I'm at home in an apartment. Do I have to buy a condo?

June 27, 2007 4:52 PM

What can I do with my money if I don't buy real estate?

My family and friends have been pressuring me into buying a condo before the rates increase even more.

Problem is, I just don't think I'm ready. I'm new to the area I'm living in (less than a year) and in a work situation that will change very soon. I don't have any savings. That's right ... none. I have less than $1,000 in consumer debt that I'll pay off in the month. I also have one student loan from grad school.

I know that everyone talks of real estate as a good investment but what if I decide to wait awhile on it?
What can I do with my money in the meantime?

I'm in a perfectly fine studio apartment in a nice part of town. Right now, I'll lose this apartment because I listened to everyone else, put an offer in on a condo, got approved and then had the deal fall through the night before closing.

I'm single with no children, female, late 30s. I don't feel like going through this whole process again and I think I can probably rent at this point for a lot less than I'd pay in a mortgage and put some money away. The larger issue here is how I can learn to assert myself and not keep doing what everyone tells me to do, but let's just start with my finances for now.

Any ideas?

posted by anonymous to work & money (26 comments total)

Personally, I wouldn't buy unless you either really want to or mortgage payments become cheaper than renting. Buying while rates are high in case they get higher? Sounds like a bad idea to me, especially with no savings.
posted by mkb at 5:00 PM on June 27, 2007

Invest the money. It's not like real estate prices are extremely depressed right now.

Put the money into the stock market, and let it grow while you decide where you want to be long term.

If you're really interested in improving this area of your life, look into a book "Four Pillars of Investing". It should give you some excellent information as to where to head in this area.
posted by ceberon at 5:12 PM on June 27, 2007

To me there's only one answer: save it. Invest it. Don't buy real estate right now just because people are pressuring you, but you should do it later when you're ready. And then you'll have some money saved to buy with.

Are you asking for specifics? That's a hugely personal choice. Lots of people like mutual funds. I personally prefer to invest in individual stocks. You can even get an online savings account and earn 5% interest if you're wildly risk averse.
posted by iguanapolitico at 5:18 PM on June 27, 2007

When someone's pressuring me about a certain area of my life, I just stop discussing it with them. I don't have to justify my (financial/career/health) decisions to anyone, except my fiance if they affect him. Don't ask the pressurers for advice; get your advice elsewhere, and make a decision. When they pressure you, say that you've already made your decision.

In this scenario, we're pretty much in the same boat, except that I'm not single. We decided to rent because we want to be able to pay off some bills and save up some money before buying. Also, we're not sure we'll stay in the area we're in.
posted by desjardins at 5:22 PM on June 27, 2007

Some things to keep in mind:

1) In the long term, stocks produce significantly better returns than residential real estate. (source)

2) Condos are traditionally a worse investment than single-family houses.

3) Depending on your financial situation, you may get little/no benefit from the vaunted mortgage interest deduction.

4) Prices will be bid up by people who will get a benefit from the deduction. You may be competing with people who pay $0.75 on the dollar in interest costs after taxes.

5) Anyone who gives you the "you're throwing your money away" line does not take into account the expenses of home ownership. By my caculations, my rent is very close to what the mortgage interest and taxes would be on my apartment if I owned it. Similarly, when someone talks about how great the mortgage-interest deduction is, remember that landlords get some very nice tax advatages (more expenses are deductible, buildings can be depreciated, etc.) that, in competitive rental markets, are figured into the rental price. You're not missing out on some great deal by renting.
posted by backupjesus at 5:24 PM on June 27, 2007

Seconding everything backupjesus says. Home ownership is touted as this magic wealth-producing guarantee of security forever and ever, amen... but the reality is a little more complicated that that.

My advice is to start a savings account immediately and start putting away a portion of every paycheck (20% if you can swing it....10%, minimum) for short-term savings. Then open a retirement plan (a Roth IRA, if you don't already have a 401(k) option or something similar at work) and fund it as much as you can. After savings and retirement are underway, look into opening an index fund. They outperform most mutual funds over the long haul, and they cost much less in maintenence fees. (IANAFinancialPlanner! I am, however, also an unmarried woman, late 30s, no kids.)

As for home prices, values cannot go up and up and up forever at the rate they've been doing over the past 5 years -- it's mathematically impossible. There have been home price declines before -- it will happen again. The landing might be "soft" in some parts of the country, but it could be a downright crash in other parts (right here in SoCal, for one).

