The Five Year Rule for Buying a House

by Thursday Bram · 357 comments

Handing over the keys when buying a house

When I first considered buying a house, my entire family got involved. I have the luck of being related to real estate agents, investors, and other experts that are more than happy to give advice about buying a property — even before you ask.

The first thing they asked me was exactly how long I expected to stay in the house. Though I didn’t know the exact amount of time, they wanted to make sure that I’d own the house for at least five years.

Why’s that? What’s the five year rule for buying a house? 

The Upgrade Cycle

It definitely varies by geographic area — if not by specific neighborhood — but a lot of folks near me will buy a townhouse or condo as their starter home. After about three years, they’ll start looking for a bigger place to upgrade to, either a bigger townhouse or a single family home. This upgrade cycle will repeat itself a few times, as people work their way up to a house that they are happy with and that is big enough for their family.

The thought seems to be that if you’re making a little more money every year, you’ll be in a position to afford a bigger house in three years time. And everyone knows assumes that buying is more cost-effective than renting — as long as you’re paying down the principal on your mortgage, you’re going to come out ahead.

But with an upgrade cycle of about three years, there’s a good chance that you will lose money.

The Five Year Rule

When you purchase a house, the general rule is that you want to be sure you’ll be in the same location for at least five years. Otherwise, you’re probably going to take a hit financially.

The first hit is your closing costs. Every time you go through closing — buying and selling — money hits the table. Depending on where your house happens to be, the buyers and sellers pay different amounts, but everyone pays something. This can easily add up to thousands of dollars, and limiting how often you have to pay that kind of money is always a good idea.

And you take a second hit when you look at your mortgage statement to see exactly where your monthly payments are going. The way mortgages are structured, you pay much more interest in the first few years that you own a house. Usually, it isn’t until you’re about five years into paying down your mortgage that you’ve made enough progress on the principal to make it a better deal than paying rent each month.

David’s Note: When you take out a mortgage, you are paying an interest rate on what you owe. So, in the first year, when the principal is highest, the interest you need to pay is also the highest. However, since the monthly payment is the same throughout the term of the loan (at least with a fixed rate mortgage), more of the payment will be used to cover the interest payments, meaning less is going towards the principal. As your principal goes down, your interest payments will go down, leaving more of your check to go towards the principal.

If you can wait at least five years to move, you’re in a better position to be ahead of the game.

Defeating the Five Year Rule

Five years is a generality. If you add in a couple of other factors, you can make buying a house that you don’t plan to stay in long-term a better choice.

The biggest factor is how much you’re going to pay on your mortgage. A lot of people buy as much house as they can afford, according to what lenders offer them. That’s usually the upper end of what you can financially manage. If, however, you buy at the lower end of what you can afford and make extra payments, you can pay off a bigger chunk of the principal. You need to run the numbers for the specific house you’ve got your eye on, but you can often come out ahead.

You may also consider buying a house that you won’t stay in for five years — but that you also won’t turn around and sell. It’s not out of the question to purchase a house, start paying it down, and fix it up so that you can turn rent it out. You do need to be careful that you’re choosing a house that you can afford in addition to a mortgage for your next home, even if you can’t find a renter,. There are plenty of other arrangements that can work out similarly, but you need to study up on real estate before making such a choice.

[Click here for a discussion on whether you should buy an investment property.]

Bottom line: if you know you’re going to buy a house based on what the bank says you can afford, and you don’t want to think about renting it out, don’t purchase a house until you’re ready to spend at least five years in it.

David’s Note: Here’s a quick and dirty formula that you can use to help you figure out whether it’s better to buy or rent, which works with any duration of ownership. Try to calculate: Seller and Buyer Agent Fees When You Sell + Purchase Price + Maintenance Cost for the Time of Occupancy + Interest Paid on Mortgage + Investment Gains from Your Down Payment + Taxes Paid (Such as Property Tax) + Closing Costs – Selling Price. This number could come out negative or positive, but if it’s lower than the rent you would have paid during the same time frame, then you would be better off buying. If the number is higher, meaning that the selling price wasn’t high enough to cover all those costs, then renting would be the more cost-effective choice.

Do you adhere to the five year rule when buying a house? 

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{ 357 comments… read them below or add one }

peter horne October 30, 2012 at 10:28 am

The list of “costs” used to compare to rents seems to be missing the tax deduction. Most middle income folks are either in 28% or lower end of 33% marginal rates. In addition there may be incentives for certain homes – energy rebates etc. – that mean the actual cost of ownership is somewhat less than adding up all of the closing costs etc.

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Greg January 18, 2013 at 5:10 pm

You said, “Most middle income folks are either in 28% or lower end of 33% marginal rates.”
I checked, and this seems strange to me given that median U.S. household income is around 50k. With deductions, the vast majority of Americans, including all middle income by any reasonable distribution, fall into 10%, 15%, and 25% tax brackets. If one runs in circles where most of his/her friends make 146k+, you are doing very well … and kudos (seriously) … just realize and appreciate that you are in actually very rare air.

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gtsga January 30, 2013 at 5:06 pm

Honestly man, I cannot imagine how families survive on less than $100k/year. Of course that depends on where you live and cost of living but let’s assume it’s a major metro area. $100k/year won’t even pay the most basic of life styles.

Ten years ago my wife at the time and I made about $250k/year combined, lived in a modest $175k home, had 2 car payments and 2 kids. After the government got their unreasonably high share of our hard-earned income, we payed our essential bills and contributed the maximum to retirement savings, we had nothing left of any consequence. We realize we were fortunate which made us wonder how in gods name families could survive on $50k/year or even $100k/year.

The US needs serious adjustments to middle-class taxation. Income below $200k/year needs much lower taxation and income, of ANY kind, above a couple million/year needs significantly MORE taxation. When we just got married and collectively made $35k/year, lived in an apartment and worked our way through school, we barely survived. The lower-middle class families in this country deserve better.

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Jim Fawcett February 11, 2013 at 12:19 pm

I wish with all my heart I could pay your unreasonable share of your so-called hard earned income in taxes. I make 30k a year, gross. Thank God the Houston area where I live is pretty cheap. Quit complaining about your ‘unreasonable’ taxes and next time you pay them, thank God you earn enough to afford it. You make me sick. And I seriously doubt you work harder than I do. Try working 12 hours a day in the fields!

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b February 19, 2013 at 9:54 am

Maybe if you spend less time leaving comments on random articles you would have more time to increase your skill set and in turn receive higher compensation.

scabbert February 21, 2013 at 6:51 am

b,
So non-rich people aren’t allowed to have an opinion on the internet. Got it.

What an awfully obtuse statement yours is, so packed as it is full of hidden, false assumptions and sneering disdain.

j cox March 13, 2013 at 4:35 pm

Listen to BOTH of you! OMG! TWO cry babies, both blaming the next guy up the ladder. The lower paying guy says to the upper mid guy that he should be thankful he makes enough to pay unreasonable taxes, and to shut up about it. The upper mid guy cries that he’s paying unreasonable taxes, and says that anybody above him should be paying more.
Is that what we’ve come to??? That the other guy needs to pay more?! I’m in agreement with both of them on the fornt end – that they pay too much in taxes. I disagree with them on the back end of their sentiments – that the NEXT higher guy in the ladder needs to be paying more than he already is.

Carleton June 19, 2013 at 12:03 pm

Jim, evidently you are not very smart. The spirit of the post you replied to was sympathetic to your plight. Yet you tell the poster he makes you sick. With a name like Jim Fawcett, I GUARANTEE you don’t work in a field for 12 hours a day. You just spiced up your post with a little whimsy.Re-read the post, and see if you might be able to comprehend it a little better, then apologize for being an arse.

hatsumi August 31, 2013 at 10:53 am

Jim very well said, I agree with you …

realistic February 13, 2013 at 8:33 am

If you can’t survive on $250k/yr, you have some “serious” money management issues.

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Stephen W March 21, 2013 at 6:13 am

It’s a pretty well-known phenomenon that almost everybody thinks that they make in the middle income range and that they pay too much in taxes. I have a hard time imagining living on $50k a year–let alone supporting a family on it!–but I also recognize that that’s a pretty typical situation to be in.

It is also my rather firm belief that my relatively high income reflects not just the effort and talent required to get some very good degrees, but also a huge amount of personal luck (starting with who my parents were, and I was really blessed when God handed out parents!), and a huge amount of support from society. So I don’t mind that my taxes go to lift up those with lower incomes than I earn. I’m glad that the latest contract has me paying a hgher share of my health premiums so that those making ridiculously small salaries can pay less.

And I make less than $100,000, so the people making $200,000 think I’m poor.

