| New to the Rockville, MD area, we found a | | | | also has an asset that may take time to sell at a |
| groomer to get our dog Rudy (Shih Tzu) cut. We | | | | price she may not get. |
| like to get him cut as short as possible or "rat" | | | | *Taxes will affect the outcome but not enough, |
| style, for what he resembles once he is done. | | | | besides the last 15 years of appreciation has been |
| After an excellent cut, the owner/groomer and I | | | | the greatest percentage rise in the history of |
| had an interesting discussion about her townhouse. | | | | modern real estate. |
| She bought it 15 years ago for about $250,000. It | | | | Consideration #2: Future Growth: In this example, |
| is now worth $750,000. Wow! That's terrific. | | | | I was talking about a pretty affluent area with a |
| Hanging By A Thread | | | | good rise in appreciation in the last 15 years. But if |
| My groomer also talked about her neighbor (let's | | | | we take a look at Altoona, PA where my wife is |
| call him Bob) who recently bought a similar | | | | from, there is no industry to bring growth to the |
| townhouse next to her for $750,000. Bob was | | | | area, so home prices have not escalated in 30 |
| telling her the he was getting killed with his | | | | years. In contrast, my brother, who lives in the |
| payments. No wonder! Assuming a 6% fixed rate, | | | | SF area, will certainly see price escalation every |
| he would have to pay $4500 a month (At 6%, | | | | single year. The future growth of the area has a |
| you are paying approx. $600 per $100,000; at | | | | great deal to do with the success of picking your |
| 7%, you are paying approx. $700 per $100,000, | | | | next home. |
| etc.). | | | | Consideration #3: What prices are really based on |
| To shell out $4500 a month at a 30% tax rate, | | | | - Family Income:: What most people don't realize |
| you need to make $77,000 to afford those | | | | is that housing bubble didn't just burst from over |
| payments. Don't forget to add in $500 month in | | | | speculation, exotic mortgages, easy lending |
| property taxes, at which point he will need $5000 | | | | practices and excess inventory. When you get |
| a month or $85,714 to cover the payments. Now | | | | down to it, home builders have a tough time |
| if you want to eat or afford a car to get to | | | | charging more than what a family can afford. So |
| work, you will need to make a lot more. | | | | if most people's average income has not being |
| I am pretty confident that at the time Bob was | | | | escalating along with home prices, what do you |
| not really considering other expenses or the risk | | | | think will happen to home prices in the long run |
| of losing his job, or worse, being married to the | | | | (especially with higher food and fuel costs)? |
| job because he can't afford to leave. Bob was | | | | If you buy a home for $750,000 (or insert your |
| probably thinking he would have a nice retirement | | | | own figure) like Bob in hopes that the home will |
| built into his house, and he would eventually get | | | | double, there has to be enough people in the |
| enough raises or get a better job to make up for | | | | future who will make enough money to afford |
| any shortfall. | | | | double or triple that cost. In contrast, the average |
| Some people buy a house just out of their price | | | | American family income has not doubled or tripled |
| range, hoping to survive until they can afford it or | | | | in the last 20 years, why should home prices |
| until the real estate market turns around. | | | | continue to double in the next 20? |
| We are all programmed with the same | | | | Consideration #4: Environmental Factors: I grew |
| assumptions: | | | | up in Florida, which a great place except for the |
| * A house is a great investment because it | | | | occasional hurricane. Unfortunately, these |
| forces you to save (this one is true!) | | | | hurricanes have really increased insurance rates so |
| * A house is the best place to put my money (o | | | | much that many consider leaving. Imagine paying |
| boy are you in for a surprise) | | | | $150/month in premiums one year and $600 |
| * I can always do better than renting (not always | | | | month the next. It has happened to many friends |
| - depends on the area) | | | | I know. With earthquakes, forest fires, hurricanes, |
| * My house will be worth more tomorrow (I hope | | | | or floods, know the potential dangers of the area |
| so!) | | | | you are moving to first before making the move. |
| A different way of looking at it | | | | Consideration #5: Insurance, Taxes, HOA fees: As |
| Consideration #1: Overextending vs. Renting: Let's | | | | you can see, increasing insurance premiums can |
| start by talking about Bob, who is now trapped | | | | become an extra financial burden in certain areas |
| with house payments he can barely afford. Let's | | | | of the country. Or, taxes or HOA can also |
| compare his purchase to a great town home | | | | become that burden, as with my groomer. Think |
| rental in my area, which is 5 miles down the road | | | | of it as her paying for the massive appreciation |
| in an equivalent community. Renting a comparable | | | | through higher real estate taxes. There is always |
| corporate 3 bedroom town home will run $1800 - | | | | a price. These other escalating costs over time |
| no taxes, no Home Owner Association (HOA) fee, | | | | can make a house difficult to afford, which is |
| no insurance. | | | | another reason if you purchase to purchase within |
| My rented town home $1800 | | | | your price range. |
| Bob's house $5000 (mortgage, taxes, ins. and | | | | Choose the right house for you, and then make it |
| HOA) | | | | a home |
| Difference $3200 a month | | | | Be realistic about your expectations by purchasing |
| Let's say I am willing to give up the benefits of | | | | a house you can comfortably afford. Besides, |
| owning my own house and invest that difference | | | | your home shouldn't be your only investment. By |
| every month earning 6% annually (over time), | | | | overextending yourself financially, you not only |
| which is the average appreciation of real estate in | | | | squeeze yourself today but also take a risk that |
| the last century. (The stock market in contrast is | | | | your home (your only investment) may not |
| about 8%). | | | | appreciate to a value that you can afford to |
| Using my savings calculator at 6%, I will have | | | | retire on. |
| accumulated $918,118 in 15 years. My groomer | | | | Pay only what you can comfortably afford in |
| only realized $500,000 in appreciation in 15 years | | | | today's dollars with your current income. A |
| of owning her own town home*, but she did | | | | general rule of thumb is to pay no more than 1/3 |
| manage to pay off her mortgage early - giving | | | | of your monthly income toward your mortgage. |
| her $750,000 total. Keep in mind that even though | | | | You should also look at homes less than 3 times |
| she may live rent free after that, she still has | | | | your annual income, unless you have saved a |
| $500 in monthly real estate taxes, $100/month in | | | | substantial down payment to cover any |
| insurance, and ongoing maintenance/repair. | | | | difference. Finally, choose the right house for you, |
| As you can see, buying a home will not | | | | and then make it a home. Fall in love with your |
| necessarily yield a better investment. Plus, she | | | | house only after it makes financial sense. |