Financial rules for buying property

I know there are various rule of the thumb out there for buying property.  ...in terms of what we can afford.  In a perfect world, we would always be paying cash. But, that does not always reflect reality. I am wondering what rules for the purchase of property we have encountered that we consider to be viable.

One of the best pieces of advice I got was that the property should never exceed 2 1/2 times your annual income, always pay at least 20% down, and never exceed a 10 year fixed rate mortgage.  I added two more conditions to this; in addition to the 20% down, I would pay the first 3 payments on the day of the purchase ...  for an added safety net. Of course, I would maintain that margin until the property was paid off.  In terms of making payments, I payed 1/2 the monthly payment every 2 weeks.  This significantly reduces accumulated interest.

And be sure that any extra payments are being applied to the principle.  The bank will happily put it against the interest.

Shoot, I'd say if you are in the position I was in (owned home for less than 3 years) refinance now especially if you have the ability to go with an IRRRL on your VA loan. I did the math and counting everything I've paid on my home and figuring that I am starting over, I just saved $124,000 if I don't pay any extra. Which now that I am paying almost $300 less per month I suppose I will! And yes, I verified that it will go against the principle, very important.

My idea is to make one extra payment per year, which is less than half of the reduction in my mortgage. So win-win, more "walking around money", home paid off quicker. What's not to like?

What is

IRRRL

please?

If you get a longer loan term, the compulsory payments are lower, and yes you will pay more money over time.
But those payments are in future dollars, not now dollars.
If you have any inflation that helps.
If you make sure you can pay the loan down faster without penalty its a great idea.

There is nothing wrong with GOOD debt.

I think a lot of people loose opportunities by waiting to save, while the world rolls past.
IE If you are paying rent while you save to pay cash for a modest place, a loan would enable you to save rent
and have a place of you own at todays dollar cost.
Think about it.

We changed our mortgage to a current account mortgage: all your wages offset the loan, which reduces the interest paid on a daily basis.  No penalty for overpaying, we paid off the loan in half the time.  You have to trust your partner though, since we could write a cheque for the full loan amount.  I used to call it his Aston Martin account!😁  
Only trouble is now the term is mature we need to open a new current account since the mortgage account is due to close.

IRRRL, "Earl", is a VA loan specific refinance deal. Interest Rate Reduction Refinance Loan, I believe. Basically if the original terms and the new terms equal out within 36 months you can refinance with limited paperwork. No credit checks, inspections or appraisal required and on the lender side they have to keep fees down low enough to meet the 36 month break even standard.

And VA?

What about those 0% down 30yr USDA loans?

VA loan - special loan available to military veterans and current military members in the US.

Hi T,

The zero down 30 Year may work for you. I crunched the numbers and ran as far and fast as I could.

Financially,  have been both winner and loser in the real estate market.  Big "win" in 2005 on a townhouse that increased some 50% in price during the 14 months we owned.  Winnings bought a condo at top of the market with enough extra for a comfortable lifestyle avoiding loans through law school.  Then luck changed and in 2008 after the crash we lost $10,000 trying to offload the condo our family has outgrown. Then bought a house that seemed affordable until taxes went up and we had to replace the roof and line the chimney all at once, so we were counting pennies each month.

So what does that mean?  Realize all the best plans can't predict the outcome.  I think don't look at property as a money investment.  Just a place to live.  Decide how much you are willing to pay as part of your income now to live there now.  No telling what the future brings.  Even a paid-off property can be lost to liens, fraud, force, or nature.

Hi MK

You approach a good point.  I have encountered a number of people who see their home as a retirement investment.  Now I admit, this is a real fine line to dance on. On one hand, of course the home is for retirement. But My llogic is that unless I am dead certain that I plan on selling the property at a substantial profit and make enough money to buy another place and have substantial additional funds, then I run the risk of fooling myself.  I choose to see my home as something different than saving for retirement.

T Simpson wrote:What about those 0% down 30yr USDA loans?

This is the type of mortgage I went for because I had no money for either a down payment or closing costs. The USDA loan rolled the closing costs into the mortgage. What I ended up paying monthly for the mortgage, home insurance, and property taxes was less than what I would have paid in rent for a home. Now, 6 years later, I paid the mortgage principle down by about 16%, and the house also went up in value by about 60%. If I were to sell this week, I would walk away with close to 100k in my pocket. Not bad for something that I put no money into 6 years ago.

I look apon houses as an asset.
If I live in it I save rent but have outgoings and some maintenance.
If I rent it, I have income, outgoings and some maintenance.
If I borrow and rent, I have some money tied up, I have income, outgoings, some maintenance and mortgage repayments, and I have a growing share of the house with the bank until the mortgage is paid out.

