Just the other day, Get Rich Slowly wrote a terrific post about renting versus buying property. I’ve been meaning to write my own post about this, especially since purchasing property has been on my mind now for over a year. It is also one of my goals I hope to accomplish by the end of this year or the middle of next year. However, I’m still not ready to take the plunge for a few reasons:

• Down payment: I don’t have the down payment saved up. I’d like to have at least 10% saved, which would be about $30,000 on a $300,000 home. I am really far from this goal.
• House prices: Decent homes in good neighborhoods are still selling for around $300,000. We live in a suburb of Los Angeles, so our prices are a little inflated compared to the rest of the nation.
• Fluctuating income: My husband owns his own business and it’s currently a little slow (normal for January). I work as a substitute teacher so I’m not ever guaranteed work. This will also make it a little difficult to qualify for a traditional 30-year mortgage at a decent APR.
• Indecisiveness: Lately, there are a few things about LA that are really getting on my husband’s nerves. He’s been complaining about everything: from the traffic to the grocery store clientele, to our neighbors. I’m not so sure he’ll be happy in LA in a couple of years if the city doesn’t begin to offer better services, smoother roads, or less traffic! Also, there is little hope for me obtaining a teaching job within the next couple of years with the school district I work for. They are one of the largest districts, and can’t find the money to continue paying it’s teachers. I live smack-dab in the middle of that district.

This brings me to rethink our idea of purchasing property. I know that we will eventually be property owners, I just don’t know if it’s going to be as soon as I had hoped. I have been really struggling with this new train of thought. That is until I read J.D.’s post. Basically it boiled down to what it really means to own property and is it a good investment?

Deep down I know that owning property is a good thing. If by the time of retirement, the home we purchase is either paid off or is worth more than we purchased  it for, it could be used to help us retire or move. It could function as an added security later in life. However, if we move only 5 years after we purchased our property and the market hasn’t improved, we would be breaking even if we’re lucky. In that event, we would be better off renting.

I found a great, free calculator from Yahoo.com that puts renting and owning in perspective. (I tried the NY Times link on GRS, but you have to be a subscriber to use it). Here is what the calculator figured out based on my numbers:

Rent vs. Buy Calculator

You’ll notice that based on these figures, it would be better if I continued to rent. The only thing this really doesn’t calculate is the profit earned by selling the property. I’m not quite sure how that works, but I would think that if you purchased a property for $300,000 and decided to sell 20 years later, the property would be worth more than what you paid for it. This is in sharp contrast to renting for the same period of time, there’s no profit in that scenario at all.

Again, I do intend to be a property owner myself in the near future. At least now I don’t feel as rushed or guilty if I don’t own my own little house in the valley by mid-next year.

What are your thoughts? Does this calculator factor in everything? Or is it missing the resale value somehow?

Samantha Taylor is a contributing Financial Writer, Moderator and Community Mentor of  MortgageFit. She has been an active participant in the forums wherein she offers mortgage advice and suggestions to people in loan problems. If you have a query on “how much house can I afford” related issues, you can simply discuss it with her in the Mortgage Forum.

When you’re intending to purchase a new home of your choice, it is always better to work out the amount of money that you can afford as a home mortgage loan and the amount of loan that you can receive.

There are many websites that feature a home affordability calculator that can help you in working out how much money you can afford as a whole, probable down payment and the EMI (equated monthly installment) that you have to pay each month. Following are the precise steps that you have to stick with to use a home affordability calculator.

• Just open the home affordability calculator page featured by various websites.
• Input your gross monthly salary (incorporating your spouse’s salary, as well).
• Input any loan EMI amount that you’re paying at the present time. If there is no EMI that you’re currently paying, input zero in the required area where it is written “current EMIs”.
• Key in the term of your loan in years.
• Choose the interest rate of your home loan utilizing the slider available adjacent to “Interest Rate”.
• Choose the proportion of your gross monthly salary utilizing slider that you’re willing to pay as your EMI.
• See the outcomes which would demonstrate to you the “affordable EMI” together with the “maximum amount of loan you can afford”, “tentative down payment” and “value of the home you can afford”.

When the lenders are pleased with your repayment capacity, they would be willing to offer you 80%-85% of your home value as loan amount and the remaining 15%-20% you have to pay as down payment.

The highest EMI that one has to pay for the projected home must not go over 60% of their gross monthly salary. You should not forget to state the EMI amount of your previous loan if you have any at the time of utilizing the home affordability calculator.

This weekend my husband and I decided to drive past a couple of houses that were in our price range: between $190,000 – $250,000. What we saw was very depressing. The first house we drove past was one right up the street from us. I had a feeling it needed a lot of work based on the low price of $190,000.  We like the street its located on, so we stopped and took a closer look. All I can say is, “Wow,” you don’t get very much for $190,000 here in suburban Los Angeles. There was  one new window in the front of the house, though I think that the bank had to replace the window. My guess is the original window fell out. The other windows were the original 1950’s windows, old, with paint peeling off the window frames. We peeked around the side and looked in a window. There was a whole in a wall in what we believed was the kitchen. We walked closer to the back yard, there were still items surrounded by overgrown, dried grass, in the backyard; a lounge chair, a table, etc. Boards were in place of where either a wall once was or a sliding glass door. I only can assume this based on the size of the area boarded up. We realized then that there was thousands of dollars worth of work needed on this particular house.