We need to accept higher taxes down to a much lower income level than $250,000 if we’re going to finance the elder-care we need and the educational systems we need. Or, on top of taxes, we’re going to find ourselves paying for private nursing homes and private schools.

CoolGal15 April 8, 2013 at 6:00 pm

Well, that depends on where you live. If you live in OC, CA, a combined income of 250+ is still less, given townhomes cost 800K. You become slave of your mortgage, unless you can compete with all cash home sales for the same price.

Larry May 2, 2013 at 2:32 pm

Amen

Rachel March 29, 2013 at 9:14 am

My husband and I make a (combined) 98K, live in an urban center, own a house, and carry 45K in student loan debt (no other debt besides our mortgage). We live just fine, and I have no real desire to make a lot more money (not that I’d turn it down). We even manage a trip to Europe every other year. And yes we have a kid. When you say you don’t understand how people can live with less than 200K it tells me you consider a lot of non essential things essential. And, while we are at it, taxes are patriotic.

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Suzych April 10, 2013 at 3:07 pm

Rachel — yes on living decently on under 100K even in an urban center; and taxes are the price of civilization, unless you’re stuck with a political administration that deliberately siphons off the government’s tax income into worthless wars and giveaways to Agribusiness and corporations. At that point you start to wonder . . . So many rich people whine and moan about paying taxes because they have no need of a generally high level of civic safety and comfort; they can buy their own insulated bubbles of both, and let the rest of us rot. It’s sad to see a prosperous nation brought so low by such selfish thinking.

Tom April 11, 2013 at 12:11 pm

Taxes are patriotic?

Do you realize that there was virtually no taxes just 120years ago?

If you actually researched into what your taxes are buying, for a lot of it you would be proud. For another large percentage, you would shudder at the sheer stupidity of the governing body you elect and what they fund.

Try Washington DC, one of the more corrupt and amazingly ignorant city governments ever gathered. Always looking for taxes for social programs to help the low income. They just finished their pilot build of a 1million dollar bus stop. I kid you not, metal, plastic and glass, and about 20ft long. You stand under it and wait for the bus. Thats its function. It has computerized digital displays on the side to track buses, and you don’t even get a decent roof in that 20ft to keep the rain off you. $1million for each stop. This is one of a thousand projects just in the one city. This made it through the system until it was noticed by the press and people started to bitch. Yes… taxes at work. One very tiny example.

What people need to do is get more transparency in what their taxes are doing and elect smarter people. Not popular people. I work with politicians in DC every single day. (When I say politicians, I don’t mean Government GS workers – who I see mostly working their butts off and are really understaffed)

I would not hire most politicians to mow my lawn.

Yes, I said most – there are always exceptions to every rule. Trouble is, the exceptions are outnumbered by the bozo’s and funding is done by the most votes…

Bozo’s are not patriotically spending your money.. believe me.

Dan May 21, 2013 at 7:46 am

120 years ago, really Tom? Before we realized that we needed to be prepared for attacks at the level of Pearl Harbor or 911? Before we had a highway system to maintain? When firemen used buckets and were paid a dollar a day? When one teacher taught 6 or 8 grades in a one room schoolhouse? When land was had for the taking and farms were built on hard work and not $350,000 combines? When 1000s of people died from the flu? What exactly were government services 120 years ago? You can definitely argue how money is spent today to but even make a statement about taxes 120 years ago is irrelevant.

kcandone June 4, 2013 at 12:27 pm

I completely agree. Im a single parent living off of the $50k range. I own a house that I was able to purchase on my own but we do not have extreme items in our home. My bed is a hand me down along with a large flat screen tv that I bought used from a friend of mine. We are not living large but I also do not consider us living comfortably either. I too worked my rear off for a college degree….in my 30’s to better mine and my daughters life but its been useless. Unfortunately I have those student loans looming over me as well. We are still able to enjoy life and go out to dinner, movies, shopping, etc but we live on a budget first and there is not much of a savings to fall back on but we do what we have to do to get by.

Carleton June 19, 2013 at 12:07 pm

OMG. Taxes are patriotic? Please, can you tell me why we broke from the British way back when? Certainly not because of your spirit or inclination…Privately employed people are sick of paying taxes that go to ungodly high public sector salaries. Yes, This Just In – Your taxes pay government employees, who work for only five years in some municipalities, then get health care for life. When a person retires after 10 years of service in the public sector, they receive a pretty nice retirement FOR LIFE. That is not available in the private sector. And you think paying for these guys to live off your work is patriotic? You are a sucker.

Tom, too August 8, 2013 at 12:44 pm

Tom, that (single) $1 million bus stop was built in Arlington, VA, which kind of kills your point.

Jeremy August 18, 2013 at 10:45 pm

I’m a government contractor just barely peeking into the 6-figure range (wage & investment). Originally from TX, I live in CA now, which has a much higher cost of living. I own 3 houses, a small yacht, a sports car, and a truck. Magically, despite my “meagre” earnings, I consider myself upper-middle or entry-upper class. Maybe that’s because I grew up in an “unimagineable” sub-$50K family.

Also, I served my country as an Air Force officer for 7 years and I enthusiastically pay my taxes. Condemn the tax man all you want, but a progressive tax system is highly beneficial.

yogahelps2 August 19, 2013 at 5:27 am

Jeremy–Possessing all those things (3 houses, fancy car, yacht, truck) on your “barely 6-digit” income is unusual, but if you are single, I can see how it’s doable having had your COL expenses mostly covered by us taxpayers during your yrs of military svc. (No objection; despite my pacifist nature I understand that we need a strong nat’l defense, albeit not one that’s larger than that of the next 10 highest-defense-spending countries, combined.) For a civilian with a family, it would be pretty tough to acquire all that stuff on that income. Hope you’re happy with all your stuff.

Like you, I believe in our progressive tax system and cannot understand the warped minds of the GOP right wingers and libertarians who want to take us back to feudalism.

RO April 7, 2013 at 8:43 am

Try surviving on disability, or on what that waitress that serves you your meals at your neighborhood Longhorns or steakhouse earns.

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Shane Mitchell May 4, 2013 at 3:40 pm

There were no taxes 120 years ago? There also was no highway infrastructure, trash pickup, sewage treatment, research and development of military weapons, airplanes, automobiles, or anything else that would require the collection of taxes.

Dino's Mom May 9, 2013 at 7:36 pm

I am disabled, my husband is retired. I planned on working until I was 56 because I would have 30 years at my job and a nice retirement. I became disabled at 43. Now my husband is 65 and I have been disabled for ten years. I am really glad we didn’t carry a lot of debt or we would have lost everything. Be very careful about carrying unnecessary debt and make sure you have a decent disability plan.

Biff Tannen May 16, 2013 at 1:46 pm

If you had nothing left making $250k, then you are spending way too much on fancy cars, insurance for those cars, eating out, entertainment and vacations, private school for kids?. Do you have any emergency savings? savings for kids college? savings for annual repairs and maintenance on cars and house? if not, why not? what happens if one of you loses one of those high paying jobs? – seems to me you should have no trouble savings $25-40k a yr in addition to retirement savings – even maxing out 401k plans, you will never save enough to maintain your extremely high standard of living. I gross $100k a yr and will have no problem living on soc sec and pulling 3k a month out of my retirement savings.

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Nick May 27, 2013 at 9:26 am

I am amazed and appalled by the sheer number of dishonest people there are in this country. I am 100% for paying any tax that everyone pays the same percentage on! I am 100% opposed to using the government as an accomplice in stealing huge chunks of income from a few in order to give it to people who didn’t earn it. Where did this idea that a person can vote to raise someone else’s taxes, but not his own, come from?! The country will not survive the greed of those who want what isn’t theirs and are willing to take it by force rather than do what is necessary to honestly make it.

I currently make over $500,000 annually, but I started out mowing lawns, selling firewood, selling encyclopedias door-to-door, or doing anything I could find to earn money. I worked hard enough in high school to go to college on a scholarship, but still sold my blood plasma twice a week for money to eat on. I waited tables in a steak restaurant while in medical school.
I have no sympathy for lazy people who just want to take what I have worked for all these years. Even now, I constantly try to acquire new skills and develop new ways of making money. I listen to Spanish language CD’s in my car because knowing Spanish will open more opportunities for me.
For those who aren’t satisfied with what they make:
1. Quit whining!
2. Turn off the TV!
3. Develop a plan to get where you want to go!
4. Every day, ask yourself, “What can I do TODAY to move me toward my goal?”
5. Keep your hands out of my pockets!

