Case Study: Housing Dilemma in Resort Town

[windriver]

Hi All,

First time poster here; stumbled on this website and spent hours reading the good word of frugality. Love it.

Topic Title: Help me determine the best housing solution while living in a resort town.

Income: $90K

Bio: Late 20's, Married, no kids...yet. Wife and I recently began our careers.

Assets: $4K in cash, small car worth $7K, $4K in equity on Truck ($12K left on loan)
Liabilities: Truck Loan ($12K) 2.25%, Loan from Parents ($8K) 0.00%

Monthly Expenses: 1 Bedroom Apt Rent includes utilities: $1K
                            Auto Loan Payment: $355
                            Cell Phone/Internet/TV: $110
                            Groceries/Dining: $325
                            Gas: $275
                            Charity: $750
                            401k Match: $120
                            Other Expenses: $500
                                       TOTAL:    $3,435

Background: We just finished paying off all student loans a few days ago, which is why we don't show any savings yet. The charity expense is high, but we are both committed to it and is non negotiable. We live in a very expensive resort town, which is where we both have jobs. The nearest towns would require a 45 minute commute - not worth it. The cost of living here isn't bad except for real-estate and rent. Currently we are very lucky to be living in a nice apartment owned by some friends of ours, the $1K rent is probably 30% below market. We have a 10 minute car ride to work, and both work on the same block. The average single family home (built in the 70's and has 3 bedrooms/2 baths) here sells for around $650K and rents for $2500 per month. Given the high cost of housing, what is a viable long term housing plan? We expect to have a kid or two so we will eventually (sooner than later) need 3 rooms. We are more than happy to live in a crap hole, and have done so in the past in the name of saving money, the only problem is that even the crap holes here are priced like pent houses. I see two options: (A) Bounce around to the cheapest rentals we can find, suffering through move after move while growing our wealth through investments. (B) After saving for a down payment, purchase a house which would swallow most of our investment capacity in mortgage payments. (C)?   Fire away!!

[Dicey]

Do you have any reason to believe you will be forced to move from your current rental in the next few years?

If not, I'd slash my expenses, live like starving students and save like mad to amass a  down payment. Then I'd look for a house with a layout conducive to a roommate/tenant situation. Could be dual masters, in-law suite, guest house or even a duplex. I really like the guest house in a resort area option. During peak season, you could squish yourselves into the guest house and rent out the main house for top dollar. (Consult your CPA first.)

While you're saving, start learning the local RE market. One good thing about a resort town is that people tend to overextend themselves to buy second homes there. When the economy takes a dump, that's the first thing they let go. Over the next few years, a lot of interest-only and balloon note loans are going to come due. There will most likely be a new wave of opportunities to buy at good prices. The penalties for walking away are starting to increase, so people will be looking to unload those second homes a little more carefully.

NO issues on the tithing, I get that, but what is this 401k match of $120? If it means that's the least you can contribute to get the full match, I'd stick with that. If you're contributing more than that, I'd crank it down and add the difference to your DP fund. Also, I wouldn't "invest" DP money. Your short timeline makes this way too speculative and risky.

[4alpacas]

1.  Start putting as much as possible into your retirement accounts.  Reduce your tax burden as much as possible.
2.  Stay in your current rental as long as possible.  You won't need a second bedroom until you're baby is about year old ("Right?" says the DINK), so you have plenty of time to figure out the
3.  Start increasing your income.  This is going to be the biggest helper in the process.  Max out both your 401ks, your IRAs ($46k/year)...if you have an HSA.
4.  Now start stashing for a down payment.  Diane C gave you great advice about how to acquire a property and how to make owning a property less of a long term drag on your finances.

Congrats on paying off your student loans! 

[acemanhattan]

Tahoe, by chance? If so--at least last I checked--Tahoe is one of those places that it often boarders on being cheaper to buy than rent; of course this would be a fixer upper, but you said you don't mind living in a junk-hole. I doubt you'd be able to do much better than the 1k a month you're paying now though and, as has been mentioned, if that is viable long term, I'd stick with it.

You live a 10 minute drive from work and work on the same block as your wife, why do you need two cars?  And how are you paying $275 a month in gas?!  I don't know of a single resort town that is longer than 8 miles from end to end; this implies that you two (a) get awful gas mileage (b) drive frivolously (c) take multiple monthly trips to the town 45 minutes away.  All of these things are anti-frugal and, if you're serious about making wise financial decisions, need to be addressed since they strike me as a big leak.

None of your other bills look bad, though I'd look carefully at the miscellaneous category (should anything be in there? I'm assuming auto/renters insurance, but what else?), and your 401k contribution isn't an expense, it is a part of your savings. 

Also, the 10% of your income given to charity is an interesting number to be committed to.  Is this a tithe to your church?

