I am about to put an offer on a house that mortgage + taxes will cost me 50% of my GROSS monthly income.

I should be able to afford it, if I rent out a room. Or if I eventually sell my S2000.

Since it's an interest-only loan, I will be able to write off the entire loan amount on my income taxes... and I'm CERTAIN the house will appreciate dramatically over the next few years.

But wow, this will be the closest to the financial brink I have EVER taken myself.

<-- had to vent. :freaking out:

 

Bay Area, huh? Are you buying a 500 sq. ft. 2br for $10 million?

We stretched on our first home, and it was scary for the first year--as your wages increase, you should feel a bit better about the purchase.

Here's a bad story--I bought my first condo in Las Jolla in 1992 for $170k. I sold it three years later for $170k, in one of California's few down markets. I had also dropped $38k into renovations. My parents talked me into selling the place--I wanted to rent it out. I listened to them.

Now 10 years later the place is worth over $550k, and I feel like kicking my own mother whenever I remember selling the property.

If anything, remember that your mortgage is one of the last good tax shelters available--it should make you sleep better.

 

Hmmm...50% of your gross income sounds like alot to me. But that seems to be the average these days, with the skyrocketing cost of real estate. I'm still back in the days when 28-33% was the norm. My ex and I bought four houses over the years, and we pretty much stretched it on all of them. It is scary at first. Making a nice return on your investment helps. I don't think you will regret getting into the market after the initial shock wears off. Good luck!!

 

50% of your gross, that would be about 70% of your net. Add rent payments that you will not have to make anymore back to the equation (can't be that little money in your area either, right?)... Yeah, I'd get nervous too.

Make sure that you get a good home inspection done before you sign the contract and have the current owners fix any issues thatturn up. If you are that close to the brink, you wouldn't want to break the piggy bank by having to pay for any major repairs you did not see coming.

 

As Deb points out, the traditional norm was that shelter shouldn't run more than 25 to 33% of your income. In the last decade or so the equation has changed and for most people 50% has become the new norm.

The most important thing to consider is cashflow. Do you have enough cash coming in to support the house, yourself and your lifestyle. If not, buying the house is the wrong choice regardless of how much you expect it to appreciate. What good is the 5 year appreciation if you lose it to the bank in three.

That you can write off the interest on your income tax return is good, but on the other hand, you won't be building any equity. You will own no more of the house in the future than you do now. If the house appreciates significantly, that is not a problem, if it doesn't or if it goes down in value that could be a problem. Many people think that home prices are way too high now and my fall. Some are expecting that the "real estate bubble" will burst. Still, if you have the cashflow (its really always the cashflow) to carry it, the market value shouldn't matter. Actually, the only time that market value matters is when you buy and sell. All other times, it's just a number.

Good luck. Keep us posted.

 

Rob has posted good advice. After all, he is a CPA.

Remember the cardinal rule of real estate: Location, location, location. Is it in an established neighborhood that is close in to the city center? Or is it an older property (how much property) that is in a area where they are building like crazy?

Back in the early 80's when we moved to Huntington Beach in So. CA. We bought a condo in an established community. Then Irvine exploded as a planned community just to the east of us where one could buy a new condo or town house for what we paid.

On the other hand. When we moved back to Northern VA. My wife found the last bargain in Fairfax County. A half acre property that was "grand fathered" in to an area that was re-zoned for five acres. We have had lots of offers over the last few years from home builders that want to buy and bull doze our house and put up a "McMansion". As they say, it is all about location.

Good luck.

 

Though it may be somewhat stressful at this time, looking back few years from today, you will see that you made the right decision. Usually, real estate tends to weather uncertainties better than consummable goods. Also, you get to live in your investment.

 

well I got out-bid on the house by $40K.

I really wanted this house too. it was up on a hill with a magnificent view, very safe neighborhood (little more than a cul-de-sac at the top of a peak).

but I probably could've just barely afforded it at the price I bid at, and if any home repairs cropped up they would've ate away at my credit cards for sure... so it might be a good thing this passed me by. but I'll probably now always look up longingly at the home that could've been when I drive by. I'm not even considering houses now in the neighborhood lower down on the hill... it would just bug me everytime I looked up and saw that house.

 

I am sorry you were out-bid on that house. Perhaps it is a blessing in disguise. I am sure you will come across a house of your dream soon that meets your need and that fits your situation. Houses over there must be very expensive.

 

trit,

There is always another train coming. Take your time and don't get in over your head. In the long run you'll be better off.