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Brian June 4, 2013 at 3:03 pm

Excellent comment by Nick. Life is full of choices. Just because some of us are disciplined enough to make the hard choices doesn’t mean we should be forced to take care of the rest. I’m 30yrs old and have been accused of being a cheap ass. Guess what I make the choice to drive an old vehicle, I make the choice to save my money and not blow it on things I don’t need, I make the choice to not care what others think about me and my possesions, I make the choice to not spend money foolishly to impress those around me, I made the choice to go to school, I made the choice to select a course of study where I could earn a decent wage, and have a chance to pay off my loans, I’ve made the choice to have a savings account so I can pay for medical expenses and retirement. I look at others my age who don’t make the hard choices and some day they’re going to look around and be screaming for more taxes because they need social security to get them through retirement. I’ve made the choice to save for my own retirement. I know bad things happen but making the hard choices to do things that aren’t easy sets you up later in life to deal with those bad things

Poor Folk June 19, 2013 at 10:17 pm

Wow….some of these comments just leave me speechless. My husband and I support our family of 5, without government assistance, on less than $30k a year. We live in a nice suburb, close to the metro area for better schools and his job. I’d be thrilled to earn so much and pay higher taxes, and I hope one day I do! I’m currently going back to school for my second degree to help us live a better life. We’ve been ‘poor’ our entire marriage, but we are happy and our kids have everything they need. We may envy those who make more, but rather than be angry with them, we try to learn from them. As a (partially) disabled veteran, there are only so many jobs my husband can physically do that he is qualified for. He went back to school for a while, but we just couldn’t survive without both incomes. Just because we are ‘poor’ does not mean we are lazy, or don’t make the hard choices, or deserve anything more or less than the next person. We work hard, we budget to afford the things we want, such as private school and therapies for our children, and my own tuition. We choose not to carry debt, we have an old, paid for car, we have an emergency fund to avoid using credit, and we rent until we have enough saved for a decent down payment. Nobody should be defined by their income, but rather their attitude.

Aaron June 28, 2013 at 4:17 pm

Poor Folk – While I commend you and your family on your efforts to get by – don’t think you are not getting government assistance(Tax payer assistance). If your family of 5 is bringing in less than $30k a year then your family is not paying Federal Income tax and you probably receive a nice check around tax time each year as a deduction for the 3 kids. Again, great job and you are right the important thing is that your family is happy.

Clare July 11, 2013 at 5:28 pm

Some of you make me laugh. No need to be so sensitive and reply defensively as though “your way” of living as been attacked personally because an above statement doesnt support your situation. I have read most of this thread, and the majority of the comments arent bashing anyone’s “input”, but rather, just showing a unique perspective. Everyene is different, lives differently, in a different area/state, has had different trials, breaks in life, hardships, help or none at all. All of these factors contribute to each of our experiences and the financial situation we currently find ourselves in. Just because you make less the person next to you, or significantly more, doesnt make your way of living “wrong”, and most people on this site arent saying that at all. These are all just different perspectives. Stop being so sensitive people, and learn to accept of points of view without offense! Cheers!

lana August 26, 2013 at 12:24 pm

Bravo Nick! We earn half of what the writer of the article earns, live in a house more than twice the value. Paid it off. Have two kids in college. We are assisting them so they don’t have debt. My husband and I worked our way through college. We have four cars to maintain, insure etc. Our budget is tight but we still tithe and save.

Like Nick said, work for what you want. Don’t expect hand-outs. I would LOVE to stop having to pay for all those who don’t want to work!

St Michael July 13, 2013 at 10:20 am

“Essential bills”??? Right. Cell phones, junk food, cable tv, stupid shit to fill the “modest house,” Starbucks on the way to work, and trinkets here and there, and crap for the kids. What kind of cars and how old? You pay high taxes because you have the wrong kind of income. The government loves your kind of income because it generates higher taxes and encourages a lifestyle of wasteful spending.

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Nathan January 13, 2014 at 1:32 pm

Getsa,
The lower class do deserve better. I read all comments, and I really can not understand why any negative comments would be made. I am lower-middle class working my way through school. I am truly grateful for the programs, fafsa, wick, va, etc. that do allow for individuals to, “pull themselves up from their boot straps.” This is done by distribution of wealth. You ask why should the million and billion aires pay for you to go to school or have children or to feed those children. Well, I say because many of those individuals, not all, are greedy. For example, Sam Walton’s aires, all billion aires paying their employees little of nothing to run their stores so that they can buy a 100 million dollar yacht or pay millions to lobbyist for their special interest. This is why the government should step in and help those that are willing but struggling to improve their lives. Human nature is naturally selfish, that is the way we are born, if we are not raised to be compassionate and self less then we become greedy and selfish. Thus, if your born rich and raised selfish, will you do what is right? If not, why shouldn’t the government step in and say; hey, we have children that are hungry, and homeless that are dying on the streets in the freezing cold, and if your not going to help them we will take a little chunk of your billions to help them.

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Hanna February 5, 2014 at 11:49 am

Try living off 35k with a mortgage and having a dog with cancer.. Unfortunately it can be done and it SUCKS!

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helot May 20, 2014 at 11:27 am

My wife and I make a hair over 60k per year in Denver. We have 2 kids. A house here is well over 250k with a mortgage pushing 1500 per month because of insurance and escrow. It is a matter of perspective on how someone can survive on that vs 100k. Do we have a 60″ tv with 250 channels? No. Do we drive BMW’s and Lexuses on lease? No. Do we spend $80 on a pair of pants? No. I grew up poor, and so I don’t feel entitled to “things”. My kids are healthy, happy, and I have enough money laying around to get them into the occasional music class or sports league. They get good birthdays, and holidays are festive. It is simply a matter of what you choose to spend your money on. Of course now that milk is pushing $7 a gallon it is getting more and more difficult to make those choices, especially when the budget is stripped bare of any kind of erroneous spending, but you make it work with whatever you have. Oh, and please don’t tell me to get some skills or some schooling to get paid more. I am not living my life for the sake of making more money. I balance my time between satisfying my responsibilities and doing what makes me happy. So what if I drive a beater and live in a neighborhood you would likely be too afraid to show your face in.

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Terri June 9, 2013 at 11:27 am

The tax deduction bit is misinterpreted by most people and those in real estate allow those false assumptions to continue (and even encourage them) because it best suits them at the time – they want the sale.

First, the only real savings is what you can write off over and above the regular standard tax deduction. Most middle class people don’t pay enough in interest and taxes to even really take the deduction since the standard deduction is higher. Those who are paying enough interest and taxes to be able to do so either aren’t middle class or have other issues (such as bad credit which is causing a much higher than normal interest rate.) Your average middle-class citizen is NOT going to see any benefit from the tax deduction.

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St Michael July 13, 2013 at 10:22 am

Allocate the debt payments to investment properties and you can deduct all the interest plus the standard deduction.

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No Political Agenda January 17, 2014 at 3:04 pm

But then, to add objectivity to your rationale, St Michael, don’t forget to account for the income tax that gets paid on the income generated from those “investment properties”. That gets added to the investor’s ordinary income, often forcing the investor into a higher tax bracket. In the suburbs surrounding the New York metro area, where we have state income tax and the largest property tax base in the country, I can assure you, the interest deduction is far more beneficial to a single family, owner-occupied homeowner than to any investor. Do the math.

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JB December 17, 2013 at 2:15 pm

not everyone gets a tax deduction. it depends how big of a house you get.

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JB March 18, 2014 at 6:52 am

Most don’t get the interest deduction with low interest rates and a relatively low house cost. Less than $200K for a house at 4%, you might just barely make the threshold.

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CMS November 28, 2012 at 11:47 am

@Peter, many Americans dont have enough itemized deductions to take the mortgage so reality is if you dont make $100K+ a year or live in a tax hellhole you likely wont get any rebate. The mortgage deduc is an upper middle class tax break.

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j cox March 13, 2013 at 4:38 pm

Duh. Like lower incomes should even be homeowners in the first place? Isn’t that how we got into this mess in the first place?

(wait for it… yup, here it comes. Go for it libs, tell me about greedy horrible bankers over-lent in a “predatory” manner is how we got into this mess. never mind libs in the first place were the ones strong-arming the bankers into lending it out to people who shouldn’t have been lent to!)

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Stephen W March 21, 2013 at 6:17 am

Considering that Fannie and Freddie were very late arrivers to the subprime mortgage market, I find it hard to see how they can be blamed for the subprime mess.

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R Bel March 31, 2013 at 11:07 am

What got a lot of people in trouble was not living below or within their means. I guess I am what you would call lower income and I own a home and has never been late on a payment. I do have credit card and student loan debt but plan on being out of it within the next 4 years. Lets stop the blame game.

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TheOtherJim June 8, 2013 at 2:47 pm

J Cox – You almost answer your own question, and with just a little bit of research you could answer the whole thing. First of all, nobody “strong-armed” the banks into doing a thing. The banks — some of them, at any rate — discovered that they could make loans and then sell them off immediately, thus eliminating any risk for the bank. They had, as you should know, no skin in the game. As long as housing prices went up and up, everybody won. There was a well-known financial writer(whose name escapes me) who got caught up in this spiral, buying a home in DC that he couldn’t really afford and then refinancing it, egged on all the while by the banks.

