[Requesting Suggestions/Recommendations] - First time home buyer
- Thread starter newhomebuyer2021
- Start date
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I helped my buyer open escrow in April and close in June on a home $100k under original asking price in the South Bay. Seller was motivated to sell and of course COVID shut down all buyers. I got at least 20 calls from agents and appraisers asking about my transaction for comp purposes.
Perhaps my advice may not make sense to those who will not have anything to gain from it. However to others in an unfortunate situation as it is for current first time buyers, it may be somewhat reasonable.
Since you are so reassured of the supply of renters, I suggest you go buy another rental in Irvine. lm sure you will do great with it.
Consider how different you are from the average person/ homebuyer. The newest data indicates people change homes every 5 years. (down from 7 years a decade ago)
If you are going to be in a Irvine starter home for 5-7 years, then missing out on the appreciation wouldn't be that much of a deal to me.
Even if you are optimistic and price in an annual appreciation of 2%. In 5-7 years when you sell your starter home, about half of that gain will go towards the transaction cost. ( perhaps to one of these lovely realtors x2)
In much of Irvine, especially the GP neighborhoods, it is still cheaper to rent vs buy. There is financial and life wisdom in saving up & skipping the starter home all together.
Sure... but this just depends on the person's situation.
There are many people on this board who have bought a "starter home" and even after selling just 5-7 years later were able to roll that up to a better home. Or they can wait longer to get a better return (which is why I always talk about having the tolerance to stay at least 10 years). Had I rented instead of stretching to buy my first home, I would not have been able to leverage that appreciation to where I am now.
There is financial and life wisdom on both sides, I can't say either is the "right" decision, only that person can.
Of course it depends on the person's situation. A few people I know stayed in their home over 15 years. Unicorns do exist here.
But most people I know, myself included, falls somewhere along the average spectrum.
So there's a lot of wisdom in discussing "the average person / homebuyer", especially in broad stroke general discussions.
My only question with your personal example is the seemingly incomplete opportunity cost analysis.
If you didn't stretch to buy your first home. Were you just going to let your down payment sit in a 0% interest checking account?
I think people who are savvy enough to be homebuyers are at least savvy enough to put their money in some sort of investment generating more than 0%.
Not even talking about anything fancy or difficult. Just parking the down payment in a Dow / SP500 / Nasdaq index fund, would have generated some sort of return.
That vs. your appreciation in buying your first home (minus the 6% selling transaction cost) would be a better comparison.
Thanks for providing your own personal #s.
So your first home was a highly leveraged investment that worked out. 100% + appreciation is likely over a very long time correct?
In that same time span, if you invested your small 3.5% down into an index fund using similar leverage %, you would likely come out the same or better.
I say that because there has not been any 5-7 year period (or perhaps longer in your case) in the past 2 decades (my entire adulthood) where Irvine real estate appreciation significantly outpaced the three major index funds.
Not harping on the 1% difference, whether that's 5% or 6%. Even at 5% it's a huge inefficiency.
In your case, that 5% transaction cost is actually more than 10% of your original investment! ( since you have more than 100% appreciation)
RE transaction cost structure makes RE investments highly inefficient. And this is something people do not often think about.
Wasn't my first home that appreciated significantly, but in a short 3 years it allowed me to move up and buy an Irvine home with 20% down (most from equity).
Sure, but... my "rent" did not increase, I had a proper SFR with a driveway and backyard, and my kids had the stability of the same home for that amount of time. There is more than just financials.
But remember I said 10+ years. Who is that population that moves every 5 years? I think we took a poll here at TI and most were over that... so it's all relative. But then again, I know some here who have moved more frequently and even with transaction costs they do alright.
I dunno... when you factor in good appreciation, that 5% seems nominal (although that's why other RE places are touting lower fees). There are inefficiencies in many financial transactions, but I don't think RE is as significant as you do. Nor do many others or people would not be buying/selling homes.
It has one a cash on cash leveraged return. Real estate allows you to lever up at least 5x (assuming 20%) and you can?t do that with a margin trading account plus mortgage rates are lower than margin rates.
Desirable areas rarely trade at or below rental parity due in part to strong buyer demand. The closest that Irvine came to trading at rental parity with 20% was in 2009-2010 and that didn?t last long. If you rented waiting for rental parity since 2011 you?d still be renting and you could have seen prices increase around 50% from a nominal perspective. Buying a home for many buyers is much more than a financial exercise, it?s a home that they can call their own and put down roots. I?ve had several buyers who were nudged into buying because their landlords either sold or moved into the homes that they were renting. As long as buyers don?t stretch too much and buy a little more space than they think they need the probability of having to sell in less than 5 years is lower.
