Author Topic: Case Study: Time to buy a home? For a 30-year old self-employed "bro-nup"  (Read 3169 times)

Bembenesaur

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Hello Everyone,

I've been reading MMM for a few months and have finally decided to participate in the forum. I have a few questions that I would like your input on. I'll start with the questions and then get to the details of my financials afterwards.

1. Am I financially ready to buy a condo?

2. What advice, in terms of the purchase process, realtors, etc., would you offer for a first-time buyer like myself?
My instinct is to speak with the lenders first, but that is not the conventional approach.

3. I have maxed out my Roth IRA for the past two years. What type of account would you recommend for other investments?

About Me:

For the last four years I've been living as a "bro-nup" (Bro + Grown-up). I am self-employed and work 20-30 hours per week and use the rest of the time to play outdoors! I provide environmental consulting services for local non-profits. I compete in big-mountain ski competitions. Fortunately my competition results have been good enough to subsidize most of my skiing and other recreation expenses through sponsorships, marketing, and winnings. I am very happy with my current lifestyle and feel incredibly fortunate to have such flexibility.

Monthly Income:
My income can vary, as project deadlines approach it tends to increase or falls when my motivation to be in front of the computer wanes. So far, I have been fortunate enough to have secure work and it is truly my judgement that has controlled income (I could earn more, but I really value free time).  For 2014, it's been the following:
Minimum: $ 1,800
Average: $ 3,540
Maximum:$ 6,640

Monthly Expenses:
I spend heavily on food, cooking is one of my passions, and sports. The categories I've used to track my expenses are not terribly well-structured and my expense tracking and or math are not excellent, sorry.
Rent: $ 0. I currently live rent-free courtesy of my in-laws while my boyfriend attends graduate school. In return, I assist with his food and entertainment expenses (included in the numbers below). He graduates in December and this friendly rent-free arrangement ends at that time.
Utilities: $0. (Same as above, but many a covered through the HOA fees and included in our rent arrangement)
Health Insurance: $ 156
Groceries: $ 250
"Me Money": $250 (dining out, entertainment, gear, etc.)
Crossfit: $ 130
Gas: $ 60
Car Payment: $0 I hope that my car will last for the next 5 years or longer.
Phone: $ 29 (formerly $47, but thanks to MMM and Republic, I am saving some money!)
Retirement: $ 460 (in the net worth section, I'll add details)
Year-round Expenses: $ 350 (funds for car maintenance, insurance, bike parts, gear, ski trips, etc. I don't buy toys of any kind until I have the funds to pay for them).
HSA Contribution: $ 50
Excess Money: $ 70 to $ 4,900 is directed into savings beyond ROTH IRA: this is why I need another saving vehicle!

Monthly expense totals:
Current arrangement (includes everything listed above): $ 1,735
Interim arrangement (January to June 2015, $300 for rent, $0 for utilities): $ 2,035
Long-term arrangement (after June 2015, assumes $600 for rent and $150 for utilities): $ 2,785

Currently, I am saving about 35 percent of income during lean months and up to 75 percent during fat months. The average savings rate would tend to fall on the lower end of the range, because of reimbursed items (supplies for clients), taxes, over-spending, and occasionally some poor planning.

I am working to strengthen my frugality muscles and reading this blog has certainly helped. I am open to suggestions if you see any glaring problems.

Assets:

Cash Total: $ 21, 600 divided as follows:

Money-market account: $ 10,600 at a staggering 0.87% (down-payment)
2-year CD: $ 5,000 at 1.20%(reserved for emergency fund)
5-year CD: $ 4,800 at 2.something % (down-payment)
I-bonds: $ 1,000 at 1.94% (reserved for emergency fund)

Investment Total: $ 36, 600 divided as follows:

Rollover Roth-IRA: $ 11,900 invested primarily in stocks with a moderate-high risk tolerance with low fees
Contributory Roth-IRA: $ 20,000 same as above. The net fees associated with both IRA accounts are about 0.47%
Green Investment Account: $ 4,700 held in CMAAX with a high ownership cost (3-4%). I will dump this into the down-payment, rather than look for new investment.