Financial institutions — Wall Street and the banks — love free money, things like “default credit swaps” that appear to take all the risk out of things and leave only generous profits. And as everyone should know, there is no such thing as a free lunch. That’s why we have — or used to have — regulation, things like Glass-Steagall.

Seriously, though… poor people caused the economic collapse? You really think that a foreclosure on an $80,000 house has more impact than a foreclosure on a million-dollar property that someone bought as speculation? Really?

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Heinz November 29, 2012 at 9:34 am

my primary residents is in California,I also own a home in Costa Rica.
If I sell the home in CR will I have to pay US capital gains tax,after I have paid tax in CR ?

Thank you

Heinz

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Glenn December 27, 2012 at 9:03 am

Yes

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Bruce Ecks CPA June 7, 2013 at 12:54 pm

Yes, if you are a US citizen you pay tax on your worldwide income,
however you will receive a credit for the taxes that you will pay in Costa Rica.

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Hanna Ann December 11, 2012 at 1:19 am

This is the primary rule for buying a house. After buying house, you can apply insulation in your house as a way of heat transfer.

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Chris January 1, 2013 at 7:48 am

The 3 biggest risks to your finances are:
-unemployment
-divorce
-health problems
make sure you take care of those items first before worrying about anything else.

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gtsga January 30, 2013 at 5:10 pm

You need a 4th:

Over-bloated government spending and the subsequent increased taxation.

Put retirement planning back in the hands of citizens, eliminate the retarded social security nonsense and things might be different.

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godzilla March 27, 2013 at 4:53 pm

The operative word in the above post is “might”. There are no guarantees in life period!

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Abigial fernandes January 9, 2013 at 8:38 pm

Hello sir,
I want a house were i could stay forever and work with my family. I am just 18 yrs. I want to buy with my own money. and settle there with them. I would like to gift a house for my family. I would like if u understand my feeling. And they like to visit in California. I would like to know the proper amount of your house and i would like to bring them in the month of December 2013.

Abigial Fernandes
From Goa.

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anon January 11, 2013 at 5:24 am

I am looking at buying a house that currently rents at 300-350/month
What price should i offer as a general rule?

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realistic February 13, 2013 at 8:36 am

Depends on:
Where it is
Condition
Appraisal value
How deep are your pockets

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Joe February 1, 2013 at 12:15 am

Very outdated analysis. With interest rates around 3% a very large part goes to principle starting month one (compared to just a few years ago when 7-8% was normal).

Buy a house you want to live in and can afford, everyone has a different take on that because different people have different income levels and the amount they can put down.

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MSG February 4, 2013 at 10:29 pm

Put your money in a place were its
-Safe
-Liquid
-0 to 12% Rate of return guaranteed
-Maximum upside potential with no downside risk
-Accumulates tax free and withdraw tax free
-Blossoms in value

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Eric February 11, 2013 at 2:15 pm

Another consideration with regards to taxes and interest paid is the deduction that you get each year for the interest paid on the loan. Granted that is taken off your gross and in reality equals only your taxe rate percentage and not the total amount, however if you are paying a 28-32% that means that your effective cost of your loan is reduced by reducing your income tax burden, equity is gained and you are paying on an assest that you can sell or rent later. This is a deduction afforded everyone regardless of income levels. Additionally, with a 30 year fixed rate mortgage, your monthly costs will go down when taking into account inflation (especially with 3-4% loans) and even though local taxes might increase, again they are a deduction off your Fed income tax. All of that beats throwing money at just renting. The key is to buy what you can afford, not necessarily what you think you deserve. In that scenario you will come out okay, regardless of how much you hate the government or taxes or all the other things you don’t have any real control over. With the ratching down on credit that has occurred (the “whys” of that is whole other topic), more and more folks are going to be put in a position that they can only rent, which is going to be good for the property owners who have a desire to rent. My take on this topic is to buy what you can in an area that has potential upside and growth, compromise on the whole “dream house” idea with a first house and get into something affordable as quickly as you can before interest rates go up or inflation starts to kick in again (always does, economics is cyclical).

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Randy K February 19, 2013 at 1:54 pm

The deduction for mortgage interest doesn’t help you at all if that plus other things you can deduct don’t exceed the standard deduction. I only financed 125k on my house, and at 4.8% interest, married filing jointly, and even adding in state and property taxes, etc. itemizing doesn’t get me to the standard deduction. And every year that deduction becomes smaller because there is less interest paid (Not that I want to pay more interest!). Ownership is still a win for me because my mortgage is $300/month less than renting comparable houses in my area, though. Even the apartment we lived in before buying the house had a higher rent than my PITI.

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rowlandw April 2, 2013 at 6:42 pm

Don’t you think the mtg deduction is already baked into house prices, that is, making prices higher? How long before Congress kills it off as a means to raise revenue w/o actually raising taxes? If so, house prices will drop as the value equation shifts.

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Living like a king February 12, 2013 at 9:54 am

Some people hate taxes but yet they want traffic lights, side walks, schools fire protection (think insurance), police, highways, the list goes on. None of that is free and someone has to pay for it and as users we pay. I don’t like taxes but until someone has a better idea we have to live with what we have. Don’t complain too much until you can do something about it. Just live within your means and not your credit cards means. You want to impress people than you pay with where you live, drive, and wear. That simple.

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Common Sense February 13, 2013 at 7:10 pm

LLAK, I don’t know anyone who complains about funding the government and government services perse. The complaints come because politicians from both sides of the aisle treat our hard-earned money like their own personal campaign funds! They don’t respect the $ they spend. It’s like Monopoly Money to them…not OUR hard-earned dollars!!

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JB February 15, 2013 at 1:45 pm

Big diference between local taxes and the money our lovely federal government grabs every month.

Have any of you wondered what retirement would look like if we had the 12% of our income social security took (6% from the individual, 6% from the employer) and were allowed to invest it ourselves?

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KS February 18, 2013 at 12:52 pm

It depends on how much you earn and how long.

1. If you are high income earner and worked for over 30 years, you will have a much better retirement.
2. If you are low income earner and/or disabled your quality of life will be much less.

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CPA February 25, 2013 at 2:01 pm

Yeah… those things cost like 1/1000th of a percent of what the rest of our federal expenditures are (particularly social security, medicare, medicaid). Most of the items you listed are local or state anyway, not federal. So you should go back to the drawing board for a better argument.

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j cox March 13, 2013 at 4:45 pm

to “living Like a King”‘s comment:
the problem is not that we hate taxes. Ay sane person knows you have to pay SOMETHING into the kitty. The root of the problem is that half of our people with incomes don’t pay into the kitty at all but they do have a vote in picking the ruling class that promises them they won’t have to pay into the kitty but they can dip their grubby paws into the kitty. I’m not knocking progressive taxes in theory that state the millioniare should pay more than the minimum wager. But I am highly incensed that the minimum wagers pay NOTHING, have a say in choosing our leaders who GIVE them stuff that we put in, and then tell millionaires (AND US TOO, BTW!) that we have to pay more, again, and then more again after that again, just to keep the whole scheme running. Oh , and btw, everyone who pays in are collectively labeled as not paying their share. Hmpph! EVERYBODY should be made to pay at least SOME token amount.

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Taxpayer April 7, 2013 at 4:29 pm

You have a very SIMPLISTIC view of the world. Many of the people who do not pay federal income taxes are disabled (as in living in nursing homes). Many are retired with no other income than social security. Many are retired military. Many are unemployed. Virtually EVERYBODY pays SOME taxes, whether it is at the supermarket or by paying higher rates for rent to cover the landlord’s property taxes. Not everybody who does not pay taxes is living off the government till. The minimum wagers you are so quick to complain about are the very people that are helping to keep your prices low. Imagine if we paid a living wage to everybody who works at McDonalds. How long do you think they would be able to offer $1.00 hamburgers? Again, they are paying sales taxes when they buy something. They are paying property taxes as part of their rent. Oh yeah, I like your “incensed” feeling also. You don’t seem to think that minimum wagers want to better themselves. I guess wanting better schools and better training opportunities is asking for too much. I guess wanting good police and fire protection is asking for too much. Maybe asking for better roads is asking for too much. That tax money that we pay at the gas pump does not give us the right to decide how it is spent, right??? Just because someone does not make enough money to satisfy YOU, the same type of selfish person who does not want them to have anything in the first place.

