Expert: Connie Wildasinn-Broker,GRI,Realtor® - 1/11/2011

Question
QUESTION: I am a first time homebuyer in the Los Angeles area. I will be using FHA financing. I am only able to get approved for around a $200K loan, which limits me to purchasing condominiums in my area. My goal is to keep this first property for about 5 years and sell it for a small profit. I would then take that profit and use it as the downpayment on my next home. My question is in regards as to whether it is more advisable for someone in this scenario to use a 30-year, fixed-rate mortgage or if I should used a 5, 7, or 10 year ARM? Since I plan to stay in my first home for 5 years, it seems to make sense that using an ARM is justified, but I would very much like you to weigh in on this matter. Thank-you for your assistance.

ANSWER: Hi Mike...

First off congratulations on deciding to take the plunge and be a homeowner...

You don't mention how old you are, but here is my concern... you are buying your first property and hoping to profit in 5 years... that is a very short period of time in today's real estate climate... depending on where you are with the world economy it could take a solid decade or more to pull up.... and recover... but that is not dismal news...that allows the average person now to buy income property, divest and grow a solid retirement plan...something that was much harder to do in the 90's.

I would try and find a property that you can later rent out and hold.  Put the condo in your portfolio of real estate... you are buying at what could be close to the end (bottom of the market) and interest rates are vary attractive...I would opt for the 30 year fixed... that way if you need to keep the property you know exactly what the property will cost you in carry costs every year.  I don't believe adjustable loans were ever intended for the average person... but for the savoy investor...and that takes time to learn.

Second get on a better budget... to have only 3.5% in downpayment is (in real estate lingo - nothing)- for your next property aim to have 20% down, get a conventional loan with an attractive interest rate (and less charges than an FHA)

Keep in mind when you decide to sell you will have closing fees above and beyond what you did on the purchase side...you now have commissions and closing fees...figure aprox 7.1% of the sales price as a round figure.... this can get very costly if the market has not appreciated up to cover and get you real profit to put to the next...(and you have tax consequences to consider also)

Don't count on grand appreciations we saw in the 90's... honestly I don't think that will happen again for this coming few decades... banks and government most likely will not allow it to happen... but hey someone could invent the next best thing and real estate is attached to it.. personally I see a very modest gain aspect... 5-8% per year not the 25% per year we saw...

And a side thought... 5 years will zip by in a blink... start your strategy now and get a good game plan going...every time you want to buy something... think "Do I want investment property or that **sweater, shoes, burger, bigger TV, Bose system** what ever"  Those who are spenders tend to be spenders and it is hard to be a saver... It is not what you make, but what you keep and what you do with that dollar that makes the difference between winners and loosers .... Good luck

---------- FOLLOW-UP ----------

QUESTION: Wow, thank-you Connie for such an in-depth answer. I would like to give you some follow-up information as well as ask a few more questions if I could. I am 27 years old and yes, at the moment, I am only able to come up with the 3.5% down for an FHA loan. That is actually my goal in purchasing this first home is to make enough profit to use as a larger down payment on my next home. I had thought 5 years was a good bet for this goal, but it sounds like from what you're saying that it may take longer, is that correct? Also, I wasn't planning on keeping this property as a rental as I do not have much desire to be a landlord to be honest. I just don't think I'm quite cut out to be a landlord, but I suppose that could change if needed.

I agree with your advice on taking the 30-year fixed rate loan, and that is what I intend to do. When you say gains of 5-8% per year, is that from this point forward or from some point in the future? That leads to my next quandary. Being that I can only afford a 1 bedroom condo, is it even worth it for me to buy at all given my goal to make a profit? Or should I wait until perhaps I can go in with someone else, say when I get married in the future?

One final question. Is it better to purchase a condo in a nice neighborhood or purchase a small house in an OK neighborhood in terms of resale value? Thank-you for all your help Connie.

Answer
Hi Mike...

Well lets see... on the downpayment... it is what it is for today.. at 27 you should be moving through your earning years and promotion years.. so, time is on your side to keep gathering cash to fund the next downpayment... the real beauty of real estate is 'appreciation', but we are in sideways trending at best and could be in line for a final dip before recover starts proper... and then as I had said modest gains... but the beauty of appreciation is the entire dollar value increases not just your initial downpayment investment... this is what makes real estate a completely different game...than say stocks or commodity market...

Knowing if you could be a landlord or not is good to know... and at 27 that could be a challenge.. as you get older you may find your temperment and investment goals change... but honestly you can hire for 8-10% of the gross rents management companies that will do for you what you may not wish to do... and it can be a way to get some income while the market is shifting up until you can sell for a decent profit...

on the 1 bedroom situation... perhaps a area of town not as desirable will open up the 2 bedroom units for you... that is suggested on condos, HOA eats a lot of the profit if you had to rent...you typically get better rents on a 2 bed... but there are areas where a 1 bed makes good money and the 2 costs so much more it is not worth it... also right now while the market is correcting the 1 bed units are a 'value' they lost the most money during the correction... hence they will have better gains when the market moves back up and 2 bed units get unatainable financially...

If you go in with someone... they will want 'something' of the profit at the sale end, so you may end up right where you stated... on the wait till married... actually ... don't .... having something that is your 'sole and separate' as we say in real estate is a good thing always... I advise this to women and the same I feel holds true to men... what is yours before marriage is yours should it fall apart...

Shoot for the house if you can... but if you are saying right now you only can afford a 1 bed condo... you will be hard pressed to get a house in any semi decent area... stay out of high crime areas where property destruction could ruin your investment...keep in mind that house has private land around it... and that will cost you money...

Gool luck Mike... dream high