Buying my first house - I'm scared

11 Replies

I know this post is rather long, but I appreciate any comments. I'll try and keep it as short as possible.

I've discussed my situation before on this and other sites and I asked whether it made sense to buy now or wait. Most of the advice that I got at the time seemed to suggest that it would be better if I waited since it's likely that I'll be moving from my current location in a year.

Quick history: I just graduated school in May, I start work on Monday in DC (1 year job) and I move to Florida next year (probably) for at least three years. So, the advice was to wait until I move before looking to buy a house. I appreciated all the comments and advice I received but I still feel buying a house is the right step for me now (even more so than when I move). But, I'm scared as heck :)

Lots of thoughts go through my head about whether I should be really buying now. Some of my friends say that I should wait until I'm more financially stable. They are probably right although I think they are referring to the fact that this is a huge step in my life (one that none of them have made) and the market will still probably go down even more. Although my friends don't have an eye towards the investing side of real estate that I have, they do have a point.

My first day at work is Monday. I don't even have my first paycheck yet. So, I neither have a downpayment nor any reserves to buy a house. If by some strange and unknown reason I lose my job, or end up in the hospital, I'll probably be screwed. They say I should wait a year and save up some money during that time.

My thinking is a little bit different. In my opinion, I feel as if I'm in the best financial situation to buy a house. That's in part beause, although I'll be making $50,000 (which I realize is nothing) now, I'll be getting a paycut ($40,000) when I move to Fl. Moreover, I qualify for an 80/20 loan with Bank of America through their community accommodation program. So, I'm getting a house no money down (don't need reserves for the program).

Given my timeframe, it's unlikely I'll be able to purchase anything in September or October and I am realistically looking at purchasing a house in November or December. Up until that time, I'll be able to save two to three months of reserve even with my current bills (which aren't a lot - especially since my student loans are on deferment). Notably, my rent of $700 will go up to $1650 in November because my roommate is moving out and it's not as easy to replace a roommate in this large apartment complex (they are very inflexible in terms of income requirements etc). Of course, I can afford it but would rather put that money towards a mortage of about that amount rather than in rent.

My goal is to purchase a house at a discount and not at retail. I plan on placing great emphasis on its rentability and the potential to acquire positive cash-flow. Additionally, I plan on keeping the house for the long term (I'm one of those buy, hold and never sell kind of guy - for now). I'm 28. Even if I move to FL (there's a small chance I'd stay in the district in which my pay would increase rather than decrease, but I'm thinking conservatively), I'm content and otherwise mentally prepared to be an out-of-state landlord. I also like the idea of having a property in or close to the District for me to use or otherwise occupy when I do return. Maybe the real life frustrations and practicalities of being a landlord will change my mind, but from everything I"ve read and looked at, I feel as if I'm prepared. I guess I'll see :)

So, to come to a close, I'm just battling various emotions. It's my first purchase, my friends think I should wait (not all of them), I am nervous and scared that I might be making a big mistake, yet, I feel as if this is the right time to buy. I plan on using a real estate agent I met at a reiclub meeting who is familiar with investment strategies such as subject 2s, lease options, foreclosures, etc. She also agrees with my philosophy of not buying anything retail.

Anyway, what do you all think. Am I just trying to rationalize a difficult decision? Is my thinking process correct? Or, with the limited information I've provided, do you think my friends are right?

I know the post is long but I look forward to your responses.

Thanks.

PS: Great forum

Dude, relax... You're doing the right thing. Congratulations on your soon to be first purchase!

The emotions you are feeling are normal for everyone when they bought their first property. Even if your friends and the other doom-sayers are right and the market still has some downside; RE is a very forgiving investment. Time will overcome all short term setbacks & fluctuations.

You said you're not paying retail price (which is the only way to buy in a slow/down market) and you were going to hold long term. Other than the potential long distance landlord challenges that could arise, I see very limited downside for you.

P.S. going from $50K in DC to $40K in FL will be like getting a raise, not a pay-cut. :)

Haha, I suppose that's one way to look at it, but I am moving to Miami which has a high cost of living I believe.

Thanks for the encouragement. I don't know if I said this before, but even though I can take risks, I don't want to be reckless. However, emotions notwithstanding, I am taking definite steps towards the purchase of my first property. I will definitely keep this forum posted and I may even write some of this stuff down for a journal or a book or something :). But, one step at a time.

With the out-of-state landlord thing, I plan on using a property manager. Yeah, I know there are challenges with that too in terms of finding a good one and making sure that rent can cover the cost. I'm also considering having section 8 tenants and I know there are issues with that too (e.g. apparently you get lower quality tenants with section 8. But, right now, I'm definitely moving in the direction of owner occupied home ownership. And, if I stay in the DC-area, it's just icing on the cake.

Thanks again for the response. BTW, even if other responses aren't as encouraging, I still welcome them.