In other words, don't get caught up in the hysteria of "buy now! Prices can only go up....forever!!!" I would say that's precisely one of the key elements that's driven prices up so high to this point anyway. Ultimately, buying a home should be about a place to live, not an investment strategy. It's not a substitute for old fashioned compound interest, much less winning the lottery, but that's exactly the mentality that's been playing out for the past 5 years or so.

I think waiting on real estate right now is a smart move. Given the fact that you're in a work situation that could change, you have no savings, and the precariousness of the market, I think the last thing you want is to be locked into a mortgage right now. Keep renting and put your money to work for you in another way.
posted by scody at 5:50 PM on June 27, 2007 [1 favorite has favorites]

Oh, and also: with no savings with which to make a down payment, the only kind of mortgage you could qualify for would be one of the non-traditional mortgages that were being handed out like candy over the past 5 years, such as ARMs (adjustable rate mortgages)....the same type of mortgage that is in large part behind the massive increase in foreclosures this year and the whole subprime lending industry implosion that's presently underway. The upshot is after a year or two of affordable introductory payments, buyers are facing astronomical payment increases and the impossiblity of refinancing, because their houses are now valued at less than the original purchase price.
posted by scody at 5:59 PM on June 27, 2007

Everyone giving you a firm answer is wrong, because the answer really depends on your situation.

There exist markets where your family and friends are absolutely correct because the rental market is tight and the housing market is a buyer's market where appreciation is highly likely (though there are very few of those in July 2007); there are markets out there where your family and friends are absolutely incorrect, because renting and saving is a superior financial option to buying. And a big part of the equation is what your tax rate is and whether you already file a Schedule A, because someone in Nevada making $30,000 a year has a completely different tax situation than someone living in California making $150,000 a year.

There are several spreadsheets around the web where one enters in down payment, mortgage payment, house price, rental price, taxes, interest rates, expected appreciation and inflation, and there will be a calculation of how long one has to live in a particular house to get the benefit of home-ownership. There are markets (like NY/LA/SF/DC in 1998-2001) where buying a condo pays for itself in a year, and there are markets where renting is clearly a better option, and there are markets where it's somewhere in between, and the decision then comes down to how long you expect to stay where you are.

Certainly, saving up for a down payment (or something else) isn't a bad idea; just on general principle, one should have emergency savings of a few months wages, and one can get a better mortgage rate with a 20% down payment than without one.
posted by commander_cool at 6:36 PM on June 27, 2007

At the very least, do some calculations to see which is better for you financially. Google is your friend here.

In many places, the cost of condos is currently dropping. It may be to your advantage to wait. If rates do rise, it will drive down the price of condos, since many people buy based on what they an afford monthly. You are better off paying less at a higher interest rate because if rates drop you can refinance, but once you buy the condo you can't suddenly reduce the amount you owe.

To get an idea of what is happening in your area, check out this tool that charts prices based on the S&P/Case-Shiller Home Price Indices. You can see that in many plces, prices are falling.
posted by procrastination at 6:41 PM on June 27, 2007

One big problem with a house as an investment is that nobody wants to sell their house to pay an unexpected medical bill or to cover living expenses while unemployed. You not only need your money to be working for you, but you need to be able to get to it in an emergency.

2nd the idea that the home you live in is not really a true investment since most people sell their homes only to buy a new one (after all they still need a place to live) so they don't cash out until they are post-retirement

That said, in five years if you have a nice savings account, some investments and you know where you want to be living for a while then you might want to buy a place, depending on what your local housing market looks like....
posted by metahawk at 6:49 PM on June 27, 2007

I can only second backupjesus and scody's excellent advice. You have already determined that you can rent more cheaply than buying and that home ownership is not priority at this time.

So first off save your emergency cash in a money market or savings account. This is six months living expenses in case you lose your job or have unexpected health problems. You'll be amazed at the peace of mind that brings. Then max out your 401k and IRA. Use low cost index funds from Vanguard or Fidelity. There have been lots of metatalk postings giving more details. Most important, enjoy your unburdened, mortgage-free life while accumulating thousands of dollars for your retirement!
posted by JackFlash at 7:07 PM on June 27, 2007

0-down, 100% LTV (Loan-To-Value) loans aren't that easy to come by these days (plus they're not always a good idea). So you can always use the "I'm saving for a down payment" excuse. You don't say what market you're in, but in here D.C. that can be 60k+ which should buy a bit of time.

As for what to do with what you're earning, 3-6 months of savings is what I understand to be the standard safety net.

