Climbing the Property Ladder

Amanda Asks: When is the 'right time' to move from a condo to a house? is it always smart to move "up" once your "foot is in the door" of the real estate market?

Good question, and I have encountered questions like this many times.

But, before I answer this question about when it is wise to move from a condo to a house, I will answer a question I have run into more than once, and that is whether it is a good idea to buy a condo at all.

I understand that in many urban markets, unless you have a huge downpayment and a great job, your options are 1.) condo or 2.) rent for the rest of your life. A condo, for many is the only way to stop renting and get into the real estate market (I address the pros and cons of buying vs. renting here).

However, if you find yourself with a downpayment and you can make the monthly payments (the interest rate time bomb is explained in part here) I would still caution against buying a condo.

Yes, yes, I know, condos are so nice. You don't have to mow the grass or shovel the walks and usually, they are nice and in a good location..... but, (and it's a big one) you are getting into an investment (as well as, I would argue, a huge liability) that you do not control. If the group of owners decides to replace the roofing, or the city finds problems with the HVAC system, the condo board will pay out a lot of money to fix the problem.... so far so good, that is what your monthly condo payments are for.

But, what if two (or three) problems arise around the same time? If the reserve fund runs out (and it happens more than you might think), you will be given a letter demanding thousands (often tens of thousands) of dollars from you in the next month to pay for the repairs or upgrade. This is called a Cash Call, and they can be horribly painful.

Now, if you owned your own home and you had, say, a roofing problem, you could ask a cousin, neighbor or friend to help you, buy the shingles and a few pizzas and reroof your house in a day for a quarter of the price you would have paid the condo association.

Even if you have to hire a contractor to do it for you, you could shop around for a better price and (here is the big one) you could choose to do (or not do) the repairs when you want (ie, when you can afford it).

Instead of buying a condo, let me suggest another option that is cheaper, offers more privacy and lets you grow your equity more quickly.

Now......I know that this is not a popular option, but this is a money blog and not a "how to look good in front of your friends and family" or "how to live in a really nice place right now" blog.

Here I go......Mobile homes...used ones

Yes, I said it.

Mobile homes often cost way less than a condo, you fully control the living unit (although you pay a monthly lot rental) and you would live in your own space.

Detractors would say that you would lose all that lot rental each month, but my response is that people paying mortgages lose much more in interest payments.

If you doubt my advice, set your personal feelings about living in a trailer park aside for the 5 minutes it would take you to crunch the numbers.
After you see that it makes sense and you still want to live in a condo, then fine, but at least you will acknowledge that living in a condo is a personal and not a financially driven choice.

Living in a mobile home is not for everyone, but it was a good start for my family and it is for millions of others.

Now, onto the question about climbing the property ladder:

When to sell one place and move into another is a very complex choice. It can be affected by the size of your family, your income, your lifestyle choices and the property values in your area. However, I will say this, I believe that most North Americans try to move up into better living spaces too early and too often. People decide that they "can't" live in their current space any longer and "need" something bigger, nicer, etc. (I imagine that they are comparing their current home with the one their parents live in, and they want one like that now instead of saving up for it like their parents did)

With interest rates being as low as they are, I imagine that there are many people who are looking at their current mortgage payments and realizing that they could live in a larger house for the same payment as they are currently paying.

While this may be true, interest rates are not going to stay low forever and you could be getting yourself into trouble if you get a larger mortgage when the rates are at all time lows.

The average North American pays twice as much of their income in mortgage payments each month as people did 50 years ago. We have become accustomed to being "house poor", but finding yourself in a tight cash flow situation (and one that you know will last for many years) has a way at eating away at your quality of life in a pretty serious way.

Here is my advice; if you can move from your current place to a home where you would rather live, and you can afford it now and in the future (even if interest rates rise dramatically), and it is a personal choice you wish to make, then go ahead, but I would suggest that before you do so, crunch the numbers to see if you really can afford it.

One last thought. I have found that for most big ticket purchases for which we make monthly payments, the recurring sting of payments lasts much longer than the new car smell.

"Real Estate is Always a Good Investment"

Blake asks:
"People have often touted Real Estate as the most secure and steady of all investments. Conventional wisdom has been to buy a principal residence, and then buy revenue property if you can. What are your thoughts about revenue property given the current economic landscape?"



Thanks for your question Blake.
I will answer your question, but today I will address some prevailing ideas about real estate ownership.


Conventional wisdom (and real estate agents) tend to say that "real estate is always a good investment".


Now, I am not one to contradict conventional wisdom or realtors, but it is not often that you find very many things in life that are ALWAYS anything.


If you ask me if there is money to be made in property, then the answer is, of course, yes.
If you look at a real estate portfolio and a portfolio containing stock and compare them in the areas of risk adjusted returns (meaning returns after risk levels are considered), then yes, the real estate portfolio is usually a better bet.
If you ask me what my personal holdings are in, the answer is mostly real estate.



