Author Topic: Rent or buy (NYtimes is about break even) case study. Please help!  (Read 1313 times)

MountainTown

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I am considering buying a house for $250 to 255k. I had actually wanted to take a pause on house buying but my wife sorta pushed me on one and I was inclined to go with her on it as it was one of the cheaper options we found in the area. I have posted before and noted that my job situation is a bit unstable. However I don't know if I am just being paranoid. Ultimately I'm a Fed employee so people tell me that I shouldn't worry about stability. I'm honestly more worried about me quitting(because I'm so annoyed with boss) as opposed to getting fired. I have stuck with it for now though because any job in this town would probably pay me half as much for similar work....

FI timeline with renting: Basically if we subsisted on our down payment to reach a 60-70k(out of 115k) savings rate we could be FI in approximately 6-7 years. I have contemplated doing something that was more 'halfway to FI' and then going back to school(let's say $500,000 in bank).

FI IF WE BOUGHT HOUSE:  we would lose that cash savings and I figure that on top of the $1200 payment(piti) we could expect to pay another $200 a month in utilities, maintenance/repairs, etc. If anyone wants to correct me on that let me know. I am trying to be overly conservative. So if we bought a house, I figure we would be hard pressed to save $35,000 a year and that would bring our FI date out a good 7-10 years....depending on how accurate my estimates are.

So the cost of FI in buying this house, even though cheap is significant. I didn't really factor in that it's a fixed cost so maybe I should somehow?  I will say that our rental price is extremely under market and I don't think we will get that when we move up. Most likely if we have 1-2 kids, we will need to move up and then we will pay $1300 to $1500 a month to live in town.

NY Times calculator Was pretty break even on this scenario.

I am struggling because my wife really wants to move on with this aspect of our life(but she is supportive either way)....but I am feeling a little scared with my job situation lately. She makes $38k a year and we couldn't afford it on her income alone.On the other hand, she makes a good point that the PITI payment at $1200 a month would allow us to "lock" in a price that we may not be able to get in the coming years as rents and housing prices have rapidly increased in this town. We are getting a lot of retirees moving here and this is driving up costs.

I know I have posted a few case studies here so forgive me for posting again. Thanks for all the help, encouragement, and putting up with our "House fever" lol

Thanks for any help. I have posted our life situation below:

Life Situation: IRS filing status Joint, no dependents, live in collegetown in the northwest. Was a low cola but this is changing fast. Used to be you could get a luxurious house for $250,000 but now anything that is in this price range is going to be in a less desireable area, super small, or super crappy. Both stable jobs but I recently got a new manager who is not that fun to work for. I am looking for transfers but i live in a remote town so it is difficult to find...it would have to be a remote job most likely.

Gross Salary/Wages: Together we make $115,000 year gross wages. (Me: 77k. Her:38k

Pre-tax deductions/Savings: Currently we are doing 18000 on her deferred comp(maxing out her paychecks). She has an 8% contribution with a 5% match. I have a 5% match with a 5% contribution. Since we could live off of our down payment money I am thinking it may be a good idea to just max everything out and live frugally, and if we needed a few thousand bucks over the year we could always access the down payment money. Thoughts? At this rate we will be doing about $35k a year in deferred savings but I think if we didn't save for down payment and even dipped into the cash fund a little we could do $60k to $70k a year for several years...I haven't ever done this extreme of savings so I am not sure how much the tax savings would help out(I mean I think it will help a lot but not sure exactly how much)

Other Ordinary Income: None

Qualified Dividends & Long Term Capital Gains: None

Current expenses: I would estimate we spend about $2000-3000 a month on regular monthly fixed expenses and pleasure expenses. We are frugal on big things like car(one 14 year old car and 825/mo rent) but maybe go out for fancy drinks more than we should :P

Assets: No assets other than a $3000 car. We are shopping for a newer used car now but not really in a hurry. Our car is a 2003 Toyota Corolla. Note: Net work is $210k between cash and retirement investments

Liabilities: No loans. No debts.

Specific Question(s): Here is my situation:


Currently we have about $83,000 saved up for a down payment(cash/liquid act) and about $5,5000 in a Roth Account. I also have another 4000 in a deferred comp account from an old job(so it can be cashed out at anytime--we will have to pay taxes).

Our retirement accounts approximate about $120,000.(Mostly traditional tax deferred accounts(TSP, 403b, TIRA,  deferred compensation for wife.). I can break this down more if anyone wants. In the past we have mostly been piling into our down payment savings so we could really get a good down payment. So our retirement savings aren't as strong as they could be. Recently I have ratcheted that up and am fully depositing my wife's paycheck into her deferred comp, while she is also doing 403b of 8%(employer matches 5%), and I am doing 5% into TSP(employer matches 5%) I think we are pretty good savers but maybe not as extreme as some in the FI community.

