Poll

What would you do?

Stay Put
3 (13.6%)
Sell th eHouse - Move to Townhome
13 (59.1%)
Keep the house as a Rental - Move to Townhome
6 (27.3%)

Total Members Voted: 22

Voting closed: October 16, 2014, 11:51:00 AM

Author Topic: CASE STUDY: SOS! Advice Needed  (Read 11067 times)

WannaBFree

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CASE STUDY: SOS! Advice Needed
« on: October 01, 2014, 11:45:40 AM »
Case Study:
My hubby and I both have professional careers (pretty stable and relatively secure). We are in our early 30th. We have recently purchased a home and left our townhome as a rental.
Our Financial Situation in a nutshell:
Salary - $175,000 +10% bonus (combined for both of us)
401(k) – about 75,000 combined

Townhome – bought for 185K 5 years ago. Currently owe $136,000 15 year mortgage at 3.00% (13.5 years left at this point)

House – bought for 378K 1 year ago. Currently owe 316,000 15 yr mortgage at 3.625% (14.5 years left due to recent refi).

We have about $50,000 in savings and about $60,000 in student loans.


Here is the question:
Our house went up in value over the last year and we could get $100,000 back if we sold it right now (after fees).
Does it make sense for us to sell it, move back to the townhome and use 150,000 (100,000 +50,000 savings that we have) of available money to pay off student loans and most of the mortgage on townhome. We could be completely debt-free in less than 1 year.  We currently are able to save 2,000/mo and will be able to save 5,000/mo once townhome is paid off. Townhome is big enough for the two of us and would work once we have kids too (at least for a while 3-5 years). I am worried that we will “loose” our “perfect” house and all the appreciation that will come with it over the years. However, a thought of being debt-free in less than a year is simply amazing…
Please share your thoughts. Any feedback is HIGHLY appreciated!!!
Options we were able to come up with:
1.   Stay put
2.   Sell the house – move to Townhome and be debt-free in less than 1 year
3.   Rent the house, move to Townhome and save an additional $1,000 each month until forced to move to the bigger house.

CowboyAndIndian

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Re: CASE STUDY: SOS! Advice Needed
« Reply #1 on: October 01, 2014, 11:52:16 AM »
A few questions, which will help us to answer your questions better.

  • Did you buy the house thinking you would have a family and need the extra space?
  • Does your townhouse rental meet the basic criteria about rentals (1% rule etc)?
  • Can you post your expenses, I think you earn a lot, so folks can give ideas?



naloj

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Re: CASE STUDY: SOS! Advice Needed
« Reply #2 on: October 01, 2014, 11:54:07 AM »
Are you basing your home's value off of Zillow's Zestimate?  If so, it's notoriously unreliable.

WannaBFree

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Re: CASE STUDY: SOS! Advice Needed
« Reply #3 on: October 01, 2014, 12:10:51 PM »
•  Did you buy the house thinking you would have a family and need the extra space?
Yes, that + the house is in a great family neighborhood with great schools, etc. We wanted to make sure we “lock” a record-low interest rate, so decided to buy now.
•  Does your townhouse rental meet the basic criteria about rentals (1% rule etc)?
We consider it a good rental – it is a bit below 1% - we rent it for $1,650/mo – could probably charge 1,700-1,750 next time we rent it out. However, we look at it as a long-term investment. We have 15 year mortgage and it is in a good area and was able to attract good quality renters.
•  Can you post your expenses, I think you earn a lot, so folks can give ideas?
I will post our expenses once I get home tonight.

The value of the home is based on recent comp sales and the appraisal we did.

Angie55

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Re: CASE STUDY: SOS! Advice Needed
« Reply #4 on: October 01, 2014, 12:20:20 PM »
I believe you will have to pay capital gains tax on the increase if you sell your house if you purchased less than 2 years ago. This will take a 15% chunk of any profit you are anticipating.

