Friend recommended this site re: my situation. Like the site, like the ideas, wondering if anyone can help:
FACTS:
35 y/o, no kids, want to move into a bigger house with girlfriend w/in next 2 years
No cc debt, good credit
No car payment (will drive till wheels fall off)
Making max contributions to 401k
Employer paying off student loans (no monthly payment required)
Mortgage Payments Made Monthly On time
Steady, Reliable Employment
2006: Purchased condo as primary residence, owe $207K, value approx $190K, monthly payments c. $650/month (interest only). Interest only expires March 2016 when payment will likely double.
2012: Purchased vacation home, owe $135K, value approx $180K, monthly payments c. $950/month. Fixed 30 yr loan. c. $4k rental income/yr
Total mortgage debt: $342K
Savings: $45K in money market account earning less than 1% interest.
Savings potential: After all mandatory expenses (mortgage, property tax, condo fees, cable/phone, energy, 401k, medical, income tax), and going on austerity budget, I can save $1,500 per month.
Goal: Move into a bigger house within the next two years with girlfriend who is about to start a new job this month, whose lease on her rental apartment expires in March 2015. Minimum price for SF homes/Townhouses in DC area $400K.
My Question: What is the most effective way to move into a bigger house in the next 2 years without carrying 3 mortgages?
After perusing the forum a bit, I'd like to anticipate a few questions and do my best to answer them:
1. Why doesn't your girlfriend just move in with you at your current place? My place is a really great location in the DC area. It is close to shopping, it is close to transportation, it's "in the beltway" (for non-dcers, this means it's a good location), it has all of those "upgrades" in it which were in it when i purchased, it has a gym and pool which i use to exercise, and my own parking space (that was a luxury years ago). The downsides (besides being under water) are the neighborhood isn't super fantastic, but more of an issue is the size. It's really small. 596 square feet. For myself, it is adequate-- just the right size, prevents me from accumulating too much crap. I've always thought it'd be really difficult to fit 2 people in here and girlfriend agrees. If the place had like 300 extra square feet, it'd be fine (don't need much). I also have music equipment in here (I'm a musician on the side-- that's no money maker). I also have a bike in here (I know that's praised in this forum). So I'd love to have us squeeze in here, but I don't think that's physically possible. She also doesn't much space, having lived in just slightly bigger 1br apts. Even all this considered, the monthly payments on it will increase in 2016 and I can't be sure the value will increase to get me above water.
2. Why did you buy in the first place? I moved to DC in 2005. I was paying $1,000/month in rent making like $35K (that's before taxes). That was tough. Then, I found out my rent was increasing to $1,400/month, so I explored other options. My employer had a program where it paid for closing costs, so I found my current condo where my monthly payments were less than $1,400/month. Then, after "the crash" in 2008 the interest rate adjusted ... downward, so my monthly mortgage payment has been under $700/month for years now which has allowed me to save. Unfortunately, the interest-only period expires in March 2016 (10 years ago, 10 years seemed like a century).
3. Why the hell did you buy a vacation home? In 2012, I realized that my property was underwater, and since I knew I eventually wanted to upgrade to a bigger place, I started looking at SF homes and townhouses in the dc area, since interest rates were low, with the idea that I'd rent out my current place until I can hopefully sell it. Not only was I extremely disappointed with what was available, I was outraged at how much they were asking. When I saw a "fixer=upper" for $370K in a crappy area, that was the last straw. I evaluated, what did I really "want," since I judged my current house a better situation than any other at the time. I had always wanted a vacation home and saw a great one which was an estate sale, so I decide to go ahead since I always wanted one, figured I'd enjoy it myself, and it had rental potential if I needed it. I had a medical emergency in 2013, so I decided to start renting the vacation house out and it really helped me out quite a bit that year. In two years, the after tax/rental fee income is approximately $4k/year. Is this vacation home an unnecessary luxury? Yep, it is. Do I regret buying it? Nope. Every time I visit, my decision is re-affirmed. I prefer not to give it up, but I will if I can get a bigger house in the DC area. With my total mortgage debt, I figure it's as if I bought one of those SF homes and I have two places that I enjoy, both of which have potential rental income. Plus, I figured by the time I really needed to move, my DC condo value would increase enough to make it happen. Unfortunately, htat hasn't happened.
4. Why don't you sell your vacation home? Right now, that's the route I'll probably take. I'm making improvements (many myself) to get the place in better shape than when I bought it, anticipating selling end of winter/early spring (for folks who want to have a vacation home by spring/summer). I'm not so sure this is the best course of action since I'd be getting rid of the "good" property that's worth more than I owe to subsidize the "bad" property that's worth less than what I owe. Plus, the vacation home is the one I'd like to keep AND it provides some added income at the same time.
5. Why don't you just rent out your condo that's under water? I would certainly do this, and I think that I can get more in rent than my the monthly payments I'm making. The only problem is that in order to move out of here, I need a primary residence (vacation home is too far away). Even if I wanted to carry 3 mortgages (I don't), bank will only approve me for like $300K which won't really get anything in the area that doesn't involve a minimum 40 mile commute, I'm sure I'd need a new car, etc. I actually can't believe they'd even approve me for that much.
6. Why don't you just rent a bigger place somewhere and rent out your place? I'd consider that but rents are about the same/more than mortgage payments in the area.
7. Why don't you just save as much as you can until March 2016 and decide then? I plan to do that, but if I save max by 2016, that would give me an extra c. $28,000. That gives me $73,000 which is great, but I'm still unsure of the best move at that point if my house is still underwater. Do I sell it for a loss than? If that's the right decision for then, why don't I try it now? Girlfriend's new salary will likely help out, but I'd still like to avoid the 3 mortgage situation. Regardless of whatever decision, from now till the end of the year, I'm going to try saving absolutely as much money as possible.
8. What is your lifestyle like? I don't enjoy fancy cars, and I don't really go to the movies. If my place was robbed and totally cleaned out tomorrow, I'd only really miss my laptop and music stuff (not into fancy furniture). I wear suits to work every day and I JUST replaced them all after 10 years because they were starting to get holes (an extreme example demonstrating I don't like blowing money on clothes). I do like to buy crap and eat out at restaurants though. I can certainly cut down on that stuff if needed and the $1,500/month extra savings is assuming I don't purchase unnecessary stuff on amazon and eat at home.
9. Why don't you invest your money better? That's a good question and from reading this board, I'm now considering investing at least some of the $45K into the Vanguard VSTAX.
10. If your DC area condo is in such a great location and in great condition, why isn't it increasing in value? I used to think there was something wrong with my place. Perhaps the neighborhood/schools aren't that great? But then i was thinking there are significantly worse neighborhoods in DC where people get robbed (a lot) where the houses are waaaay more valuable than mine. Then the other day I saw this Wall Street Journal article that said there is a trend of lower-priced homes not increasing in value like higher-priced homes are and they mentioned that this is an issue for first-time home buyers who were hoping to use equity in their homes to upgrade, but now can't (that's me!). Theoretically, the value HAS increased over the past few years and it *should* continue to rise, but that's what all the wizards said when I bought in the first place (not blaming anyone, still my decision).
My ideal scenario: Get rid of primary residence somehow, keep vacation home and keep renting it out, buy new place, live happily ever after. Secondary (likely path I'm on): sell vacation home next year, buy new place, move into new place, rent out current underwater condo, sell in 2016 whether underwater or not.
I'm up for any advice/options anyone may have/suggest.