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Author: jammasterlee One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 6725  
Subject: Saving up for house Date: 4/13/2006 10:55 PM
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My goal is to use my Roth IRA to buy a house, hopefully within 5 years.

I haven't purchased anything yet (besides index funds) because I am waiting for a transfer into scottrade.

I'm looking at the following stocks:
CAKE
VLCM
URBN
ZIPR
ANF
PSUN
Basically, I'm trying to follow Peter Lynch's advice by investing in what I know. And the only thing I know is retail. I like companies with strong brands and strong balance sheets more than anything else. I don't quite understand the whole surfer movement (VLCM and PSUN) but I'm willing to take Tom's word for it. And I like the idea of ZIPR.

Any thoughts on this selection and how I should arrange my portfolio? I'm going to keep about 1/4 to 1/3 in something big, like an index fund or in BRK.A

Thanks for any feedback!
Jamz
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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5611 of 6725
Subject: Re: Saving up for house Date: 4/13/2006 11:38 PM
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Any money that you need within 5 years should not be in stocks. Too much volatility, you don't want your house downpayment to go disappear when you need it. You don't want to have to sell at a bottom.

And just because the law allows you to pull from your Roth for a house downpayment does not mean its a good idea. If I was you, I would try to save up elsewhere for one, and allow your retirement funds to grow unimpeded. As for what to invest in... a savings account, or money market fund... or CDs, short term bonds, or *maybe* a short term bond fund if you're particularly risk adverse.

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Author: kaudrey Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5612 of 6725
Subject: Re: Saving up for house Date: 4/14/2006 9:51 AM
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A few things:

I agree with DeltaOne that using your Roth to fund a house should really be a last option. Save outside of the Roth for the house, and let your Roth be used for retirement.

Second, you have to think more about risk and diversification.

Risk: if you need the money in 5 years and therefore can't handle a decent-length downturn in the market, be wary of stocks. Although I myself might invest it in an index fund (instant diversification), DeltaOne is not off base suggesting safer alternatives. Depends on your risk tolerance. Also, stocks like ZIPR are probably very volatile and not really appropriate for this goal.

Diversification: 4 of those stocks are clothing retailers geared toward young people. If you want to invest in that market, pick one, maybe 2. Your overall portfolio should be well diversified. If you are relatively new to investing, IMHO, you should be investing mostly in mutual funds - low cost index funds. Instead of 1/3, make it 3/4 or more. Pick a total market fund, an international fund, maybe a small cap and a REIT. The rest of the money - pick stocks if you want, but don't concentrate them in one industry, and it should be money that you are OK to lose.

Just some thoughts.

Karen

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Author: vickifool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5613 of 6725
Subject: Re: Saving up for house Date: 4/14/2006 10:48 AM
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As for what to invest in... a savings account, or money market fund... or CDs, short term bonds, or *maybe* a short term bond fund if you're particularly risk adverse.

It's easy to open a Treasury Direct account to buy T-bills and T-bonds from the U.S. government. And they are state-tax free.

http://www.treasurydirect.gov/tdhome.htm


Vickifool

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Author: brndnsdad Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5614 of 6725
Subject: Re: Saving up for house Date: 4/15/2006 7:20 PM
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I have to agree with the other posts about keeping your money in T-bills, high yield money market funds or CDs, if you need the money for a house within five years. The stocks you chose are risky and too concentrated in one industry.

Keep funding your Roth for retirement purposes, but I suggest you use index mutual funds until you have a chance to learn more about investing.

Using Treasury Direct may yield slightly less than a CD, but will probably work out better if you live in a state with a high tax rate. There's no commission and you can choose a variety of terms for your investments. Right now I'd recommend 13-week or 26-week T-bills so you can take advantage of the rising interest rates by not locking up your money. Once the interest rates level off you can lock in longer term T-Bills with higher rates. T-bills can be purchased in $1,000 increments.

Keith

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5620 of 6725
Subject: Re: Saving up for house Date: 4/25/2006 7:11 PM
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My goal is to use my Roth IRA to buy a house, hopefully within 5 years.

A Roth IRA is an excellent place to save money for retirement (if you qualify).

This quality also makes it a good place to save money, in general.

However I strongly urge you to not abuse the IRA this way. Once you pull money out there's no way to replace it. You'll be giving up potential years of compounded growth, severely shortchanging your retirement.