I am self-employed, so I do not have access to a company-sponsored 401(k).  My current allocation is "cash heavy", because I am saving for a house down-payment. I know this is not a particularly wise long-term strategy. I feel comfortable selecting the investment, but am not sure of the appropriate account type (i.e. Solo-401 vs. unclassified investment account).

Debt:
$0 I paid off my student loans years ago and no longer have a car payment. I very much prefer this situation.

About the potential house:

I live in a Colorado ski town. Our real estate is expensive relative to the wider world, but cheaper than many ski towns.  My potential budget, up to $180,000, limits my search to condos. I currently live in a condo and am mostly happy with the arrangement. I am interested in two bedroom, two bath units with reasonable HOA fees near the ski area and our free public transit system (there are cheaper options in nearby areas, but I'd rather avoid driving everywhere- long live walking, biking, and free buses!). Based on my review of the market, there are a handful of potential properties and the current prices seem very reasonable.

I currently have just over $ 20,000 for a down-payment (cash assets - (6K emergency fund, for 4 months bare-bones expenses) + green investment account) and will be saving like crazy in the coming months. We can live in our current condo with cheap rent until June 2015 (We move when the in-laws retire in June).  The most I am willing to spend on the house is $180,000. This would result in a mortgage of approximately $ 160,000. I hope to cover the closing costs with my next few months of savings. It's possible I could save more and my boyfriend will begin saving in January.

My boyfriend and I share a similar philosophy with respect to money and he may be slightly better than me at saving. However, his job long-term job prospects are unknown; he can continue working in his current job arrangement and earn about $ 36,000 annually. His money has been directed toward school and he will graduate debt-free. Although he cannot provide much for the down-payment, he would like to pay a larger share of the mortgage to catch up over time. Because of that we want our mortgage or rent to be affordable even if we were both working less than ideal jobs. We estimate this amount to be up to $1,500 per month including utilities. The reason we are looking for a two bedroom, two bathroom condo is to allow for the option to have a roommate- to hedge against tough times. In our ski town this is very realistic and rent for that person could be $ 600 month plus half the utilities. Under normal circumstances the second bedroom would be my office and I can take a deduction for that and a portion of the utilities.

The ideal condo would have some fixer-upper potential so we could increase the value and build equity more quickly. We're relatively handy, so we'd take on this work ourselves. Which is something I'd really enjoy.

Rent for a two-bedroom, two-bath condo in our area is $ 1,000- 1,200 per month and does not typically include heat, internet, and other utilities.

I've plugged this information into the NY Times rent vs. buy calculator (recommended on this site and at http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=1&abt=0002&abg=0) and others and have found that for a five-year horizon, buying is slightly advantageous. Emotionally, I would like to be a home-owner. But I'm not sure about committing to a mortgage because of an aversion to debt and general uncertainty about staying in one place with rewarding work for both of us (it's beautiful but the job market is limited for professional work). So, I'd like to know what some of you savvy folks have to say about this! Thanks for your time.




     

Angie55

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Based on pure price point, you are going to be paying more for home costs monthly than renting. Quick mortgage calculator for 180k with 10% down is $1,111/mo but then you will also have HOA fees. That's bringing you past or right around monthly rent. With the prospect of moving within 5 years or so there is not a clear cut advantage to buying other than the emotional aspect.

If you really wanted to make it work for you you could rent it out airbnb once in awhile during ski season.

Bembenesaur

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Thanks for your thoughts. We have definitely looked at using VRBO to set-up short-term rentals. Vacation rentals are really popular here and fortunately the summer is becoming more popular.

mulescent

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My advice would be to postpone the house purchase.  Here are my reasons in descending order of importance:

1)  There are two key unknowns in your life that make buying risky.  First is you/your boyfriend's job prospects.  It sounds like things could change a lot, given that he will graduate and your job is flexible.  Being tied to a home would tie you down.  Second, you didn't really hash out how committed you/your boyfriend are but buying a place you can't really afford on your own with someone who isn't a fixture in your life is a big risk.

2)  You don't really have much cash.  It sounds like you can barely afford a 10% down payment, and that's not counting closing and moving costs.  You should have lots more saved before taking on a mortgage, especially given the inconsistent nature of your work.