Cheddar Stacker

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Re: CASE STUDY: SOS! Advice Needed
« Reply #5 on: October 01, 2014, 12:30:46 PM »
Don't take offense to this as it describes me somewhat as well (check my signature line), but you seem indecisive. You had a townhome that was adequate but you purchased a home anyway. Then 6 months later you refinanced. Then 6 months later you're ready to sell. I think it's time for you guys to really lock in a strategy here and stick with it.

I would sell the house if it really has appreciated that much, but more because it sounds like too much house at too high a cost and this is a good opportunity to dump it. You will have to pay taxes on the gains (which I think is about $40-50K based on your description) since you didn't live in it for 2 years. You also need to find another place to live.

Why do you have $50K in cash while carrying $60K in SL debt? Nuts. Either invest it or pay that junk off. I would've invested it.

Living in the townhome poses another problem though since you have tenants. When is their lease up? Will you need to make any repairs? Is it really going to be big enough for a family?

I think you should consider renting a small apartment that suits your current needs, then find a more modest house once kids are on the way.

Use of excess cash post house sale - Max out 401k's and IRA's for 2014 and 2015 as soon as you can, but don't pay off 3% debts. If the SL's have a low interest rate I would hold onto those as well and invest in more rental real estate or stocks with any funds left after maxing the retirement plans.

WannaBFree

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Re: CASE STUDY: SOS! Advice Needed
« Reply #6 on: October 01, 2014, 12:34:54 PM »
Great point. However, most of the true profit will be absorbed by closing costs/realtor fees. Most of the money we can get out from the proposed sale would be the money we put in as the original down payment, etc. The thinking at the house-buying time was - lets lock in a low rate. However, now we are thinking why pay any interest? We can live in TH and save up and once we need a bigger house - we can sell TH, add some money and buy a house for cash! Even with a low 3.625% we end up paying about $10,000 of interest annually!

Thank you so much for your input!

Mazzinator

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Re: CASE STUDY: SOS! Advice Needed
« Reply #7 on: October 01, 2014, 06:18:17 PM »
Why are you so hard up to pay off your low interest mortgage? Is Dave Ramsey here? Do you want to be debt free or financially independent?

Thegoblinchief

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Re: CASE STUDY: SOS! Advice Needed
« Reply #8 on: October 01, 2014, 06:25:16 PM »
Do whatever you want. Which house makes you happier?

At your income level FI is inevitable. This choice amounts to less than a year's income.

ShortInSeattle

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Re: CASE STUDY: SOS! Advice Needed
« Reply #9 on: October 01, 2014, 07:26:35 PM »
I second Cheddarstacker's comments. But I'll also add that we did something kinda similar!

1. Bought expensive house.
2. It appreciated.
3. Three years later, sold it and downsized to a small place, became debt free and mortgage free in the deal.

We loved our expensive place, but we felt that we could be just as happy in the small place, and we were very excited at the potential to be 3-5 years closer to FI and mortgage free.

It's been a great decision, but giving up our "dream home" wasn't easy. You just need to decide which thing matters to you more.

As soon as we downsized (and our monthly bills plummeted) my SO's company went through a few rounds of layoffs. He wasn't laid off, but knowing we'd be fine anyway was priceless. And we dropped our FI projections from age 45 to 40.

Give yourself some time to think through the pros and cons. It sounds like you've got time, and options.

And yeah, be skeptical of Zillow's value estimates.

WannaBFree

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Re: CASE STUDY: SOS! Advice Needed
« Reply #10 on: October 02, 2014, 10:14:25 AM »
Thank you everyone for your input! Reading your comments has been incredibly helpful for us.
Here is our spending breakout – After our FSA, 401(k), $2,000 direct deposit to savings account, etc our take home pay is roughly $6,600/mo.
We are “young” mustashians – basically just recently realized that with current mindless spending we are on a way to a financial disaster. We are trying to write all of our expenses down to have a better picture but even putting a quick summary was pretty eye-opening!
So here is a break-out. We had a long discussion last night and will try to limit some of the spending. We basically put away our credit cards and got weekly cash allowances. 