So, it seems like you fundamentally want to buy a rental property in DC. If you can find a property that is positive cash flow, that could be a good idea. Keep in mind that positive cash flow does not mean just that the rent is greater than the mortgage payment. Try to determine ALL your expense or use the expenses = 50% of rent rule of thumb. Especially with actually paying for the property manager and letting them manager the maintenance from far away.

Don't assume you will have appreciation, unless there is something in play in the area you are buying that will really drive it. I truly think we will see price declines in the coming years.

Before you get totally bound up in the idea your rent money is just going into a hole, consider that the interest you pay, less the tax benefits, is also just going into a hole. Rent property or rent money (i.e., pay interest), you're renting something. There should be no emotion involved in this decision. Work through the math.

Jon

Thanks for the response Wheatie.

I plan on using mike's "real world expenses" formula to the best I can. As with appreciation, I just view it as icing on the cake.

Given that you expect prices to decline in the coming years, conventional wisdom would suggest (presumably) to wait until prices decline further and further.

I gather that there are at least two main fundamental concerns with my plans. The first is the distinct possibility of being an out-of-state landlord (even with the frustrations of getting a good property manager). The second is the not so rare expectation that prices will continue to decline thereby making it more desirable to wait before getting in the market.

I know there's no scientific reason or probably no historical data to back up what I'm saying, but I like the idea of not doing what everybody else is doing. If it is indeed conventional wisdom to wait further until prices decline, I figure it's probably a good time to get into the market...and if it's conventional wisdom to get out of the market, I figure it's a good time to stay, etc. That is, I don't necessarily like the idea of following the crowd. I realize that what I've said probably makes no sense and I've probably lost whatever credibility I have in making a sound decision, but I'm just expressing what I feel in this psychology forum.

But, moreover, while what the market does should definitely be a concern (and believe me, it is), the fact that my investment strategy is to hold for the long term may negate any potential loss I incur in market value. That being said, of course I'm not buying to lose equity. That's probably just as bad as buying a property with negative cash flow (considering real world expenses).

So, I guess, the trick will be to see whether or not I can find a property in a good rentable location that will positively cash flow from day one with appreciation not a factor in the decision making process. I know it's going to be tough and I may not be able to find one anytime soon. I guess, the other part of the equation is to ensure that I'm not a motivated buyer :)

But, I appreciate the comments and believe me, I'm taking in everything that's said and constantly evaluating my circumstances because I want to make the first purchase a pretty good one.

You said you weren't going to pay retail and was going to hold long term. With that combination, I'll reiterate that your risk is mostly the "potential" mental anguish (not so much financial) of being a long-distance landlord.

I dont care if the market goes further backwards, if you buy the property right, you cant avoid making $$$. My $0.02

Good luck!

Boy, I can really relate to being scared.

I made an offer on my first rental property last Wednesday. It was just about to go into foreclosure, so I was lucky on the timing. We agreed on a price (about 21% below appraisal), and until then everything was just theoretical.

Then my agent faxed me the official offer paperwork for me to sign and return. With a nervous stomach, I did.

Then yesterday I received title and insurance information in the mail. Yikes.

We're waiting for the bank to approve the deal, but believe me, the butterflies are dancing away in my belly. I may be shaking if and when it's time to sign the final contracts.

I'm with ya, and congrats on the deal!!

:clap:
...

I haven't got a deal yet...will post when it happens. But gratz to you. Actually, one of the strategies I'll be pursuing is to acquire the property subject-to the existing finance. That's definitely nerve racking because it's so unconventional. But, my real estate agent who is familiar with the different investment strategies (and use them also) is helping me with it.

I hope you're able to close without any problems. Let us know how it turns out.

Originally posted by "dal1":
what does that mean "subject to existing financing"? Is that the same thing as conditional on getting financing? Just curious.

Dal, It means taking over the existing financing. When you acquire the property this way, you get it free and clear of all liens and encumbrances except the one loan you're keeping in place. Hence, the "subject to" terminology.

Jon

Originally posted by "dal1":
Geez, I thought assumable loans went out 25 years ago. I had one assumable mortgage and that was an FHA back in the early 90's that I helped my daughter get.

Subject-to is not assuming a loan in the legal sense. You are making the payment on a pre-existing loan but legally the loan is still in the name of the original borrower. It could be described as a gray area. The lender has the right to call the loan due if there is a due on sale clause in the contract. If you fail to pay a loan that is involved in a subject-to deal the lender will still come after the original borrower. The person who did the subject-to deal with the original borrower has some legal exposure to the person but not really to the lender. There is more detail but it is a bit arcane.

To assume a loan is to legally step into the shoes of the prior borrower and to take over responsibility for the loan. With the passage of legislation Due On Sale became the norm so you are largely correct that assumptions are no longer common in the residential loan space.

John Corey

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