How much house can I afford?

Question

I know there are a lot of hidden costs in buying a home to live in and even more when buying an investment property.  I am trying to figure out how much I can afford without taking on too much risk.  I'm planning on a 20% down payment, I know there are closing costs of some amount, rehab/repair costs, plus there needs to be reserves to cover vacancies.  There are probably other costs too.  I already have a resource for figuring out how much to set aside from each rent check to cover additional repairs, vacancies and taxes after the initial purchase.  Can someone point me in the direction of a resource for estimating the up front costs?  Then I will know what my price point is.  I am planning on a buy and hold strategy of either a condo or a single family home.

Chris Mason · Answer

Hi, and welcome to California. :)

California Proposition 13 of 1978 protects long term homeowners. That person paid something slightly below $183k back when they purchased it. Whatever their purchase price was, is the "basis" of their prop tax bill. Similarly, if you buy it for $299k, your property tax "basis" will be $299k even if it appreciates to being a $550k home. This is part of why I'm not a huge fan of the "50% rule" -- it implicitly assumes that prop taxes go up as rents go up proportionally, which very well may be true in 49 states, but it is not true in California.

Your local lender can teach you how to calculate a very close approximation for what your property tax bill will look like, once the county tax assessor ganders at your purchase price and adjusts the bill accordingly. This is one of the more common things out-of-state lenders screw up. I refinanced using a jenky internet lender for the experience (professional development), and actually had to teach my 1-800 number LO how California property taxes worked and how to read a prop tax bill (what he was doing would have resulted in a "Surprise!" unexpected bill for a few thousand dollars a year down the road....).

Stan K. · Answer

Account Closed Here's a list of expenses you need to be able to cover on top of your down payment:

• Make sure you have enough in the emergency fund to last you 3-6 months in case you lose your job
• Closing costs: usually 1-2% of purchase price (this includes financing/bank charges, inspection, appraisal, etc.) plus points if you decide to buy them
• Insurance. Most banks will want you to pay one year of insurance in full upfront. 
• Taxes at the time of closing. You will either get a credit from the current owner or will have to reimburse them for the taxes they paid. This depends on when you buy and when the taxes are due. 
• Taxes after you purchase the property. You will need to pay property taxes. Note that after you purchase, the property will be re-assessed at a higher price and you will have to pay taxes higher than the previous owner. Based on the numbers you provided, it could be twice as much.
• Repairs. The amount depends on the condition of the property and the level to which you want to update it. Also, inspection can find items that need significant investments (for example, a roof or HVAC might need to be replaced). Make sure your offer is subject to inspection, so you can get out of the deal if it gets too much.
• Security deposit. If the place is rented, you should get the security deposit tenants paid to the current owner
• Reserves to cover expenses while looking for a tenant. When you are just purchasing, you need to have enough to cover the time it takes you to repair/rehab the property plus the time it will take you to find a new tenant. Make sure you have enough wiggle room. This will also apply after tenants move out (a year or two later).
• Emergency fund. Things break in most inconvenient time/fashion, so you need to make sure you have funds to cover them.

As far as the difference between assessed value and asking price, as others mentioned, assessed value is based on the last purchase price. It will change after/if you purchase the property. This will also raise the property taxes you'll have to pay.

Chris Mason · Answer

That's actually typically not the case. Lenders for the buyers order the appraisal.

• If it comes in low relative to contract purchase price, we make a stink about it, send a copy of it to the seller's side, scream about the appraised value from the rooftops, and try to renegotiate price. 
• If if comes in high, we just say it "supported value," no one gets a copy because now it's Top Secret information that the seller doesn't need to know, and we keep our mouths shut and (often) stop negotiating. :P

Daria B. · Answer

Closing costs can be considered upfront costs, at least I look at them as that.

You have listed a lot of costs you are already aware of so I'll just give my opinion on what I look at as "up front" and all are mostly closing costs:

-loan points (you may have depending on your lender) and only they will know if hey are adding points

-taxes (talk to the municipality you are purchasing in to ask them about the tax rate and presumed taxes)

-insurance (ask a broker to get you quotes)

-title ins (part of closing costs) talk to title companies to get an estimate

-talk to a lender to find out in your area of purchase what additional closing costs exist - things like doc stamps (in Florida it's a cost of buying based on the # pages of mortgage and also deed cost)

Account Closed · Answer

Wow, okay thank you @Chris Mason.  So the assessed value on the county site is strictly for estimating taxes and does not accurately reflect the actual value of the home then!  In order to get that information, I would have to have an appraisal done.  I was thinking assessment = appraisal, but a quick google search shows me that these are two different things.  :)  Since the Bay Area market is so competitive, I know that appraisals are often done by the seller in advance to speed the process.  How does one get their hands on this info?

Account Closed · Answer

Thank you everyone!  That is very helpful.  Another question: I've been playing around with the BP Rental Property calculator and reading up on every element in the form.  I picked a house that I had actually seen during an open house just to practice doing the calculations.  I checked the county website for the net assessed value and found it was $183k, but the asking price for the home is $299k.  Why is there such a wide discrepancy?  The house is in Sacramento.  It is a pricier area of the country but nowhere near as competitive as San Francisco where I live.  I would think that the county assessor's values would be fairly near the asking price or higher, since I have heard that realtors in my area price very low to get more people interested which drives up the offers.

Marelyn Valdes · Answer

Condos can also have large expenses (new roof, paint, etc.) that are billed to each owner and you need to check with the HOA to see if there are any large expenditures planned.  I prefer SFH with no HOA for investments.

Jeremy Godwin · Answer

use the bigger pockets rental property calculator on the website it will help you. as far as specifics you would have to ask a mortgage company or bank what the closing costs would be, property taxes is public info and you can figure a mortgage by googling mortgage calculator.

How much house can I afford?

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