The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: blackfedora on May 13, 2013, 12:36:29 PM
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Hi everyone,
My wife and I are recent college grads who've just started growing our staches in the Charleston, SC area. We're living off $~40k (before taxes and insurance) and saving the entirety of my wife's income (around 30k annually). We also save about a 5th of my salary (the 40k) towards emergencies and vacations as we really love to travel. We've been renting an apartment ($850/month before utilities) because we weren't sure if our careers would be stable in Charleston, but it now seems that we can both make a living in Charleston for at least the next 5 years, so we're looking to buy a house. Up until now I've been calculating our budget and retirement plan using rent, so I was hoping to find a house with a mortgage payment low enough that paying the mortgage and insurance would still cost less than our current rent. Based on quotes from Zillow.com that would mean looking in the 200k range.
However, the houses we're interested in are more in the 250k-300k range. They're within biking distance to a grocery store and some form of cheap recreation like a boat ramp (we're rowers), or public park. They're in good school districts, and they have ample yards/garages/workshops which we can use to grow our own food and develop our hobbies. I'm just not sure if they're worth exceeding our current budget for living space.
Conventional wisdom would tell us to buy a simple starter home and then upgrade. Then again, the same conventional wisdom would say that our $70k/year income, good credit, and large downpayment can buy quite a bit more than $200k of house :P. Furthermore, upgrading will become much more expensive as the housing market is picks up, and since we're looking to retire early I'd much rather invest in a home that I'll still be living in 40 years from now.
TLDR: is it worth buying the house I want to retire in for more than I currently pay in rent, or should I buy a less ideal house for less than my current rent and upgrade later?
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House upgrading is really expensive once you factor in transaction fees.
One option to perhaps consider is moving into less expensive apartment for the short term. And then save up the difference between what you would like to spend now to keep your mortgage below a certain point, and the house you really want.
Another important consideration is most mortgage calculators, especially on real estate sites only tell you half the story. You also need to add to the principle and insurance payments how much property tax and insurance are.
A $200K 30 year mortgage @ 3.5% interest is close to $900. Add another four or five hundred dollars on top of that to cover your basic housing cost floor.. insurance, tax, greater utility costs vs. an apartment.
If you could find an apartment for 750/month instead of 850. The savings between that and what you'd be laying out every month for 13 or 14 hundred on house you don't really want will add up fast, especially if you add that to what you are already saving.
I'd say wait, save up lots of money to be able to afford what you really want instead of the starter home route.
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I can't answer without knowing whether you have other debts and how much you are prepared to put down.
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Sorry I should've provided how much we have to put down.
We have $7,000 of student debt that I haven't been in an hurry to put down because our stocks have been doing much better than the ~3.5% interest federally backed loan. Due to a year of saving and a sizable inheritance we currently have around $160k in savings, of which I'd be willing to part with 100k for a down payment.
Another problem is that the housing market is really starting to pick up, so I'm afraid waiting will just result in the houses we want being even further out of reach. Prices in the neighborhood are already up 10% compared to a year ago. If I think about this as an investment it makes sense to buy the house, since it will almost definitely appreciate rapidly in the next few years (it's still not quite at the 2007 sale price). However, we're looking for a house we can retire to which means we'd never realize those gains.
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TLDR: is it worth buying the house I want to retire in for more than I currently pay in rent, or should I buy a less ideal house for less than my current rent and upgrade later?
No. Neither.
Everybody buys the house that they're going to retire in, but I've only met one homeowner who's actually done it.
Everybody wants to buy a "good starter home" and upgrade later, but if the current apartment suits your needs (at less than the cost of ownership) then why buy an intermediate house with an extra set of transaction costs?
I'd suggest that you keep looking at neighborhoods and homes, and keep going to open houses. Wait a year or three. One day the right home will come on the market (probably in November or January), and after you've been through 40-50 open houses you'll know exactly what you're looking for. If it's way below the cost of renting then you could buy it, but only if you're putting down at least 20% and the math (including closing costs, maintenance, and all the other fudge factors) is overwhelmingly in your favor. You don't want to leave your current apartment unless your circumstances change (for example, you start your family with triplets) and you definitely don't want to move to a nasty commute just for the sake of a nice house-- which you'll never see because of that nasty commute.
While you're looking at houses, you could practice your homeowner budget. Figure out your ideal price (the one that's cheaper than renting) and then see if you can live within that budget. Then see if you can still live within that budget assuming one of you gets laid off or decides to stay home with the triplets.
Don't get pushed around by the housing market. You're not trying to buy every house on the market, so you don't care about prices going up 10%. You're only trying to buy the place that's right for you, at the right price, and perhaps at the right time. No matter how high the market gets, you'll find bargains. Eventually the market will retract (especially during winter) and you'll find more bargains.