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No Political Agenda January 17, 2014 at 3:57 pm

Sorry to say your comments are somewhat naive, Taxpayer. For starters, the single largest factor driving the value of rent anybody pays is supply & demand, not “higher rates for rent to cover the landlord’s property taxes”. When taxes go up, a landlord can not simply “charge a higher price” if the market doesn’t dictate. In fact, the past decade, the rate of property taxes – at least in the northeast – has increased at a significantly higher rate than average rent prices. More often than not, it is the landlords that have absorbed the increases. Yet, the renters have an equal say in voting for such things as increased school budgets. Who wouldn’t want more for the kids – especially if they are not directly affected by the cost. Next, the sales tax on goods sold you mention is something EVERYBODY pays, so that should not even be a matter for discussion. Then, perhaps you might want to consider taking a look at the numbers – because there are an overwhelming number of people on public assistance – and for multiple generations – who do not fall into the “disabled” category but, rather, who ARE living off the system. A system that does not tax ANY of the assistance they receive, nor take into account any of the funded-programs they might be able to take proactively advantage of but opt not to – education credits, childcare, job training – to better themselves. Before you criticize a company like McDonald’s, whose CEO started at minimum wage behind one of their counters, you might also want to consider that they offer a considerable number of advancement opportunities for their employees, including tuition assistance. Whether or not people want to take advantage of that is up to them. But, often, in lieu of personal accountability, excuses are made and liberally accepted. For example, we hear that people can’t pursue higher education (and in many of these cases, I’m referring simply to HS graduation) because they chose to have children too early (even as early as mid-teens), or they chose (at any age) the wrong type of partner to have a child with – ie. not responsible or educated, lack of initiative or willingness to better themselves. And your fire protection investment comment really gets me. Did you know that more than 70% of the fire departments in this country are staffed by volunteers? Well, I do. After I put in a long week at my private-sector job – with considerable overtime for which I am not compensated – and pay upwards of 30+% of my salary in income taxes, guess what? I’m one of those volunteers giving back to the community – my personal time for the good of others and the community, ,with an understanding of what it would cost me and other taxpayers if we didn’t have volunteers. I can also tell you first-hand, in my capacity as a volunteer, how many “subsidized” residences I’ve been in that have luxuries that I can’t even afford – multiple flat screen TVs, XBOXes, iPhones, eccentric jewelry, flashy cars and more – and my income is well above the national average. You do not have to be selfish or rich to believe we are being taxed to death. In NY, a person who lives entirely off subsidies actually has a household income equivalent significantly higher than someone who is on minimum wage. Therefore, any incentive for someone to take the initiative to work and better themselves is removed. And voila’ that is how we end up with multiple generations of people in the same family on the system who NEVER end up paying ANYTHING in. Tell me again, who is it you believe are the selfish ones?

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WI CPA March 10, 2013 at 6:59 pm

If people either take out a 15 year loan or have a 30 year loan but pay it off in 15 they will be saving a lot in interest. Granted your tax deduction on the interest will go decrease faster, but it is a good way to build up the equity quickly. Granted it is nice to get an interest tax deduction but its nice to have your house paid off and you aren’t making any payments.

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yogahelps2 March 17, 2013 at 8:37 am

The author’s formula at the end omits something big: All the capital improvements you put into your home in those first 5 yrs. There are always surprise major investments you need to make, even if you had the home inspected like we did prior to buying, and unfortunately, you can typically recoup less than 50% in the eventual sale price. In the first 5 yrs we owned our 1994-built townhome we put in about $40,000–2 new A/C units, a new roof, new gutters, sided the rotting wood trim, patio, new windows, security system after being burglarized, new carpeting. Only 1/2 of those were anticipated, and although we bought just post-peak, the realtors were telling us our offer was too low. By now we’ve done probably better than renting (by a hair) only because we had a huge down payment and relatively low interest payments, having refinanced 3 times. With a 6% broker’s commission, we’d have to sell at a loss if we were to sell this year.

For those who think the mortgage interest deduction lessens the cost of owning vs. renting, you need to consider that those mortgage pmts could be invested, and earn, after-tax, more than what you save in taxes.

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Jason R. March 27, 2013 at 4:57 pm

What the mortgage payments could earn after deducting rental expenses…

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fred van allen March 20, 2013 at 7:18 pm

It’s easy to generalize, but timing within the real estate cycle and location can make a big difference.

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Steve March 30, 2013 at 11:22 am

Notice how the author hides the BIGGEST cost associated with “the five year rule” — the ridiculous 6% real estate agent fee for “selling” your house.

He mentions “closing costs” and how “buyers and sellers closing costs are different” but the truth is that the seller’s closing costs are usually less than a grand UNTIL the seller gets hit with that bull crap 6%.

Think of it this way: does your house’s value go up 6% in five years? Not in this market. But let’s imagine it did. The profit from value increase is erased by these ridiculous fees.

In the internet age, the house sale fee is too high.

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Tim April 10, 2013 at 9:33 pm

Like I always say to clients if they inquire of such. “You are free to attempt to sell your home on your own.”
Like good luck with that when most of my clients have MOVED at least 500 miles from the home they are selling.

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charlene clifford April 23, 2013 at 6:55 pm

You missed the point, Tim. Steve was telling you your fees are too high! If you are making more than $36,000 a year as a realtor, then your fees are too high! And I’ll bet most realtors make way more than that! Secretaries don’t make more than that and they have a more difficult job than you with 8 hour days.

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Sean April 23, 2013 at 7:02 pm

Not to side with the realtor, especially one who takes the approach above, but 36k is a little low. The bottom line is that a sales commission should be earned. Most realtors got used to the easy money, and the 6% is not real money since everything is financed …. so what right. Now they hold it as a fee to sell your house (try to do it on your own??) instead of defining why the service is worth that ….

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rowlandw April 2, 2013 at 6:33 pm

Can you count on your job lasting 5 years or being able to find another job commutable from your house?

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The Rooster April 4, 2013 at 1:00 pm

What do you all want? The American Dream? You can by it from any Saudi Business man or CEO for a Chinese Industry…

I can live on $50K per year easily… It’s all a matter of living within one’s means. Now, if one’s means mean a BMW, 3600sqft. home with all of the ‘cool’ things that consumers can be trapped into buying in order to keep up with the Jones’, then it’s going to strap you a little bit more. But hey – you want that American Dream.

Who came up with the American Dream anyway? Obviously some deviant manipulator that has a way with words and making you want things you never thought you could own, so you can be viewed a s ‘Winner’!

Just live for God’s sake… You’re going to die anyway and worms have to eat!

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gullahgal April 13, 2013 at 3:47 pm

You realize that following the 5 year rule would prevent most military families from ever purchasing a home until after retirement.

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Dan May 21, 2013 at 8:28 am

I’m from a military family. My parents did just that, they never owned a home until they retired. We lived in base housing. It worked out well anyway, you can retire from the military relatively young, have another career, and buy a house. In their final retirement, most people are envious. They have their house paid for. Guaranteed retirement benefits from both military service, my mom’s job after my dad retired from the military, and social security. They have nearly free medical care. They have commissary and BX privileges. They have no debt. When we were a military family the pay was worse than it is today, going to Burger King was a big deal I remember once. There were hard times during service and starting civilian careers. If you are talking military retirement, you have to take the long view, buying a house at each posting would be dumb. I think the longest we were anywhere was 4 years, usually 2. If you have the money to think about that, then save it for later.

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JB May 29, 2013 at 1:50 pm

Why buy a house if you keep moving? It’s just a place to live.

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mind over money April 22, 2013 at 9:16 pm

I think the biggest issue in society is that too many people don’t know how to manage their finances. They taxes we pay are the taxes we pay and we can all cry about it , but in the end it makes no difference , we are stuck paying them. We are all left to deal with living on what resources we have. The bulk of society would serve themselves better if they learned how to live below their means in stead of barley within them , or grossly over them. I have in my line of work watched thousands upon thousands of people of all walks of financial life waste so much of their money on ” poor choices ” than on daily living. It isn’t to say that there aren’t masses out there suffering and scraping their pennies to get by and make ends meet making all the best choices for their circumstances, there are. I am talking about the ones who waste hundreds and thousands a year on things they claim they ” need ” , that truthfully are only ” wants ” that can be done without or saved for instead of splurged over. And it’s these repeat offenders who find themselves deep in debt, unable to make bills, or end up in foreclosure. They usually have little to no retirement , and the few who do keep digging into it today , with no worry for tomorrow. It’s the vicious cycle of ” I WANT IT NOW, NO WAITING” , ” BUY NOW PAY LATER” MENTALITY.
Then they find them selves whining and crying when they are drowning with no life preserver! There needs to be a finance rehab for addicts who can’t keep their money where it should be and make sound choices . So they can break these habits .
No , I am not wealthy, Our home is modest in income under $100k per yr. We have 4 children, and only one income.
We don’t live like prairie people , but we are frugal . Everyone can save money ! It’s a matter of what it is worth to you, and what you are willing to give up to do it!
As an example, my wife has set herself a monthly budget for groceries of 250$, she will not and does not exceed it. ( Her choice ) She has taken the time to find ways to save enough money by couponing and bulk shopping to cut our bill from 1000$ mo. And still feeds a family of 6, and has food to donate to our local food pantry.
She then went over our household budget and cut our internet, tv and phone down to the minimums and saved us 240$ on our home and cell phones, 160$ on our tv service , and 75$ on our internet.
She even went as far as to home school our 4 boys which cut hundreds of dollars a year in school fees, and food costs for packing and buying school lunches. And sports fee’s . She signed them up for sports through our local Y for the homeschooling PE credits at half or more than it would have cost if they played for our local school. Saved us 200$

These are just some of the things we did to cut back and save money that greatly impacted our household finances.

