Equity Trade-Up

[youngster]

To reach the goal of owning a single family residence in a nice area, there are 4 options (to buy). The pressumption is buying at the bottom of the market.

1) Buy dream house in nice area. (Overextend, defALT-A, suicide loans)
2) Buy house in lower priced area, then sell & buy dream house. (Santucky?)
3) Buy condo, then sell & buy dream house. (Downtown super-sales)
4) Buy lower priced house/condo. Then buy dream house while renting out house/condo. (Landlord migraines)

Option 1:
The massive leverage provides opportunity for large appreciation for investment, but inadequate cashflow is a risk.

Option 2:
Good starter home & builds some equity with fewer taxes, lower payments, & less interest.

Option 3:
Almost affordable. Additional association fees, but fewer responsibilities. Less privacy.

Option 4:
Tenant headaches. Good thing your not renting out your dream house.

I favor Option 1. Good schools, nice area, great appreciation investment (if done right).

Anybody have any experiences, philosophies, or suggestions?

[JWM in SD]

“I favor Option 1. Good schools, nice area, great appreciation investment (if done right).”

Please don’t waste our time here with such nonsense…

[Bob G]

I suggest option 5 for you. I call it the Martha Ray. Find an elderly widow with loads of money and marry her.

[recordsclerk]

Try option 6. Wait for the bubble to burst, buy at the bottom. Then buy dream house if you can afford it or buy two lower priced homes, rent one out, pay down mortgages. Sell both homes and buy dream house. Or option 7, which is renting both homes and buying dream house. This is something I’m currently doing. I’m just waiting for the bubble burst to complete option 6 or 7.

[JJGittes]

Sorry, but I don’t get the trade up scenario. Say you buy a condo at the bottom (good luck calling the bottom though). Then it appreciates and you walk away with $200k in profit. Then you go to buy your dream home. Well, guess what, while your condo was appreciating your dream home was appreciating too, and maybe even at a faster rate than your condo. How are you any better off? In fact, your tax basis will be that much more than it would have been years ago on the dream house. Yeah, I guess you could buy a few low end properties with suicide loans and cross your fingers for the highly leveraged appreciation. But unless you are rich already, if that plan goes south you could be financially screwed for decades — like half the people in the inland empire and southbay are now.

Now, if your salary goes up substantially faster than inflation in the intervening years of condo ownership, then the trade up could obviously be doable since you can handle a bigger mortgage.

[recordsclerk]

Sorry, but I don’t get the trade up scenario. Say you buy a condo at the bottom (good luck calling the bottom though). Then it appreciates and you walk away with $200k in profit. Then you go to buy your dream home. Well, guess what, while your condo was appreciating your dream home was appreciating too, and maybe even at a faster rate than your condo.

You are 100% correct. I don’t understand why people think that it easy to trade up with appreciation. If your condo goes up $100k, your dream home goes up 200K. OK you have $100k to put down, but you’re still going to borrow a $100k more then if you purchased the dream home from the beginning. The key to my statement earlier was to “pay down” the mortgages. This may take 5 or 10years, but as long as appreciation doesn’t get out of hand, you can trade up. I was also assuming that a buyer can almost afford the dream home, but can take the financially safer route of purchasing two lessor older homes for $500k each and eventually trade up for lets say a $1,000,000 dollar home. Your rental income in most cases should cover insurance, taxes, interest. Basically the cost of the two properties should come out to about the same, and you can use the rental income to pay down the mortgages. But like I said the key is to pay down the mortgages. You can also accomplish the same thing by renting and saving money for a large down payment, but you can be leveraged out if appreciation goes up.

[noone]

I don’t understand why people think that it easy to trade up with appreciation. If your condo goes up $100k, your dream home goes up 200K. OK you have $100k to put down, but you’re still going to borrow a $100k more then if you purchased the dream home from the beginning.

But there is safety in diversification.

If you put all your eggs in one basket by overextending yourself on a mortgage, even small changes in your financial situation can put you at risk of losing the home and hurting your credit.

Whereas if you’re in a place that falls more in your “affordability” zone, you can weather larger changes and come through clean.

During that same time period, you might be able to earn that $100k or more by investing the difference elsewhere.

[mydogsarelazy]

When we decided, in 2003, to put a deposit on a new home, we estimated that our existing home would bring $275k.

By the time we closed on the new home in 2004 we were able to get $375k for our home, and the home that we had moved into had also dramatically appreciated.

Don’t know if there will ever be another opportunity like that in my lifetime but real estate appreciation allowed me to get ahead like no other opportunity of my life.

JS

[little lady]

“”I favor Option 1. Good schools, nice area, great appreciation investment (if done right).”

Please don’t waste our time here with such nonsense…”

EXACTLY!

[Ozzie]

A better option is to buy a home or condo you can easily afford with a 20% down payment and still save a significant amount of money in a combination of cash and equities. After 10 years and increased earnings and savings you’ll have enough saved to increase your 20% down payment on a more expensive home. Repeat every 10 years and trade down once you retire.

[Author]

Posts