Any input is highly appreciated!

We pay out our credit cards monthly and have no car loans (bought both cars for cash).

Expenses   
   AUG
Car care    30.00
Cleaners    20.00
Clothes    157.00
Dining Out    200.00
Family Help/Gifts, etc    350.00
Food    600.00
Cleaning supplies, pers care, etc    300.00
Gas    250.00
Personal Care - Hair Cuts, etc    130.00
Home Impr    200.00
Lunch -for networking    150.00
Personal    100.00
Bills    300.00
Mortgage    2,513.00
Student Loans    660.00
Pets    50.00
GYM    200.00
Misc    340.00
Snack    50.00
   TOTAL:  6,600.00

Cheddar Stacker

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Re: CASE STUDY: SOS! Advice Needed
« Reply #11 on: October 02, 2014, 10:27:12 AM »
Switch the $2K direct deposit from savings to investments.

You are spending $1,000 month on food which is too much (200+600+150+50).

You are spending nearly $500 on cleaning and personal care. This is the biggest wasted money I see in your budget.

Categories like Bills and Misc should be investigated by you guys, share here if you'd like but at least get a better handle.

Drop the gym and start taking the stairs, taking walks together, riding bikes, doing pushups. No gym is worth $200/month.

Your mortgage is 38% of your $6,600 and 29% of your $8,600. This would be your biggest savings by far if you make the move. If you do nothing else but this you will improve your position substantially. Priority #1, 1a, and 1b should be this.

marblejane

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Re: CASE STUDY: SOS! Advice Needed
« Reply #12 on: October 02, 2014, 10:50:00 AM »
My immediate reaction to your expenses was "Holy Jesus."

Your discretionary spending is insane. I think you know this.

Just as a thought experiment, let's say that you cut food spending (all categories: dining out, "food", lunches out & snacks) to $300/mo, personal care/cleaning supplies/haircuts/gym to $200/mo, and clothing/dry cleaning to $100/mo. That's an additional $1207/mo in free cash flow that can go towards debt repayment. If you put that $1207/mo along with the $2,000/mo you are putting into savings towards your mortgage on your new house, you can pay off that mortgage in 5 or 6 years.

I've written some comments below on certain categories and how you can cut them. The big picture here is that you were contemplating selling your dream house so that you can continue to spend $1,000/mo on food and $300/mo on cleaning supplies.

Let's just look at the "Food" categories. You are spending 600+200+150+50=$1000/mo for 2 people. There has to be food waste going on here (or excessive food stockpiling?). How much do you cook at home? You can easily live on a quarter of this budget.

Clothing: You are spending $177/mo on clothes. That's maybe acceptable in your first year of work, when you building a professional wardrobe, but in your early 30s, you both should have an ample supply of professional looking clothes. Experiment with a minimalist wardrobe (check the threads around here and check out Project 333)

Personal care: You are spending $300/mo on cleaning supplies/pers care, $130/mo on personal care/haircuts, and $200/mo on the gym, for a total of $630/mo. Try putting a moratorium on buying cleaning supplies. Stretch out the time between haircuts, and try going to a beauty school for cheaper haircuts. I go to the Aveda Institute in San Francisco every 10-12 weeks for a cut that's $20+ tip. If you really want to be badass, learn to cut each other's hair. Are you really getting your money's worth from a $200/mo gym membership? Can you find more affordable alternatives (say, running outside, or lifting weights at home, or yoga dvds, or even just a cheaper gym)?


