Author Topic: Guidance Requested - Balancing new house with long-term  (Read 3760 times)

Learner

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Guidance Requested - Balancing new house with long-term
« on: May 12, 2015, 05:36:17 AM »
Greetings all,

I'm currently on a house-hunting trip for an upcoming move this summer.  We're looking at a slew of houses with pretty broad criteria.  We have three kids, and I expect this to be a 2-3 year position before being moved again.  Additional time here would be a bonus from our perspective.

On the lower range, we're looking at houses in the $150k range.  On the upper end (single family homes) we're looking at $225k.  I'm willing to entertain a duplex, and we have a ceiling of about $350k, assuming we get rental income of at least $800.  Our family consists of me, my wife, and our three kids (twins at 3, baby at 11 months).

Initially I was looking at getting our debt-load to $0, but realized it might be better to focus on net worth.  I did a really rough preliminary analysis out to 2 years, I realize I need to extend this.  My target will be 10 years, when an annual pension of somewhere around $50k (pre-tax) kicks in and I should be able to FIRE at 43.  While the (federal) pension will cover most living expenses, we're locked in for 10 years, so I want to optimize as much as possible in the meantime.

We should (conservatively) net about $63k after selling our current home.  My employer pays relocation benefits (house-hunting trip, closing costs, etc).  The main summary of our debt load is approx:
  • Line of Credit = $31000 at 5.64%, interest-only payment of about $160/mth currently
  • Vehicle Loan = $10500 at 4.84%, payment of about $350/mth
  • Federal Student Loan = $27000 at 5.25%, payment of about $475/mth
  • Provincial Student Loan = $3900 at 0%, payment of about $80/mth

We're planning on 20% down.  (I might explore 10% if a duplex to have access to a down payment for the next place.)  If the house is inexpensive enough, we would plan to pay off/down the federal student loan, then vehicle.  With 20% down, we should be able to change the line of credit to a secured line of credit which would reduce the interest to 3-3.5%.

Our long-term plan has my pension which consists of a main amount, bridge benefit (until I'm 65), and 50% survivor benefit.  Canada Pension Plan and Old Age Security kick in around 65 (haven't looked at too extensively yet).  At 65, the bridge benefit of about $10k (of the $50k) kicks out, and in theory about $16k CPP/OAS kicks in (current estimates).  We plan to move surplus cash flow into my wife's RRSP, which guards her against the pension reduction if I kick the bucket first.

My concern if we go for a duplex is that most of our available down payment would be locked into the rental.

Since I'm short on time this week, I'm hoping to hear your thoughts/guidance on:
  • Have are your general thoughts on adding a rental combined with pension?  I could do most of the work myself as long I'm here, but would need a property manager if I have to be away for a long term or I have to move.
  • What are the main readings I should look at if I consider becoming a landlord?
  • My really quick analysis saw the $150k option as leaving us with 0 debt and about $93k net worth (existing RRSPs, which are approx $35k current) after the 2 years.  The $225k option leaves us with about $16.4k debt, but a net worth of about $110k (the delta is the equity in the house, assuming constant growth).  Does this make sense?  With the cheap house, the non-mortgage debt is gone in 22 months.  Our cashflow in that scenario would allow debt payments around $1000/month (beyond minimums).
  • What are reasonable planning estimates?  I'm using 6% on stocks after fees (a bit less than 1%), before inflation, 1.5% growth on house, house maintenance of about 1% annual.

Thanks for looking!

waltworks

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Re: Guidance Requested - Balancing new house with long-term
« Reply #1 on: May 12, 2015, 06:03:32 AM »
Am I understanding correctly? You want to buy a house for a 2-3 year gig? That is almost certainly insanity and a financial disaster. Actually, given your very low net worth, it's even worse, since you are talking about tying up almost all of it in a house.

Rent. Buy a house again when you have your finances in order and are going to be somewhere long term.

-W

Learner

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Re: Guidance Requested - Balancing new house with long-term
« Reply #2 on: May 12, 2015, 06:15:25 AM »
Waltworks, I'm curious as to why?  We have no closing costs whenever we move, and similar rentals are $300-400 more/month where we are looking.

I get the 2-year insanity perspective when there are realtor, lawyer, etc fees, but with no costs to spread out, I don't understand the risk.

MrsPete

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Re: Guidance Requested - Balancing new house with long-term
« Reply #3 on: May 12, 2015, 06:24:34 AM »
I'm with the others:  Buying a house is a great idea, but -- oddball exceptions excluded -- it only works well financially if it's something of a long-term investment.  Planning to buy and move again so quickly sounds like a mistake. 

waltworks

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Re: Guidance Requested - Balancing new house with long-term
« Reply #4 on: May 12, 2015, 07:34:07 AM »
Go read up on the RE forum. Long story short there will be significant maintenance costs and even with closing costs paid when you buy, you'll have significant costs when you sell. Even with significant appreciation you would be lucky not to lose money over such a short timeframe.

And, of course, you have practically no money and a bunch of other debt, so tying a ton of it up in an illiquid, leveraged piece of property is not so smart.

