasion (like my wife) is very rewarding and satisfying. Choose very wisely my friend, try it before you buy it, be roomates first before encountering any big debts because you never know someone until you live with them.
     
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