3)  You have a fantastic low cost lifestyle right now.  Is that really worth giving up?

That's my advice.  In terms of how to invest, you can at least buy CDs with the money market cash.  You can always take the money out of the CDs if you need, giving up the interest as a penalty.  What you really need, though, is a long-term strategy.  If I were you it would be focused on continuing the retirement savings (in self-employment tax sheltered accounts) and building up a bigger chunk of money for a house purchase 3-5 years in the future.  That money could go into a stock index fund, with the understanding that you could wait a number of years on the house purchase if the market happened to crash.  Alternately, a short-term bond fund would provide reasonable security with better yields than a money market.

Bembenesaur

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My advice would be to postpone the house purchase.  Here are my reasons in descending order of importance:

1)  There are two key unknowns in your life that make buying risky.  First is you/your boyfriend's job prospects.  It sounds like things could change a lot, given that he will graduate and your job is flexible.  Being tied to a home would tie you down.  Second, you didn't really hash out how committed you/your boyfriend are but buying a place you can't really afford on your own with someone who isn't a fixture in your life is a big risk.

2)  You don't really have much cash.  It sounds like you can barely afford a 10% down payment, and that's not counting closing and moving costs.  You should have lots more saved before taking on a mortgage, especially given the inconsistent nature of your work.

3)  You have a fantastic low cost lifestyle right now.  Is that really worth giving up?

That's my advice.  In terms of how to invest, you can at least buy CDs with the money market cash.  You can always take the money out of the CDs if you need, giving up the interest as a penalty.  What you really need, though, is a long-term strategy.  If I were you it would be focused on continuing the retirement savings (in self-employment tax sheltered accounts) and building up a bigger chunk of money for a house purchase 3-5 years in the future.  That money could go into a stock index fund, with the understanding that you could wait a number of years on the house purchase if the market happened to crash.  Alternately, a short-term bond fund would provide reasonable security with better yields than a money market.

Thanks for taking a look at my situation. I think you're advice is sound, but I'd like to follow-up a bit.

1. My boyfriend and I are committed to one another. Marriage is on the horizon, but we think buying a home is a more useful symbol of our commitment than a wedding (even a frugal wedding seems wasteful... I clearly lack the romance gene).

2. You're right, I'm not quite there cash-wise for the down payment. But I am concerned that growth in our real estate market (this summer was the highest volume EVER), a tightening rental market with a lack of long term leases, and potential for increases in interest rates will outpace our ability to save in the next 1-3 years.  Are there any circumstances where you would consider buying with less than a 20 percent down-payment? What do you feel is an appropriate amount of cash to have set aside given my income?

I assume you hunt, so good luck this fall if your season isn't already over! Thanks again.



mozar

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I wouldn't buy if you have to get pmi. Sounds like you are buying the house by yourself, or is your boyfriend going to buy with you? Banks typically don't like self employment. You will have to provide a lot of proof that it is consistent. I'm going to assume that you and your boyfriend are buying together. You don't need a wedding, but a marriage certificate is a good idea if that's where your headed.

« Last Edit: May 10, 2018, 12:39:13 PM by mozar »

Bembenesaur

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True story: I lived in DC for 13 years. I watched as average prices went from 200k to 600k. I realized I didn't want to buy in DC anyway. Yes, you might be priced out, or prices could come down again, but it's way better to be as ready as possible than over-leveraged.

Thanks for your input. In my gut, I know it's probably not quite the right time. Its hard to ignore the market and be patient. But your comment about being over-leveraged really rings true.

2Birds1Stone

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One thing to keep in mind, with the Fed poised to raise interest rates sometimes next year, it could suppress RE prices temporarily.

waltworks

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You don't have the dough. Simple as that. If you're struggling to come up with 20% to put down, and you're relying on variable self-employment income to pay the mortgage... bad things can happen. A big injury, or a special assessment from the HOA, or just a few random bad months could sink you. I'm not honestly sure you would manage to get approved for a loan anyway but that's beside the point.

Seriously, it's a losing proposition even without the uncertainty surrounding jobs and future plans. Throw in those caveats and there is no way you are ready to buy a house. Renting for $1k a month sounds pretty damn good to me in any CO ski town. Stick with that.

-W