Author Topic: Help me Weigh My Options?  (Read 2547 times)

nexus

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Help me Weigh My Options?
« on: March 14, 2017, 11:39:02 AM »
Hi everyone, this post's main question is regarding whether or not I should keep renting despite my current location raising my rent for the second time (seems to happen on an annual basis), or to take control of my housing costs by looking to purchase something.

Here are the details:
- My initial rent was $1075. A year later it jumped to $1125, and starting in May it will increase to $1175.
- New tenants are paying $1475 for the same 1bd 1ba.
- I expect my rent to increase each year until it reaches the market rate, probably by $50 annually since that was the amount both times so far.
- Other 1 bedroom places are renting for similar rates, so moving to another apartment would not save me money. The same is true for 2 bedroom places. I'd pay just as much as I'm paying now, but then have the headache of living with someone else.
- I anticipate living in this area for the next decade or so... and my down payment should be large enough that if I need to move and rent it out I will have forced a positive cash flow.

Can I pay it? Yes. It increases my target FI amount by almost $20k. Following the 4% rule it will take a stash of $352,500 to fund that housing cost forever. I have made some awesome spending cuts, but cannot easily cut another $50 out of my budget to offset the increase in rent. I do have a side hustle, which could absorb the extra expense but it is not ideal.

In addition, I just transitioned from a high paying temp position to a lower paying permanent position (job security and benefits), so I am kind of feeling the frustration of making less money and being at the mercy of a landlord.

I like the idea of buying something because it puts a deadline on how long I'll have an expense for, whereas rent is forever -- and appears to be increasing. Buying a house would definitely increase my monthly housing expenses, but I'd be paying myself in the form of equity rather than simply spending $X each month.

I am open to the idea of buying something and then renting out a room or two, but not sharing an apartment with someone. Places in my area would cost me between $400k - $500k. I am battling with the idea of taking the $40k I have in a taxable brokerage account and using it as a down payment. The idea of having to rebuild what took me nearly two years to stash is challenging, especially given that due to a lower income I won't be able to save as many dollars per month even though adjustments to my spending will keep me around the same savings rate.

Last stats:
Accessible cash (non tax advantaged): 50k
401k/IRA: $5,500 (will add another $5k annually, then 2nd year at job I get a 100% match so it will jump to $10k/yr in 401k contributions)

So, should I start shopping for a home? Save for a larger down payment? Or just shoosh and accept my rent increases as they come until my rent hits the market rate?

Mother Fussbudget

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Re: Help me Weigh My Options?
« Reply #1 on: March 14, 2017, 12:44:23 PM »
+Taxes, +Insurance, +Utilities (more for a house/condo than a 1bed/1ba), +lawn maintenance/HOA. You're probably better off renting.

TheAnonOne

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Re: Help me Weigh My Options?
« Reply #2 on: March 14, 2017, 12:49:21 PM »
Not to mention when the water heater leaks takes the dryer along with it. (Not describing myself or anything.....)

My friend just bought a house. Week 2 ac and furnace died. 7k.

I own a house but have lots of money to fix this stuff. Do you?

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Prairie Stash

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Re: Help me Weigh My Options?
« Reply #3 on: March 14, 2017, 01:00:52 PM »
- New tenants are paying $1475 for the same 1bd 1ba.
 
- I anticipate living in this area for the next decade or so... and my down payment should be large enough that if I need to move and rent it out I will have forced a positive cash flow.

I am open to the idea of buying something and then renting out a room or two, but not sharing an apartment with someone. Places in my area would cost me between $400k - $500k. I am battling with the idea of taking the $40k I have in a taxable brokerage account and using it as a down payment.

Last stats:
Accessible cash (non tax advantaged): 50k

So, should I start shopping for a home? Save for a larger down payment? Or just shoosh and accept my rent increases as they come until my rent hits the market rate?
I kept what I felt was relevant. I went from a 1 br/1ba apartment to a 3 br/2ba house, I feel empathy to your situation.

Do you want roommates? Sharing a house is pretty much the same as sharing an apartment. What would a bedroom in a house bring in for rent?
What do the other house expenses in your area amount to? If you buy a $400k house what will your monthly bills amount to?

I recommend shopping around and figuring out all the details, look at a house and figure out all the costs. Looking at houses isn't the same as buying, you're allowed to shop and stop the process. Once you have all the details you'll be able to determine if your down payment is enough and if your expectations are correct.

If you don't look you'll never learn. I'm not trying to be mean, I'm trying to encourage you to go out and find out all the details first hand. However don't buy until you run the numbers, we'll be here to help analyze if you want ;)

nexus

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Re: Help me Weigh My Options?
« Reply #4 on: March 15, 2017, 10:09:04 AM »
Thanks for the great responses. Perhaps my mindset is just off here, but is there no added value in building equity? Absolutely my expenses will increase. Let's say my housing expenses (utilities, PMI, mortgage, etc) jumps up to $2000 per month (probably more than that). Is there no value in the fact that a small amount of that each month is being paid back to me in the form of equity whereas the $1175 I pay in rent is simply gone. I could rent for decades and have nothing to show for it, but if I buy and live in it for decades and decide to move I could incur a gain or a loss, but at least I'll get something.

