Author Topic: Convince me not to buy an unmoustachian house  (Read 3799 times)

Jax1023

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Convince me not to buy an unmoustachian house
« on: May 01, 2014, 08:26:39 AM »
I live in a hcol area. Husband and I work about 10 miles apart. Living close to his work is not really an option for several reasons, including that it's in the ghetto and would move us within city limits with a terrible school district and a 4.17% wage tax.
So we'll live in the suburbs. I fell in love with a house, 3 miles from my job, 7 from my husbands. But it's very expensive-495,000 with 8900 a year in property taxes. Unfortunatly, unless we live singnificantly further away, we won't find much for less than 450. Even at extreme fixer status.

Out gross income is 160,000 a year, 130 of which is guaranteed and 30 would be my husbands summer salary. While this is not 100% guaranteed! it's pretty likely. He's good for 3 more years on his current grant.

We currently have 160k in cash, to be used for house purchase and for an emergency fund. Very high right now due to the need for a downpayment.
I have 80k in a Roth IRA, DH has 12k.
I have 60k in a 403b, DH has 50k.

We're not aiming for a super early retirement. My husband is a college professor and will likely not retire for along long time, he's one of those people who loves the academic environment and thrives off it. Ideally I'd like to retire by 60, which is 28 years from now.

We currently save 15% of gross salary each to our 403bs, my employer smtches 2%, my husbands matches 8%. We also max a Roth IRA each yearly. And we save cash each month, that we should likely do something with besides shove in a savings account making .9% interest.

So would it be stupid to buy this house? Should we look further away and cheaper? Should we stay in our rental at 1900 a month?

Thanks

sherr

  • Pencil Stache
  • ****
  • Posts: 694
  • Age: 34
  • Location: North Carolina
Re: Convince me not to buy an unmoustachian house
« Reply #1 on: May 01, 2014, 08:40:17 AM »
Well considering that the property taxes alone are more than a third of your rent, I think it's pretty likely that it would be cheaper to continue renting. Add in 4% interest on a $340k mortgage and you're already at what you're paying in rent, and that's not counting insurance, maintenance, opportunity cost of having all your money tied up in a half-million dollar house, or intangibles like being locked in to where you live for the foreseeable future.

In some markets it makes sense to buy a house, in others it does not. It sounds to me like you're way better off continuing to rent.

nereo

  • Senior Mustachian
  • ********
  • Posts: 11001
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Convince me not to buy an unmoustachian house
« Reply #2 on: May 01, 2014, 09:04:42 AM »
It sounds like you could certainly afford it, but you didn't mention anything about what the rental market is like in your area.
so - what's renting like in your area?
Any HOA fees with this property?
Also, what kind of rate can you get?
with a 20% down payment (99k) and $8900 in property taxes you're looking at $2500/mo ~3.5% (30 year) or $3500/mo (15 year). Your rate will change the equation significantly.


Jax1023

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Convince me not to buy an unmoustachian house
« Reply #3 on: May 01, 2014, 09:11:07 AM »
Rental market is small and competitive in our area. I'm expecting a significant rent increase at the end of our lease in August. This is a close inner suburb of a major northeast city. Our rent is on a two bedroom apartment in a complex, to rent a single family house would run about 2500 a month.

A far as rates, we were looking at a30 year, so current rates are just over 4% if we went with an online bank. We were also looking into purchasing a points to reduce the rate and possible putting down more than 20%, like maybe 130.

I don't foresee us leaving the area, my husband is a tenure track professor at a major university, a position which is hard to come by and not left lightly. I work in healthcare, so my job is portable, but I think we'll be here for the long haul.

Rationally, I know renting may be cheaper. It's the emotional part that gets me. I want my son to have a house and a yard, etc.

James

  • Handlebar Stache
  • *****
  • Posts: 1680
  • Age: 47
  • Location: Rice Lake, WI
Re: Convince me not to buy an unmoustachian house
« Reply #4 on: May 01, 2014, 09:31:52 AM »
Given your numbers, I don't think it is a crazy idea to buy the house, but it does seem like a big stretch.

One thing that scares me is your  comment "I fell in love with a house"...  That sends me warning flags regarding everything thing else you say. It just sounds like you are making an emotional decision. It very well might be the right decision, but just be very careful about talking yourself into something. When you say "we won't find much for less than 450. Even at extreme fixer status" it does sound like the purchase is a no-brainer, but it just doesn't make sense to me that the house you fall in love with only costs $45k more than an extreme fixer... again, I hear warning bells going off in my head, but I can't know if they are valid.

So really make sure you are looking at all your options fairly. Have you shopped at lower ranges and told your realtor you want to see everything available? Often a Realtor won't push to show you cheaper options if they think they can get you into a house at a higher level. Just do all diligence in this decision, it's a big one.

At the end of the day there is so much involved in the decision that we might not be of much help with the limited information we have. The purchase of a house at that price by our family would be a huge mistake, and I make a lot more than you do. But housing costs vary a lot and others can't make that decision for you.

Finally, do remember that a nicer and bigger house brings with a lot of implied responsibilities and expenses. You need to fill the house with furniture, make it look good, take care of it, keep it improved and normal for the neighborhood, etc. You see the type of cars the neighbors drive, you interact with them and can pick up a lot of their habits and lifestyle. It doesn't have to control you, just something to be mindful of when picking a house.

