How to not be throwing away so much rent money?

Question

I'm totally new to this, so bear with me if I'm using terms wrong.

Right now I'm looking into ways to not be throwing away $2000/mo rent and still be able to live in the area. Home values around here are skyrocketing, I've heard people are swooping in paying 20% over listed prices with cash.

I have very little savings, and my business income fluctuates, so I can realistically only invest like 1% as a down payment.

Is working out a lease option my best bet? I can't come up with a 3% lease option down payment for a $500k house, and I think a $500k deal would probably be bare minimum of what kind of house I would want around here, as far as I can tell.

Any other ideas? I don't need a great deal, just a less bad deal than renting for $2000/mo, if I'm going to stay in the area. Maybe there's just no way for me to afford it right now?

I was thinking about getting into real estate investing somehow, I've been reading the book Secrets of Buying and Selling Real Estate, but it's gotten me really down on the idea. I thought I could do it before, but after reading tthat book it seems like you really have to love negotiating and networking in order to meet enough people and strike deals, and that kind of thing would be a nightmare to me. But it did wake me up to how renting is such a horrible deal.

Account Closed · Answer

Welcome to the Bay Area. You are in the boat with millions of others. Truth is, there are no magic shortcuts. Either you have the money and income or not. You can get 3.5% down FHA loans but still need that plus closing costs. You also need at least $150K/year income to comfortably do a $500K house, which you are right, is quite bare bones basic in the Bay Area. You can save on rent by sharing a space. You can work on income by developing your skills. If its any consolation, back in 1998 when I bought my first house in the Bay Area it was scary expensive as well, although very cheap in retrospect. Getting your foot in the door is hard but once in the market, it usually works out if you hold long enough and buy in the core areas with good schools and employment.

Account Closed · Answer

@David Kiesling   I do not mean this to be rude, but you simply cannot afford a $500,000 house.  You would be extremely lucky to get a loan that size for $2750 a month plus insurance, plus taxes.

I would suggest

1)  Get a cheaper rental.

2)  Build up an emergency fund.

3)  Pay off all high interest debt.

4)  Save enough money for a down payment.

5)  House hack a duplex or triplex.

Once you have done all that, post about it here on bigger pockets and people will tell you what to do next.

I hope this helps.,

Christopher Brainard · Answer

@David Kiesling

I think it is unrealistic to find a deal on a $500k house when you have 1% to your name, plus your mortgage payment (and taxes, insurance, repairs, etc) are going to exceed $2000 a month and probably end up closer to $3000 a month.

In most $500k transactions, 1% will not even cover the closing costs, let alone a down payment. This would likely be the case for a lease option, most require an up-front fee that will be more than 1%. I think you should evaluate what your minimum needs are and downsize to the smallest place you can and start to build some reserves. Once you have enough liquid assets, you can decide what type of home purchase will be right for you.

-Christopher

Brian Lacey · Answer

https://www.biggerpockets.com/search?utf8=✓&term=h...

House Hacking, ^ here is a search for it.

https://www.biggerpockets.com/search?utf8=✓&term=f...

A FHA loan is your new friend.

Jacob Sampson · Answer

I would not view rent as throwing money away any more than you will be throwing money away on your personal residence.  If in fact your market is in a situation where people are coming in and offering 20% over asking then be patient, that isn't going to last forever.  You want to buy when everyone is selling not when there is a feeding frenzy of buyers.  Didn't we learn our lesson in 07/08?

Other than in abnormal locations and periods of time your personal residence is losing you money, also.  It MAY be slower than renting but it's still a loss.  Appreciation is not going to beat out interest, insurance, taxes, and maintenance.  it just isn't going to happen in 99% of the areas.

JD Martin · Answer

Welcome to BP. Also, one thing I would note is that renting is not necessarily "throwing your money away". In a very expensive place like California, renting can allow you to put the difference between the rent and what a steep mortgage might cost into some kind of investment. Not including insurance and taxes, a mortgage on a 500k house with 1% down (never going to happen, but anyway) is going to run you almost $2600. You are renting at $2k, so if you could even afford $3k or more you should consider putting the rest of that money into investments. Now in your case, if you are that bereft of money you need something more drastic than buying a house - you should probably consider moving or getting a much higher level of income.

Nick Zocher · Answer

I will definitely be utilizing an FHA loan to begin. Nice to hear reinforcing encouragement  on just jumping in despite the frightening market. Looking to utilize the Bay Area market for buy and hold and search elsewhere for further cash flowing properties

Brent Coombs · Answer

@David Kiesling, there are so MANY people in your exact situation, that it has created a vicious upward spiral of price / rent increases.  Answer: MOVE AWAY!

Oh; welcome to BP!

Brian Gibbons · Answer

Hi

@David Kiesling

You need to cut expenses or make more money or both.

See Dave Ramsey books.

I do get California, very expensive.  I live in LA.

But you need to see a mortgage broker and get a handle on mortgage origination.

How to not be throwing away so much rent money?

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