After that, it's a giant It Depends. A professional financial adviser should be consulted, cause you can tell them stuff like your market and tax-bracket and plans and stuff.
posted by EmptyK at 7:08 PM on June 27, 2007

I had the same reaction as EmptyK. It sounds like you know what you want, and are looking for something to tell people who (let's assume) are meddling because they have your best interests in mind. Tell them, "I don't have enough saved yet to get a good mortgage, but I'm working on it." If you're mean, add "Of course, if you wanted to give me a good interest-free loan, that might be a different matter."

P.S. Yes, I know that using loaned money for the down payment doesn't always count the same.
posted by Clyde Mnestra at 7:15 PM on June 27, 2007

Buy stocks. Mining stocks are doing well, but this depends on your risk tolerance. Avoid oil.

Do not buy real estate- have you checked the foreclosure rates lately?? Have you looked at the interest rates? (They're going up.) Not the time to mess around with a mortgage.

Consider shorting bonds.

As always, do your due diligence; know your investment professional.
posted by solongxenon at 7:33 PM on June 27, 2007

You need a Financial Advisor! Don't worry, many of them have programs where they work off of percentage plan, so they make money when you do. You don't need to spend a lot of money out of pocket to begin with.

You need a financial advisor because while the stock market can be a great source for income, as has already been stated here, you are a beginner and simply don't know enough about the market to just run out and buy stocks. Plus, you need to be able to keep assessing and re-assessing what financial prospects are best for you personally.

You might also try educating yourself by getting Suze Orman's book written expressly with women like you in mind.
posted by misha at 8:00 PM on June 27, 2007

work off of A percentage plan! sheesh
posted by misha at 8:00 PM on June 27, 2007

I think this is the bottom line: don't buy property unless you want to own it. Real estate is far from a bullet proof investment, and buying without a down payment seriously slows the returns. In the US, anyway, in many areas property values are falling, in a soft economy with inflation not a current concern interest rates are unlikely to be increasing sharply any time soon. Your friends and family are giving you bad advice, plain and simple.

Beyond that, there's a lot of good advice here, aside from "dick around ignorantly with the stock market." There are tons of books and websites out there dedicated to the basics of personal investment. I also think you can do a hell of a lot worse than the 9-point system suggested by Dilbert creator Scott Adams, if you want a no-thinking approach.
posted by nanojath at 9:09 PM on June 27, 2007

My S.O. loves Suze Orman, and from what I've seen of her show, her advice seems pretty sensible and solid. You could do a lot worse than to start out by reading her book.

And just to nth others' suggestions, your first priority should be to pay off your debt and put 6 months of expenses into a savings account. (Maybe a money market one? Something safe but where you're not getting screwed by a sub-inflation interest rate.)

Then I'd look at getting some investments. I don't recommend 'playing' the stock market, but you could think about a good balance of securities and index funds (the Motley Fool people really like Index Funds, and I've found some of the stuff on their website good reading -- I have an S&P 500 fund through Vanguard that I'd recommend for medium-risk investment). Done correctly -- you may want to buy the time of an investment advisor here -- you should be able to get a decent return and not expose yourself to too much risk. (At least, not much more than you'd be exposed to in the real estate market if your savings was tied up in a condo!)

Lastly, I'm not sure I agree with your "friends" about a condo being a good investment. Depending on where you are, I think there are some markets that are basically flooded due to greed and overbuilding by developers, and that the market will continue to contract in the next year or so. There are a LOT of condos on the market where I am, and some of them have been listed for months and months. Not getting that condo you made an offer on may have been a blessing in disguise.
posted by Kadin2048 at 9:38 PM on June 27, 2007

Real Estate is a great investment...five years ago. Now, not so much. If I didn't have dogs and kids who deserve a big yard, I'd have cashed in my house and pocketed the profit already, then gone and rented somewhere for less than my old mortgage until prices dropped again.

The trouble with a lot of investment advice is that people equate past results with future performance; in the housing market, that means people who invested years ago will urge to you "get in" or whatnot even if the market has turned. From *their* perspective, the market downturn didn't impact them much (if at all) so they still see it as a good investment. For you, it wouldn't be.