[totoro]

Do you have any reason to believe you will be forced to move from your current rental in the next few years?

If not, I'd slash my expenses, live like starving students and save like mad to amass a  down payment. Then I'd look for a house with a layout conducive to a roommate/tenant situation. Could be dual masters, in-law suite, guest house or even a duplex. I really like the guest house in a resort area option. During peak season, you could squish yourselves into the guest house and rent out the main house for top dollar. (Consult your CPA first.)

Plus one.  This plan works in resort areas but check the bylaws.

[windriver]

Diane C: I believe we can probably stay 3-4 years in our current rental. I don't anticipate the rate to go up, but you never know. The 401K match is the least to get the full match each month. My wife doesn't yet qualify for a match. I know this isn't an expense, but I am showing it too illustrate cash flow. I agree with the rental idea, but it's a well know and used idea in this town; a house with the potential to rent out extra space, or that has a guest house, usually has that priced into the selling price. Still a good idea though.

4alpacas: So are you suggesting we eventually cash out the 401K/IRA towards the DP or save it untouched for retirement?

Acemanhatttan: Not Tahoe, but similar. Agreed we can cut back more on gas. We carpool when possible but have very different work schedules usually. We also bike a fair amount. The gas adds up when you need to run into town for a forgotten grocery, etc. Also, we recreate a lot on the weekends which means some driving. The plus side is that we each fly only once every 5-7 years, so we save a lot by doing that. Also, my family is a 4hr drive away so seeing them 4-5 times a year adds up. Overall, we need to do a lot more biking, especially during the summer months. Yes 10% is a church tithe.

Thanks all for the responses so far!

[waltworks]

I think you're doing great. I mean, you can cut down here and there but crap, stay in your $1k rental as long as you possibly can. Assuming you are netting $90/year or ~$7500/mo, you're at a pretty high savings rate as it is. Keep maxing tax-advantaged stuff, keep enjoying living in an awesome place (we delayed FIRE by a solid 4-5 years to live where we do and it's worth every penny) and feel great about donating a nice amount to charity. You rock, your life rocks, don't get bummed when people brag about how they're FIRE in a $20k house in the middle of a dying town somewhere in Arkansas. You can always move there if you decide that's what you want and live like royalty!

Seriously, you are doing great. Pat yourself on the back. And drive a little less.

-W

[former player]

Not much to add, except that when you are keeping your eyes out for an opportunity to buy property, don't just look for the standard fixer-uppers, look for a neglected plot (not necessarily on the market: find the owner and make an offer) that you can buy and develop, look for an old commercial building you can turn into housing or add housing to, keep an eye on any property auctions, etc.  Creativity often trumps lack of money.

[theadvicist]

In general, it sounds like you're doing well, especially getting cheaper housing in an expensive area.

The only thing that struck me was this: "The gas adds up when you need to run into town for a forgotten grocery, etc." Just no. If you've forgotten a grocery, you live with it. You substitute it, you work around it, you make a slightly different meal than the one you planned. Get used to working around this kind of inconvenience, and you will soon realise most of those trips to town are a waste, or can wait and be made all together in one trip. You don't need things immediately. Patience is the friend of the thrifty.

Regarding long-term housing plans, I'd start stashing as much as you can, and cross that bridge when you come to it. In the meantime it will be great to see what you can realistically live on (and therefore how far you can stretch yourselves house-wise).

[SnackDog]

Either don't ever buy property (most frugal solution) or wait as long as it takes for the next real estate bust. Resort towns tend to bust harder and faster.  Also consider one vehicle which gets much better mileage. 45 minutes is not a bad commute.

[bluecheeze]

Just wanted to say good work on keeping the charity commitment strong- I have found that it pays back immensely (non-financially and financially speaking).
We were in a similar situation while living in California for 2 years and one minor way we found to save money was by reducing the tax burden through itemization.
Goodwill, charity, state/sales tax- try to get it as accurate as possible so you can reduce your tax burden- even play around with the best 401k value.  Every dollar that doesn’t go to the gobment can be used for your future :-)

If you do consider purchasing make sure you add the potential tax savings to your analysis- in our market it ended up being a wash between renting/buying (as far as monthly expenses- not really as we increased equity every month so you come out ahead) and we even lucked out and made 100k on the sale- just something to consider though I would personally only purchase if I had 20% down.
100k on the sale- just something to consider though I would personally only purchase if I had 20% down.

Real good job on paying off the debt and I would just keep picking at the car loan and personal loan while saving up $$$ for taxable or a down payment.

[SunshineGirl]

Can you acquire handyman skills and be a caretaker for a super-rich property owner, thus living free or nearly free? Can you start a property management company so you make money off other peoples' rentals?