Cheddar Stacker

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Re: CASE STUDY: SOS! Advice Needed
« Reply #13 on: October 02, 2014, 11:05:26 AM »
I just want to add, you have an amazing amount of income, and your expenses are likely average compared to normal people. Most of us here are not normal/average, and we are proud of that. Something brought you to this website so take advantage of it. If you truly wannabfree make sure you think seriously about the advice here, even if it hurts and seems like we're being tough on you. We're trying to help and pointing out things we all try to improve on as well. If you aren't in a hurry to get out of debt or retire, you're doing just fine as is and your income will get you there sometime in your 50's.

WannaBFree

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Re: CASE STUDY: SOS! Advice Needed
« Reply #14 on: October 02, 2014, 01:58:25 PM »
Thank you everyone! All great points! I cannot wait to get home and discuss your thoughts with my husband! Please be harsh! This is very helpful for us… we need a reality check. We both have been in our lines of business relatively short (4 years for me and 6 for my husband) and, luckily, were able to almost double our incomes…and, as it usually the case with “normal” (I would argue this one) people, we got carried away with lifestyle inflation! It is just insane to take so much stress at work to buy stuff we don’t need… I am very happy that both my husband and I are on the same page and very thankful that I stumbled upon this website! We are ready to implement changes and, for the first time in a while, we both feel empowered… so THANK YOU!!!
 

GregO

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Re: CASE STUDY: SOS! Advice Needed
« Reply #15 on: October 02, 2014, 02:42:55 PM »
Options we were able to come up with:
1.   Stay put
2.   Sell the house – move to Townhome and be debt-free in less than 1 year
3.   Rent the house, move to Townhome and save an additional $1,000 each month until forced to move to the bigger house.

This thread is going to quickly get off of the original question now that you posted your expenses.  But to try to bring it back on course, I'll give my opinion.

I think it's clear the consensus is that you shouldn't stay in such a big house and pay all of those expenses.  I also don't think it makes financial sense to pay off a 3% mortgage.  So that, to me, means the options are either 1) to rent or sell the house and then 2) to move into the townhouse or rent somewhere else.  I think you should investigate each of your other options separately: would the house be a good rental property?  Would it be a positive cash flow (including repairs, vacancy, etc)?  It doesn't appear that it does, but it might.  If it doesn't, then I agree that you should sell it.  Lastly, you can then decide if you want to move into the townhouse or continue renting it.  You can investigate if you can rent somewhere cheaper than you could live in the townhouse (including commutes, utilities, etc).

I voted for Option 2, because that seems likely where the answers to the questions above will lead.  But I wouldn't suggest paying off the townhouse mortgage with any of the funds.  I'd take any proceeds and invest them, as Cheddar said.

Mazzinator

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Re: CASE STUDY: SOS! Advice Needed
« Reply #16 on: October 02, 2014, 03:47:00 PM »


Use of excess cash post house sale - Max out 401k's and IRA's for 2014 and 2015 as soon as you can, but don't pay off 3% debts. If the SL's have a low interest rate I would hold onto those as well and invest in more rental real estate or stocks with any funds left after maxing the retirement plans.

Yes!!!!!

Quote
I voted for Option 2, because that seems likely where the answers to the questions above will lead.  But I wouldn't suggest paying off the townhouse mortgage with any of the funds.  I'd take any proceeds and invest them, as Cheddar said.

And Yes!!!

WannaBFree

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Re: CASE STUDY: SOS! Advice Needed
« Reply #17 on: October 24, 2014, 10:44:09 AM »
After looking at our expenses carefully, we decided that unless we chance something in our spending dynamic, moving anywhere won’t solve our problem.
This whole “should we stay or should we go” question has raised a “true” underlying problem…which is our overspending. We tried to come up with some creative solutions and here is what we have:

