Fear of First-Time Homeownership

I have the benefit of 20 years of personal experience and many discussions with those going back 40 years:
1. I never look at the 20% down payment as anything other the movement of $ from one class of savings to another.
2. Rarely in my life have I met someone who didn't have a positive experience in home or other RE investmenting. I can not say the same about most other asset classes.
3. Home ownership teaches financial discilpline. And, that knowledge IS transferrable to rental properties.
4. There is simply no way to measure the great satisfaction derived from owning and living in your home.
5. Once you're in, you're in. So, if you sell someday, do not worry about a good or bad market becauseit will be the same market when you turn around and sell.
6. Update your insurance annually. Not on it's increased value, but rather on the cost to relplace, in todays materials & codes in your city..by the sq ft.
7. SFR (and condos) make great rentals as well.
8. Today, I look at each property I own as a seperate (savings) account.

Larry - Couldn't agree more. Great comment.

Noah,

My husband and I have found a great(level:excellent) , large (1,160 sq ft), 1.5 bedroom coop in Brooklyn Heights that meets all our criteria for $750 K and $1,148 maintenance.

Now that it's time to make a bid, I'm getting nervous, mostly because the 20% downpayment is going to force us to liquidate all of our investments. We will just enough for our emergency cash fund, though we have enough shared parental funds to pass the board expectation for liquid assets.

My nervousness comes from the fact that I am afraid the BH market will decline in the 5 year time frame we will have at the apartment. I did some rough calcs, and because of the transaction costs and slightly greater effective monthly cost, there needs to be a 9-10% gain on the value of the apartment in the next 5 years for me to break even (forget the opportunity cost of keeping the $150 K down in the currently roaring stock market or even a safe money market).

I have read some CNN reports suggesting that there will be a 2-3% decline this year and next year in the NY/BH area. That would mean that the following 3 years would have to have big gains of 15% total. Since we just came off a big boom, I'm not sure that's possible in the next 5 years.

In November 05, the same apartment just one floor off in the same condition sold for 725 K- but this was at the peak of the hype. In Sep 05, the same apartment 1 level higher in mint condition sold for 760 K- so it looks like there's a 5% premium from exc-mint in that building.

The most recent sale in the building was in Sep 06, of a diff size apartment in a similar floor but in mint condition - for $600 per sq foot. This was less than the others the previous years that had been going for $650 per square foot. And since this was "mint", perhaps you could say the apartment we want should be at 95% of the most recent sales/sq foot price would be $570/sq foot x 1160 sq foot- $660 K for the apartment. That's 12% off the starting ask price (it's been on the market for 2 weeks).

So I guess what I'm asking is:

- What do you predict will be the appreciation in BH 5 years from now? Do you think we'll make the 10% increase hurdle for breakeven?

- Do you think we should buy or keep renting for a few more years until the market bottoms out and we have more money in the bank?

- How much should we pay for this place if we decide to buy?

- Knowing that, what should our starting offer be? We know there was one below ask offer and the owner countered with the ask price.

Thanks for your help

Anna

Oh Anna Anna Anna...first off I can't possibly answer some of your questions because I haven't seen the property and dont know how quality the permanent features are that mean so much in eventual resale; exact location in BH, nat light, views..

Besides that, let me see if I can answer your questions:

1. Predicting a 5 yr timeframe for ANY local real estate market is simply absurd. I do near term predictions based on alot of fundamentals I see out there and economic data that continues to get released, markets reactions, monetary policy short term predictions, etc..

5 years is simply too far out. However, I think that a 10% appreciation over a 5 yr timeframe is certainly not such a far off possibility.

2. You're doing some good calc's, I like to see that; especially counting opp cost of renting rather than buying. My question to you is, do you have only $150K in liquid combined, or more? Sounds like your using all of it for doing this deal. I dont like the idea of using parental funds to buy the apt, especially as there doesnt seem to be a gift being passed down.

Based on this alone, I would say wait and build more assets or lower your standards on the house, to change the dynamic of the investment.

In short, RENT for another year. The housing market is on your side, and I want you to wait to meet what I consider 1 out of 3 MUST's in making this decision: LIQUID ASSETS.

3. I dont know. didnt do any research or see the place. Ask your broker.

4. Again, ask your broker. This is where a broker's true services are given. So, you really should ask their opinion.

Good Luck

Hi Noah,

Why are you averse to using parental funds to buy the apt? Is cosigning with parents (so you're both on the lease, if you don't have enough liquid assets on your own) a bad idea in comparison to a gift?

Thanks in advance.

Thanks Noah. The downpayment of $150 K would be almost all our money, we'd be left with about $75 K in liquid assets (stocks and cash) for emergencies/investment. We have about $125 K more stored away in IRAs/401Ks that we're not planning on touching until we retire.

I referenced the parents because I was told we need to show several years of mortage payments in the bank to pass the board- so for that reason our parents have added our names to their investments/accounts. So it looks like we have another few hundred thousand dollars to our name, but that money isn't really ours and we're not going to touch it- it's just for show .

We're paying $36 K for year ($3K per month) for rent, and if we bought our monthy cost would be roughly $3,500 after the tax deduction.