I know and you can also use options but those trading vehicles are not for the faint of heart or folks that are busy with a family SBs theur career.
Don't really need 2011. There are GP homes that are better to rent than to buy right now.
I don't think anyone is going to argue with " buying a home is much more than a financial exercise"
But at what point does the price tag become too much? Do first time home buyers consider the opportunity cost of putting their savings into a 20% down payment instead of investing elsewhere with higher returns? Do they consider the potential downside such as job lock? In my experience with mentoring young professionals, the answer is often no.
I mention job lock specifically because I think it's much more relevant to potential first time home buyers as they are often in their earning prime.
USCTrojanCPA said:
I helped my buyer open escrow in April and close in June on a home $100k under original asking price in the South Bay. Seller was motivated to sell and of course COVID shut down all buyers. I got at least 20 calls from agents and appraisers asking about my transaction for comp purposes.
Nguyen80 said:
Perhaps my advice may not make sense to those who will not have anything to gain from it. However to others in an unfortunate situation as it is for current first time buyers, it may be somewhat reasonable.
Since you are so reassured of the supply of renters, I suggest you go buy another rental in Irvine. lm sure you will do great with it.
newhomebuyer2021 said:
Consider how different you are from the average person/ homebuyer. The newest data indicates people change homes every 5 years. (down from 7 years a decade ago)
If you are going to be in a Irvine starter home for 5-7 years, then missing out on the appreciation wouldn't be that much of a deal to me.
Even if you are optimistic and price in an annual appreciation of 2%. In 5-7 years when you sell your starter home, about half of that gain will go towards the transaction cost. ( perhaps to one of these lovely realtors x2)
In much of Irvine, especially the GP neighborhoods, it is still cheaper to rent vs buy. There is financial and life wisdom in saving up & skipping the starter home all together.
irvinehomeowner
Well-known member
-
Kenkoko said:
Kenkoko said:
Sure... but this just depends on the person's situation.
There are many people on this board who have bought a "starter home" and even after selling just 5-7 years later were able to roll that up to a better home. Or they can wait longer to get a better return (which is why I always talk about having the tolerance to stay at least 10 years). Had I rented instead of stretching to buy my first home, I would not have been able to leverage that appreciation to where I am now.
There is financial and life wisdom on both sides, I can't say either is the "right" decision, only that person can.
irvinehomeowner said:
Of course it depends on the person's situation. A few people I know stayed in their home over 15 years. Unicorns do exist here.
But most people I know, myself included, falls somewhere along the average spectrum.
So there's a lot of wisdom in discussing "the average person / homebuyer", especially in broad stroke general discussions.
My only question with your personal example is the seemingly incomplete opportunity cost analysis.
If you didn't stretch to buy your first home. Were you just going to let your down payment sit in a 0% interest checking account?
I think people who are savvy enough to be homebuyers are at least savvy enough to put their money in some sort of investment generating more than 0%.
Not even talking about anything fancy or difficult. Just parking the down payment in a Dow / SP500 / Nasdaq index fund, would have generated some sort of return.
That vs. your appreciation in buying your first home (minus the 6% selling transaction cost) would be a better comparison.
irvinehomeowner
Well-known member
I think I've said this before but I started with a 3.5% down payment. I barely had that but lending practices for FHA were pretty loose. I was single, my first job... etc etc. Interest rate was really high too and I had to pay PMI.
And none of my transactions were 6%... the most were 5% and of that, the agent would either discount or rebate. Appreciation on one of my Irvine homes was over 100%... so yeah... timing helps.
Also, back then rent/buy parity favored buy... so there's that to consider.
And none of my transactions were 6%... the most were 5% and of that, the agent would either discount or rebate. Appreciation on one of my Irvine homes was over 100%... so yeah... timing helps.
Also, back then rent/buy parity favored buy... so there's that to consider.
usctrojancpa
Well-known member
I tell my current buyers that ask me where I think prices are going that if they are going to buy a home today they need to make sure to own it for at least 5+ years because I have no idea where prices will be next year or the year after but I'm fairly certain that prices will be higher in 5 years than they are today.
irvinehomeowner said:
Thanks for providing your own personal #s.
So your first home was a highly leveraged investment that worked out. 100% + appreciation is likely over a very long time correct?
In that same time span, if you invested your small 3.5% down into an index fund using similar leverage %, you would likely come out the same or better.