MrsPete

  • Magnum Stache
  • ******
  • Posts: 3519
Re: Convince me not to buy an unmoustachian house
« Reply #5 on: May 01, 2014, 09:42:33 AM »
Why do you want the house?  Have you outgrown your rental, or do you just feel it's time to start investing in real estate?  If you've outgrown the rental, is another rental possible?  In general I feel that home ownership is well worth the expense (not everyone on this board will agree), but I'm not sure you specifically are the right person to jump into this. 

Is the house in good condition, or would you need to put in money right away?  Would you also need to buy appliances and other costly items? 

How long do you envision yourself living in this house?  In general, you need to stay put a while to make a house worthwhile. 

I think it sounds crazy expensive, but we're about to BUILD exactly what we want in a retirement house for less than half that cost . . . and our taxes are just under 1000/year.  So of course it sounds crazy to me. 

Greg

  • Handlebar Stache
  • *****
  • Posts: 1449
  • Location: Olympia, WA, USA
Re: Convince me not to buy an unmoustachian house
« Reply #6 on: May 01, 2014, 09:44:26 AM »
How big is this house? Is it a McMansion or a modest 50's rambler?  How well built, energy efficient is it?

Long term costs like heat and maintenance should be a factor you consider.

mnstachian

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Re: Convince me not to buy an unmoustachian house
« Reply #7 on: May 01, 2014, 10:04:37 AM »
Additional food for thought: How far away from your husband's tenure decision are you? If there is any chance that he won't get it, I'd hold off on the house. Once you're sure that you'll be staying in the area, then buy. Because he's an academic, you may also have access to preferred mortgage rates. Usually though, those special rates only apply if the home is your first purchase in the zip code, so that may also be a relevant consideration.

soccerref

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Convince me not to buy an unmoustachian house
« Reply #8 on: May 01, 2014, 10:08:55 AM »
I have been a homeowner for over 30 years, and I have been thinking about the rent vs. buy decision.  Typically, the question being addressed is can the buyer afford the mortage payments.  Here is another way to consider the issue.  First, your costs of home ownership include not only the property taxes but also maintenance and insurance.  I have a house that is close in value to the one that you are considering.  I estimate that I spend about $4,000 per year on average (20 year history in the current house) for things like roof replacement, painting, water heater, furnace etc and $1,500 for homeowners insurance.  Assuming comparable costs for your house, the annual average cost of ownership would be about $14,400 compared to rent of $22,800.

Now you borrow $395,000 plus a $100,000 down payment to buy the house.  Over the long term, the house is likely to appreciate at the rate of inflation, say about 2%.  You can borrow today at 4.25%, and you should be able to earn at least 5% on the $100,000 if it was invested in a Mustachian portfolio of stock and bond funds.  Thus, you are paying 4-5% (average of direct borrowing cost and foregone income) to acquire an asset that will return about 2%, so add another $15,000 to the annual cost of home ownership.

Unless you get lucky and the house appreciates faster, buying the house over renting will result in a longer time horizon to achieve FI even if you can afford the payments.

SunshineGirl

  • Pencil Stache
  • ****
  • Posts: 749
Re: Convince me not to buy an unmoustachian house
« Reply #9 on: May 01, 2014, 10:26:48 AM »
I would keep saving until your husband gets tenure. That way = much bigger downpayment and certainty about your husband's employment.

I've read a lot lately about how colleges/universities are setting themselves up for financial trouble based on demographics and declining enrollments and crazy spending on non-core things. I think there could be shakeups as a result in the not-too-distant future.

I get the emotional part regarding your child. However, you'll still likely be buying a house while he's young, and so he'll still get what you're wanting him to get. The difference is, you'll be in a much better financial position. Interestingly, we have owned our house for 15+ years, since just before our first child was born. We have neighbors who've RENTED nearly as long, and their kids have the same feelings about the neighborhood as mine do. They don't understand ownership like adults do. They understand a stable vs. non-stable home life. They understand consistency, etc. But who owns what means nothing to them. My son goes to "his house" to play; and he comes to "our house" to play.

I'd try to rent in a great neighborhood within walking distance of a great school, and then buy in that same neighborhood once your husband gets tenure. 

momo5

  • 5 O'Clock Shadow
  • *
  • Posts: 74
Re: Convince me not to buy an unmoustachian house
« Reply #10 on: May 01, 2014, 06:40:02 PM »
when we bought our house, our numbers looked very similar to yours.
I did not factor in the care and upkeep of a house our size, nor did I have a clue that our electric rates would double over the last two years. cleaning a large house is a large job. yardwork is another.
I also did not factor in the unfortunate turn of events which effectively halved our income last year.
we are two years away from paying off the house, dh is dead set against moving. I regret buying a house this size, its just not worth it.
and it has not appreciated much either. I mean, had we sold at the height of the bubble we could have doubled our money, but we didnt and now its worth pretty much what we paid for it 13 years ago.

kmm

  • 5 O'Clock Shadow
  • *
  • Posts: 49
Re: Convince me not to buy an unmoustachian house
« Reply #11 on: May 01, 2014, 07:06:52 PM »
I was in a situation similar to yours, and I bought the house. I wouldn't have done so if I was strongly focused on early retirement, but I'm not. I don't regret it, it's a wonderful home, but it's by far my biggest financial commitment and as everyone says, you need to plan for both planned and unexpected repairs (and then double that estimate).