TOTAL APPROXIMATE NET WORTH $210,00 TO $215,000

At this point I anticipate we will have saved about $35,000 in tax-deferred savings by end of year. We definitely could do more if we were less focused on the house....like about $60k to $70k


Other details:

Current rent: 825 a month(our landlord is quite generous and does not raise rent so we are locked into pre-housing boom rates)
Average rent for similar house as we are considering buying: $1300 to $1500

Incomes: Both are generally stable. I don't see huge jumps in income but steady steps. My job is stable but sensitive at times due to political nature of my work.

Future: We plan to have 1-2 kids  starting within the next year. We may wait for my income/job situation to stabilize a little here.

MountainTown

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Re: Rent or buy (NYtimes is about break even) case study. Please help!
« Reply #1 on: June 25, 2017, 06:09:54 PM »
I should also add to the costs that there is a $45 a month HOA for a shared water association fee with this possible house purchase.

JLee

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Re: Rent or buy (NYtimes is about break even) case study. Please help!
« Reply #2 on: June 25, 2017, 11:13:13 PM »
I am considering buying a house for $250 to 255k. I had actually wanted to take a pause on house buying but my wife sorta pushed me on one and I was inclined to go with her on it as it was one of the cheaper options we found in the area. I have posted before and noted that my job situation is a bit unstable. However I don't know if I am just being paranoid. Ultimately I'm a Fed employee so people tell me that I shouldn't worry about stability. I'm honestly more worried about me quitting(because I'm so annoyed with boss) as opposed to getting fired. I have stuck with it for now though because any job in this town would probably pay me half as much for similar work....

If you buy a house, you'll effectively be eliminating your current escape route (i.e. you can't quit and keep the house). Keep that in mind; how much value does your ability to FU/quit have for you?

Quote from: MountainTown
FI timeline with renting: Basically if we subsisted on our down payment to reach a 60-70k(out of 115k) savings rate we could be FI in approximately 6-7 years. I have contemplated doing something that was more 'halfway to FI' and then going back to school(let's say $500,000 in bank).

FI IF WE BOUGHT HOUSE:  we would lose that cash savings and I figure that on top of the $1200 payment(piti) we could expect to pay another $200 a month in utilities, maintenance/repairs, etc. If anyone wants to correct me on that let me know. I am trying to be overly conservative. So if we bought a house, I figure we would be hard pressed to save $35,000 a year and that would bring our FI date out a good 7-10 years....depending on how accurate my estimates are.

What state/climate?  $200/mo sounds incredibly low to me, even excluding home repairs/maintenance.  I have a house in Phoenix and when I lived there, city water/trash was about $80/mo.  Internet was $60 and my electric bill varied, but once I set aggressive thermostat programming and spent ~$600 on an efficient pool pump, I was averaging $155/mo. That's about $300 plus maintenance/repairs - I don't have comprehensive numbers handy but I needed a water heater when I didn't have time to do it myself ($900) and an AC repair when I was out of the country ($500+). Termite treatment was another 3-figure sum last year. I'm pretty sure the electric bill has skyrocketed since I left (it's rented to friends & a family member now) but I don't pay that anymore so I have no idea what it costs them.  Obviously other parts of the country will vary dramatically (typically increased heating costs vs decreased electricity costs).

Are you factoring in closing costs, home inspection, etc (often $3k or more) as well as your down payment?

Quote from: MountainTown
So the cost of FI in buying this house, even though cheap is significant. I didn't really factor in that it's a fixed cost so maybe I should somehow?  I will say that our rental price is extremely under market and I don't think we will get that when we move up. Most likely if we have 1-2 kids, we will need to move up and then we will pay $1300 to $1500 a month to live in town.

NY Times calculator Was pretty break even on this scenario.

I am struggling because my wife really wants to move on with this aspect of our life(but she is supportive either way)....but I am feeling a little scared with my job situation lately. She makes $38k a year and we couldn't afford it on her income alone.

Seems like your wife is viewing life as an escalator of achievements? Go to college, graduate, get married, buy house, have kids. If you don't do that, you're "stuck" at a lower level of life? Everybody has goals and that's fine, but keep in mind that home ownership is definitely not a necessary thing.  Also note that buying a house is not a fixed cost.  You might need a new water heater, you might need a new furnace, you might need a new roof, your property taxes could (will) go up, etc. Sure, mortgage P&I is the same, but there are a lot of other expenses that you are not responsible for as a renter.

Regardless, when do you plan to have kids? Do you also plan on living in this town forever?

Quote from: MountainTown
On the other hand, she makes a good point that the PITI payment at $1200 a month would allow us to "lock" in a price that we may not be able to get in the coming years as rents and housing prices have rapidly increased in this town. We are getting a lot of retirees moving here and this is driving up costs.