•   Income – my husband re-negotiated his salary and our combined income is now –  $184,700
•   We refinanced our mortgage from 15 years at 3.625% to 30 year at 3.875% with a monthly saving of $800. We believe that given 3.785% rate it makes more sense to pay off student debt first. Refi costed us only $300.
•   Student Loans -  I have the biggest chunk of the loans. The plan is to pay off my unsubsidized $15,000 from the available savings (all loans are about 6% interest rate). The remaining $23,000 are subsidized loans, so I will be going back to school to get another an advanced degree that I have been thinking about getting anyway (since it will cost me $0 -my employer is willing to pay for it). Interest on subsidized loans will stop accumulating and I will be able to comfortably pay it off in 1-2 years (Starting with my husband’s interest-bearing loans and then onto my essentially 0-interest loans).
•   GYM – we are switching from $200/mo gyms to $30/mo gym. Since we had gym memberships at different locations, we have not been able to carpool (which we can do – we work two blocks apart). Carpooling will save us another $40-50/week for a total of $240-250/ mo. Yaay!
•   Meals – we do cook at home a lot. However, we buy a lot of items in bulk (which we are planning on reconsidering since we do have a lot of waste ) and buy expensive organic products. I will have to do some research to see where we can get away with buying non-organic stuff (bananas, for example). Additionally, we spend a lot on coffee and snacks. I need to make sure to pack up snacks to work (not just lunches) and switch to office-grade coffee…yaaak!.. The plan also includes figuring out how to cook nutritious but simpler meals as well as switch to buying some frozen ingredients (right now we buy absolutely everything fresh, including meat, fish, veggies, berries, etc). The goal is to be able to spend no more than $500 which is still a lot, but a huge decrease of $500 from where we currently are.
•   Personal Care – I am going back to my natural hair color… this brave move alone will save us $100/mo! Massage will have to wait till better times too… The new gym is offering free yoga classes so hopefully I will be fine without massage for a while ( I sit all day at work so somehow I felt that it was a justified expense). I will also do my own mani/pedi like in good old days! All these things will save us about 200/mo. I use expensive skin care products and will continue it for now as I cannot give this up just yet...but will revisit this thought later . The goal is to bring personal care expense amount from $630 to $200/mo for a saving of $430.
So that’s our plan in a nutshell. I think that once we get this plan going we will be able to identify additional areas of potential savings. We both are very excited about what this journey will bring us! Thank you again for all your input. It has been incredibly helpful for us!  I will keep on reading and participating in forum discussions (to obtain more mustashian tips and give my two cents where I can).

4alpacas

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Re: CASE STUDY: SOS! Advice Needed
« Reply #18 on: October 24, 2014, 11:12:33 AM »
•   Meals – we do cook at home a lot. However, we buy a lot of items in bulk (which we are planning on reconsidering since we do have a lot of waste ) and buy expensive organic products. I will have to do some research to see where we can get away with buying non-organic stuff (bananas, for example).
When you buy in bulk, think about cooking in bulk.  I find that cooking a large amount of food as soon as I buy it is easier for me not to waste the food.  Since I like variety, I freeze most of the food and slowly defrost it throughout the next month or so.

Quote
Additionally, we spend a lot on coffee and snacks. I need to make sure to pack up snacks to work (not just lunches) and switch to office-grade coffee…yaaak!..
Why switch to the office coffee?  I'm not a coffee drinker, but I make my own tea (from high quality loose leaf teas that I keep in my office).  Why not invest in a coffee maker or french press for your office?

My key to office snacks is to keep both healthy and unhealthy items around.  I pack hard-boiled egg whites for snacking...and dark chocolate (usually have a bar or two stashed in my closet) for indulging.

Quote
The plan also includes figuring out how to cook nutritious but simpler meals as well as switch to buying some frozen ingredients (right now we buy absolutely everything fresh, including meat, fish, veggies, berries, etc). The goal is to be able to spend no more than $500 which is still a lot, but a huge decrease of $500 from where we currently are.
Check out budgetbytes.com

I only cook 1-2 recipes/weekend, but we eat something new every night due to bulk cooking and freezing. 