Use the Roth IRA for what it was intended for -- retirement savings -- and make sure you can pay for a house with actual cash. Reduce your expenses, raise your income, whatever. There's no shortcut to a down payment.

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Author: obiwankenobe1250 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5694 of 6725
Subject: Re: Saving up for house Date: 8/26/2006 10:23 AM
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RE>>My goal is to use my Roth IRA to buy a house, hopefully within 5 years.

Understand first of all that, I am a Realtor AND an investor, so I'm a bit biased. However, that being said, why would you wait 5 years to purchase a home?

There are buku mortgage plans out there which allow 100% financing, an 80/20% 30-year fixed being one of the best options available to you. Also, in many towns and cities, there are serious incentives for 1st time homebuyers, including $20,000 grants for converting a duplex back to single family, etc.

Even without the grant, it's very hard to save money fast enough to even keep up with the typical appreciation rate. HOWEVER, that being said, buying real estate is a lot like buying Stocks -- you have to thoroughly research the fundamentals.

I recently sold a home to someone and we had seen 21 houses together. They had probably seen another 10, and I had previewed 5 myself and ruled them out, SO, we had examined about 30 potential investments. From those they made offers on two, and the one they won was purchased at for 7,400 UNDER list price.

Now I ask you, what kind of investment can you purchase where you likely get at least a few thousand dollars in instant equity, and an appreciation rate based on the value of the ENTIRE investment? Fantastic leverage, but you have to be smart in order to make sure you're getting an above average ROI.

Purchasing a home, IMO, should be the very first investment you make, just as soon as you can possibly make it. THEN, once you have at least a "starter house", you can work your way up to something much more comfortable -- an investment portfolio that includes your home, your current investment portfolio, AND your retirement savings -- and a nicer pad.

I have come to these conclusions after 55 years of living, having made nearly ALL of the mistakes. There are NO get rich quick schemes worth the time of day. The best plan to follow is the tried and proven method of conservative investing over 30 years, which is similar to what I have just described.

I wish you luck and Godspeed, but most of all I wish you absence of failure. Learn from the mistakes of OTHERS and avoid them yourself.

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5696 of 6725
Subject: Re: Saving up for house Date: 8/26/2006 10:58 AM
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Even without the grant, it's very hard to save money fast enough to even keep up with the typical appreciation rate.

Hahaha... a little bit biased, huh? ;)

Been looking at those typical prices recently? ;)

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Author: obiwankenobe1250 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5697 of 6725
Subject: Re: Saving up for house Date: 8/26/2006 3:56 PM
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DeltaOne81
Hey, DeltaOne81

RE:>>Been looking at those typical prices recently? ;)

Because Real Estate is "regional" in pricing, I pretty much have my head into just the Central Iowa Market, which means we're nearly immune to the "frothing" of Alan Greenspan fame.

For about 15 years now, our appreciate rate has hovered between 3% and 7% in the neighborhood I track. I track an older area of Des Moines where there are about 2,500 homes, and for the first six months of 2006, the rate of appreciation has actually climbed from 0% (which was for 2005), to 2.6%. Prior to that, it was 2001 - 6.7%, 2002 - 7.3%, 2003 - 5.8%, 2004 - 5.3%, and 2005 - 0%. That's from memory, mind you. Don't quote me, but these values are fairly close.

Here in the upper midwest, we avoid the extremes of the coasts -- places like Boston, NY, Florida, Las Vegas, San Francisco. It's just kind of boring, actually. But, we like it that way. No, it's not heaven, it's Iowa!



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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5698 of 6725
Subject: Re: Saving up for house Date: 8/26/2006 10:42 PM
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Fair enough, obi, but since we don't know where the OP is, its probably not fair to assume he's in central Iowa :).

Nontheless, it absolutely is possible to save up enough to build up a downpayment. In a few ways... first, not just total dollars matters, but percentage too.

If you can get up a 5% downpayment, or 10%, your interest rate will be lower. So, if a starter house is $150K, and it goes up at a steady 4%, that's $6K/year. If you only can save up $5K per year, in 4 years you will have $20K (+ interest, so lets call it $22K or so) on a $174K house... that's well over 10%.

Second, it will teach fiscal disclipline and being more than aware that you're capable of living below your means and making housing payments.

Finally, its also important to realize that even if you don't decrease the loan amount, not only have you decreased the interest rate, but you *have* decreased the 'real' downpayment - i.e. adjusted for inflation.