In all cases I believe its better owning than renting and doing nothing with my cash or time.
In fact if you can improve any property with your own time and effort you may have an asset that increases in value.

I know some may say, ' I dont want to improve my own house the taxes will rise'!!!
A couple of my own thoughts on the matter.
- tax is the price of a civilised society.
- I am not convinced letting a house fall into ruin to save tax is a good idea
- If you have maintained it and need a quick sale,{ to purchase a motorcycle or something else important] the maintained house will sell faster and maybe at a better price.
- Well maintained rental houses seem to be kept in better condition by the tenants.

John C Daley wrote:
- tax is the price of a civilised society.
.

Wait what? ~This~ is a civilized society? Oh man, did I ever land on the wrong rock!

Just kidding.... Or am I?

I think things took a wrong turn for everybody when housing ceased to be about... housing people... and became about money. My extraterrestrial outpost and permaculture pals in Trout Lake say it thusly: ‘if it isn’t good for everybody it isn’t good’.

My permie story is that I worked super duper hard to develop a permaculture urban farm on a landlord’s property only to have him take an unsolicited offer from a developer after 5 years  and plow the whole thing under! Made three 1 million doll hair condos on the land I cared for! Took me nearly 4 years to stop being heartbroken and get on with it only to build a new set of gardens (also on a ~new~ landlord’s land) and now we are finding we must be moving along again, as this too shall be sold to the higher-than-us bidder, though this time hopefully we’ll launch to a place that we will ourselves own - with the help of our credit union mortgage.  (Even a CU is not our friend really, I know, but I will pretend for now...)

So here I am 11 years later from that heartbreaking plow-under and many gardens built on this Earth and I always have to walk away.  🥺🌱😱
And for want of money, not of skill, not of passion, not of labor, not of heart.  But munney.

So yeah, civilized society.  

Honestly I have yet to see it.  

I volunteered extensively at a cohousing community to learn permaculture and at the end of a 5 hr day in the garden they still charged me cash on the barrelhead (which I truly could not afford at the time!) if I wanted to share in the community meal I had helped to harvest for that night’s dinner. I mean I learned a LOT of technique, stuff I use on my own gardens now, well, my landlord’s gardens  that I eat from I should say... but... in the end I soured on the cohousing/community ideal because, it really wasn’t the ethic that I had in mind, once I experienced it first hand.

Maybe my own land exists out there? Maybe gardening is ok as a solo sport? (I have long said and been convinced it wasn’t intended to be such but... I alone do the weeding and seeding and tilling around here! Family of four and only Ma has dirt under her fingernails!)

Maybe civilized society exists? I am not discounting the possibility. Optimism grows most plentifully in *my* gardens, perhaps my most bountiful yield in fact! But still I am still a seeker for that civilized bit. (Pardon my while I optimize my edge. 😉 Or is that edginess? Maybe I misunderstood that principle...)

Annalie, you have certainly had an arduous journey.

Perhaps you have proven the importance of having a vested interest in the landscapes you have worked in.
Either with a long term lease or ownership of the land.

I think land tenure and Democracy are two certainties that seem to bind a community.
Winston Churchill { Prime Minister of the UK ] is attributed to say that Democracy was pretty hard to manage, but it was better than the alternatives.

Land Tenure comes in a few forms;
To illustrate how forms of land tenure emerge function, and change, six forms of land tenure are analyzed below.
Owner Cultivation of Small, Private Lands. ...
Squatting on Public or Private Lands. ...
Large Estates or Latifundia. ...
Feudal Tenures With Bound and Unbound Labor. ...
Communal Tenures.

Where humans have no legal tie to land, somebody usually ruins things, as you have witnessed.

Maybe study the variety iof forms of having laand tenure for life, it may help.

My advice on buying property is a bit different than others. This is coming from purchasing a house in the city, a tree farm, small property attached to the farm, and a foreclosed house on the small property.

First figure out what you can afford to pay monthly then aim for paying only 80% of that. That will give you some extra overhead incase something breaks or any other expenses pop up.

Don't buy the first place you find look at lots of properties, if you are looking in different regions have a different agent in each and tell them what you are looking for. Expect for them to do a shitty job and miss over half your requirements, I had a requirement for highspeed intranet and kept getting properties where the only option would be to get satellite. We looked for about 2 years off an on in the Northern Kentucky triangle (Cincinnati, Louisville, Lexington each is 100mi apart).


