Gyroscopic Investing

So here's my situation.

I'm contractually obligated to work for the government for 2 years, but might end up staying a few years afterwards. I can't say with certainly that I would leave the job but there might be after a while more exciting opportunities in the private sector.

Regardless, I'm thinking of staying in one area to work for around 5 years in the Aberdeen, MD area.

I was looking up apartments around the area and found them to be around $600-$700 a month. I then found that you could purchase manufacturer/mobile homes for pretty cheap, around mid-$30k.

Here's my potential plan I wanted to get opinions on:

With treasuries so low as of now, I could purchase a 5/1 ARM (Adjustable Rate Mortage) that has a fixed rate for the first 5 years and then variable after that. As of right now I think 5/1 ARM are maybe around 2.8%+. If I purchased one of these mid-$30k homes (2 bedroom, 1 bath, 700-800 sq. ft or something along those lines) and got an adjustable rate mortgage with as little money down payment as possible for those 2.8% rates my monthly payments would only be around $150 for a savings over an apartment by maybe $450+ a month.

That would be a significant savings over an apartment and I would be building equity in the home and I like the idea of this as part of the ERE mindset. Technically I could just purchase the home outright but the opportunity cost of this wouldn't allow for my investment portfolio to grow as much.

The risks I see in this are if it takes a while to sell the home after I'm finished living in it. I see it though, even if it takes a year to sell it, and I'm still paying it off and building equity, I'm still doing far better than if I got an apartment during that time. There's also the risks for having to deal with home repairs yourself versus having a landlord of an apartment.

I'm not married yet but if I was within 5 years of living there, the house could still house 1 child pretty comfortably I believe.

I see this approach is that I need a place to stay and this would be potentially a much cheaper option than having an apartment and you build equity during this time as well paying down the house. I also believe at such low rates for treasuries and the corresponding low rate of the mortgage, that as long as my investment portfolio was able to pull in higher than 2.8%, than I'd be beating the opportunity cost of purchasing the home outright.

Thoughts?

1NV35T0R wrote:
I'm not married yet but if I was within 5 years of living there, the house could still house 1 child pretty comfortably I believe.

Wait until you are married and have a long term job.  Renting as a bachelor will provide you with less strings and responsibilities.

I was in a similar situation when I moved to Florida in 1981, only with 3 children, a wife, and a mother-in-law tagging along. Buying a house was out of the question because interest rates were running around 19% so renting or buying a mobile home were the only options. Went with a brand new 4-bedroom mobile home and I can tell you it was actually one of the nicest homes I've ever lived in. Back then it was commonly understood that mobile homes depreciate in value as opposed to houses but watching what is now happening to my house now I wonder if that is even the case any more.

The mobile home eventually ended up being a total loss for reasons I won't bother to explain unless you are interested in hearing about the sorry mess I got myself into but the loss was actually eaten by the taxpayers during the S&L crisis.

For a TCO comparison you should factor in some other expenses on the manufactured home:
- Often you must pay ground rent / HOA dues
- Property tax
- Insurance
- Responsible for more maintenance
- Transaction costs: realtor, government fees, etc.

AFAIK in general manufactured homes depreciate, not appreciate the way conventionally constructed homes do. So the notion of building equity may not work. Or is mid-$30k the fully depreciated price?

Interest rates have nowhere to go but up, so personally I wouldn't start an ARM now. I'd either pay cash, which would reduce transaction fees and general life complexity, or get a conventional mortgage. Rates are only slightly higher for a 10-15 year loan with 20% down.

Without knowing any other details, I'm leaning toward buying one in cash.

Having recently graduated and rented for the past 3 years, I'd say renting is the way to go.  You never know what will happen, and it's nice, as Bean said, to have no strings attached.  This will allow you to move on a moment's notice if you want.  Or you'd have the option of taking a lower paying job if you couldn't stand your current (future) one.  I would just take things slow and pile up cash (and pay off any debt).  Then when you've decided you want to settle down, you'll be in a good situation with a very healthy down payment.  This is what I've done, and it's worked for me.  I've lived in three cities since I graduated; I'm glad I wasn't stuck with a house in the first one.

As KevinW said, there are many other expense factors to consider when purchasing a home.  Also, if the 5/1 ARM is interest only you will not be building any equity.  Mobile or manufactured homes notoriously will depreciate rather than appreciate in value.  What is the location of the mobile home compared to where a rental apartment will be and will your comute be longer (more auto expense)?  Being your age and single it seems that renting would be the best option.  I would wait until I could afford a nice home or condo in a good location.  There is also something to be said for the carefree single lifestyle.  Don't be in a hurry to clutter things up.

Thanks for all of your comments thus far. And I realize there would be other expenses other than just the housing price. I wasn't thinking whether I'd just be paying interest versus building equity which would make sense. I'm also not positive of how much the property would depreciate. The places like this look like nice little homes and they're near an Army base which might make them good for people coming to work there.

I might speak with a realtor while out there, but not sure if telling them my plan would be a good idea. Or perhaps they wouldn't care I just wouldn't want to divulge all of this when trying to get the mortgage?

I was just thinking that since I have to work there for 2 years in Aberdeen, MD, and my girlfriend is working on her masters and won't be finished for 3, that it wouldn't make sense for me to leave my job for somewhere else further away until she is completed. Stating that, if you were in an area for 3 years, couldn't buying a really cheap home with still cheaper than an apartment with a rather large safety factor thrown in there?

I'll also check to see how prices of houses in the surrounding area have been holding up. As long as the price wouldn't drop drastically from when I purchase to a few years later that wouldn't be too bad I wouldn't think.

If you're only planning on being there 2 or 3 years, I would rent, no contest.  Don't forget that in addition to purchase costs and maintenance costs, there are costs to selling as well.