In the example above, the loan would have gone for a $150K loan, to a $154K loan, but at 3% inflation, that's $133K of dollars adjusted for inflation.

Even if you dont catch up in absolute terms, it is a good thing in several ways.

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Author: obiwankenobe1250 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5699 of 6725
Subject: Re: Saving up for house Date: 8/27/2006 2:26 PM
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Hey DeltaOne81,
Thanks for the reply. I like it when people challenge my assumptions, logic, or even my rendition of the "facts".

RE:>>it absolutely is possible to save up enough to build up a downpayment.

True.

RE:>>If you can get up a 5% downpayment...
This is the challenge. Most 1st-timer buyers I'm working with today don't have closing costs OR a DP. They barely can scrape together an earnest money check! Yet, the only way I encourage people to wait on buying a home is if their credit score won't allow them to obtain a mortgage! Then we follow your route.

Here's why. Assumptions.

House Price - $100K (still lots of decent houses in Iowa for 100K - fancy, No. Spacious in the burbs, NO way! Liveable for a "starter home" and in a fairly decent neighborhood -- absolutely!

Mortgage = 100% - 1st 80% at 6.75%, 30-yr fixed, next 20% at 9% - 15 yr fixed.

PI 1st=$518.88
PI 2nd=$202.85
Total PI =$721.73
Tax Deductable Property Taxes - $ 125/mo
Non-Deductable Property Ins. - $ 45/mo
Total PITI = $849.80
HOA = $100/mo
Interior Maintenance Sinking fund - $50/mo
TCO = $1,000/mo.

Closing costs - we'd find a house where the seller would pay all but $500.00. It's more of a buyer's market today, even in Iowa.

Now, let's look at future appreciation. $127K at 5%. No, let's use 3.5% just to play it safe. 3.5%/yr, for 5 yrs. makes our property worth $118.7K.

Subtract out selling expense at 10%, netting $6,900 to our buyers who started 5 years ago with $500. Not too shabby! But wait, there's more!

ADD to this the tax refunds during those 5 yrs totaling $10,875! Wowzer! Imagine; Uncle Sam wants Americans to own a home so badly that he helps underwrite the cost!

So, now we have $6,900 in cash for the next purchase, and hopefully, we've wisely invested the tax refunds but take just the net of $10,875. We now have $17,775, or 17,500 to put down on the next house. That's 10% down on a 175K house. A nice step up.

NOW LET'S EXAMINE THE WAIT, TRY TO SAVE AND THEN BUY LATER APPROACH.

Let's assume the buyer would pay only $800/month for rent for a comparable apartment, with a 3% increase each year. That's $50,966 in 5 years or an average rent of $850/mo. This yields a savings of $150/mo over a condo payment, that's a potential $9,000, IF, and that's a big IF, our buyer saves ALL of the money. What are the chances of that happening? But let's assume they save all of it, and make a 10% return, per year, call it 12%, total with compounding. That's $10,080 (I think half of this would have been eaten up in pizzas, new CD's, and furniture, but for sake of the argument, let's assume they saved it all).

So what do we have. $17,500 vs. $10,000, without the pride of ownership, AND the learning lessons that come from owning your own home. This is why I say that the only people who can AFFORD to rent are the wealthy. The rest of us poor chaps MUST own at least the property we're living in. And, homeowner's learn a lot more about forced discipline for savings than tenants probably 90% of the time.

Short story long, if you have to choose between waiting to buy a home and waiting to make investments, buy the home ASAP but observe the fundamentals!







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Author: obiwankenobe1250 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5700 of 6725
Subject: Re: Saving up for house Date: 8/27/2006 2:30 PM
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Hey Jamz,
You might want to look at this thread again to read my last post about your dilemma. Or, you might not. Either way, however, I thought I'd let you know that I posted something to help you with your question.

Ciao,
Obi


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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5701 of 6725
Subject: Re: Saving up for house Date: 8/27/2006 3:24 PM
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Thanks for the reply. I like it when people challenge my assumptions, logic, or even my rendition of the "facts".

Absolutely, its all about the give and take. So, if you'll allow, I'll continue to do so.


This is the challenge. Most 1st-timer buyers I'm working with today don't have closing costs OR a DP. They barely can scrape together an earnest money check!