I say that because there has not been any 5-7 year period (or perhaps longer in your case) in the past 2 decades (my entire adulthood) where Irvine real estate appreciation significantly outpaced the three major index funds.
irvinehomeowner said:
Not harping on the 1% difference, whether that's 5% or 6%. Even at 5% it's a huge inefficiency.
In your case, that 5% transaction cost is actually more than 10% of your original investment! ( since you have more than 100% appreciation)
RE transaction cost structure makes RE investments highly inefficient. And this is something people do not often think about.
irvinehomeowner
Well-known member
Kenkoko said:
Wasn't my first home that appreciated significantly, but in a short 3 years it allowed me to move up and buy an Irvine home with 20% down (most from equity).
Sure, but... my "rent" did not increase, I had a proper SFR with a driveway and backyard, and my kids had the stability of the same home for that amount of time. There is more than just financials.
But remember I said 10+ years. Who is that population that moves every 5 years? I think we took a poll here at TI and most were over that... so it's all relative. But then again, I know some here who have moved more frequently and even with transaction costs they do alright.
I dunno... when you factor in good appreciation, that 5% seems nominal (although that's why other RE places are touting lower fees). There are inefficiencies in many financial transactions, but I don't think RE is as significant as you do. Nor do many others or people would not be buying/selling homes.
@IHO
I definitely agree buying a house for many people is more than just financials. But if one doesn't separately analyze the financial aspect of it, how would one know what price tag to put on his/her enjoyment of a proper SFR with a backyard & driveway etc etc ?
Also in an environment where it is cheaper to rent vs to buy, you aren't really missing out on the "proper SFR with a backyard & driveway" experience. You can even rent a better version of it or do the same and save some $.
There is no right or wrong answer when you bring in human aspects into a financial investment. I just wanted to point out buying a home as investment (or partly as an investment) is far from the slam dunk win/win it is often portrayed to be. Especially if you consider the opportunity cost, it is often not the best financial investment.
Lastly, I disagree with your take on RE inefficiency in comparison with other legal financial investments.
You said there are inefficiencies in many financial transactions. I have a pretty diversified investment portfolio, but I can't think of one that would even be within the same ball park as RE. Care to name a few to enlighten me?
I definitely agree buying a house for many people is more than just financials. But if one doesn't separately analyze the financial aspect of it, how would one know what price tag to put on his/her enjoyment of a proper SFR with a backyard & driveway etc etc ?
Also in an environment where it is cheaper to rent vs to buy, you aren't really missing out on the "proper SFR with a backyard & driveway" experience. You can even rent a better version of it or do the same and save some $.
There is no right or wrong answer when you bring in human aspects into a financial investment. I just wanted to point out buying a home as investment (or partly as an investment) is far from the slam dunk win/win it is often portrayed to be. Especially if you consider the opportunity cost, it is often not the best financial investment.
Lastly, I disagree with your take on RE inefficiency in comparison with other legal financial investments.
You said there are inefficiencies in many financial transactions. I have a pretty diversified investment portfolio, but I can't think of one that would even be within the same ball park as RE. Care to name a few to enlighten me?
usctrojancpa
Well-known member
Kenkoko said:
It has one a cash on cash leveraged return. Real estate allows you to lever up at least 5x (assuming 20%) and you can?t do that with a margin trading account plus mortgage rates are lower than margin rates.
usctrojancpa
Well-known member
Kenkoko said:
Desirable areas rarely trade at or below rental parity due in part to strong buyer demand. The closest that Irvine came to trading at rental parity with 20% was in 2009-2010 and that didn?t last long. If you rented waiting for rental parity since 2011 you?d still be renting and you could have seen prices increase around 50% from a nominal perspective. Buying a home for many buyers is much more than a financial exercise, it?s a home that they can call their own and put down roots. I?ve had several buyers who were nudged into buying because their landlords either sold or moved into the homes that they were renting. As long as buyers don?t stretch too much and buy a little more space than they think they need the probability of having to sell in less than 5 years is lower.
usctrojancpa
Well-known member
Kenkoko said:
I know and you can also use options but those trading vehicles are not for the faint of heart or folks that are busy with a family SBs theur career.
USCTrojanCPA said:
Don't really need 2011. There are GP homes that are better to rent than to buy right now.
I don't think anyone is going to argue with " buying a home is much more than a financial exercise"
But at what point does the price tag become too much? Do first time home buyers consider the opportunity cost of putting their savings into a 20% down payment instead of investing elsewhere with higher returns? Do they consider the potential downside such as job lock? In my experience with mentoring young professionals, the answer is often no.
I mention job lock specifically because I think it's much more relevant to potential first time home buyers as they are often in their earning prime.