Similarly, if I decide to move in a house I can either keep the house and rent it out or resell. Yes,  these are messier and require more effort whereas with an apartment it is much easier.

To answer the question about what rooms rent for in my area -- I have a buddy who pays $600/mo for a room. The range is typically $500-$800/mo for a room in a house. I'm not banking on having a roommate, but I'd be more open to someone living with me if I knew their contribution was essentially going to helping me pay down a loan.

I think this may just come down to my own value systems. I do want to own a home. I also see it as a feasible way to hit FI, but it doesn't make sense to own rentals until I stop renting myself.  I don't feel a sense of urgency by any means to move, but do want to take a calculated approach. I will do some research and see what utilities look like for homes that I'd be looking at (I do expect my utilities to be lower than the average household due to some good habits I have plus a knack for never being home).

FINate

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Re: Help me Weigh My Options?
« Reply #5 on: March 15, 2017, 11:28:24 AM »
Thanks for the great responses. Perhaps my mindset is just off here, but is there no added value in building equity? Absolutely my expenses will increase. Let's say my housing expenses (utilities, PMI, mortgage, etc) jumps up to $2000 per month (probably more than that). Is there no value in the fact that a small amount of that each month is being paid back to me in the form of equity whereas the $1175 I pay in rent is simply gone. I could rent for decades and have nothing to show for it, but if I buy and live in it for decades and decide to move I could incur a gain or a loss, but at least I'll get something.

Similarly, if I decide to move in a house I can either keep the house and rent it out or resell. Yes,  these are messier and require more effort whereas with an apartment it is much easier.

To answer the question about what rooms rent for in my area -- I have a buddy who pays $600/mo for a room. The range is typically $500-$800/mo for a room in a house. I'm not banking on having a roommate, but I'd be more open to someone living with me if I knew their contribution was essentially going to helping me pay down a loan.

I think this may just come down to my own value systems. I do want to own a home. I also see it as a feasible way to hit FI, but it doesn't make sense to own rentals until I stop renting myself.  I don't feel a sense of urgency by any means to move, but do want to take a calculated approach. I will do some research and see what utilities look like for homes that I'd be looking at (I do expect my utilities to be lower than the average household due to some good habits I have plus a knack for never being home).

I think your thinking is off here. There is nothing magical about homeownership*, and the "building equity" thing is something the RE industry worked very hard to establish in the mind of the consumer because they want to sell houses (same with "rent is throwing money down the drain").

By your own estimates you're paying below market for your rental, even after recent rent increases. I would take that deal as long as possible.

Yes, with the 4% rule you'll need ~$350k to fund rent at current prices in perpetuity. If your rent goes to market rate (say $1500) then this increases to $450k, which is right in the middle of the 400-500k range you cited for housing in your area (ok that's probably for 3/2 houses vs. your 1/1 apartment, but you'd have new expenses with taxes, insurance, maintenance). In other words, whether it's investments yielding returns funding rent or a pile of capital tied up in a house, it's all fungible. But if you buy more house than you really need (because RE agents always try to convince to buy as large as you can "afford") then you end up essentially misallocating capital - renting rooms can help offset this, but that's one more thing to manage and may or may not cover all the new expenses.

My advice: Decouple homeownership from retirement planning. Paying for rent or paying for a mortgage/taxes/maintenance are all just costs of living - and you need to save a certain amount to cover this regardless of circumstances. Buy a house if you really want your own place (though be aware it's very easy to waste huge sums remodeling just the way you want it).

*My only caveat here is if you're planning on staying indefinitely in a HCOL with persistent housing shortages (such as the SF Bay Area) - I think it may make sense to buy for the long term in such areas because rent will eventually outpace the cost of homeownership. But even this is not without risk and there are a bunch of other factors I won't go into here.

frugaliknowit

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Re: Help me Weigh My Options?
« Reply #6 on: March 15, 2017, 11:31:02 AM »
Please keep in mind that housing costs are based PRIMARILY on square footage.  If you are willing to live in a one bedroom apartment, you are much better off not buying a house.  Counting on appreciation to "bail you out" of the higher monthly cost of a house is not wise.  You might consider buying a one bedroom, if you are sure you'll stay there ten years (arguably 5 or 7 years).

Ayanka

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Re: Help me Weigh My Options?
« Reply #7 on: March 15, 2017, 11:46:12 AM »
First of all buying a house is a decision you need to make with your heart, not just with your brains. And no that is not to say that you should not look at the finances, but if you just do it for the finances and the numbers don't work, don't do it.
Now let's try to see if I can show you why the others are telling you renting might work better. Inhere we assume a 400k house and a 40k downpayment.

Ok for a 400 k $ house, to not have PMI, you would need 80k downpayment. Currently you don't have that, so you would need to pay PMI.
If we use the numbers from this site: http://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx
You would need to pay 123 $ a month for PMI. (This is included in the calculation further down).

A rule of thumb is you need 1-2% for repairs. This is assuming you don't buy a fixer-upper because than it will be a ton more. Let's assume just 1% in this case. 4k a year or 333 $ a month.