Quote
•   Personal Care – I am going back to my natural hair color… this brave move alone will save us $100/mo! Massage will have to wait till better times too… The new gym is offering free yoga classes so hopefully I will be fine without massage for a while ( I sit all day at work so somehow I felt that it was a justified expense).
Try trigger point.  I use a tennis ball and a foam roller. 
Quote
I use expensive skin care products and will continue it for now as I cannot give this up just yet...but will revisit this thought later

Check out Paula's Choice.  I used to be a product junkie (and probably still am).  I've found great products through her website that work and are reasonably priced (MUCH cheaper than what I was using before). 

Thegoblinchief

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Re: CASE STUDY: SOS! Advice Needed
« Reply #19 on: October 24, 2014, 04:15:14 PM »
AeroPress for coffee at the office. Easy enough to transport from home, cheap enough to buy a second one. If you have easy access to hot water and can clean things in a sink, makes really good coffee.

I just got mine last week and I love it.

falcondisruptor

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Re: CASE STUDY: SOS! Advice Needed
« Reply #20 on: October 24, 2014, 04:56:26 PM »
Here's a link for the dirty dozen and clean 15 if you're looking into switching some of your groceries to non-organic.

http://www.davidsuzuki.org/what-you-can-do/queen-of-green/faqs/food/what-are-the-dirty-dozen-and-the-clean-fifteen/


Edited: the link wasn't included the first time.  Not sure if I just didn't include it or if it was removed.  Since there's no mod comments, I'm going to assume I just forgot.
« Last Edit: October 25, 2014, 07:11:29 PM by falcondisruptor »

1967mama

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Re: CASE STUDY: SOS! Advice Needed
« Reply #21 on: October 24, 2014, 05:19:06 PM »

WannaBFree

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Re: CASE STUDY: SOS! Advice Needed
« Reply #22 on: August 10, 2017, 02:17:06 PM »
UPDATE!
It's been a while, but just wanted to give you an update!
Thanks for all of your advice - we were able to become more mustashian... A lot has happened after the original post: we upgraded our cars,did some remodeling, sold the townhouse, had a kiddo, etc, etc! 

I am proud to report that we are now debt free! Yes, completely, including our mortgage - all while still contributing to our 401(k)s and having a healthy emergency fund!

Feels great! We could not have done it have we not stumbled across this  website some years ago! Life inflation is a real deal and controlling it can do wonders for your future and overall happiness!


Thank you again and best of luck in your mustashian journey!




4alpacas

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Re: CASE STUDY: SOS! Advice Needed
« Reply #23 on: August 10, 2017, 02:54:49 PM »
UPDATE!
It's been a while, but just wanted to give you an update!

I am proud to report that we are now debt free! Yes, completely, including our mortgage - all while still contributing to our 401(k)s and having a healthy emergency fund!
CONGRATULATIONS!!!!!!!!!!!!!!!!!!!!!

MBot

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Re: CASE STUDY: SOS! Advice Needed
« Reply #24 on: August 10, 2017, 07:48:33 PM »
Whoa!!! That's amazing!! Congrats!!!

memorytoast

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Re: CASE STUDY: SOS! Advice Needed
« Reply #25 on: August 11, 2017, 08:47:49 AM »
Glad to hear! Thanks for posting :)

marblejane

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Re: CASE STUDY: SOS! Advice Needed
« Reply #26 on: September 18, 2017, 09:55:32 PM »
Wow, incredible!! Thanks for the update!

Basenji

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Re: CASE STUDY: SOS! Advice Needed
« Reply #27 on: September 19, 2017, 05:56:25 AM »
Well done!

cchrissyy

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Re: CASE STUDY: SOS! Advice Needed
« Reply #28 on: September 19, 2017, 10:17:06 AM »
I go to the Aveda Institute in San Francisco every 10-12 weeks for a cut that's $20+ tip.


Oh wow thank you for this tip!
I know the thread is old but I've been living close to this place for a decade and not known it.