Author Topic: relocating, do we buy again? Rent?  (Read 1706 times)

ReformedShoppingAddict

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relocating, do we buy again? Rent?
« on: May 20, 2017, 02:50:20 PM »
Hi folks!

Totally new to FI. Totally new to the discussion boards. Just lurking and learning. Appreciate you all so much.

First, let me say, I have spent my entire life fiscally irresponsible. I'm 43, married, five kids (two are in college and we pay their tuition which is very important to us). When I say irresponsible, I mean carrying credit card debt, filed bankruptcy in 1997, no savings. I spent a lot of years pretty broke but not in the last 10. So this is embarrassing. (I would use curse words here). My uncle is the VP of Federal fricking Reserve, meanwhile my parents saved ZERO dollars and taught me nothing

Here's our current situation:

We live in California (not the cool part). We "own" our house. (Mortage bal: 225K, appraises at 285 ish. 30 yr fixed at 3.9%, $1890 pymt).

We have two car payments (balances of 15K and 22K payments of 387 and 750 respectively).

We have 25K in credit card debt. It was 65 three months ago. It'll be paid off by November.

I have a student loan bal of 26K. 6% interest. Payment 200

Husband 401K@ 97K with Schwab. We contribute 3%. They match. Rollover IRA @ 36K with etrade which I invested in an index fund. I have a 401K from previous job (I'm also an RN) of about $10K

Unvested stocks of $160K (We generally sell stocks twice a year netting 30-40K)

Sad savings account of 3K

My husband works in the bay area and commutes. He stays there for 3 days/wk in a rented room. This is not ideal. Obviously, because kids.

Next year, when my oldest in high school graduates, we are moving to Austin. My husband works for PayPal, there is a branch there so no more commute plus more opportunity for the younger kids (5 and 6, we live in rural CA, farming town).

My current plan of attack is this:

1. pay off all credit card debt.

2. once that's done, save everything (as opposed to paying off cars) for house down payment.

3. We should have 70K saved by next May (including sold stocks) to buy, we will probably get a 401K loan at 4% for 50K because it makes more sense to do that and have 20% down than it would to do 10% down and pay mortgage insurance? We'll probably need a jumbo loan. Max FHA is 417K there. The 401K loan term would be 5-10 years.

3B. Sell our current house and use profit toward down OR keep as a rental? Rental wouldn't provide income unless we refi.

4. Buy Austin house for 500K ish maybe 400 maybe 600? Austin real estate is not cheap. But could be a good rental later?

5. Move (hopefully with a moving allowance but who knows?)

6. Pay off the car with a 6.25% rate. (would take 2-3 months)

7. Pay off the student loan (4-5 months)

8. pay off the car with the 3.75% rate (4-5 months)

9. Save/invest.

My husband grosses 225K a year. I gross 80K (but self-employed as a writer so TAXES). We are in a 35% bracket. I pay 4K quarterly. We paid almost 60K in taxes in 2016.

My job may not last forever. I'm the editor in chief of a online femisint, family, and lifestyle magazine. But while I work, every penny goes to debt. We currently have childcare costs of $1600/mo. As of August that will be freed up.

Am I doing this right? Should we not buy? Rent and elminate debt/save/invest? I honestly don't know. It would take 6 months to save to move, then back to debt payoff and 401K focus raised to match (which is 5%?). Austin has skyrocketed in price (100%+ in the last 10 years?) so i feel like buying might be smarter. Also, we might find something with Airbnb possibility (external unit) which could be income producing. (several thousand dollars just during SXSW).

If you made it this far, you're a saint.

Any, all advice welcome and so very appreciated.



clarkfan1979

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Re: relocating, do we buy again? Rent?
« Reply #1 on: May 20, 2017, 06:28:46 PM »
I wouldn't buy until you pay off the credit cards and auto loans.

Scortius

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Re: relocating, do we buy again? Rent?
« Reply #2 on: May 20, 2017, 11:41:41 PM »
When moving to a new city I always think it's best to rent for at least a year while you get to know the city, the neighborhoods, and more specifically, the neighborhoods you want to live in more permanently.  That year would hopefully let you get out from your 'hair on fire' debt as well and put you in a great place to buy.  The Austin market is appreciating, but it's not going to go insane over the course of a single year like it does in more land-constrained high-demand areas like the Bay Area or Manhattan.

Linea_Norway

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Re: relocating, do we buy again? Rent?
« Reply #3 on: May 21, 2017, 01:10:26 AM »
With five children you probably need a big house. I wouldn't buy even bigger to make room for Airbnb.
But isn't your total income, especially your husband's, extremely high? In that case I think you have more to win on badass saving than on finding an extra income.
Can you swap the cars for cheaper (and more fuel effecient) cars to get rid of the car loans that way?
« Last Edit: May 21, 2017, 07:30:01 AM by Linda_Norway »

Villanelle

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Re: relocating, do we buy again? Rent?
« Reply #4 on: May 21, 2017, 03:31:11 AM »
First, congratulations.  It sounds like you've turned things around pretty dramatically and that you are in a position to still be able to set yourself up for a nice retirement.