I'll disagree. I've spent enough time on the LBYM and Consumer debt boards to know that most people don't have any savings because its not a priority of theirs. They'd rather have big things like tv or new SUVs every few years, or small things like clothing, lattes, expensive phone packages or tv packages, etc. Or eating out a lot and going to bars and spending a lot on alcohol, or buying a lot of convenience foods instead of cooking for themselves, etc.

I would say that the vast majority of Americans are more than capable of saving up significant savings - both or downpayment and retirement - if they really wanted to. And needing to do so provides them with an important incentive to learn to watch their spending and not spend every penny.

I think the 0% down thing is yet another example of American 'have it now no matter the cost' mentality. Borrow, borrow, always live in debt. Of all the things like that, its probably the only one where its not an awful mistake, but its still avoiding an important lesson about being fiscally responsible, while at the same time subjecting people to significant financial responsibilities.

Now I understand that this does not apply to *everyone*, but I absolutely do think it applies to a significant majority.


ADD to this the tax refunds during those 5 yrs totaling $10,875! Wowzer! Imagine; Uncle Sam wants Americans to own a home so badly that he helps underwrite the cost!

The home mortgage tax deduction is one of the greatest exaggerrations around. I kinda had to reverse engineer your numbers, but assuming you're using a 25% tax bracket, you're saying that of the $721/month P&I, $680 is I. For the first 5 years, I can believe that.

But this tax deduction is *only* true if the buyer already itemizing their taxes. How likely is that??

At $8160 in interest per year, and with there other itemized deductions probably consisting of mainly some charitible dontions and maybe state taxes, the typical stanard deduction for 2006 is $5150.

If they already had $2500 of itemized deductions (probably an exaggeration, although a very person-specific calculation), that leaves $8160 - ($5150-$2500) = $5,510 * .25 * 5 = $6,887.50 - not over $10K like you said. Or about $115/month. Its not bad, but its not 'wowza!' either.

Btw, lets take a married couple, with a deduction of $10,300 and $5000 in previous deductions, then of their $8160, only $8160 - ($10,300 - $5000) = $2,860 is deductible each year, or $715/year in the 25% bracket, or $60/month. Again, a factor to be considered, but not a 'wowza!' factor.


Oh, and if we're gonna talk 25% tax bracket, then remember that we're talking about a single person earning at least $39K, or a married couple earning at least $78K. Both situations where we're not talking about people who can't save if they want to.

If we go own to the 15% backet, which is more like what you were talking about for people who can't save, then you're going to need to reduce those benefit numbers for an additional 40%.


What are the chances of that happening? But let's assume they save all of it, and make a 10% return, per year, call it 12%, total with compounding. That's $10,080 (I think half of this would have been eaten up in pizzas, new CD's, and furniture, but for sake of the argument, let's assume they saved it all).

I certainly agree with you, and here we're talking about a mortgage functioning as 'forced savings'. Its a legitimate fact, but its not something that you or I should be encouraging. We should be encouraging people to get past that and be wiser in their money. If they refuse to, alright, that's their loss... but its not something that anyone who gives advice should be writing off and jumping straight to the mortgage for.


So what do we have. $17,500 vs. $10,000, without the pride of ownership

The example you gave, may I say, is very much leaning towards the owning. You gave a mortgage (P&I) of ~$720 and a rental of $800. If those things are how it is in your area, then yes, your area is a particularly good chance at having owning working out for the best.

Many people aren't in areas that are anything like that. Here is Massachusetts (and not Boston, but a number of towns west), renting may cost $800/month and buying an equivalent place may have a P&I of $1200.

In some of the most extreme markets the P&I costs can easily be twice an equivalent rental cost.

Of course, real estate is very local, but in a good portion of the country (by population) P&I is almost always higher than rental cost. So your example is using a market where homeowning is particuarly likely to be a good deal.

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Author: obiwankenobe1250 One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5702 of 6725
Subject: Re: Saving up for house Date: 8/27/2006 9:05 PM
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Hey DeltaOne81,
Thanks for the thoughtful reply! I had completely forgotten about the standard deduction, but I still believer that it isn't until a person purchases a home that they can switch to taking itemized deductions. Is this a good deal? Maybe not. I hate forms!

RE>>Btw, lets take a married couple, with a deduction of $10,300 and $5000 in previous deductions, then of their $8160, only $8160 - ($10,300 - $5000) = $2,860 is deductible each year, or $715/year in the 25% bracket, or $60/month. Again, a factor to be considered, but not a 'wowza!' factor.
------
Your points are well taken. So, it's not as clear as I had laid out, but the reality is, if the payment on a house is only 25% more than the payment on rent, it may make VERY good sense to purchase a home, rather than to rent.