You're currently considering a guaranteed increase in non-negotiable monthly expenses and an increase in unpredictable repair expenses for the possibility of future savings and for additional space in the event you decide to have an undetermined number of children which will demand an undetermined amount of space -- with an uncertain job on top of that?  When a $1200/mo mortgage house could be rented for $1300/mo without putting $35k down up front?

That sounds like a bad plan to me.

MountainTown

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Re: Rent or buy (NYtimes is about break even) case study. Please help!
« Reply #3 on: June 26, 2017, 01:07:51 AM »
Ha JLee. Loved that last paragraph.

Eliminating the escape route...does disturb me. She thinks I am being too conservative as I am Fed. She's probably right but it's not so much about me getting fired as losing my mind haha(not funny though!).

We are in MT. Honestly I appreciate your perspective because I am pretty baffled as to what the true costs of ownership are. I have the PITI dialed in but repairs/maintenance is tougher. I should mention it's electric baseboard heat which annoyed me. Though there are gas supplements. in the end the utilities averaged $150 a month so I guess the gas supplements may be doing the trick.

Yes I did factor in closing costs. We have $83k in cash so can do 25% and still have emergency fund...

Again to your last paragraph...I think it's pretty poignant. And I think I agree....I guess help me with this. What do I tell her or tell myself when she says that rents could be way higher in two years? Or that this house could go from being 254k to 300k? Will we then regret it...? Will we find ourselves priced out? I realize we may have saved an additional $100k in retirement which is awesome but then again, I can't exactly grab that money until I FIRE or she does.

Thanks again. And maybe you could help me clarify or come to terms with that last question I posed.?

MountainTown

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Re: Rent or buy (NYtimes is about break even) case study. Please help!
« Reply #4 on: June 26, 2017, 01:37:56 AM »
forgot to answer these questions
"Regardless, when do you plan to have kids? Do you also plan on living in this town forever? "

Probably in the next 1-2 years. She would like to start trying within the next 1-2 years. We are pretty settled in this town. We have family here(brother) but parents of hers and mine are both quite far so sometimes I wonder if we could end up back home.

Dee18

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Re: Rent or buy (NYtimes is about break even) case study. Please help!
« Reply #5 on: June 26, 2017, 05:57:53 AM »
The other cost of home ownership is time.  Even if you are renting a house now and responsible for yard work, expect your time commitment to your home to be significantly greater. You'll probably have to:  grow the grass, figure out why the grass has brown spots, finally grow good grass, cut the grass, rake the leaves, trim the bushes, buy and hang curtains and blinds, fix all the plumbing issues that arise over time, repair an air conditioner or find the repair person and supervise that, paint some rooms because the current color doesn't work....etc, etc.  I was renting when I had my first child, but bought a house the next year.  The house took a lot of time away from just enjoying and playing with my child in my free time. 

It doesn't sound like you want a house now.  If that's the case, don't get one.

MountainTown

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Re: Rent or buy (NYtimes is about break even) case study. Please help!
« Reply #6 on: June 26, 2017, 06:54:10 AM »
Hey Dee,

Yea part of me always wonders if I would enjoy it or not. I think i would take some pride in it but truth be told I work 11-12 hour days often and travel for work....after that I really don't invest much in our little rental yard so maybe I'm not being realistic about how much time I could pour into a house at this time. Thanks for your perspective on house time vs kid time.

JLee

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Re: Rent or buy (NYtimes is about break even) case study. Please help!
« Reply #7 on: June 26, 2017, 03:06:53 PM »
forgot to answer these questions
"Regardless, when do you plan to have kids? Do you also plan on living in this town forever? "

Probably in the next 1-2 years. She would like to start trying within the next 1-2 years. We are pretty settled in this town. We have family here(brother) but parents of hers and mine are both quite far so sometimes I wonder if we could end up back home.

Let's say you started trying in two years and got lucky almost immediately (let's say 3 months). You're three years out from now for having your first kid. You're potentially FI 6 years from now. Basically - if you don't buy a house, you could be FI on your child's 3rd birthday.

Would you be more likely to move closer to family 1) if you were FI and 2) if you had young children?
« Last Edit: June 26, 2017, 03:10:49 PM by JLee »

MountainTown

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Re: Rent or buy (NYtimes is about break even) case study. Please help!
« Reply #8 on: June 27, 2017, 08:15:36 AM »
Thanks again J lee for the prescient questions.

Wow, being FI on child's third birthday...that did hit home in a big way! How awesome of a Dad could I be if not working lol?!

But seriously I appreciate you phrasing it that way.

To answer the latest question....I dunno. If I was totally FI, I sure would think I would quit and spend some more time with family...We might move closer to home if they needed us. It would be a tough call because we love the mountains and my brother's family is here too