However, the idea that it is ALWAYS a good investment is problematic for several reasons.
First, it implies that buying ANY property at ANY price is a good idea. (which people who bought houses at the peak of the bubble and are now "under water" learned was not the case)
Second, it does not take several important factors that should become very important to a potential buyer, such as location, market conditions, risk, carrying costs, and condition of the property.
Third, (and this is a big one), people often have an emotional attachment to homes, and therefor make emotionally based buying decisions, which rarely lead to profit.

So, yes, real estate CAN be a great investment, but it is not ALWAYS a good investment.


Let's say you are currently renting, and your parents are bugging you to "stop paying your landlord's mortgage" and buy a house.


What should you do?
Or, to put it a different way, which is better, renting or owning?



Well, its true, no one wants to be paying someone else's mortgage, but it should not be assumed that it is a good idea for you to buy a house at this point.



If you want to financially benefit from owning a house, you could do so in two primary ways:

• By saving money each month (by paying less as an owner than you would as a renter)
  
• By selling the house for more than you bought it for.
  

Now, first time homebuyers often get it wrong in both of these areas.

First, they look at the monthly mortgage payment and if it is less than rent, they become homeowners.

The problem here is that they often ignore other costs such as home insurance, property taxes, and (this one can be huge) maintenance that will add to the carrying costs, but not really add to the value of their investment.

Second, people tend to buy properties with the idea that they will buy a house for one price and sell it for twice as much a few years later.

Unless we have another housing bubble around the corner, it is likely that house prices will drop, stay stagnant or creep up slowly for the foreseeable future.

Now, let's say that you find the house of your dreams, and when you consider mortgage payments, insurance, taxes and maintenance, you would still pay less as an owner than you are currently paying in rent.

Should you buy it?

There is one more thing for you to consider that should affect your decision, and that is that you don't know what the future holds.

As of today, you are probably employed.

As of today, interest rates are at all time lows.

These two factors can make home ownership easy today, but they could both could change very quickly.

If your financial situation changes significantly, you could potentially leave your rental house and move to a different one, but if you have mortgage payments, you are stuck.

If interest rates go up (and they will. I will write more about that some day soon), you may find it impossible to afford the mortgage payments you can afford today.

So, to sum it all up....

Buying a house can be a good decision for some people in some situations under certain market conditions.

I am sorry.... I know that statement doesn't roll off of the tongue as well as “real estate is always a good investment” does, but its true.

So, I am not trying to scare you away from home ownership.

I just want to make sure that you know what you are getting yourself into before you take the terrifying plunge into the world of real estate ownership.

The Year Almost Everyone Was Wrong

I remember it clearly.
It was 2007 and 2008.

All around me, I saw prices rising: stocks, commodities, houses...everything.
You could get a job at Wendy's at $14 an hour to start.
A euphoria swept the market and it seemed like everyone was talking about buying a house to "flip" or revenue property.

People were snapping up 5 and 10 Miami and Las Vegas condos at a time....even before construction began.

This market was going to the moon. Everyone knew it. Experts were predicting the DOW to reach 30,000.
The only risk was that you would miss the boat, so you had better buy something now. And people did... Lots of people.

Buyers were lining up to make bids on houses. They were offering $50,000 over asking price, all the while hoping that one of the other 30 bidders would not outbid them.
This was an "Information Economy", not subject to the normal up and down cycles of economies past. This economy would grow forever.
The only risk, is that you might miss the boat, and then you will never be able to afford a house, so buy now.

Oh, no. You don't have enough money to put a decent downpayment on a house? No problem, I am sure you can find a mortgage broker who can pull some strings and get you into a house for nothing down. And don't worry about getting yourself into trouble with your mortgage, house prices always go up. A couple years from now, you will have a nice chunk of equity.

Yup, I remember it well.

Most people were wrong.
House prices did go down..... a lot in many places.
In many US markets, house prices are half of what they were before the bubble burst.

Millions of jobs and trillions of dollars have been lost over the last few years.

If you had asked anyone, (a person on the street or a financial or economic professional) whether AIG,  Lehman Brothers, GM and Chrysler could fail, most would have said "no".

 Now, a few years later, in a much different financial and economic landscape, with markets facing uncertainty, people are feeling anxiety about the future.

Is this a good time to buy stocks or mutual funds, or is better to hold bonds or gold, or even cash?

Where is the economy headed?
Are things going to get better from here, or are there still more rough waters ahead?

Should I sell my house now or wait till prices come back up...... Are house prices going to come back up?


This blog is here to answer questions like this.
If you have questions about financial, economic, investing or real estate topics, this is the place to ask them.

My name is Dan Kremer and I am here to answer your questions.

Please post  your question in the comments section. You are probably not the only person who has it.

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