Look at the cars.  Sell both, and replace with cars that cost less than $10,000 each.

Unless you are super familiar with Austin, I wouldn't buy right away.  Even if you are familiar, run the numbers and see if it actually makes financial sense to buy.  Do you plan on staying in Austin forever?

You say you'd need to refi your place in order to make money as a rental.  Without details, it is tough to say but would you actually make money, even then?  Have you factored in all costs (including paying a property manager, which you'd probably need to do since you are local) expected vacancies, long term repairs, etc?  Most likely, it would be better to sell.  So sell your house and rent until you can actually afford to buy.  (A 401k loan does not count as "can afford".)  Unless the market in Austin is such that buying is significantly cheaper than renting, I would not buy until I'd saved up 20% (and even then I might not buy).

Can you refi those student loans to get the rate down?

For the AirBnB, make sure you are doing an honest assessment.  Can you *LEGALLY* rent out an extra space?  Under what terms?  What would you realistically make in the actual area you are looking to buy?  So you can make $3000 in a few weeks. Would you be willing to rent it out full time?  (Google for blogs about running and AirBnB as it is not without work and headaches.)  If so, what can you *reasonably* expect to make (rent rates and average occupancy)? What about expenses, including fees paid to AirBNB, any required permits, etc.?  Taxes on that income?  And then compare that to how much more it is going to cost you to buy the larger place.  It doesn't seem like you'd need a very large house if this will happen after all 5 have graduated, so it might be feasible, but you need to do the research and run the numbers. 

former player

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Re: relocating, do we buy again? Rent?
« Reply #5 on: May 21, 2017, 05:05:25 AM »
Between you and DH you are earning $305k per annum.  Are the stock sales of 30k-40k on top of this?

You also have debts of $225k on the house, $37k on the cars, $26k on student loans and $25k on credit cards.  Your retirement savings are an anemic $107k, you have "unvested stock" (which could presumably disappear overnight) of $160k and savings of $3k.  Taking into account house equity of about $50k after selling expenses, your total net worth, not including the unvested stock, is $72k.

The good news is that you do not have an income problem.  The bad news is that you have an extreme spending problem.

I would suggest -

1.  Make sure that the two retirement accounts are well invested, in low cost index funds.
2.  You are paying off debt at about $10k per month.  Pay off the highest interest debts first.  If there is high interest debt that will take more than a month or two to pay off, consider the costs and benefits of refinancing.  Your high interest debt includes your credit cards, the high interest car loan and your student loan.
3.  Max out your retirement contributions. DO NOT BORROW FROM YOUR 401ks: this negates all the value of that investment for your retirement for the period of that loan.
4.  Use the equity in your current house, plus the stock sale, plus savings after paying off high interest debt, as your 20% deposit if you buy a house.  Buy modestly and it should be fine: you do not need to borrow from your 401ks.
5.  Even with your newly reformed habits, you need to keep an eye on continuing to dial down on your expenses.  Now would also be a good time to start selling off any surplus possessions before you move.

On buying in Austin, your reasoning is that housing there has skyrocketed in price.  This is equivalent to the "sunk costs" fallacy: buying now will not get you the benefit of those past price rises.  The only reasoning you should be considering is the comparative expense of renting vs buying, possibly including estimates of what house prices will do from now on as against your attitude to risk.  Given that past bankruptcy, your judgement on financial risk is probably not yet where it should be: buy conservatively.  You do not need a big house when the older kids are on their way out in any case and the two youngest are young enough to share until the older kids move out.  Don't think about AIRBnB or a future rental: income is not your problem.

Congratulations on the turn-around, and good luck.

Lady SA

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Re: relocating, do we buy again? Rent?
« Reply #6 on: May 21, 2017, 06:18:51 PM »
My current plan of attack is this:

1. pay off all credit card debt. Start with highest interest rate first, pay off anything over 5%. Anything below that the math work out better to invest instead (ie pay minimums+a little extra, but focus mainly on investing)

2. once that's done, save everything (as opposed to paying off cars) for house down payment. Sell the cars, replace with ones under $10k. Carrying that much balance on cars is outrageous. Route your car payments to debt/savings instead.
 Now, I suggest waiting a year for buying a new house, so saving EVERYTHING now doesn't make as much sense. pay off debts/invest instead. You can start squirreling away cash for an eventual downpayment, but don't neglect investing/debts in favor of this.


3. We should have 70K saved by next May (including sold stocks) to buy, we will probably get a 401K loan at 4% for 50K because it makes more sense to do that and have 20% down than it would to do 10% down and pay mortgage insurance? We'll probably need a jumbo loan. Max FHA is 417K there. The 401K loan term would be 5-10 years. Avoid at ALL COSTS! DO NOT TAKE OUT A 401K LOAN! if you do you are losing all the potential compound gains that money would have if you left it alone. Which you desperately need since you are pretty slim on the retirement savings as is. Don't steal from yourselves.