Now let's see how much you would need to pay on a 360 k mortgage. I ll use a 4  mortgage and a 30 year.

If we use this calculator:
http://www.mortgagecalculator.org/

Leave in the standard values if I haven't specified it and we get: 2369 $ a month. This does not include upkeep, but it does include PMI, insurance and property tax. With upkeep it would be 2702 $. This is twice what you are currently paying.

Please note there are a lot of assumptions, you can use the links to make an accurate calculation. However there is a rule you should not spend more than a third of your money to housing. Using the 2369 a month figure you should then make 7k a month.
Honestly I would very much like to advice you NOT to buy a house right now. Save up some more, do some more research.

2Birds1Stone

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Re: Help me Weigh My Options?
« Reply #8 on: March 15, 2017, 11:53:27 AM »
In your situation I would definitely continue to rent.

nexus

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Re: Help me Weigh My Options?
« Reply #9 on: March 15, 2017, 12:18:40 PM »
More great advice, I love it!

A couple more comments -- I do live in the SF Bay Area (since caveat was mentioned)

Annual income is 85,000 with up to a 10% bonus. So just about $7k monthly before taxes. After taxes, not counting any bonus is about $4k. Spending half on a home each month would be painful. Should revisit if I ever become a couple with two incomes.

The new job offers the option of working from home, which would be awesome. I'm in a noisy office floor trying to run data analysis. Other folks in here are loud as hell. Apparently they've never heard of "inside voices" or don't know how to operate their volume configuration on their headsets.  Over the summer we are moving to a new office space with lower cubicle walls, which just seems weird to me. Then I'll be able to see the people who are being super noisy.  I'd love to have space for a work desk and the ability to hear myself think or speak without feeling noisy when on conference calls. I don't need a new housing situation to do this, but it would definitely equate to me being home more often.

And yes, lawn mowers, weed whackers, power tools! I really want one of those old school Motor-less push mowers. As for the tools, I would opt into borrowing things initially and build my collection over time. (Ie: forget to return things ;p jk!)

One thing is clear though -- I need to save up for a larger down payment and keep renting in the meantime.

marielle

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Re: Help me Weigh My Options?
« Reply #10 on: March 15, 2017, 12:29:08 PM »
How come you're open to renting a room if you buy something but not share an apartment? I'm guessing it is because of less space?

Can you look on Craigslist and rent a room from someone that has a house, maybe pay like $600-800? Or sign a lease with a friend/coworker on a house to rent, so both of you are responsible for the rent?

Or if you do end up sharing, try to find someone who works a lot and is never home. No couples, no kids, a single professional like a nurse or something. My roommate is a nurse (12 hr shifts) and is never home, never cooks, so it's basically like living by myself but paying half the rent.

nexus

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Re: Help me Weigh My Options?
« Reply #11 on: March 15, 2017, 03:47:20 PM »
@marielle,

There's virtually no benefit to sharing an apartment with someone in my area because it would cost me the same amount of rent each month, give or take $100. Two bedrooms in my area rent for upwards of $2,000 per month. I am not in the business of paying "the same" for less privacy.

If I owned something, I would be willing to relinquish  some privacy in exchange for money paid to me in the form of rent. In an apartment, my roommate doesn't pay me anything. Their rent payment does not have a direct impact on my net worth (and I wouldn't rent a two bedroom apartment by myself). 

The point of this post was to highlight my lack of control over being a tenant (rent increases). Moving into someone else's home also feels like having less control, less space, and even less autonomy than I would have in my current apartment. Renting a room would be a step backwards.

Lastly, on the subject of rent let's say I did rent a 2 bedroom and they raised the rent a year down the road and my roommate decided he/she didn't want to pay the additional rent so rather than stay they wanted to split. Suddenly I have to find another roommate, or am forced to move too. I wouldn't have that problem in a house I purchased. Whether the person stays or goes, my overhead is the same each month and it is something I am willing to shell out with or without anyone else's help.

I like the idea of having a roommate that is low maintenance and semi-never present. I have a buddy that fits the mold fairly well (and does not like to party either). He's either always at work, rock climbing, gym, or playing some sort of sport -- only home long enough to eat and sleep. As long as I would have space for his stuff (bikes, surf board, camping equipment), he would be a great candidate.

marielle

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Re: Help me Weigh My Options?
« Reply #12 on: March 15, 2017, 08:58:28 PM »
Wow, in my area one bedrooms are $750-850 and 2 bedrooms are only slightly more, around $1000-1200. 3 bedroom apartments maybe starting at $1300. It made sense for me to get a roommate because it was only $150 extra for the 2 bedroom.

nexus

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Re: Help me Weigh My Options?
« Reply #13 on: March 16, 2017, 12:42:05 PM »
Back when I lived in Nashville, rental rates were similar.  For an extra $200-$300 you could get 2-3 bedrooms and significantly reduce your expenses with roommates.

On the other hand, here it's practically $1000+ per person/bedroom. Maybe if I found a 4-5 bedroom house with three or four other people we could make it work...