So do you still recommend we wait a year, or do you think we should go for it now?

Noah,

Do co-op board generally accept parental assets when looking at liquid assets? Even if the money is gifted down, would like raise a flag to the board. I.e would they not just suspect that you would turn around and give the money back after closing?

Jan,

I am averse to using parental funds if the SOLE reason for getting those funds are to pass the co-op board, and then right after the deal is done, the funds are returned to the parents. This is often the case, rather than a true gift from the parents for their child to buy their first home.

In Anna's case, she wouldn't have enough liquid assets leftover after closing if she had to return a family gift after closing and would put herself in a tough financial situation.

Co-sgning is not a bad idea at all, as that puts your co-signer at risk if you run into financial troubles. But again, we are talking sound investing here and combatting the problem of buying a property that is above one's means. I just want you to be comfortable in your purchase and for you to buy what you can afford and avoid potential disaster later on.

Anna,

Is the $75K in liquid assets for emrgencies YOURS or your parnets money that is being used for show?

If it is yours and yours alone, than go for it! if it's your parents monies that are being used for show to pass the board, than seriously consider renting.

Also, what is your combined salary and are your jobs secure? Given your expected monthly expenses after taxes, which I would assume would mean before taxes is about $4300/mth or so, you should take home at least $14,500/mth combined for a debt/income ratio of 30%. If you take home less than that, question I have is how much less?

Then it becomes an affordability based on salary question. You do not want to sacrifice quality of life to buy a home.

Anoon - Depends on the board. Generally, a tax free gift is ok, especially if done early on so that the generated bank statement given to the board in the package, doesnt show the deposit.

Some boards dont mind the gift. But, NO, most boards do not consider parental assets as liquid assets for you when applying unless you are using them as a guarantor or having them buy for you.

The $75K we have left in cash and stock is our own to keep- we earned it.

We have several hundred thousand dollars more (about $300-$400 K) that our parents have agreed to let us become "joint" owners of during this purchase process. They didn't give it to us, they just added my name to their accounts. After the home purchase happens, we may take my name off that money. It doesn't matter so much to them because I'm an only child, I'd ultimately be the heir to the money, but either way, I agreed not to touch that $300-400 K because it's theirs. They added our names over 6 months ago so we should be okay for the board process. They would not be cosigning for us, the house would be me and my husband's.

As for income- my husband and I make about $230 K in salary per year with usually $30 K more in bonuses.

I feel that technically, we can afford it. My real concern is whether I'm going to lose money on the place in my 5 year frame vs. renting and investing money in a money market or stock account. I am concerned that the BH market is not going to rise by the minimum 10% required to break even because we just came off a boom.

It sounds like you think it will make it to that threshold.

Anna,

OK. On the salary and liquid asset front, I think you are fine to buy the home. Now your situation becomes more clear.

But Im not a wizard. One thing can happen in 3 years time that changes everything, so its silly for me to say that you will get 10% appreciation in 5 years time.

If you MUST get 10% appreciation just to break even on the deal, I would say stick to renting and getting interest/gains from your liquid. Build up more wealth in meantime with your great salary. Its very possible you can get the house for a bit cheaper at some point in the next 1-2 years, question then becomes what your timeline to own is? I would rather you bu a property that you dont have to sell in 5 years, and rather, can live in for 5 years and then rent out for income and keep the property as an asset in your portfolio. Your income allows this longer term wealth building strategy.

I would stick to Manhattan and consider renting out after 5 years is up, giving you more options.

My wife is Japanese. She can refer you to lots of people who didnt have positive experiences in home ownership or RE investment. My inlaws own a condo in tokyo they rent out, several homes they rent out in their hometown, their own home, their parents old home, a farm, and some other land which they lease to a shopping mall. I am very happy that now the J-RE market appears to be turning- but for the last *14* years its been nothing but depreciation and pain.

A home is always an investment, plus a place to live. If you do a mortgage (and lets face it, who doesnt?) then its a leveraged investment. Which means when its up, you're getting high ROI. But when its down- you get cleaned out quick. Its still a place to live, and thats enough for most people- but there is never a good time to own a depreciating asset. The only question is "can you weather the storm?"

Right now, renting + investing to get over the storm seems like a valid strategy- especially if you bought more than 4 years ago and have some room to breathe on your pricing so you can attract a buer. You can still lock in most of your profits- and get out at a time when further RE advances are far from guaranteed.

Noah, regarding the following tip:

"Quick Tip: If you have the 'live-in then rent-out' strategy in mind, try to live in the apartment as your primary residence for the first 2 years. That way, you can rent it out for another 2 years and if you decide to sell it after the 4th year, you will qualify for the primary residence tax benefit for any gains reported at resale on the transaction. You must live in the property for 2 out of the last 5 years as your primary residence to qualify for this tax break."

>> As soon as I lived two years, and I sell, do I qualify for primary residence? Or I have to rent it out for two? and then it qualifies? Thanks.

Eric - You only need to live in the property as your primary for 2 years out of the last 5 years. If you just qualified the 2 year timeline, you can go ahead and sell and qualify for the tax exemption on the gain.