So this becomes the critical criterion for our original poster -- if he has to have DP money, and money for closing costs, saving for these in some good mutual funds, or ETF's, or even some strong stocks with DRIP options available -- these are all good ideas. My point is, he could start investing, but if he lives in the right area of the country, he could purchase the house now, too! The best of both worlds!

Thanks for reminding me about the SD.

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5703 of 6725
Subject: Re: Saving up for house Date: 8/27/2006 9:22 PM
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Your points are well taken. So, it's not as clear as I had laid out, but the reality is, if the payment on a house is only 25% more than the payment on rent, it may make VERY good sense to purchase a home, rather than to rent.

Well, I'm not a fan of 'rule of thumbs' in a situation like this, for two reasons. One, because a lot of personal details make a big difference. And two, because its a very big purchase in someone's life, and a rule of thumb is very inexact.

However, I'll admit that it may not be bad to toss out some 'rule of thumbs' that people may want to consider as a very very first look. Assuming by 'payment' you mean total cost of ownership (PITI + home ownership + maintanence fund + extra utilities), then yes, I would think that that's not a bad place to start. Although I have no idea if the correct percentage is 10%, 20% or what. I do agree that if they're comparable... AND, if you plan on staying for at least a few years, preferably 5 or more, home ownership is definitely worth considering.

Another rule of thumb I've heard is that the home price should be less than 20 times the annual rent of an equivalent place.


My point is, he could start investing, but if he lives in the right area of the country, he could purchase the house now, too

Sure, in some areas of the country, homeownership is particularly a bargain. But in any area of the country, a downpayment is a good idea too. And in some areas of the country, it may be particularly key.

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Author: jammasterlee One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5704 of 6725
Subject: Re: Saving up for house Date: 8/27/2006 9:44 PM
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Thank you all for all the wonderful advice. And thanks to Obi for notifying me that people had responded to this.

I didn't quite understand all of the posts as I'm new to this. It took me a while to piece together what PI was. Principle and Interest I take it. I am actually located in Boston where purchasing a home for one is almost a complete ripoff. When I buy, I'd like to get a 3 bedroom place or so to offset some of the mortgage costs. I'm pretty used to getting tenants so I understand the hazards there.

Given my area and the high housing prices, does it make sense to go in with a small down payment? Personally, if I'll be renting out, it seems to make a ton of sense. I just didn't know people made loans with such small DP's, like say 10% or less.

The housing market right now is in a downward trend. Demand has shored up and prices are taking a while to adjust. Houses are sitting on the market for well over 90 days it seems.

I have an income of about $42k and I live WELL below my means. I save a ton of money. I don't live on PBJ, but I find my deals and spend in short bursts when I have to.

Point taken about stocks. In my mind I knew that bear markets, or pricing in general can take 5+ year downswings but somehow it just never entered my head as to my own situation. I'm itching buy more of ZIPR but um, that's probably not a good idea. I don't know, I'll have to think about that one considering my goals.

I wonder if one of you all could spell out some of those acronyms?

Thanks so much!
Jamz

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Author: jammasterlee One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5705 of 6725
Subject: Re: Saving up for house Date: 8/27/2006 10:05 PM
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Another question: it makes sense to forego some money from investing in retirement and channel in to a house, correct? Right now, if I max out both tax shelters that would total about $14k out of a $42k income. Dude, I can save that much, but that leaves no money for a house. The way I see it right now, I'm burning $600/mo on rent. Just down the toilet it goes. Plus, I'm earning no rental income as I would be if I purchased a 2-3 bedroom place. It seems like I'm passing up on a chance to put $600 + ~$600 (in rental income) per month by not having a house. Wouldn't getting that house up and running be priority 1? Maybe not all money, but say max out Roth at $4000 and then saving the rest for a downpayment.

Thoughts?

Jamz

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5706 of 6725
Subject: Re: Saving up for house Date: 8/27/2006 10:55 PM
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Given my area and the high housing prices, does it make sense to go in with a small down payment? Personally, if I'll be renting out, it seems to make a ton of sense. I just didn't know people made loans with such small DP's, like say 10% or less.