-W

Waltworks, I'm curious as to why?  We have no closing costs whenever we move, and similar rentals are $300-400 more/month where we are looking.

I get the 2-year insanity perspective when there are realtor, lawyer, etc fees, but with no costs to spread out, I don't understand the risk.

RexualChocolate

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Re: Guidance Requested - Balancing new house with long-term
« Reply #5 on: May 12, 2015, 07:38:39 AM »
You have no closing costs due to employer paying youre saying?

You still have transaction costs of the realtors which on a house of that price range typically 6% of the sale. I'm positive your company does not cover this.

Buying a house for any term under 7 years is financially poor decision. You'd have to experience approx 20% appreciation just to break even.

More likely you have some bank agent shilling a no closing cost mortgage which means they're just pumping up the interest rate.

PharmaStache

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Re: Guidance Requested - Balancing new house with long-term
« Reply #6 on: May 12, 2015, 07:49:31 AM »
Holy crap, that is a ton of debt. How fast are you going to pay it off?

I'm also on the rent train.  I'd assume your work is not paying realtor commission every time you sell?  What about land transfer tax?

Sibley

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Re: Guidance Requested - Balancing new house with long-term
« Reply #7 on: May 12, 2015, 10:20:04 AM »
I'm with the others. Rent a house. Yeah, it's a little more money, but less risk. And get your financial house in order.

Learner

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Re: Guidance Requested - Balancing new house with long-term
« Reply #8 on: May 12, 2015, 11:31:24 AM »
No realtor cost.  Debt is on track to be entirely paid either mid 2017 or 2018 depending on housing option.

RexualChocolate

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Re: Guidance Requested - Balancing new house with long-term
« Reply #9 on: May 12, 2015, 11:45:10 AM »
If someone's giving you a house with zero transaction costs on both the buy and sell sides and zero financing costs on both sides with market interest rates, do it.

This is equivalent of saying 'If someone gives you a unicorn, ride it.'

Its not possible, but given you're in a universe that it is happening, ride the shit out of that unicorn.

In the real world, its a bad decision.

Learner

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Re: Guidance Requested - Balancing new house with long-term
« Reply #10 on: May 12, 2015, 12:29:00 PM »
I guess a couple of relevant details I omitted earlier was income of about $95k.  I work for the federal government, so the no closing costs (or agent fees) on selling or buying are part of our standard relocation package.

Side note, that gets murkier in the case of a rental property, in that case we are only partially reimbursed for closing/fees.

RexualChocolate

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Re: Guidance Requested - Balancing new house with long-term
« Reply #11 on: May 12, 2015, 01:01:01 PM »
This makes more sense and is antiquated relative to what is found in the private sector which has just shifted to a cash bonus. They give you a taxable relocation benefit, and you use it to incur costs. It also limits their cost to the amount, whereas this is just a loot piρata.

I'd go ahead and do it since the taxpayer is footing the bill. Make sure the realtor fees are clearly delineated in the contract.

http://gsa.gov/graphics/ogp/Relocating_Federal_Employees.pdf

(b) What residence transaction benefits will I be
reimbursed for as a transferee relocating in CONUS?
Your agency will reimburse you for the allowable costs that you
incur, up to a maximum of ten percent of the actual sale price
for your residence at your old official work site and up to five
percent of the actual purchase


(c) What benefits depend upon my agency policy for a
transferee relocating to a CONUS location?
Depending upon your agency policy, you may be reimbursed
for:
• A househunting trip (HHT) including per diem for you
and your spouse;
• Temporary quarters subsistence expense (TQSE);
• Shipment of up to 2 POVs;
• Use of a relocation services company (RSC);
• Home marketing incentives;
• Property management services expenses in lieu of
selling your home at your old official work site, pursuant
to FTR 302-15.17; and
• Transportation of a mobile home/boat, if applicable
under FTR part 302-10.

Learner

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Re: Guidance Requested - Balancing new house with long-term
« Reply #12 on: May 12, 2015, 05:26:42 PM »
Viewings done for the day, so I have a bit more time tonight.  I appreciate everyone's concern about buying vice renting.  Unfortunately, no-one has really addressed my initial questions, which would be awesome if they could be covered.

Thanks again!

Since I'm short on time this week, I'm hoping to hear your thoughts/guidance on:
  • Have are your general thoughts on adding a rental combined with pension?  I could do most of the work myself as long I'm here, but would need a property manager if I have to be away for a long term or I have to move.
  • What are the main readings I should look at if I consider becoming a landlord?
  • My really quick analysis saw the $150k option as leaving us with 0 debt and about $93k net worth (existing RRSPs, which are approx $35k current) after the 2 years.  The $225k option leaves us with about $16.4k debt, but a net worth of about $110k (the delta is the equity in the house, assuming constant growth).  Does this make sense?  With the cheap house, the non-mortgage debt is gone in 22 months.  Our cashflow in that scenario would allow debt payments around $1000/month (beyond minimums).
  • What are reasonable planning estimates?  I'm using 6% on stocks after fees (a bit less than 1%), before inflation, 1.5% growth on house, house maintenance of about 1% annual.

Thanks for looking!