Get the longest term loan you can as long as the interest is not to high. Often the total out of pocket expense will be higher if you go the full-term but the monthly will be lower and easier to manage when things come up. Setting a spread sheet and/or using an online calculator is great for this.
You might find a 15yr loan will cost you 32K in interest at the end paying $736 monthly.
The 30yr will cost 51K in interest paying $422 monthly ($314 less monthly).
This is 19k more in interest you could consider this a monthly insurance penalty of $52.77 ((19000/30)/12).
Now if you pay that "penalty" every month on the 30yr it will save $9500(in interest) at the end of the loan and be paid off 5yr 1mo early still leaving you with $261 extra and the end of each month to put to the property or other debts.
Just for fun if you wanted to pay the interest "penalty" over 15yrs instead of 30yrs the extra $105.55 (still have $208 left over) the property will be paid off 8yrs and 7months early saving $16000 in interest.
Please do your own math based on your interest rates, and make sure there is no penalty for paying it off early.


Before paying extra on any loan I recommend to have a minimum of 3 months sitting in an account to cover the mortgage if you lose a job or get injured. I try to do this always have in the fund taxes and insurance covered, and realistically this amount should cover all required expenses (loans, bills, food...).

My last requirement when buying property buy in unincorporated areas or an area with little to o building codes, it will save you time and money.

I like 6-12 months cash buffer and considering current interest rates, probably wouldn't pay down any extra unless I felt I had nothing better to invest in.

Hi, One advice is to only buy what you truly need and not what you want. If one of you is handicapped then you truly need large bedrooms for wheelchair access. Mostly the room is for sleeping and getting dressed, unless you need to read in bed. Otherwise a 9x10 bedroom is small but livable. Storage, what things do you need. Clothes, How many do you need not want. If you wear 10 shirts and 4 pairs of pants closet space as a walkin is not needed. Smaller bathrooms.

Right now prices are really high in some areas because people are moving out into the countryside, to get away from the cities. Properties are on the market for a few days.  Look in less desireable locations, meaning not vacation properties, or cities with higher than normal taxes to keep your price down. Check the cost of utilities in with your mortgage. Add 10%mo for repairs and save it.

Make sure you shop different banks and credit unions. Small local banks usually have better rates than large ones. Start working on your "Climate Change Score" and credit rating for a better rate.

It is estimated that food costs will be 10-15% higher at the end of the year just from inflation, and if the mileage tax is passed it will go higher because almost everything comes in on a truck, even if it is only your pickup truck at the local farm.
So do your math and buy right and sooner than later.

I agree with Arthur; separate your wants from needs, and be realistic. This may not be your forever home, but if you stop paying rent and start growing equity, you will get there, if land is your goal.

For me it was buying a nasty 70's mobile, with crappy additions on three sides, knowing full well it would eventually be torn down and replaced. BUT the land was level, the massive shop was to die for (rented that out to cover the mortgage) and it was JUST on the verge of urban and rural (proximity to town/fire hydrants - significantly lowers insurance costs).

It may just be a piece of land you put an RV on, or a home that is beyond repair; but if the infrastructure (water, septic, power, fencing, foundation etc.) is in place, that is half the battle; even if you intend to be off grid, in the beginning, before those are an option (cost) and/or for resale/mortgage valuation.

I did get side swiped by "taxes" where I bought as I settled in a "local improvement district" that added a third level (local, provincial, federal) of taxes. The second thing that blindsided me was water - we have a two tier system: pay X amont every three months for "water access" as it runs down the road, regardless of whether I use it or not, of $75. IF I use it I pay by the cubic metre - tat part of the quarterly bill is maybe $20...so my original idea of a well is NOT good financial sense.

Lastly, live where you love! Be it renting or owned, if you do not like your residence you will waste all manner of cash avoiding going home or doing financially wasteful things to compensate yourself.

Annalie, people may scoff at the sentence, "Tax is the price of a civilised society", but the alternative
of lawless communities, rutted roads, no infrastructure is not a good choice.
When people are upset about the local community infrastructure I notice they will tell a few people but not actually do anything themselves.
It seems to be, "I cant do anything" thinking.
"Its somebody elses responsibility to fix it!"

I would add: Before you buy, apply a skeptical eye.

If you need to get out quickly, for whatever reason, will the property move quickly and will you at least break even?

My rule is "no debt ever for anything".

Joseph Lofthouse wrote:My rule is "no debt ever for anything".

As a principle, I agree. Debt is poison, for the most part.

The exception is land, which frankly is difficult to acquire without some debt.