Its up to you what you're comfortable with. Its pretty easy to get a $0 down loan now a-days... but with Boston prices declining mildly now, i wouldn't be in any rush to pay, and would certainly what to have a decent downpayment. Otherwise what if you got transferred and had to sell, or lost your job and had to sell. You don't want to have to bring money to the table to leave, especially money you don't have.


I have an income of about $42k and I live WELL below my means. I save a ton of money. I don't live on PBJ, but I find my deals and spend in short bursts when I have to.

Good for you. Congrats. In the Boston area that's saying something. You seem like someone to me who can really decide whats in their best interest.

If I was you, I would sit down with a pen & paper and really get an idea of what the tradeoffs are, what the costs are.

Since you seem to be a saver, I think the following equations should work pretty well:

Cost of owning: Interest + Taxes + Insurance + RE Commissions (monthly, the longer you own, the lower) + any condo fees/home owners association fees + reasonably expected mainanence + additional utilities - tax savings - various guesses at value gain/loss

Cost of renting: rent + home owners - investment returns on difference


I wonder if one of you all could spell out some of those acronyms?

Which ones? PITI = principal, interest, taxes, and insurance. HOA was referring to any homeowner association fees. Anything else?

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5707 of 6725
Subject: Re: Saving up for house Date: 8/27/2006 11:01 PM
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Another question: it makes sense to forego some money from investing in retirement and channel in to a house, correct? Right now, if I max out both tax shelters that would total about $14k out of a $42k income. Dude, I can save that much, but that leaves no money for a house.

Yes, you need to balance your goals. Retirement is important, and you need to fund it well, but there is definitely room for intermediate goals as well. So long as you continue to fund your retirement in a way that will likely allow you to retire when you want to retire, there is no need to absolutely max out your accounts before you consider other goals as well.

There is no right answer to how much goes to what, but there are a wide variety of correct ones as well.


I'm burning $600/mo on rent. Just down the toilet it goes.

Not at all. All the money listed above in my equations in the last post is 'burnt' as well.

That whole 'rent is throwing money away', well, it may be true (in the same way that you 'throw' away money to eat, or buy just about any other need)... but there's a ton of money being 'thrown away' in owning a home too. Money you'll never see again - property taxes, homeowners, maintanence costs and upkeep, real estate commissions, etc. And probably the biggest, interest.

Think of it this way... either you pay money to rent, or you pay money to borrow the money to own. There's not nearly as large of a difference as those realtor pamphlets I constantly find in my mailbox would have us beleive.

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5708 of 6725
Subject: Re: Saving up for house Date: 8/28/2006 3:00 PM
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an 80/20% 30-year fixed being one of the best options available to you.

"Best" in terms of allowing you the maximum leverage, and giving you flexibility of repayment. However, if you buy more house than you can afford, you can get yourself in serious trouble in a 100% financing situation.

Also, in many towns and cities, there are serious incentives for 1st time homebuyers, including $20,000 grants for converting a duplex back to single family

Not around here. Can you list some of these "many" towns and cities?

it's very hard to save money fast enough to even keep up with the typical appreciation rate.

I know I can't keep up with the appreciation rate on a $4,500,000 penthouse with a view of Central Park, but I suspect I can keep up with the appreciation rate on a $80,000 handyman special. However Bill Gates can easily keep up with the appreciation rate on the penthouse.

Now I ask you, what kind of investment can you purchase where you likely get at least a few thousand dollars in instant equity, and an appreciation rate based on the value of the ENTIRE investment? Fantastic leverage, but you have to be smart in order to make sure you're getting an above average ROI.

1. You weren't the seller; you were the broker. You didn't sell the house; you got a commission for enabling the sale of the house.
2. "Equity" only exists if you can sell the house at that price. The seller was unable to sell the house at $x and had to sell at $x-7400. I conclude that the buyer has no equity.

It's true that with stocks you cannot borrow the value of the entire investment, but stocks typically appreciate more than real estate does.

Purchasing a home, IMO, should be the very first investment you make, just as soon as you can possibly make it. THEN, once you have at least a "starter house", you can work your way up to something much more comfortable

Why should someone pay two additional sales commissions, and additional moving expenses, and all the maintenance expenses, if renting meets their needs?

Why should someone buy if it's much cheaper to rent & save money?