Many other small things were done as well , but even the small things add up over time and in a year can amount to hundreds of dollars saved and not wasted.
It’s your money! Spend and Save wisely!
Her best idea was turning our home into a rental property instead of selling it to purchase another home. A great way to help kick uncle sam where it hurts and shake some of your hard earned money back out of his hands and into yours!

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JB May 29, 2013 at 1:49 pm

You control your taxes by not purchasing a huge house.

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DLS April 23, 2013 at 10:07 am

Sadly, myself and many others are making less each year once you account for inflation and the absence of salary increases. Despite doing better work and more of it, I’ll be looking to downgrade in the next few years, not upgrade.

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Nix April 30, 2013 at 9:44 am

The 5 year rule is fine if your goal is to break even on owning a house over renting. But if you want to accumulate true wealth, the only way to make money on owning a house is to spend at least half the loan term in your new house.

That means 15 years for a 30 year mortgage, 10 years for a 20 year mortgage, 7 years for a 15 year mortgage, etc.

All of these rules will only work when the housing market isn’t dropping and interest rates aren’t skyrocketing. If the housing market drops, you have to be prepared to spend even more years in your home to build wealth.

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rowlandw April 30, 2013 at 10:28 am

And, if you buy another house, keep the original mortgage end date the same instead of starting over with a 20 or 30 year note.

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JB May 29, 2013 at 1:48 pm

Rules never work out the way people plan. Just buy an affordable house and don’t keep moving.

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Larry May 2, 2013 at 2:31 pm

I have found it necessary to move frequently to capture career opportunities while owning a home.

My solution: I have never sold a house I bought. I convert them to rentals and let someone else pay them off. I plan to retire on the rental income after mortgages are paid off.

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JB May 29, 2013 at 1:46 pm

As long as you have continuous renters that is fine. That rarely happens. Selling would bring you money in equity built up. If you are always moving, why buy a house in every city? You can own rental property all over the country if you want to be an absentee landlord.

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Dave Harris May 2, 2013 at 3:17 pm

This sounds like a good strategy for lifelong debt bondage. Why should anyone need a new or bigger house every 5 years? All you do is guarentee that you’ll never pay off your mortgage. Most of what you pay is interest, and you only recover a third of that (at most) with the tax deduction.

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Johnny May 3, 2013 at 8:03 pm

Don’t listen to these 5 year rules. If you get enough coin from a sale, sell and use the coin to get more for your money.

Make your own rules in life as long as they are within the law of-course. Live and be happy and don’t feel trapped by rules and other sh.. you read online. Writers get paid to write sh.. that sounds good, but in the end, it’s your one life. Live it well and on your terms.

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Me May 12, 2013 at 5:37 pm

Rule #1: do not follow, make your own trail but read (educate yourself) a lot.
I do understand it is hard on the beginning, but everyone is different, plus difference in time could cost you a lot of losses. Have multiple views on same issue than make a decision. Do not think (sit on it) too much (too long) otherwise opportunity will be gone.
I’ve bought my first house in 2005 and did not sell it yet.
Only regret I have had I did not buy it earlier.
Now I would like to get bigger one, and working on it.

About taxes. We have to pay them only problem we do have is “wrong” spending.

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Sharon May 17, 2013 at 11:25 am

I was married at 17 and my husband was 18. We rented for two years and then decided to purchase our first home. My dad (who was not educated and could not read) advised us to purchase a duplex so that we could have help with the mortgage payment each month. We listened to his advise and purchased our first home in 1974. In 1987 we took out a home equity on our first home in order to buy a bigger home for our family that grew in size to number 6. We have been married now for almost 41 years, raised four children and have two houses completely paid for. We are still receiving monthly rent on the two units we purchased in 1974 and this will greatly add to our retirement income. If we can make it on high school diplomas and income of less than $75,000 per year, anyone can.

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KJ May 19, 2013 at 7:34 pm

So you’re a boomer that started life at the cusp of the most advantageous bull market in history (and likely ever), and you were able to do well with your investments? Yeah, can’t imagine why everyone doesn’t just do this.

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Dan May 21, 2013 at 8:15 am

My parents bought a 2 year old house in a top school district in 1976 for $30,000. They had a low interest VA loan. The value of the house was about the same as their yearly income. The world has changed. First off, today they wouldn’t qualify for the loan. Second off, today the same house, 37 years later is in a declining neighborhood and sells for $190,000.

You made some great decisions in 1974, but that is probably not helpful to people in the same situation today. If you had it to do over in today’s market and economy those options aren’t available because you need more money up front. If you still own the duplex, as an exercise, check its current value and consider what an 18 year old couple would have to have in order to get into the deal. If they’ve got the money, its still a good idea, I just don’t think its available to everyone.

Like many of us, you also had the good luck to be able to consistently hold a job and not loose everything. There are a lot of people today who have been downsized out and lost all they had, even with the best decisions.

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JB May 29, 2013 at 1:45 pm

You can sell the duplex and take the lump sum of the value of the duplex.

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Dan May 21, 2013 at 8:04 am

Another consideration I’ve only realized in hindsight over a life time. Costs only go up. Houses become more expensive over time and rent goes up over time.

I’ve been paying mortgages for nearly 30 years on a succession of three homes. My current home sells for about the median price in my area for a family home, $250,000. If I had purchased it 20 years ago I would have had it for $170,000. 30 years ago and it would have been $150,000. My first home was purchased during a downturn for $70,000 and in now worth about $180,000. The people I know that are in the best overall financial position are those that bought what they wanted as soon as they could and stuck with it as long as they could. I think you are better off saving up and keeping your eye on the market for a house you can stand to live in for a long time, than you are buying a house just to buy the first house on a ladder to the next.

If you are just going to buy and trade up over and over, you have to count on luck with the cycles of the market. Every time you trade up, you loose a percentage in closing costs, even if you gain overall in value, its not as much as you thought it would be. If you stick with a house, it will go up in the long run. 20 years from now you could be paying a lot less than your friends and neighbors because the principal of the loan was half what theirs is. At the same time, salaries tend to go up. 20 year from now you might find you can easily pay more on your mortgage. 20 or 30 years from now, you aren’t comparing renting vs mortgage, you are comparing property taxes vs. renting. At that point you might want to sell and use the proceeds to buy another house, but you have so much equity you can hardly loose.

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yogahelps2 May 22, 2013 at 6:41 am

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Don’t forget to add forgone investment income to the cost of owning. If you were to sell today for $180,000 and invest that money at 8%, with a 25% tax rate for a middle-class retiree, it’s a $900/month opportunity cost. Add your cost of eventual broker’s commission, upkeep, improvements, etc. and THEN compare the monthly number to renting. If you truly value your freedom from neighbors and enjoy being a handyman, groundskeeper, etc, it may make sense for you to own. Otherwise, you could very well be better off, financially, if you rent.

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JB May 29, 2013 at 1:44 pm

Interest rates are at historic lows compared to 25 years ago, so costs can go down.

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CJ May 28, 2013 at 8:41 pm

Whatever happened to buying a home and living in it for the rest of your life?

Moving every five years until you buy the home you want to live in seems like a lot of effort. If you have to move 3 or 4 times, that’s 15 to 20 years of your life. And a lot of packing and moving.

While my husband and I were saving the downpayment for our dream home, we started looking for it. The search for the right home in the right area for us was part of the fun. We knew that we wanted to move only once more—into our dream home—and we did. We’ve been living in our dream home for nearly 14 years and our family has built memories and traditions that have provided us with stability and a history and sense of belonging that moving every five years would not have done.

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yogahelps2 May 29, 2013 at 4:52 am

That’s definitely the thing to do if you can. But if your spouse and/or you lose your jobs, it may NOT be the wisest thing to do. My parents stayed in their house 53 yrs, but my dad was at the same job his whole adult life. The economic conditions, corporate environment and the world of small business are much different today, and that has led to a society that is much more mobile than what we had 50 yrs ago.