Louise House, Needs Work!

The second house we drove past seemed promising, based on the information my husband printed out online. It was situated on 8,000 sq. ft. of property. That’s a lot for our neighborhood. Most homes sit on 6,000 sq. ft. But, before we got to the house, I knew the neighborhood wasn’t going to be a favorite of ours. There are many multi-family apartment complexes in that area. We found the street and parked in front. This time, we decided not to get out. The house, built in the 1920’s, was basically falling down. There was still someone living there, we could see their car in the drive way. It was a narrow, deep lot, and a large apartment complex was directly to the right of the house. The street, itself, was filled with run-down, over-grown lawns. It was not a desirable neighborhood. We kept on driving.

Canoga Park House, we decided to drive right past this one.

My husband felt slightly discouraged. So, on the way home we stopped at a couple of garage sales to browse items. While turning around to go back to a garage sale, we drove through a pretty nice neighborhood, or at least nice for our area. A small, yellow house with a for-sale sign caught our eye. We turned down the street and decided to take a look. It was a very cute house, on a large lot (again, anything larger than the standard 6,000 sq. ft. is large to us). It looked well-maintained, as did the entire block of homes. We used our phones (we use FROG as our homepage) to check the house out on Zillow. Unfortunately, according to Zillow, the house had just sold for $250,000! We were happy to know that a cute house, in decent condition was actually selling within our price range. I did more research when we got home, and found out that there is another home for sale in the same neighborhood for a little more, $285,000. This may be a neighborhood we need to explore more when we get closer to actually buying a home.

This is a promising home in a decent neighborhood.

Recently, I’ve been reading and hearing some buzz about how small houses are a better choice, for many reasons, as opposed to large, box-style homes. I personally adore small homes and feel that I could be more creative with a small house, than I could a large home. Small homes also are a better financial choice for smaller families, obviously if you have 6 kids, it would be a little tight in a 2- or even a 3-bedroom house. Though, it doesn’t mean families can’t make it work.

First, let me define my version of a “small” home so that I’m clear. To me, a small home is 1,200 square feet or smaller. I currently live in a 1,100 square foot rental home and my husband and I don’t even utilize all of the rooms. My sister-in-law lives in a large, newer, cookie-cutter home with a sprawling 2,500 square feet. Their family of 5 practically lives in the family room, barely venturing into the living/dining room. This seems like a bit of wasted space, as does their loft that they don’t know what to do with.

There are so many benefits to a small home that I don’t even know where to start, so I’ll begin with something everyone can relate to: the cost of utilities. The smaller the square feet, logically, the less space there is to heat and cool. Now, of course with inefficient, drafty houses, this basic rule may not apply. Energy efficiency wins out over old, inefficient homes and corroded air ducts. However, if all is equal in energy efficient appliances and heating and cooling systems, the small house wins: the utilities will be less expensive.

Small houses are easier to clean. Again, the less square footage means the less mopping, vacuuming, and sweeping of the floors area wise. I’d prefer to vacuum 1,200 sq. ft. versus 2,500 or more square feet. Wouldn’t you? If I choose to re-carpet or re-floor your home, the cost is again less because the area is smaller. I may even decide to invest in higher quality materials since I won’t need to purchase as much as I would for a large house.

This Tiny House small cottage

When looking at homes in my neighborhood, I can see many of them are in need of maintenance, such as painting and landscaping. The smaller the house, the less I have to roll my paint brush over the exterior walls and the less paint I will have to buy. I save money while saving my shoulder and elbows from bursitis. My creativity can be used towards making sure the trim and the window dressings are painted and decorated to match which ever style I decide best suites the house. On a larger house, with more windows, I might be cash-strapped and have to stick to more simplistic decor.

The fewer the interior rooms, the more time I can spend carefully choosing how best to decorate each one. Or, pick a theme that runs throughout the house. Frequently, smaller homes are less expensive than larger ones. The money I save on the difference in a mortgage, can go towards purchasing furniture that matches my theme or style. I won’t have to worry about a huge house sparsely furnished. If I can’t buy furniture for my small house right away, at least it won’t be as obvious!

One great addition to a small house, and some may disagree given their personal family situation, I don’t have to worry about uninvited relatives crashing at our house with their 3 kids and 2 dogs. A small house would only allow us to have a guest room with a single or double bed. One or two people max is my motto. Luckily, my husband and I don’t currently have family members who show up with their RV and park it out front, at least not yet.

On a final note, small houses are more eco-friendly, using and consuming less resources. My husband has recently mentioned that he’d like to add solar panels to the home that we purchase. A small house would need fewer panels and take less energy, again saving money in the long run.