Many years ago, Elizabeth Warren wrote the book "The Two-Income Trap" about dual-salary couples buying high-priced real estate... and then one (or both) of them got laid off. While you're checking listings and visiting open houses, it's worth digging that book out of the library and reading it. I'd also recommend the book already mentioned on this forum, "Rent vs Own" by Jane Hodges.
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For what its worth, I found the Zillow estimates to pretty inaccurate as to actual monthly payments. You have 40-50% to put down, I think the Zillow default is 20%. But that number doesn't include property taxes, insurance, etc. that can add up fairly quickly, especially if you're in an area with five figure annual property taxes. I would run the numbers on a mortgage calculator and see if you can get a more accurate picture. The taxes should be listed on the MLS report, or you should be able to look them up at the governmental entity that collects that tax (here, its the county assessor, but it may differ in your neck of the woods).
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I would recommend nothing greater than the median priced house for your city. If you are buying greater than the average person, you are most likely buying too much house.
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I have family in Charleston and love the area, so I can understand the draw!
Sounds like the numbers favor renting. I've looked for housing in Charleston and was always surprised by the high cost.
If you are determined to buy, consider putting a rental unit onto your house. It could really lower your expenses.
A friend bought a place on James Island and put a 1br apartment above the garage. He did much of the work himself to save on costs, and it has worked out very well for him. We did the same thing to offset our mortgage (we live in a high cost area but this keeps our expenses relatively low).
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Thanks everyone (and especially Nords); I knew I'd get some good advice here. We're definitely itching to get out of this apartment, but we also have the luxury of not being on school time, so we should probably be waiting it out until at least November when the market contracts from parents being more locked in.
It's so hard being mustachian when house shopping because the whole market is really driven by spendy buyers being willing to rack up obscene debts. A lot of our friends and family think we're crazy for not looking at even more expensive properties given the large down payment we have from the inheritance, and on top of all that every house is unique, so it's hard to remember that it's not the end of the world if a certain house you like get's snatched up for a price you did't want to pay.
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hi, are you sure this is the area you want to be your forever home, if not you could buy to let a house in the area you do want to retire to (where property is cheaper hopefully) and aggressively pay that debt down whilst continuing to rent.
this holds true for a forever house in the same area as you live in at the moment, buy to let the forever home and rent some where smaller (that is what I am doing in the UK, I own two properties and live in neither of them)
Consider what space you actually need now and what you will need in the future (avoided the baby question, well there!), the best time scale to consider is the five year plan, if you could have a lodger for a few year, you might want to consider a two bed place and rent out a room (this made a decisive difference to my finances ten years ago and enabled me to get the second property)
p.s , 40k a year for two people seems very high, I live on 15k, maybe a change of focus is need, instead of enjoying vacation now, why not get yourself FI first then go live in south of France (insert favourite place in the world) for six month when you are FI. five year's hard work for a six month holiday, seems a fair swap to me.
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The taxes should be listed on the MLS report, or you should be able to look them up at the governmental entity that collects that tax (here, its the county assessor, but it may differ in your neck of the woods).
Just make sure it won't change when the property changes hands. Sometimes the current owner will get a tax credit or abatement for repairs/renovations.
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Mackey,
We probably actually live off of a little over 30k (depending on what emergencies come up), with the rest going to vacation or the occasional luxury purchase. It's not ideal, but planning our big trips is somewhat of a hobby, so it actually eats up way more time than just the days we're enjoying the trip. It helps keep us sane, and isn't on the table to be chopped. That said, we have been looking at restricting ourselves to North America as spending $3-4,000 on airfare alone is pretty ridiculous, and there's a lot of North America we still haven't explored (for instance we live on the east coast and still haven't hiked the Appalachian trail!)
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I don't know the answer to the "how much" question...BUT, the biggest obstacle to FI for a young couple is overspending on their own house (based on my experience). I have to fight this off myself as I am currently looking for a stable family home.
If you have 50% down that money should be working toward your goal of FI. It's a dog fight to save that money up in the first place...I would hate to see it all go bye bye because the wife wants granite counter tops (I like them too :). It'll be even harder to save the second time around because houses are expensive...more expensive then you even realize until you buy one.
Basically, what I'm trying to say is the home purchase is crazy emotional and a trap. It can be even more difficult for the security seeking nesting woman. Trend lightly because it can knock you off course and cost you 10-15 years of FI before you even realize it.
P.S. I have lived in really nice houses and houses I wasn't so proud of...I felt trapped in the nice one and after three to four months I didn't notice the stuff I originally hated in the crappy house. The happiest I ever was with a house was the one I felt like I had gotten a great deal on...it wasn't the nicest by far.
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If you buy a house which meets the requirements of a good buy-and-hold rental investment, it won't matter if you live there forever or decide to move in the future. You could just rent it out and enjoy the cash flow if that happens. Actually, since interest rates aren't as favorable for rental property mortgages, the cheapest way to acquire a portfolio of rental houses is to live in them first and get the great owner occupied rates. You didn't mention what your investment methods are but it's a pretty good strategy for long term wealth.