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(8 votes, average 4.25 out of 5)
House - Buying Real Estate
Written by the frugal nomad   
Monday, 12 July 2010 03:30
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Size matters – especially when it comes to homes. The original purpose of housing was to provide a little privacy, give Condosyou shelter from the elements and a place to horde your food. I think we’ve all inherited a few territorial genes, but excess space can be a very expensive proposition. From a financial point of view, there’s no difference between having a room you never use, installing a second "decorative" dishwasher in your kitchen or keeping a few spare cars in your driveway "for emergencies."     

The benefits of living in a smaller space are obvious. You end up with a smaller mortgage payment and more affordable utility bills. The taxes and insurance are lower and you’ll spend less time and money on upkeep. Less space means fewer reasons to buy furniture. The best part is that smaller homes are easier to clean so you can do without a maid and clean up after yourself.

With what you sacrifice in space, you can live closer in and commute to work with public transportation or you can get an address in a better neighborhood with quality schools.

The best way to save on housing is to buy the home you want in the location you want the first time around so you don’t ever have to sell. Whether you’re upgrading or downsizing, the transaction cost of buying and selling can really take a huge slice of your appreciation. There’s another reason to buy a size appropriate home that you intend to stay in for a very long time. Interest rates are very low right now. A 30 year mortgage at 5% is a very attractive proposition but only if you stay in the house for thirty years. If you decide it’s not the right house five years later, you might have to finance your dream home at a higher rate.

Consider the advantages of condo living – especially if you don’t have children. You can just walk away and go to Paris for a month without worrying about the yard or the pipes. Your neighbors look out for your property because it will preserve the value of their property. You end up with a real tiny community of folks – sometimes it ends up being like a little village in an urban jungle. You watch out for their cat when they’re away and they keep an eye on your place when you take off.

If you’re buying a condo – buy in a self-managed complex with a maximum of 12 units. That’s where you’ll find the lowest fees and have a sense of community. Condo fees vary widely and small complexes usually end up being self-managed by the residents and that often results in lower fees.

When it comes to Condos – try to buy in newer developments built by experienced small developers with some kind of distinctive signature. As an alternative, go to the other extreme and buy a well maintained unit in a well managed smaller building that has distinctive and historically significant features. That’s where you are likely to get the best appreciation and that’s where you’re likely to stay for a long time.

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haverwench  - Fifteen percent?!?! |2010-07-12 12:22:07
I'm all for not buying more house than you can afford, but...*fifteen percent* of gross income for housing? Including property tax, insurance, maintenance, utilities? Even after the recent drop in housing prices, this would make it pretty much impossible to buy *any* home in central New Jersey with less than a six-figure income. And don't even think about it in the Bay Area.

Why not stick instead with the Warren-Tyagi 50-30-20 formula? That is, spend no more than 50 percent of income on Needs such as housing, transportation, food, and so on; spend no more than 30 percent on Wants such as travel and recreation; and save or invest at least 20 percent. That way, if you live in an area with sky-high housing prices, you can cut back on Needs in some other area to stay within the 50 percent limit.
frugal nomad  - Make That 12% |2010-07-12 12:41:27
Most Banks qualify you for a loan where the payment including principal, interest, taxes and insurance does not exceed 28%. That's the ceiling. And then they do another test, where all your installment payments including your house payment does not exceed 35%. That 28% is the max - we're just slicing it by 50%. It's a comfortable target and very achievable with a condo or a small house. I agree that in certain parts of the country, it is not doable. But in most of the country, you should be able to get close to 15%, especially if you have 1 20% down payment. On a combined 80K income, a two income professional family would have 15K which should cover a loan of 200,000 including taxes and insurance. Sorry, but I don't see the problem here.

If you don't have a 20% down payment, you have no business buying a house. If you can't get a steal in this market, you haven't learned enough about how to bargain for a house. With these interest rates, a one thousand payment can cover a lot of house.

a 200,000 dollar home would require to take out a loan of about 160,000 with a 20% payment. The principal and interest on it should be around 9,000/ a year.

That's 15% of a 60K income.

Remember I'm suggesting a target - if you end up at 18%, close enough. But there is no reason you should max out at 28%.

A lot of people see what they 'qualify' for and go and get the biggest house they can for that amount. We're just saying avoid the temptation and don't max out on a house anymore than going up to the limit on your credit card.
frugal nomad  - a clarification |2010-07-12 12:45:29
The 15% is for interest, principal, taxes and insurance. Utilities and maintenance is something else.
Omiewon  - The point is a good one for high cost areas |2010-07-13 08:32:42
The generic formulas break down in both really inexpensive places and the ultra expensive places. There are places in this country where at current interest rates, you would be hard pressed to pay 28% of your income for housing. Places where a $250,000 house is a relative mansion. And you are correct in San Francisco, 15% would mean that you need to make about $350,000 a year to afford the median priced house at 15%.

Having said that, I know a number of people in high cost places that still keep their PITI at about 15%. Invariably, they bought a condo/small house a while ago and rolled over the equity gain into a larger place and then refinanced when rates plunged. They have good (typically dual) income, but they also put down hefty downpayments because they saved and rolled over their equity from a first house.

