The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: epz87 on March 12, 2014, 06:55:15 PM
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Posted this on reddit too (http://www.reddit.com/r/personalfinance/comments/209aj0/should_i_buy_my_first_house/) but here's my info:
I live in Cambridge/Somerville Massachusetts renting for $1750 right now/month with my spouse. There is a 50/50 chance that in about 2-4 years, we will move out of state (at which point we will likely want to buy a home for growing family). Because of that short timeline, we haven't considered purchasing a home. However, after looking at some properties and numbers, I'm beginning to think it could make sense financially if we live in it for a little then rent it out. Some numbers:
- 55k for down payment saved (basically all of our liquid cash not in 401k or vanguard... roth IRA contribution and savings)
- could get more for down payment from family, no strings attached, if necessary
not worried about emergency fund after DP b/c of high cash flow and family help if something terrible really happened - high dual income, $4500/month after all living expenses currently. could be higher if we reduced our 401k contributions slightly which is maxed out atm/adjusted withholding since we got a big tax return this year due to lots of deductions
- homes we would be looking at would be in the $250-300k range.
- mortgage would actually increase our cash flow, mortgage + fees = ~$1500, so +$250/month.
crunching (conservative) numbers in the NYT buy/rent calculator, it looks like buying is better than renting after 2-3 years. - if we moved after only 2 years, we would be willing to rent out the home
- the cash flow of areas we would purchase in if we were to rent out, is not fantastic, but occupancy is near 100%
- historically very stable area in terms of price
- subway system is (likely/hopefully) extending into the area in a few years, possibly pushing rents/home prices up significantly.
Couple questions I had:
- is buying silly? am i being dumb? If I stay here for several years, for sure it seems like a good deal. Even if I moved in two years, if I were to stay cash flow even or just above, it seems like appreciation, or at least stable prices would mean I'd be earning at least the mortgage rate on my money.
- What type of mortgage should I consider if I buy? rates are low so taking a standard 30 fixed and putting it into other investments is a decent idea, or maybe a 5/1 since my likelihood to move is high?
- What else should I be considering and thinking about? At the very least, I want this to be a good exercise in what I should be considering for a future home.
- would buying now hurt my chances of buying in 3+ years again? Assume I have the down payment ready again by that point.
- if we buy now, should we be throwing more at our mortgage? the return would be 4.25% on our money versus other investments I may have in Vanguard or somewhere else. Other considerations for this calculation?
Smack me in the face if I'm being dumb. Thanks all!
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If you sink your saved up down payment into this house and then move out of state, and rent it out instead of selling, where will you get the $ for the down payment on a new house out of state?
The other issue I foresee is that with the mortgage for this house on your credit and no history of renting it out--that is, no way of showing the bank that you have rental income they should count--how will you qualify for a new mortgage? Google debt to income ratio. If your income before expenses is, say, $7500 and you have a $1500/mo mortgage payment, that $1500 PLUS the payment for your new house (plus any other monthly payments you have that show up on credit reports) will have to be below the DTI required by the bank.
Not saying this is a terrible idea, just pointing out some hurdles to factor into your decision making.
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Good questions, thanks! If it came down to it, we could rent for a little before buying a second home. However, we are saving about $4500/m after living expenses currently which would take us north of $100k in two years. (not factoring in raises and other income). As for DTI, I hadn't considered that, but the first home, our DTI would be <10%, and even if we added a more expensive second home, our DTI would be under 30%.
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$250 a month advantage can easily evaporate with repairs and maintenance. How DIY capable, or willing to learn, are you?
I would also focus on the intangibles: do you care about having a yard? Do you want to garden?
At your cash flow, the cost difference is somewhat negligible. I'd focus on what will give you happiness.
Also, since you say a move is likely, is it going to be local or out of state? If out of state, factor property management into your rental analysis.
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- homes we would be looking at would be in the $250-300k range.
Where are you seeing these kinds of prices in the Somerville area? West Medford? And what kind of condition are these homes in?
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One bed one bath condos in good shape. Old, but seem like they're in good condition/reno'd. E.g. http://www.trulia.com/property/3148452131-400-Broadway-4-Somerville-MA-02145