Author Topic: Are these good ideas to decrease housing costs?  (Read 4219 times)

MustacheMcHermanson

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Are these good ideas to decrease housing costs?
« on: February 16, 2015, 05:04:36 PM »
Hello,

Before learning about Mustachianism, we purchased a house.  This was September of 2013.  I thought and possibly think we will be here for life, or at least own it for life so I financed based on that assumption.  I financed mortgage insurance into the loan (about $5000).  We only put 5% down, but with the extra mortgage insurance added into the loan cost, we essentially put 3% or less down, or at least one might call it a 97% or higher Loan to Value. 

So... We were creative starting in January of 2014 and had a tenant move in with us.  In August of 2014 we got a second tenant and will have these tenants until our baby is due in September this year.  They pay $450/month so our mortgage is knocked down from $1557 to $657.  Shannon would like to stay at home once the baby comes. 

Anyway, below are my thoughts.  Please let me know what you think of the ideas.

1) We can purchase a rental property with 20% down for roughly $100k ($20K down payment).  My brief research tells me that we can get roughly $800 - $1200 for rent.  Our mortgage all in PITI would be around $600/mo.  This would be a positive cash flow of $200 - $600/month.  So... total housing outlay of $955 - $1355 with current mortgage - cash flow from rental property.

2) We can purchase a different house for $100K and rent out our house.  I think we could pull in close to the cost of our mortgage if we rent out our house, or at least $1450.  Then we would pay our mortgage on our new house of $600.  Here the total housing outlay is $600 - $700.  (New Mortgage + any cash flow deficits from old house). 

3) We can rent out our current place, and find a different rental for us to move into.  Unfortunately, with a dog, this limits our options.  We are looking at $800-$1200 for rental prices.  Here our total housing outlay is $800 - $1300 when factoring in expected rent on current house.

4) We could sell our current house and buy a new one or rent.  I think this is the worst option, but I asked the question, so if you disagree please let me know.  The reasons for this are because we really don't much equity at all with the loan choice I made.  Our break even on the mortgage insurance upfront buy-out is 3.66 years and we have been in the house just about 1.5 years.  Also, with closing costs, I do not know if we would even break even.  We might owe roughly $10K based on expected closing costs.  Also, then we wouldn't have any down payment money.  In some research, I heard that it might even be best to never sell because of the associated closing costs.  I tend to agree with this at this point.  I would rather rent out our house every time we moved.

5) Other alternative arrangements - possibly moving in with one of our parents to really sock away money, or let them take the dog for the time being so we could get a cheaper rental?  Shannon is not keen on this, but I want to explore all options. 

6) Any other ideas I missed?

Also, we have an office downstairs.  Would it be worth it to put in an egress window downstairs to have a 4th bedroom?  Would that increase the rent potential?

As always, thanks for all of your input! 

SaintM

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Re: Are these good ideas to decrease housing costs?
« Reply #1 on: February 16, 2015, 05:17:56 PM »
Can you refi, with or without paying some down? Rates have dropped considerably since Sep 2013. This might make the math come out more in your favor, particularly option #2. If you have more house than you need right now, option #2 lets you downsize without too big of a hit, let someone else pay for the extra space, and allow you to easily upgrade later. There isn't much wiggle room, and you will take a hit for every month it goes unoccupied.

Goldielocks

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Re: Are these good ideas to decrease housing costs?
« Reply #2 on: February 16, 2015, 05:18:51 PM »
You did not say if your current mortgage is a financial cash flow problem after the baby comes.

I would not move close to sept, fyi.

My option would be to put in egress window and move one roommate there, for $400 per month rent, keep the second roommate, assuming they are ok with crying baby.

Net to you is cost of window and only $50 per month less. Low hassle to find new arrangements.

Lots of future chances to expand your rental business with new properties when cash flow and savings are up

SaintM

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Re: Are these good ideas to decrease housing costs?
« Reply #3 on: February 16, 2015, 05:32:16 PM »
Call me a fool but I don't want to live in a place with someone else's crying baby and I don't want anyone else living with my crying baby.

MustacheMcHermanson

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Re: Are these good ideas to decrease housing costs?
« Reply #4 on: February 16, 2015, 05:46:06 PM »
SaintMichael: We originally purchased @ an interest rate of 4.75%.  Our Principal & Interest Payment is $1143.05.  A refinance at 4.125 (today's rates), would actually be worse.  The Principal & Interest with PMI would be $1165.  (I would assume I would have to pay PMI... unless there is some way for a new lender to honor the past upfront buyout of PMI that I financed into the loan).  Thanks for your input.  Option 2 is definitely my preferred choice. 

goldielocks: Probably a good call on not moving close to September.  The only way we could do that and not have it be crazy is if we truly went minimalist to the extreme helping for an easy move.  Egress window is an interesting approach with living in the house.  Although it really isn't that soundproof downstairs, so if you or anyone else has any soundproofing ideas that would be great.  As you can see by my suggestions, I'm always down for anything, but I don't know if others would be o.k. with a crying baby, or if it would be best to have roommates with kids period.  Yes, cash flow would most likely be very very tight with one income.  I think it's possible, but it would be a stretch.  My monthly guaranteed income is $2980 after tax, and roughly $3915 with expected bonuses after tax.  Our minimum fixed expenses total $2779/month (Gas & Electric ($160), Student Loans ($492), Car Payment($297), Mortgage ($1557), Internet ($45), Cellphones ($64), Vet Plan ($31), Garbage ($25), Water ($44), Geico ($55), Netflix ($8).  So... we would have $200/month on a "guaranteed" basis of wiggle room for everything else.  Food, Gas, Repairs, Healthcare, etc.  As it currently sits, Shannon brings home $2570/month. 