Our first home is estimated, on Zillow, at triple what we paid for it in 1983. That is not a great investment return, especially when you add in all the improvements we would have had to make over that time. In comparison, the stock market had about a 7-fold increase over that time span.

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JB May 29, 2013 at 1:33 pm

Houses are not investments. They are shelter you pay for. It doesn’t matter what your house is worth if you aren’t planning on selling it. If you have student loan debt, don’t buy a house until you pay it off.

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Terri June 9, 2013 at 11:24 am

But, you are losing out on collecting investment properties, which can substantially add to your income once you retire. Moving every few years really only make sense if you are turning them into rentals, not if you are just trading up, though. Part of me wishes I had taken your approach and started out with my dream house, but part of me is glad I’ll have the extra income once I retire. Actually, that extra income is going to allow me to retire 15 years earlier than most people. So, I guess whichever path you choose, there are pros and cons.

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Dan September 18, 2013 at 11:55 pm

Good point you made but the dream house usually costs a fortune.
I bought what I could afford and in 78 I paid 50 grand for a two bedroom bungalow and payed it off in 10 years and still live there today.
I wanted a mortgage free home so I could afford to have a nice car and travel.
I can’t imagine paying 4 5 hundred grand for a house today and that’s for a house not much more than I have now.

If I was starting out today I wouldn’t buy a house at to days prices that is madness, grand kids be paying for it.

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JB May 29, 2013 at 1:32 pm

Even 5 years is too short sometimes. Kids were raised in 1,000 sq ft houses all over town. They don’t need their own bedrooms until they hit 10 years old. Buying too big of a house has problems as well.

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Rai May 29, 2013 at 7:51 pm

It seems to me that you will always have enough for what you put first, regardless of how much or how little you make. I wanted a comfortable home that my disabled son would be capable of caring for when I’m no longer able to so I saved while working after my husband passed away leaving me with 5 special needs kids to raise. We now live in a 2500 ft home that is set up to maximize results with minimal effort AND provide him with a source of income when I no longer can. It will be paid off 3 that’s right three years after I made the first payment on it. Oh and our combined income is less than 25K a year and the only “assistance” we have ever gotten was from the SSA but his father worked very hard for that and I consider it his on going “child support” which if he were still here would be very substantially more.

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Anne Breen May 31, 2013 at 1:04 pm

I enjoyed reading most of the comments. Some were better than others and some were great. You have to be able to do the math and have a budget plan that you stick with to make it happen. Your health is your most important asset and you need health insurance for your family. Planning ahead for retirement makes sense too, but life is what happens while you are making other plans. Gbyaay anne

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Terri June 9, 2013 at 11:20 am

What I did was buy every 3-5 years. As soon as I could command rent higher than the mortgage, it got rented out and I moved on. In just under 15 years, I have purchased 4 homes, all of which I still own. All are on 15 year notes, which means some are almost paid off. And, the income from the 3 rentals pays the mortgage costs on all 4 homes, which means I’m essentially living in mine for free. Sure, there are maintenance and repair costs, but in the long term, I’ll come out ahead when I have 4 properties that are paid for with no mortgage and will have income coming in on 3 of them. Selling a house that you’ve got a good amount of equity in just so you can take out a new loan on a bigger property is silly. Earn and save the downpayment on the new property just like you did on the first. Don’t sell to get your new downpayment.

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Jose Nunez June 21, 2013 at 1:15 pm

Everyone should STOP paying their mortgages immediately and let the banks collapse. Then everyone will own their homes, and be debt-free.

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1ltlos June 27, 2013 at 3:21 pm

My property taxes (so Cal) are $3900.00 times 2 every six months, and my mortgage is $3470.00 and again 2000.00 every 6 months for fire/quake insurance. My home is 62 years old — Where to get the funds to put into the house is what concerns me – I give more out than I am able to put into the house in upkeep — I figure that you young folks with your great paying jobs, who are still paying student loans and already have a home? How did that happen? Property taxes have to be on a tier system where those living in their homes longest pay less and less and those who purchase later and live in the home fewer years pay a higher rate so that the older folks can tend to the property and the neighborhood maintains its curb appeal no matter whose home one drives by. Many of you make bank and I dont know how I survived all this time on a teachers salary – Jose Nunez where did you get that strategy? If you stop I will stop — are you an American citizen?

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Ummmmm July 1, 2013 at 10:12 am

I’m grateful to see some people on here who have a little sense, it’s just so funny how these message boards, with little regard for the actual article, generally degenerate into name-calling and partisan posturing. Well, not funny so much as sad.
In any event, my hubby and I live in a small suburb outside a city on $110K or so (hubby’s self-employed) with a $300K mortgage and my grad school debt ($125K) and, though it’s not fun, it’s fine. I recently graduated, but we decided to first purchase our home and THEN pay down my SL debt, which is at 6.2%. Our mortgage at 3.7% is at the bottom of our radar. We also put down enough that we have no PMI, which frees us from worrying about paying it down so quickly. On our payment plan, we estimate that my SL debt will be fully paid down within 7 years, saving almost $100K in interest (I know, Yikes). But, at that point, we WILL rent out our home to get our dream home and maintain income…That’s our plan, and though it doesn’t work for everyone we like it. Also, taxes are patriotic :P

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1ltlos July 4, 2013 at 12:30 am

And also express their opinions with out much care.

Taxes are not patriotic. Look at how your tax monies are abused and wasted. The story goes that this nation launched itself into Independence due to taxation on the Peoples favorite drink – tea. Taxes when fair are Fair Taxes — when unfair and families are gouged Yearly and even daily no – taxes are not patriotic.

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Mike July 6, 2013 at 10:51 am

Actually, paying your taxes is patriotic. Without a government, funded by taxed, you have anarchy. We came together as a nation for a reason….reasons actually. Government is not the enemy, bad government is the enemy. Government, for the complaining has accomplished many great things.

All those ‘states rights people’, watch what happens when a disaster strikes (hurricane, tornado, etc.), the first thing they do is cry out “Where’s the federal government?!?!”

IF people in this country could put down their fast food, cheap beer and reality TV long enough to actually pay attention, we could vote the bastards out and vote in good people to make wise decisions.

The system hinges on informed voters and yet we, the supposed ‘shining beacon on the hill’, the greatest democracy in the world, has a voter turn-out of >40% for Presidential elections. That’s right, 6 out of 10 who could vote, don’t.

I agree about turning homes into rentals. I just bought a very nice, 1925 home in East Bradenton, FL for $35K, will probably spend about $15K fixing it up and I can then live in it for free (taxes, utilities, maintenance) or rent it out for $800-$900/month. There are lots of good deals out there, you just have to look. This wasn’t a foreclosure either.

I’m a registered independent and don’t care about donkeys or elephants. Please get your info from a more respectable and reliable source than Rupert Murdoch’s high-salary professional liars.

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Michael July 13, 2013 at 6:35 pm

A little bit of math works here.

I’m using a $300,000 mortgage at 5% for 30-years fixed as an example, and only the P&I payment, not taxes and insurance.

Payment is $1,610.46/month. Assuming no appreciation they’d have $13,552 in equity, after making $57,976.74 in payments after 36 months. They’d have $24,053.12 in equity after making $96,627.89 in payments after 60 months. So, for $38,651.16 in payments they’d accrue an extra $10,500.82 in equity by paying an extra two years.

These figures strongly suggest the writers friends, family members, and other real “professionals” are banking on appreciation as their rationale for staying put.

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Laura R July 16, 2013 at 9:58 am

I want to go back to the ‘unreasonable fees’ that realtors charge..
I work in the real estate industry. I am not a Realtor. For one very simple reason, I can’t AFFORD to be! Realtors (if they are members of the National Association of Realtors), pay very high annual fees, and fees to MLS annually, are required to complete annual continuing education to renew their license (which also cost money)…
That 6% you speak of, is split between the buyers agent and the sellers agent, leaving just 3% per realtor.. and of that, a percentage goes to the Designated Broker for the ‘office space’ they work from. Add to that, that they must be ‘on call’ at all times and there are no Medical/401k benefits. It is not some cush job that has an infinite cash flow. You really think that making $36k a year is too much?
I imagine if you are a broker in Beverly Hills, or NYC, you could do quite well.. but the vast majority of Realtors work their tails off, handle the $150k home purchase with the same respect and care that they do an $800k home purchase, regardless of ‘what’s in it for them’.. and they do not make much in the end.
Don’t even get me started on the service industry, in which both of my daughters are employed while working their way through school.
Income is subjective. If you’ve ‘always’ made $250k a year, you will find a way to make it .. not enough to live on. Same as $50k a year.
We’re doing okay on $80k.. in the black on the house, have an RV that we get out in most weekends, have 2 IRA’s and and 2 401k’s that are healthy.. I’m able to finally work part-time (after working full-time for 39 years.. and I’m only 55)..
We pay taxes all year (and usually owe a bit more at the end of the year.. we haven’t quite nailed the magic deduction! :) The husband is a newspaper journalist – not a real money-maker as far as careers go, but he’s a sports editor, so it’s a dream job for him.
We’re happy, we don’t begrudge people who a Type A personalities that must amass money. It’s your thing, and congrats! I’m all for flat rate taxes by the way.. no deductions or ‘tax-breaks’. Just a nice 10-15% off the top. There are, I’m sure, flaws with that… but seems simple and fair to me!
Life is short, and you really can’t take it with you!