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5709 of 6725
Subject: Re: Saving up for house Date: 8/28/2006 3:09 PM
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The way I see it right now, I'm burning $600/mo on rent. Just down the toilet it goes. Plus, I'm earning no rental income as I would be if I purchased a 2-3 bedroom place. It seems like I'm passing up on a chance to put $600 + ~$600 (in rental income) per month by not having a house.

If you consider your entire rent payment to be "burnt", then when you buy a home you will be "burning" all of these:
- structural maintenance (roof, walls, floors, plumbing, wiring)
- landscaping
- leaf raking, snow shoveling, grass mowing
- repair/replacement on major appliances
- property taxes
- mortgage insurance
- mortgage interest
- the portion of insurance that corresponds to structural
- water bill
- sewer bill
- garbage bill

Right now your landlord is paying for all of these. When you buy, you will pay all of these.

And by the way, rental income is taxable. You do get a few more deductions to partially offset it though.

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Author: TurkeyBreath Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5712 of 6725
Subject: Re: Saving up for house Date: 8/29/2006 10:32 AM
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...The home mortgage tax deduction is one of the greatest exaggerrations around...

Getting $0.25 on the dollar has much to be desired.

Saying that, I am glad to have purchased my home about 28-years ago. I was able to make the down payment by working 2 full time jobs for a whole year. One job to live, the other to save every single penny for my down payment.

After haveing the down payment, I bought my fix-it-upper 3-years later and still working on it. After deduction expenses, except for my labor, my ROI has appreciated about 7% per year.

Good luck to all.

TB

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Author: jammasterlee One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5713 of 6725
Subject: Re: Saving up for house Date: 8/29/2006 7:01 PM
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Yes but how much of that stuff can be recouped in the sale of that house? Don't some of those (I guess besides the bills) add value to the property?

Does having tenants more than offset these expenses in terms paying rent vs. owning with tenants?

That is, desipte average expense of owning, isn't it still better to own with tenants than rent a place? Given that you are willing to put in the extra work?

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Author: jammasterlee One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5714 of 6725
Subject: Re: Saving up for house Date: 8/29/2006 7:02 PM
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Sorry, in my post i was referring to jrr7's post below:

If you consider your entire rent payment to be "burnt", then when you buy a home you will be "burning" all of these:
- structural maintenance (roof, walls, floors, plumbing, wiring)
- landscaping
- leaf raking, snow shoveling, grass mowing
- repair/replacement on major appliances
- property taxes
- mortgage insurance
- mortgage interest
- the portion of insurance that corresponds to structural
- water bill
- sewer bill
- garbage bill

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Author: TurkeyBreath Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5715 of 6725
Subject: Re: Saving up for house Date: 8/29/2006 8:48 PM
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I don't know if this post is addressed to me but I shall throw in my two cents.

Yes but how much of that stuff can be recouped in the sale of that house? Don't some of those (I guess besides the bills) add value to the property?

Usually a portion of the improvements increase the value a fraction, but maintenance keeps the value as is plus inflation.

Does having tenants more than offset these expenses in terms paying rent vs. owning with tenants?

That is, desipte average expense of owning, isn't it still better to own with tenants than rent a place? Given that you are willing to put in the extra work?


Yes, until your tenant is one of those who "came straight from Hell".

TB


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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5716 of 6725
Subject: Re: Saving up for house Date: 8/30/2006 10:29 AM
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Yes but how much of that stuff can be recouped in the sale of that house?

As far as I could tell, none (except possibly appliance replacement). Those were all strictly ongoing maintenance expenses that are necessary to preserve the value of the asset.

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Author: DeltaOne81 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5717 of 6725
Subject: Re: Saving up for house Date: 8/30/2006 12:30 PM
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Yes but how much of that stuff can be recouped in the sale of that house?

As far as I could tell, none (except possibly appliance replacement). Those were all strictly ongoing maintenance expenses that are necessary to preserve the value of the asset.


And if you think about it, the question really isn't really what 'adds value', otherwise you could argue that paying your interest adds value because otherwise the house will be foreclosed on and sold at auction for less.

Rather, the question is comparing it to renting and how the money works. Maintaining the property and doing repairs is paid for you in renting, so it is an additional expense of homeownership that is included in rent.

If you want to argue that maintanence is value gain, then both removing the maintanence and including your value gain is double counting. If you don't count maintanence as an expense, then you have to remove the value gain portion due to maintanence... since you've already counted that by not including maintanence as an expense. The answer still comes out the same, but just becomes overly complicated.