Goldielocks

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Re: Are these good ideas to decrease housing costs?
« Reply #5 on: February 16, 2015, 08:20:16 PM »
If you plan to stay home for just 4 months you have time to save and just make it, depending on care costs, otherwise, selling and buying a new cheaper place for you may be the answer to avoiding a money hole or risks.  You will need to assume that you stay in your new place 7 years...  As you may want to move up after that.

I would say rent but the differential seems to be in your favor to buy.  Just don't start renovating.

Could you make more money?  Wife sit for other kids while home if a year or more?  Definitely ask the roommate you like and trust what they think about staying downstairs...


crispy

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Re: Are these good ideas to decrease housing costs?
« Reply #6 on: February 16, 2015, 08:48:24 PM »
Are you just looking to lower monthly expenses? If you have 20K to throw, consider recasting (or re-amortizing) your current mortgage which allows you to put a lump sum down and then they recalculate your mortgage payment.  Not all lenders will do it, and there is a small fee involved (usually a couple of hundred dollars), but it is much cheaper than a re-fi.

worms

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Re: Are these good ideas to decrease housing costs?
« Reply #7 on: February 17, 2015, 12:51:35 AM »
6) Any other ideas I missed?

Keep the dog, send the baby to grandma's!  ;)

ShoulderThingThatGoesUp

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Re: Are these good ideas to decrease housing costs?
« Reply #8 on: February 17, 2015, 04:26:02 AM »
Is it possible to pay less on your student loans based on your lower household income and larger number of people in your household after the baby comes?

By your math Option 2 sounds best, but here are the concerns:
-What if you need to replace two roofs at once?
-What if your current house sits vacant?
-What if you have bad tenants and a new baby at the same time? That will be hard to handle.

How much could you rent for in your area? If you can rent for $800/month it might be worth bringing cash to closing to get there. It's a lot less risk than Option 2. With a new baby, you need security.

So I'm in favor of Option 4.

MustacheMcHermanson

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Re: Are these good ideas to decrease housing costs?
« Reply #9 on: February 17, 2015, 01:01:41 PM »
One thing I should add... We don't have $20K saved up now, we have about $6K, but will get there by September.

frugaldrummer

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Re: Are these good ideas to decrease housing costs?
« Reply #10 on: February 17, 2015, 03:29:21 PM »
1)I would not buy a rental property now.  Although the cash flow looks attractive, you do not have a big enough emergency savings to cover if disasters occur (prolonged vacancy, meth dealing occupants you can't get evicted, new roof, etc etc.).

2) I would not move from your house.  You bought this house because you liked it and felt it could accommodate your growing family and future dreams. Your mortgage payment is not excessive.  And you have enough room for room mates to knock your mortgage payments down.  I'd rather have a $1200/mo payment and the option to rent out a couple of rooms, than have an $800 a month payment and no possibility of room mates.

3) Yes, put an egress window in the basement.  And see if at least one of your room mates will stay.  If they like you and the location enough, they may not care about the baby (especially if your baby is not a mega crier - not all of them are colicky!).  Better still if you can soundproof the basement or arrange a separate entrance for one of the rooms. 

4) Use your savings to cover any emergency or unexpected costs due to wife being home. 

kendallf

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Re: Are these good ideas to decrease housing costs?
« Reply #11 on: February 17, 2015, 03:56:20 PM »
I second the stay put, don't buy a second property.  It wasn't clear to me from your initial post, are you still paying PMI each month?  If so, focus on paying down the mortgage until you can drop it or refi to a better rate without it. 

MustacheMcHermanson

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Re: Are these good ideas to decrease housing costs?
« Reply #12 on: February 18, 2015, 04:43:01 PM »
ShoulderThingThatGoesUp... All good things to ponder.  I think it would be tough to get a rental for $800 that allows pets.  Again, we may be able to get the dog to live with our parents for awhile, but not for sure, and that's still a lot to ask. 

frugaldrummer: Remember, our total PITI is $1557/mo and not $1200 as you said.  Taxes are pretty expensive in Saint Paul (at least from my perspective). 

kendallf: We financed PMI into the loan for about $5000.  So... we do not have a monthly PMI payment, but we be at a disadvantage if we refinanced now.  Basically, a refi is out of the question with the current mortgage balance and capital available.

One other thing to note... It may not be mustachian, but IF we were able to get good renters and cash flow for our current place, I just talked to our mortgage broker, and he said a lot of folks are renting their current place out, and buying a second property.  Because, if you move to a second property and have it as your primary residence, you can get an FHA loan with only 3.5% down.  Given cash flow (in my opinion), and wanting to reduce costs but not be out boat loads of money, this seems like a no brainer.  I know there are a lot of risks, but it just seems like something I should ponder. 

Doesn't anyone like to take risks here?  :)

Goldielocks

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Re: Are these good ideas to decrease housing costs?
« Reply #13 on: February 18, 2015, 11:04:34 PM »
Well, I for one knows what happens when baby comes along and would never encourage someone to stretch themselves at that time.

I do like your thinking, it is just that you have so much colliding at once, and  are not thinking  of this as a pure business proposition, but because of tighter cash flow concerns in future. Starting a business to generate more cash flow is not the usual way, businesses can suddenly require deeper pockets than expected for a while, even ( or especially) leveraged real estate.

If you were single guy or two income couple, I would say to go for it if you have the energy and gumption to really learn as you go.