Owning real estate is fine if you desire a place to call your own, to do with as you want and not be at the whim of a landlord to tell you what to do and increase your rent on occassion.

As a pure investment, owning real estate is good only if it is appreciating in value.  I have learned over the years that in a flat or declining real estate market you are better off financially to rent rather than own.

Trying to determine where we are in the real estate cycle is another matter, like timing the markets.

Alanw wrote: Owning real estate is fine if you desire a place to call your own, to do with as you want and not be at the whim of a landlord to tell you what to do and increase your rent on occassion.

As a pure investment, owning real estate is good only if it is appreciating in value.  I have learned over the years that in a flat or declining real estate market you are better off financially to rent rather than own.

Trying to determine where we are in the real estate cycle is another matter, like timing the markets.

This is very true. I have a very strong urge to have a place to call my own (still renting) but one thing that was tough for me to accept is that you're always renting, whether from a landlord or from the government. That's what property tax is--your rent to the state and local governments. This also explains how the government can impose building codes, zoning laws, and all manner of property-related interventions in "your" land--it's not actually your land at all, you're just renting it from them.

I tend to believe that building your own house is the only way to go, but that's just me.

You are better off renting. 

You need at least five years after a home purchase for all the acquisition costs (taxes, fees, insurance, escrow, mortgage application fees, appraisals, inspection, points, and a lot of other junk fees like document prep, underwriting fees, etc.) and the selling costs (mostly real estate commissions, but there may be others depending on your location and the market) to break even on these kind of expenses, and that was in a growing market.

So unless you're planning on being around for five years or more, it's a better idea to rent instead of buying.  Besides, renting gives you lots of flexibility for accepting jobs or trying for interesting experiences all over the place, not just in Aberdeen.

Manufactured/mobile homes tend to lose value like a car, no matter what neighborhood they're in or its popularity.  So I wouldn't count on it appreciating.  Semi-manufactured homes (modular homes--where large sections of the home are assembled in a factory and delivered and assembled on site over a traditional poured foundation) may gain in value, but they're also subject to this weird real estate market, which has lots of uncertainty built in. 

Hurricanes and tornadoes can turn mobile/manufactured homes (and the contents) into total loss kindling within seconds.  Unless you can buy a mobile home for practically nothing (no more than $2,000 to $4000 or less), don't keep anything valuable in it, and can get a good deal on ground rental, utility hook-up, and other fees, I'd think twice about doing this.  They are for situations when you have few options and it's the best you can do, and from what you've posted here, you have plenty of options.

Wait until you're certain you are living in a community you want to stay in for the long haul, where you want your kids to grow up and make friends, where you want to sit on the school board or transit advisory board.  Until then, rent.

These are all very good posts you guys have. I'll have to think more on this decision. I still might speak with a realtor just for inquiries around the area. As of now I'll be commuting from my parent's home which is about an hour away but I don't want to be doing that for the next 2-3 years or so. Unless I just get a lot of books on tape hah.

As an extra, I found this which some might find useful in the rent vs. buy battle.

http://www.nytimes.com/interactive/busi ... lator.html

1NV35T0R wrote: Unless I just get a lot of books on tape hah.

Check out podcasts and http://librivox.org/ .

1NV35T0R wrote: These are all very good posts you guys have. I'll have to think more on this decision. I still might speak with a realtor just for inquiries around the area. As of now I'll be commuting from my parent's home which is about an hour away but I don't want to be doing that for the next 2-3 years or so. Unless I just get a lot of books on tape hah.

As an extra, I found this which some might find useful in the rent vs. buy battle.

http://www.nytimes.com/interactive/busi ... lator.html

Yes, the buy-rent calculator basically says (for the price given, and a rate of 3.5%) you need a good five years in the home before the break even point in year six.

Also, don't forget that this buy-rent calculator is for standard construction, not manufactured/mobile.  

smurff wrote:

1NV35T0R wrote: These are all very good posts you guys have. I'll have to think more on this decision. I still might speak with a realtor just for inquiries around the area. As of now I'll be commuting from my parent's home which is about an hour away but I don't want to be doing that for the next 2-3 years or so. Unless I just get a lot of books on tape hah.

As an extra, I found this which some might find useful in the rent vs. buy battle.

http://www.nytimes.com/interactive/busi ... lator.html

Yes, the buy-rent calculator basically says (for the price given, and a rate of 3.5%) you need a good five years in the home before the break even point in year six.

Also, don't forget that this buy-rent calculator is for standard construction, not manufactured/mobile.  

I was looking at more of a $35,000 @ 20% down. Right now a 30 year mortgage is around 3.7%-ish right now I believe. You then are comparing that to $700 a month for an apartment. If you also just for the mobile version, I decided to take the price down by 10% each year that the house depreciates (so a $35k house would be worth around $25k by the time I sell it), you still end up an annual savings of $1750 a year for a total of $5251 savings over renting. And some of these places are only 5-10 minutes from Aberdeen. Seems like apartments are around 15.

I'm just pondering that's all.

Keep maintenance in mind as well. Landlords should take care of all that for you, but with your own house, you're on your own. You may even like home repairs (I do), but it's definitely another cost that you won't have when you rent. My experience with manufactured houses is that even when new, things start to degrade pretty much immediately, even with good weather. In a powerful storm, or god forbid, a tornado, forget it. You'll have problems with the siding, the roof, mold in the wood, you name it. Even something simple like a leaky shower can be the difference between an annoyed call to the landlord and an expensive call to a plumber. Of course, if you build the house yourself, you know all about the plumbing so you can probably fix the leak on your own (if it even happens in the first place). 

ok.