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Author: DawnAndBen Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5761 of 6725
Subject: Re: Saving up for house Date: 11/12/2006 7:11 PM
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Living in Eden Prairie, Minnesota... EP is a developing suburb of Minneapolis, and one of the more affluent ones. We bought our first house, a townhouse, 5 years ago for $266k. The builder was selling for $275k but his inventory wasn't moving so he was offering $15k in incentives. We used that $15k to cover $6k in closing costs and drop the financed price $9k. We also put $12k of our own money down to bring the total loan to $253k.

We had bad credit (ok, I had bad credit... I was horribly irresponsible on college) so we had to fork over $150/month in PMI. We financed at 6.25% / 30 yr fixed. Association dues were $118/month and taxes were just over $3k a year.

Two years down the road, thanks to better credit, and aggresively building up equity in the house, we refied into a 5/25 balloon at 4.25% and our PMI went down to $50/month. In the mean time, our taxes went to $3500 a year and our HOA went to $218/month.

We currently pay about $900 a month in taxes. We're in the 28% tax bracket which does help.

Between taxes, HOA, P&I, PMI, figure our monthly payment is $1791.

A comparable rental unit would cost about $1500. From that perspective... it's not bad. Of course, being first-time home-owning American yuppies, we bought a house that's way too big for us (we moved from a 1100 sq ft apartment to a 2300 sq ft town house). Moving to something that better fit our needs (1000 sq ft would be plenty), we could get into a dog-friendly rental for $1000 / month.

All in all... was it a good investment?

Well, in 5 years of living here, we estimate that we could, maybe, get $285 for our house. That's an increase of $19k. Call it $20k and you're at an increase of $2k a year.... but, it's unrealized profit until you sell... and selling can be challenging. We had one real estate agent that wanted to charge us 7.5% to sell. We walked away, trotted actually, very fast. We've met an outstanding broker since then that will sell our house for 5% and will lower that to 4% if he ends up without a buyer's agent to pay. Plus, we have to pay a a few state and local taxes that add up to 1.5%.

Add it all up and we walk away with $261.8k (call it $262k). That's $4k less than we paid for it 5 years ago.

If you're looking to hold on to the house for a while... then it might be worth it. If you're not, then it really depends on your local conditions. The coasts fluctuate more, but there's also probably going to be more long-term demand for housing.

If you're going to be a landlord then really do some soul searching first to make sure you're up for that. We thought we were... we were very, very wrong. Take into account ways to shield yourself from liability. You'll also want better insurance than you'd carry for just yourself. Those paths present a variety of challenges and opportunities in themselves.


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Author: TurkeyBreath Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5763 of 6725
Subject: Re: Saving up for house Date: 11/13/2006 11:19 AM
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...Add it all up and we walk away with $261.8k (call it $262k). That's $4k less than we paid for it 5 years ago...

The first 5-years of my home "ownership" were hell. That was 28 to 23-years ago. Glad I stuck it out. My $50k buying price plus another, say $100k in interest, taxes, maintenance and improvements = $150k spread over 28-years. I've been offered $730k. If I were to sell it, pay its taxes, commission, and moving expenses I would walk away with say $525k. While that only comes to about 5% profit, the pride of ownership have added value that I cannot place a dollar figure to it.

The above example and my investments studies have lead me to the conclusion it takes about a generation for an investment to pay off. Be it real estate, stock, bonds, employment, etc. etc.

Good luck,

TB

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Author: DawnAndBen Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5764 of 6725
Subject: Re: Saving up for house Date: 11/13/2006 11:37 AM
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>The above example and my investments studies have lead me to the conclusion it takes about a generation for an investment to pay off. Be it real estate, stock, bonds, employment, etc. etc.

Agreed. That was my point at the end... a house is probably more worth it if you're going to either buy and hold on to it and / or make material improvements to the property.

However, it's worth noting that, just like any other investment, it really pays off once you hang on to it. Otherwise, just like anything else, it's speculating.

Also, at least now, and I would wager going forward, houses will retain their value better than a condo or townhouse. Each has an upside / downside, and it's worth considering when deciding what to buy.

The pride in ownership is definately an intangible and one that's going to be different for everyone. Personally, my wife and I are at a point where the freedom to move around the country and experiment are more important than pride in ownership. Everyone is different. I suppose it's like any other investment, know why you're getting in and judge if that reasoning makes sense... don't go off of anyone else's research or hot tip.

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