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Steve F July 16, 2013 at 10:12 am

Laura,
A very thoughtful and mature comment. We live in a great country still abundant in opportunities. Having a good financial plan, managing money well, and building a career with hard work and skill is still the path to success. Everyone should pay their fair share of taxes, and people who succeed shouldn’t be penalized.
Steve

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Dina July 26, 2013 at 11:27 am

REALLY PEOPLE!@! We are fortunate we live in a country where opportunities are endless.

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Saffrondawg August 24, 2013 at 8:10 pm

The responses to the comments that spawned a lot of this commentary wander off into politics and philosophy from the actual content of the original comment, which is that the article did not account for the income tax effect of being able to deduct a portion of your payment for housing when you compare renting to owning. The 1st response to the comment was that the income tax rates used in the comment were higher than the actual rate of tax paid by middle class people. First, it is not just interest that is deductible. Ad valorem tax is deductible as well, which in some places can be equal to the interest. Next, the use of the overall rate of tax paid to determine the tax advantage is also an error. The correct calculation involves figuring out the rate of tax at the upper marginal (or highest) rate of tax, not the overall rate, because by comparing the upper marginal rate you figure out the number of dollars saved by owning rather than renting. The article also doesn’t take into account the risk of owning property that declines in value after 3-5 years when you need to sell, or the benefit of an increase. If you can buy or sell a house without a broker, the numbers also work better for you. It is a complicated calculation that requires forecasting the future of property values in the neighborhood. But the 5-year rule is a good one.

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Chris September 8, 2013 at 9:48 am

Wow. Some of these posters on this thread are terrible liars AND closet socialists. I worked my tail off from 16 years of age through college as a foreman for a Landscape installation company in Ohio. I earned a degree in Landscape Architecture and have an Arborist certification at 32. I make just north of 50K, own a house on 3 acres, have a car (2006), save 15% for retirement and still manage a vacation every other year. I have WORKED MY BUTT OFF to get where I’m at.

I agree with some of the posters that taxes are necessary, because we have to maintain public services, provide for a national defense and still invest in roads, bridges, parks, etc. HOWEVER….they are bad when they go to lazy Americans that sit around all day collect public assistance, have babies and do drugs.

I also strongly object to the lazy public sector workers that sit around and whine about how they don’t make enough money, are overworked, can’t get anything done, but still have 100% funded pensions and healthcare benefits, retiring at 50. Give me a break. These people are a huge part of the problem as well.

Now to the closet socialist millennials. YOU HAVEN’T EARNED A DAM THING! Stop your bitching and crying to this administration and get off your lazy arses and make something of your life.

Understand that when you wet your bed you have to sleep in it. Instead of studying in grade school & high school, you smoked weed, skipped school, got piss poor grades and now you are complaining that you can’t get a decent job and no college will touch you?

Instead of getting a job and working your way up the corporate ladder, saving for school and acquiring some skills, you sat around in mommies basement playing computer games and after getting kicked out are now on public assistance, live in subsidized housing scheming hating your life. PLEASE….

Don’t come on here telling people making good money that they are despicable human beings. YOU are the problem, you are the lazy sad ones that haven’t earned a thing yet are on this forum and others (particularly CNN) screaming at people like foaming rabid dogs, torch in hands ready to kill and take by force so that you can live the same way.

CRY ME A RIVER….WHA WHA

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Kristy September 28, 2013 at 7:50 pm

I know I am late into this banter up the comment chain. Try living off 1,116.00 a Mo. in disability. I have A honor student in college Fasfa!! Thank God!! We have completely paid off all our debt, but; our Mortgage. I stay at home now to care for my 2 disabled vets, Brother & husband. We went from 300 thous plus income to 1116.00 dollars a month over night, when my husband, Air force; became severely disabled. Paralyzed. My brother has severe brain damage now, Marines corps!! Va benefits help, but;?? we make it. Have no choice. We do not get food stamps or cash aid. Just my 2 guys ssdi each mo. I have great credit & we sold A home to pay off all our debt. & have some left over. Running out fast. The Govt. does not allow us to have money over the income limits to keep my guys w/ health ins. It is tough, but it is being done!! We have never missed a mortg. payment, & now we cannot qualify for refinance due to our income to debt ratio. I have rent income from another property, I pay taxes on that. It is just terrible that the taxes the rich bitch about, I used to pay them too. Live with in your means America!! & please hope Obama care kicks in, as my daughter & I need it. Try being told you make to much monthly income to get medicaid. My husband & I make 16 dollars to much a month for me to qualify for health ins, & I was reading you people bitching about your taxes!!??? I would give anything to be back in our tax bracket we were in!!! WHITE EDUCATED WOMAN I CA> & proud of myself for managing my families budget of $1,116.00 A MONTH.

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AGod December 23, 2013 at 1:03 pm

When you came to the earth you came with nothing, when you leave you will leave with nothing.

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Frank February 13, 2014 at 10:04 am

My grandfather, a German immigrant farmer between the two world wars, who enlisted to fight in WWII for USA, but he was too old, gave me some words of wisdom that I’d like to share with you folks.

The USA, as stated in the constitution, guarantees the pursuit of life, liberty, and happiness for all. Nothing more. One’s life is what one makes of it. And then, death comes to us all. What I take from this, as a child raised by a single parent in below poverty conditions with four siblings who never graduated high school, and three of which are convicted felons to boot, is that if you pursue excellence in all that you do, chances are you will achieve what you set out to do. If your desire was to make a lot of money, or become the best mailman the postal service has ever seen, or perhaps to be a physician like myself, well, I bet you are currently living your dream.

The second thing he taught me was to never complain. Men who wish to be respected don’t do that. You take your lumps on the chin, and if you one day grow tired of taking those lumps, you do something about it. My wife loves that she never, ever hears me complain about anything. I bear my crosses, big and small, silently.

I am no pariah, but I do believe these tidbits of advice have helped me tremendously in life.

Make a good day.

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Buck March 18, 2014 at 2:11 am

Boy, you guys are making some dough. I’ve had no problems surviving makin $50 per year for the last 8 years smashing pop cans.

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Property Management Services in Annerlay by Image Property April 28, 2014 at 9:03 pm

Going to buy a new house? Before purchasing it, there are some points to give focus to get the best place for you.

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Frieda Deadman April 29, 2014 at 3:54 pm

We did the five year rule.
The income went down.
I called a year in advance of our impending economic downfall.
Now in the sixth year, we are waiting for the foreclosure mediation hearing with a judge.

The f’in bank played the let us turn perfectly good customers into deadbeats in 2012, and we never could pull out of the economic downfall…companies haven’t been giving raises that keep up…

So, now, we wait. I will give the judge our side…I fully intend to make this foreclosure cost US Bank and the Wisconsin Department of Veterans Affairs the most time and money for doing what they have done to us. And, guess what? The politicians DO NOT CARE and neither does anyone else as long as it isn’t happening to them.

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Michelle June 26, 2014 at 9:09 am

This is a very interesting post, as well as a lot of great comments…

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Don H August 8, 2014 at 3:55 pm

Nice post – becoming a fan of your blog.
My wife and I live in Irvine – and despite the temptation to consume we stay disciplined and save proactively (about 41% of our total household income).

We’re debt free with only our mortgage and plan to buy a larger home in the next 2-3 years. We want to position ourselves to our at least 20% down without affecting our 401ks and emergency fund.

While these goals are obtainable (we review the #s periodically), I wonder if its really “worth” it to save as much as we are only to spend the bulk of it for a downpayment in Irvine. We love it here, plan to raise a family as well but the way the prices are (north of 1-1.5 million), just seems overdone. I fear we’re just “buying” into an inflated housing market that will drive the prices higher unless there’s a meltdown – and I don’t see that either.

Am I alone here? Is that how things just are?
Sorry if I deviated a bit just been thinking of what we are doing is really practical.
Thanks again for the post.

Best,

DDH

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