For me, I think the classic 20% down and 28% of income on a 30 year fixed has held the test of time and if you can't do that then you shouldn't buy a house or you should buy a less expensive house. That rule would have kept a lot of people out of trouble 5 years ago.
Omiewon  - Where the Small House Backfires |2010-07-12 09:09:28
The time when a small house really backfires is when you have a growing family. I've seen this play out dozens of times with friends. They get a small house when they have one kid. 2 or 3 bedrooms maybe 1,500 square feet. Everything is great and then they have kid #2. No worries, they still feel they have room and if they have another kid, they can always, "move up". Then kid #3 arrives and they really are starting to feel cramped. No matter how much you can argue that they have plenty of space, they don't feel that way. While they thought that they could move up, the reality of the selling costs (about 10%), higher prices and taxes, and how high their expenses already are, sets in.

They have equity in the house so they decide to do an addition. They think it will cost $50,000 to $100,000 but before they know it, the cost doubles.

To be sure, there are disadvantages to having a bigger house than you need, but if you have a growing family, the small house could be a lot more expensive over time. If you are single or without kids, having a big home would be an enormous waste of money.
frugal nomad  - An appropriate size |2010-07-12 10:58:46
The average size of a suburban home has nearly doubled over the last three decades and that's not because families have gotten any bigger. So let's be real and not blame excessive space on the little darlings. No one is suggesting we live in cramped quarters, just appropriate sized houses. A kid should have his or her own room but it doesn't have to be a master suite.
amp  - BINGO! |2010-07-13 10:54:29
Frugal Nomad - you hit this one right on the head! My Grandparents raised three children in a small home (3beds + 1bath + EIK + LR +~1000 sq feet) - and never once did they "outgrow" that home. Also, there was no Master Suite, and their bedrooms were probabaly the same size as those walk-in closets everyone is coveting. Do we really need sooo much stuff??? Or sooo many rooms?

But I disagree on a child expecting to have their own room - that's ridiculous! We all shared as kids and most of us didnt' get our "own room" until others moved out or we moved out on our own.

BTW - The Waltons had 5 bedrooms (Gparents, parents, john boy, the boys, and the girls - and oh yeah - one bathroom).
frugal nomad  - Levittown homes |2010-07-13 12:43:22
The thousands of Levittown homes that were built after world war 11 measured 32 by 25 feet for a total of 800 square feet. People don't seem to realize that the size of the average home has almost doubled in the last four decades. Very few families had more than one bathroom. The average urban European family considers a 1000 square foot pad a luxury. In Manhattan, an 800 square foot five floor walk up will cost you a small fortune. I personally lived for fifteen years in a charming Anhalt built townhome condo that was 800 sq. It was more than enough space for a couple and we often hosted out of town guests. It was the place I loved the most.

One way you can manage small space is dual purpose furniture. Sofa sleepers, murphy beds, expandable dining room tables. Efficient storage helps. If you just get rid of your clutter, you'll be amazed at how much space you really need.

IMHO, for a childless couple, anything over 1000 square feet is an indulgence.
Ryan  - Wait a second... |2011-05-05 19:07:48
We had World War 11? When did we have World Wars 3-10? Of course, I kid.
Anonymous |2012-02-01 08:18:04
I totally hear you -- I'm one of those childless couple living in an urban area.
We bought our first place a couple years ago Our condo building sits in an absolutely stunning locale. But our unit is just one-bed-room and no more than 850ft2. Our mortgage is small so we're able to spend a quite bit on furnishing. We still have some disposable income left to take an exotic vacation annually. Granted, I still wish we had just one more bed room. Our condo complex's two-bed-room unit is about 1050ft2.
I definitely don't think we need any more than that.
flamaest  - Condo Living pros and cons |2010-07-12 09:08:45
I know there are pros and cons too all types of homes, but for Condo's I can say that aside from some of the small perks mentioned here, there are some major issues with Condo Living:

--Condo Fees and HOAs will kill any prospect of retiring in a condo. People on fixed incomes cannot deal with 5-10% yearly increases for poorly run condo associations which incur massive legal fees while chasing after non-payers; and the honest condo owner is the one who flips the bill through an increase. It's a vicious cycle. Most HOAs do not have a retirement discount, but most states DO have property tax relief programs.

--Also, noise is a major problem in Condos. Today you might have a nice neighbor who is quiet and respectful, and then they move; and you get a group of party animals for the next 10 years. Good luck fighting that battle.

--And let's not start with neighbor induced damage. Someone above you spills a wine bottle onto the floor and they sop it up thinking nothing is wrong. Months later your roof starts to cave in and your neighbor claims it wasn't them. Your word against theirs.

--Condo management agencies used to be small run groups who you could talk to and they would help. That may still be the case in many locations, but many are consolidating or outsourcing their management tasks to large, bureaucratic groups who put home owner issues on the bottom of their to-do list, and collecting your fees on the top.

frugal nomad  - Fair enough but ..... |2010-07-12 10:55:20
You've made some excellent points but they're probably based on personal experience. First, condo fees cover insurance, maintenance and taking care of common areas. Those expenses will also be incurred when you own a house. So, your point about a discount for retired folks doesn't apply. When it comes to taxes, any discounts for seniors apply to condo owners.

When it comes to neighbors, you can be just as unlucky.

For all the other problems, the best solution is to buy into a condo building with 12 or fewer units that is self-managed and looks like its in great shape.

We recently wrote an article on why Home Owners Dues are not created equal to address the problems you bring out. You might want to check it out. s-dues-are-not-created-equal

There is also an article on why condos are the sane middle ground between buying and renting.
flamaest |2010-07-12 11:33:34
Thanks, I'll check out those links, love the site BTW!

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