Being a real estate newbie, I’ve been reading a lot of housing market articles lately. It seems like everyone has an opinion. Buy now. Buy next year. Sell now. It’s a bubble. It’s not a bubble. You know what it reminds me of? The stock market.

And therefore, just like the stock market, perhaps it is simply best to buy for the long-term and ride everything out. The median home price in June 1976 was $46,100. The median home price in June 2006 was $243,300. Did really matter if a person bought it for $42,000 (10% less) or $50,000 (10% more) back then? Not in my opinion, especially considering I see no proof that anyone can predict housing prices. At the very least, I’m certain that I can’t predict housing prices, and that’s what really matters. Just like the (good) investing books say, it’s time in the market, not timing the market that counts.

Even if I decide to move, I expect my new house’s price to move up or down with the value of my current house. On top of that, I’ll probably try to rent my first house out if at all possible. Finally, if the market does tank, perhaps that will provide a buying opportunity for an investment property.

So here’s my game plan: 1. Get 20% down, or at least 10% and no PMI. 2. Decide on an affordable mortgage amount. 3. Find a good house, regardless of future price predictions. So far I’m still working hard on #1…

Or am I all wrong?

Besides asking family friends for real estate advice, my father-in-law also manages rental properties himself. He is an extremely handy guy, and I hope to get him to teach me some useful home repair and remodeling skills later on. But today, he was replacing a tenant’s toilet and dropped it on his foot. The result was a side trip to the Emergency Room and a stylish cast. As a klutz myself, this is not good.

Over Thanksgiving holidays we met up with a family friend who is a very successful real estate investor. She has millions of dollars of property both here in the U.S. and internationally. We started talking about investing and here are some of the points that I recall:

Get started as soon as possible. When she found out that we were without kids, making a decent income, and still renting, she looked at me like I had three eyes. I think most successful real estate investors are like that. When I explained that we’d be moving in 6 months, she still said that we need to start as soon as possible. Think long-term, but get on that property ladder!

Learn more about taxes. If you want to have rentals, you need to keep great records and take advantage of all the numerous tax breaks. She said she once took H&R Block’s income tax course and it was the best money she ever spent. That way, it forces you to examine all the byzantine forms step-by-step.
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So you may be wondering, how did I go from wanting to put only 10% down to thinking about 15-year mortgages? Well, mostly idle mind exercises since I still have about a year before purchase. But here’s my idea. I would like to get an investment property somewhere down the line, but the gap between rent and most mortgage payments is just enormous. I would really like to get a cashflow positive property, where the rent covers all my expenses (mortgage, insurance, maintenance).

So what if we buy a smaller 2-bedroom place, and get a 30-year mortgage on it (instead of the 15-year as I was thinking), but pay it down as fast as you can (like a 15-year). After 5 years or so, we could check out current rents. If they are high enough, we could just leave the 30-year mortgage on it, rent it out, and buy a second house. If they aren’t we should have paid down the principal enough to be able to refinance the loan to a low-enough mortgage payment.
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I should preface this with the fact that I’m still very new to mortgage loans in general. I’ve been considering getting a 15-year loan instead of a 30-year fixed loan. The general consensus seems like if you can afford a 15-year fixed mortgage, you should go for it. The interest rate will be lower, you own your home in half the time, and the payments aren’t actually that much higher (definitely not double). But what if you just took a 30-year fixed mortgage and had the discipline to pay enough extra each month to equal the 15-year payment? Would you really be that far behind? The results surprised me.

Using the current average mortgage rates at Bankrate.com (5.68% for 15-year fixed, 5.96% for 30-year fixed):
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The house search continues as we try to see how much our parents’ house is really worth and if we can afford to live near them. Besides Zillow.com, I also like the home valuation tool from HomeGain, where you can get a real estimate from a local real estate agent for your house. It’s low pressure, they just e-mail you their estimate and ask if you are looking to buy or sell right now. We were definitely surprised by the number – Zillow was off a lot, mostly due to wrong square footage.

What I really like is that you also get a listing of actual houses that sold recently in the area, with all the stats like address, sale date, square footage, bedrooms, year built, and of course price. And you can keep getting updates every month for free. That way, you can do your own comps and try to spot trends. Burst, bubble, burst!

Lots of good comments on my previous post on how much to spend on housing. As a follow-up, let’s run some numbers for fun. To make things easier, let me refer to what I call mortgage calculator heaven at DinkyTown.

How Big A Mortgage Can I Get?
Let’s start with the Mortgage Qualifier calculator and use the ‘Total Monthly Payment’ option. I’ll assume an annual gross income of $100,000, but let’s also say I go nuts and pay 41% of it towards housing: $3,417/month. With no cash on hand, a 6.25% APR 30-year fixed mortgage, no other debt payments, and the defaults for everything else, it says I can get a loan for $432,378. Here’s how the monthly payment breaks down:
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My new favorite pastime is searching MLS listings for houses. Who needs baseball when you can drool over houses you can’t afford? Or can I?

I’m also reading Automatic Millionaire Homeowner by David Bach (free review copy, will give it away when I’m done). Inside it refers to the FHA guidelines for how much of your income should go towards your house payments. Specifically, lenders use a term called PITI – the sum of your mortgage principal, interest, (property) taxes, and insurance payments. To get an FHA-insured mortgage, your monthly PITI should be between 29% and 41% of your gross monthly income, depending on your other recurring debt such as credit cards or student loans. Let’s take a look at what that means:

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