In case you’re not convinced, OR you’d like to read some articles on other sites, here are a few links:

• Treehugger – “Small Houses Getting Big Coverage” (I love Treehugger.com)
• Sunset Magazine – “Crafy Makeover”
• Tiny House Blog – an ode to small houses

I remember when my parents purchased their first house in 1978 in Granada Hills. They bought a 3-bedroom, 2-bath fixer-upper for $68,000. I was 7 and very excited to have neighbors with small children to play with. My parents spent the first few months replanting the lawn and garden, tearing out old bushes and planting new flowers. Over the next few years, they lost a little steam, adding brick to the front of the house, but then only painting the front a grayish-blue and leaving the sides and the back the old yellow it had previously been. They lived in that house 12 years, selling it in 1991 for $189,000. As they moved 2 hours north of me, I stayed behind to finish college. I’ve never left, I live 6 miles from where I grew up as a child.

I grew up with the notion that everyone eventually owns a home with a yard for their children to play in. This is something my parents were able to easily do. Yet, a home purchase has eluded my husband and me. Years ago, when my husband and I were in the early stages of our relationship, we happened upon an open house in an older, yet respectable neighborhood. The house was selling for $110,000. It was a 750 square foot, 2-bedroom, 1-bath house with a somewhat prestigious zip code. At the time, we knew nothing about purchasing a house. We were under the impression that we would never qualify, nor did we know what it would take to qualify and actually purchase a house. So, we made the decision to continue renting.

Then something began to happen in the surrounding neighborhoods that we couldn’t make head or tails out of. The housing prices began to sky rocket: $300K, 350K, 450K, 550K, 628K for a 1000 sq ft starter home, or what most would consider a starter home. These prices weren’t just homes in Malibu or on the ocean, these were homes in our somewhat run-down neighborhood. We started to realize owning a home in a suburb of LA was an impossible dream for us.

In December of 2005, during the peak of the housing market, we decided to move out of our 2-bedroom apartment into a 3-bedroom rental house. This was the closest we could get to living in a house with a yard and private garage. As I became acquainted with the neighborhood through evening walks, I would cringe at the For Sale signs with price tags of $525,000 and up. I couldn’t figure out how these people were doing it, purchasing homes for over half a million dollars. One sign I made a mental note of was a sale sign detailing out the monthly mortgage payment, I nearly choked. Not because it was excessive, quite the contrary, this particular home was selling for $529,000. The monthly mortgage price they were claiming a purchaser would pay was only $1,349! This was almost $500 less than our monthly rent. I remember thinking, “How is that possible? The math doesn’t work out unless you pay that amount for almost 100 years!”  Something smelled fishy.

Then things began to fall into place and make sense. Mortage brokers were allowing unsuspecting homeowners to take out negative ARM loans. Their monthly payment was less than the interest due on the house. With lax qualifying measures, anyone could purchase a home, but the catch was they would have to pay for it later. Many people probably thought, “Oh, I’ll sell it for a profit before the time comes that I have to pay principal plus interest.” Unfortunately, that time never came.

Mid-2008, the fish smell materialized and it all became clear. Recent purchasers were loosely qualifying for these quasi-loans that allowed them to pay less than the interest on the home. Once their 5-year ARM reset, they would have to pay 3-4 times more than their current monthly mortgage payment. Most people would not be able to afford this once this happened. Hence, all the foreclosures that are now in my neighborhood. With banks realizing their huge mistakes, they began to realize many of these loans would never be paid in full. Now, many homeowners are underwater, owning way more on their home than their home is worth.

When I ride my bike through the neighborhood I can’t help but see the neglect of homes with overgrown lawns, the sales signs on some houses are foreclosure property, others are on their way to being foreclosures. My husband and I aren’t realtors or bankers, yet we called this bubble breaker back in 2007. We knew that most people didn’t make $250K a year in salary, the standard income ratio of 2.5 times the house price. There wasn’t any reason to believe these people were making more than twice as much as us. We also knew houses couldn’t continue on this escalator forever, if it did, how would people qualify for a 1 million dollar home in the future?

Many realtors were lead to believe this housing boom would last forever, housing prices would never decrease. But looking as 10 year trends in the neighborhood, I could see that this “bubble” didn’t make any sense over time. A steady price increase is normal, the huge jump is not.

A look at home prices over 10 years in my neighborhood

I used the Zillow home value index chart to show home values over the past 10 years in my neighborhood since it’s easier to read over time. When I looked at the prices homes sold for, it was all over the place and made it difficult to see the increase vs. decrease over time. Yet, the end results were similar. The dark orange line is the neighborhood I currently live in. This chart is estimating home prices just below $400K, still too pricey for my husband and me. However, the sales list on Zillow shows some homes selling for below $300K. Below is a sampling of homes listed in my neighborhood that are well below the average $387,800 price tag:

A sampling of affordable homes in my neighborhood from Zillow

If all goes as planned, by mid-next year my husband and I should be in one of these affordable, fixer-uppers. We’ll be happily fixing up our little house in the valley.