That does not preclude having access to land without owning it, provided you have the personal connections, personable skills, and the stomach and drive to take this path. Big farms have tons of corners they can't reach with their big equipment. I see it all the time. And big farmers aren't necessarily evil; they're just trying to make a living. A deal could be made. Just don't plan on a multi-generational orchard.

Multi-generational orchards on non-owned land work really well. My multi-generation tree breeding projects happens on land that I've never owned. The last few years, I've planted seeds for the 4th generation of my walnut breeding project, all generations living on land that I don't own.

Land ownership tends towards ephemerality. So much death, divorce, marriage, new jobs, etc...

Every year, I harvest apples, apricots, plums, and asparagus that my community planted 163 years ago, from land that my family never owned, (and nobody else really does either, except perhaps on paper).

Joseph, that's remarkable. Nicely done!

I would love to hear more about how this came about, how it has lasted so long, and how you and your community interact with the technical owners of the land.

We farmed on 1/4 acre of land that we didn't own for 27 years. We had a handshake agreement. We were to make the infrastructure improvements at our expense and pay a percentage of gross sales quarterly. We had no sales for the first two years but did make substantial infrastructure improvements. When we got our animals figured out and started to make money our quarterly payments began. Over the years we made more improvements and raised more animals and made more sales and paid more in quarterly payments. The owner of the property was quite happy with the quarterly income and we were happy with our enjoyable and profitable farm business. We sold the farm business and retired in 2021.

Land ownership tends towards ephemerality. So much death, divorce, marriage, new jobs, etc...

I actually dont understand what you mean Joseph.

NOT TRADITIONAL LOANS ON BARE LAND:  When you say "property" or "land," when it comes to banks where I am, they don't offer traditional loans, with the best possible interest at the time, on unimproved land.  They offer 18-month loans, with pretty high interest, to supposedly give you time to develop it.  These days with "green" building codes it takes way longer than 18 months, especially in a rural setting where there are no utilities.  Each utility has to be developed by a different entity; water, septic, power, geology, etc.

To overcome this, some landowners have to be willing to be the bank for the buyer, which has its risks.  That means if you buy that land, and don't develop it, you might be the bank if you need to sell it.  That could be a 10-15 year loan, hoping people keep their jobs, etc.

EXPENSES TO REPAIR WHAT'S EXISTING:  Financially the output could be way more than the cost of land, even if it is developed, if things weren't built to code or fire regulations kick in, or just needing to repair what you bought.  In that case it would be crucial to be able to get a traditional loan because you'd have enough going on, you don't need a deadline on a loan ticking away in the back of your mind.

LEGAL PARCELS:  There's also the issue of legal parcels and non-legal parcels, meaning if there's an acreage minimum in an area, and the property isn't big enough, they won't allow it to be developed into a house to live in.  Where I am the Coastal Commission has its own set of codes in addition to County codes, houses cannot show from major roads, usually called Scenic Corriders, and that calls for planting trees that take years to grow, and other requirements that are expensive.

BURNED OUT LAND:  There's a lot of land on the West Coast of the US now that's burned out and selling pretty cheaply, but that means either it's not developable, it's a slide, or it doesn't qualify in acreage, or it shows from a scenic corridor, or it needs an easement over someone else's property, (who may or may not allow it,) or some other requirement.   In some communities the County and the government have stepped in to "rebuild the habitat" supposedly so it won't burn in the future the way it did.  What this amounts to is not only the original codes kicking in, but a whole new pile of codes they've made up to somehow control how trees and native plants will grow in the future, and impose that on people who are already suffering.  Those kinds of headaches have to be taken into consideration.

If I hadn't gotten a 30-year loan in the beginning I never would have the property I have now.   If you're careful you can refinance better terms and/or pay it off early.

TAXES:  Probably the most important thing in the long run is what are the property taxes?  They are forever.  You can pay off property eventually, but the taxes will always continue and tend to keep increasing.  If it's a primary residence or a business hopefully you can take State property taxes off on your State and Federal taxes, but it is another big expense to take into consideration.

Nobody seems to talk about the joy of owning land, for me that is important.
My own bit to do what I want grow, store, camp when ever I want.
Its fantastic!

John C Daley wrote:Nobody seems to talk about the joy of owning land, for me that is important.
My own bit to do what I want grow, store, camp when ever I want.
Its fantastic!

That is true. Being master/mistress of one's own slice of Earth makes a person deeply "grounded." Literally and psychologically. Owning (for the moment) and equally being responsible for good earth is somehow deeply ingrained in the human psyche.

I don't know how city dwellers can manage without this, but they seem to. I am an outlier, but then I have four generations of hardworking pioneers at my back. I suspect these things are taught and ingrained early, akin to language.