Finally, before you do anything else, i'd recommend this:

1. Pay off your debt (car payment is fine, if it's not hurting you);

2. Adjust your lifestyle so that you can save a small fixed amount each month, and ideally enough beyond that so that certain items can be paid for in up-front lump sums rather than month-to-month (insurance renewals, ISP charges, things like that.) This way you are actually saving some money, AND can jump to month-to-month on those items if you suddenly find money a bit tight;

3. Make sure you're tracking your money in a detailed fashion, not just in quicken or whatnot, but via a double-ledger accounting method (it's worth it to get past the learning curve);

4. After you've lived this way for a bit and feel it's sustainable, look at how much extra money you've saved -- then make a choice. That choice depends a lot on the amount you have, the security you have, and how risk-averse you are.

For instance: you've saved $3,000, your monthly outflow is $2,400 with rent, car payment, food, and putting aside money for those lump-sum payments that come up every six months or yearly...I would keep saving rather than invest, because you can only be unemployed for a month before you're broke.

However, if you've saved $8,000 and your monthly outflow is $1,200, you might keep three months' worth ($3,600) liquid and drop the other $4,600 into something with a higher interest yield.

Same numbers as the previous, but you're really not risk-averse? Bank two months' money and make a long-shot investment with the rest.

You get the idea. Don't be afraid to consult a financial planner, either.
posted by davejay at 10:36 PM on June 27, 2007

What can I do with my money if I don't buy real estate?

I don't have any savings. That's right ... none.

Well, you just answered your own question, didn't you?

Save some money first. Worry about what you're going to do with it after that. It's nice to have 3 to 6 months of living expenses (rent, food, bills) socked away in the bank where you can get at it easily.
posted by ikkyu2 at 1:24 AM on June 28, 2007 [1 favorite has favorites]

Where I live, there is a condo glut (mostly just because of the slow market), but it's going to be much worse in about 3-5 years when Phase II of all these condo projects go up for sale and there are developers trying to sell new Phase II condos around the time that the Phase I buyers want to move out of their used condos.

As for your money... what Scody said. And the S&P 500 index fund outperforms housing historically iirc. Maybe moreso now, given the recent runup in housing.
posted by salvia at 2:10 AM on June 28, 2007

Also, DC condo glut. Too bad we don't know where you live.
posted by salvia at 2:10 AM on June 28, 2007

Property is just one kind of investment device. But one advantage of investing in property over any other kind of investment is that it's a "forced savings" mechanism: you have to put your money in your asset (the home) or else you'll be homeless. So, if you decide to continue renting, you need to make sure you're still saving the same way you'd be if you bought property. What you need to do is set up automatic savings mechanisms for yourself -- for example, automatic deposit from your paycheck into one of the life-cycle funds.
posted by footnote at 7:04 AM on June 28, 2007

footnote makes a nice point about forced savings; scody and others make excellent points about what else you can invest in.

Real Estate is a great investment...five years ago.

Don't try to time the market! Even moreso than with other markets, you should not consider price trends when buying a home because you are not investing in a diverse portfolio but rather betting on a single unit. Like any form of gambling, this can lead to terrific gains (which you hear about at cocktail parties) and terrible losses (when the rendering plant nobody told you about opens next door). The housing industry works very hard to convince people that they're not gambling with borrowed money but investing in something that will always appreciate. In truth, you're putting a big chunk of money on a roulette table that, while it has a mildly positive expected long-term payout, may not go so well on your own personal spin.

The decision to buy or not to buy should come down to whether the total cost of ownership is worth it compared to the cost of alternatives (i.e., renting). The TCO should include a risk-adjusted figure for expected appreciation, but I would contend that that figure should be quite low in most cases -- short-term appreciation may be high but extremely risky, while long-term has much less risk but is probably close to the 3% historical return. Irrational expectations for appreciation are what drove the bubble.
posted by backupjesus at 7:27 AM on June 28, 2007

Property is no panacea that assures financial wealth, and currently in most (but not all) areas of the US, prices are stangnant or in decline, especially when considered against a combination of inflation and guaranteed bond returns.

However, one reason to own property *as well as* equities is because property is reasonably uncorrelated or decoupled from the returns of equities. Compared with possessing assets with high correlation, ossessing several asset classes with minimal correlation over the long-term will result in a greater probability of higher overall returns.

What about international equities, people say? Well, if you look at broad indicators such as the MSCI and Euro indexes, they are now basically coupled 60-80% with US equity returns. Equity diversification has resulted in a systemic, global correlation.
posted by meehawl at 7:53 AM on June 28, 2007

Following up: here's a useful article I just came across on MSN.Money regarding the whys and why nots of homeownership.
posted by scody at 11:47 AM on June 29, 2007