Real Estate Financial Fitness Q&A

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Wondering what’s the latest in real estate? Every year, the Financial Planning Association of New York sponsors a “Financial Fitness Day” at New York University, co-sponsored by Moneyland. This year’s real estate discussion (which I participated in with Hedda Nadler of Mount and Nadler and David Breitstein of Apple Mortgage) addressed some especially timely questions.

Here’s a sample:

Q: Is the old rule that the time horizon to hold a property should be at least five years still in effect?

A: With the housing slump, average “tenure” — length of time Americans spend in their homes — has actually lengthened, from six to nine years, according to a chart published at Credit Sesame using statistics from the National Association of Realtors. If you’re planning on become a homebuyer, though, the issue is not average tenure, but will you be in the home long enough to ride out an economic down-cycle. So you want to take a look at housing statistics in your area, which your realtor should be able to give you. In many markets five years will be long enough, but in some — as residents of speculative markets like Phoenix and Vegas can tell you — seven years is a better rule of thumb.

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Q: Should I get a mortgage if I have the ability to pay all cash?

A: This isn’t so much a real estate question as it is a personal finance question. If you buy a home with cash, you’ll be giving up the time value of the money you spend. The question is what you would do with the money if you borrowed instead? Invest in stocks? Buy a car? If you can borrow at 4%, and are confident that you could earn more with the money by investing it, then it may make sense to borrow. But bear in mind that you’ll also get a tax deduction on the mortgage interest you pay on the first $1 million that you borrow.

Q: How are millennials affecting the housing market?
A: This generation (generally defined as people born from 1980 to 2000, and therefore including people in their twenties and early thirties) faces special challenges, as they’ve come of age in a climate where student loan debt is high — almost like a second mortgage. The jobs market in recent years hasn’t been pretty either, with the result than many young people have come back to roost with their parents. That’s the bad news. The good news is that this generation has a lot of pent-up housing demand, and, with today’s low rates, should be able to enter the market as the economy recovers.

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Q: If I know my mortgage costs, how can I estimate my total housing costs?

Too often, a potential homebuyer will think of her housing costs as simply the cost of her mortgage. This simplification especially distorts rent-vs.-buy calculations.  (As one industry saying goes, “You can rent your house, or you can rent the money to buy your house.”) Don’t forget to add in property taxes (ask home sellers to provide copies of their property tax bills) which can range from .18% to 1.89% of your home’s value annually, according to the Tax Foundation. Property taxes can be deducted on your federal income taxes, but that’s a deduction that gets phased out for homeowners who get hit by the AMT.

Also worth considering are utility bills, especially those you might not be used to paying as a renter — heat and water, for example. Homeowner’s insurance should also be figured into the calculation. And don’t forget to include a number in your budget for home maintenance; a good rule of thumb there is that you’ll spend between 2% and 3% of your home’s value each year. Some years you won’t spend that much, but setting it aside will enable bigger projects, like re-shingling the roof or renovating the kitchen, in other years.

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Q: Why can’t I find real bargains on foreclosures in my area? If the housing market slumps, then you should be able to find some serious bargains, right? Unfortunately, a lot of the low-hanging fruit gets snapped up quickly by flippers and local real estate agents or contractors who know the local housing stock intimately.

It’s also important to consider condition when you talk about distressed properties: Heavily discounted foreclosures have often suffered through months, if not years, of neglect — so some of the money you save will have to be reinvested in additional maintenance. I’m not saying that you can’t find a foreclosure that’s right for you, but don’t expect to save a huge amount of money in the process.