3B. Sell our current house and use profit toward down OR keep as a rental? Rental wouldn't provide income unless we refi. Your best bet is to sell the house. Too much hassle to maintain a rental from afar, and there will be costs associated with renting. I'd just cut your losses and move on.

4. Buy Austin house for 500K ish maybe 400 maybe 600? Austin real estate is not cheap. But could be a good rental later? I always suggest renting for at least a year (unless renting is SIGNIFICANTLY more expensive) for reasons others mentioned above. Take the time to get to know the city and figure out where you want to live. Don't get suckered into buying before you are ready. Rent and save money for a higher downpayment (WITHOUT the 401k loan). Also when looking for a house, look for a modest one. Your family is downsizing, so don't go out and get an ostentatious house. You don't need it.

5. Move (hopefully with a moving allowance but who knows?)

6. Pay off the car with a 6.25% rate. (would take 2-3 months) get rid of the car and replace with a cheaper one. Facepunches for having two financed cars.

7. Pay off the student loan (4-5 months)

8. pay off the car with the 3.75% rate (4-5 months) same as above, get rid of the financed cars and replace with nice used cars for under $10k.

9. Save/invest.

Laura33

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Re: relocating, do we buy again? Rent?
« Reply #7 on: May 22, 2017, 08:13:49 AM »
OK, I am going to suggest something slightly different for you than I would based on the plain math, because I think you need some pretty serious mental retraining.  You have a massive debt problem: you think it is ok to finance a lifestyle by borrowing.  You have borrowed for your house, you have borrowed for your cars, now you are talking about borrowing from your 401(k), because you want a house and you want it now.  Think about this:  you make like $300K a year and live in a relatively cheap part of the country.  But this isn't enough for you.  So you are paying other people for the privilege of using their money to elevate your lifestyle even more.

This is what has to stop -- you need to change your mindset until it is crystal clear to you that this is simply not an option.  The fact that someone will lend you money does not mean you can afford something.  You need to earn the money to pay for the things you want before you buy them. 

[And, really, $750/month for a car payment?  Are you driving a Rolls?  Seriously?]

So my suggestion for you is to focus right now on getting rid of the damn debt so you learn to live within your very ample means.

Before you move:

1.  Sell the cars, now.  Get rid of the car payments, buy something cheap with cash from your stock sales. 

2.  Max out retirement contributions -- not to the match, to the $18K max.  You are way behind -- as in, on the "retire never" plan, especially if you want to retire at anything near your current burn rate.  Your current retirement savings will throw off about $6K/yr -- and that assumes you don't take 1/3 of it as a loan.  How sobering is that?  You need to start throwing serious cash at closing this gap. 

3.  Build up the emergency fund.  $3K isn't close to what you need to cover the costs of an interstate move.  Use your stock sales and extra cash from not having car debt to build this up to probably $20K.

4.  Throw anything else at the credit cards.  Do whatever you need to do to have them paid off by the move.

5.  Once the CCs are paid off, throw the remainder at the student loans.  Ideally, you would also have all of this paid off before you move.

Once you move:

1.  Sell the house.  Do not even attempt an interstate rental.

2.  Move to Austin.  Rent.  [Yes, this is emotionally painful, because you are used to having everything you want, a lifestyle to celebrate and impress others, right now!  But that is exactly why this is necessary:  to retrain your expectations to below what you can "afford" so that what you can actually pay for begins to feel sufficiently luxurious.]  During the next year or two:

a.  Figure out what neighborhoods you like.

b.  Pay off any remaining debt.

c.  Max out all available retirement options for both of you.  You are way behind.

d.  Build the emergency fund back up.

e.  Establish a "new car" fund for when your current beaters die.  You will never again have a car loan.

f.  Track every single penny you spend.  Figure out the cost of living and what your "real" budget is, post-tax and after all retirement savings.  This will tell you how much house you can afford. 

g.  Figure out if there are any homes you like in the category of "houses we can afford with a 20% downpayment."  If not, increase your downpayment target to whatever it needs to be to get the house you want.  Note:  it does not matter whether a "decent" house in Austin requires $250K, $500K, $750K, or whatever.  The only thing that matters is how much you can afford.  If the house you want requires a higher mortgage than your budget allows, you cannot afford it, unless you save up a sufficient downpayment to cover the difference. 

h.  Once the debt is paid off, throw all remaining money at the downpayment fund.  When this is at the figure you need to afford the house you want (minimum of 20%), save another $10-15K more for closing costs, moving expenses, and immediate house fixes that always come up when you move. 

i.  Now you may buy a house.  If you still want one.

You really can do this.  You make plenty of money to enjoy a really nice lifestyle and a secure future.  The key is to re-orient yourself to the idea of "what I can spend = net income - retirement savings," not "what I can spend = net income + what I can borrow from someone else."

PS:  cursing is not merely socially acceptable here but encouraged.  :-)