Author Topic: Help with Next Financial Steps - House Upgrade  (Read 4050 times)

kelsshep

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Help with Next Financial Steps - House Upgrade
« on: May 09, 2015, 11:24:39 AM »
My husband and I live in the suburbs of a major west coast city. We own a home that is valued at $320,000. The house is 1200 square feet with one bathroom. We owe $178,000 on the home and pay $3100 in taxes and $600 in insurance per year. We paid $280,000 for the home ten years ago. Similar houses would rent for $1700 per month in our area.

We make a combined $170,000 per year. He makes $55,000 working at a job that is 20 miles from our home. He drives to the transit center that is 5 miles from our home and takes the bus. He can work during his bus ride. I make $120,000 working 28 hours per week. My job is 10 miles from home.

We own two cars that are fully paid for. One is a 2008 and the other in a 2009. They both have low miles. We spend about $200 per month on gas.

We pay $2500 per month for a very good child care facility that is 3 miles from my work. We have a four year old and a one year old.

We have $200,000 in retirement funds and $30,000 saved for our kids college. We have $260,000 in cash savings. The real estate market we are in is very competitive right now. To purchase a "forever house" would be a $550,000 purchase.

We are evaluating two scenarios:

Pay off our current home now. Stay here for two years to save up a down payment for a bigger home. Once we purchase a bigger home, use our current home as a rental to create passive income

Purchase a bigger house now as prices will continue to rise (projected) because of a large influx of well paid jobs at big companies in our area.

My husband and I are at odds over this. He wants to buy now, I want to stay put and save. I am having a hard time justifying the large payment required for the upgrade. It is a delicate issue as I am the breadwinner. I am not interested in working more to earn more as I value my time more than additional income at this point in my life.

What would MMM do? Are we missing another good scenario we should consider instead?
« Last Edit: May 09, 2015, 11:32:28 AM by kelsshep »

Self-employed-swami

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Re: Help with Next Financial Steps - House Upgrade
« Reply #1 on: May 09, 2015, 11:26:21 AM »
If you have a mortgage on a rental house, the interest is tax deductible as an expense against income earned.  (I'm in Canada, but I can't imagine it would be that different in the US).

Chrissy

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Re: Help with Next Financial Steps - House Upgrade
« Reply #2 on: May 09, 2015, 11:42:39 AM »
There's a 3rd and better option.  Refinance the current house to a new 30-year.  Since you have so much equity, this will be less of a payment and a lower rate.  Your monthly expense for the home would then be ~$1,200 including taxes and insurance.  As you said, you could get $1,700 to rent it out, so that's $500/mo profit right there.

Meanwhile, take the $260,000 in cash savings as a down payment on your new "forever" home.  At $550,000, your mortgage would be ~$1,400/mo MINUS the $500/mo you're getting from the rental.  Don't forget insurance and taxes.

Voila!  The house upgrade doesn't cost you any more than you're currently paying.

nereo

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Re: Help with Next Financial Steps - House Upgrade
« Reply #3 on: May 09, 2015, 02:44:06 PM »
There's a 3rd and better option.  Refinance the current house to a new 30-year.  Since you have so much equity, this will be less of a payment and a lower rate.  Your monthly expense for the home would then be ~$1,200 including taxes and insurance.  As you said, you could get $1,700 to rent it out, so that's $500/mo profit right there.

Meanwhile, take the $260,000 in cash savings as a down payment on your new "forever" home.  At $550,000, your mortgage would be ~$1,400/mo MINUS the $500/mo you're getting from the rental.  Don't forget insurance and taxes.

Voila!  The house upgrade doesn't cost you any more than you're currently paying.
+1

... but since you included his details in your OP, I have to ask - does your husband like his job?  With a $55k salary and a 20 mile commute, plus $30k/year in childcare ($2500 x 12) you could be better off if he quit and took over the child care duties.  IN fact, my back-of-the-envelop calculation shows you'd be better off financially when you consider the cost of taxes and commuting. 
Likewise, $120k for 28 hours/week of work?  Could you add a day and another day and earn another $30k?

Finally, you didn't mention why you wanted to move, but I'll assume the '1-bathroom and 2-kids' has something to do with it'. If your new home was within commuting distance you could ax one of your cars, which might save you $10k/year or more.

kelsshep

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Re: Help with Next Financial Steps - House Upgrade
« Reply #4 on: May 09, 2015, 03:22:44 PM »

... but since you included his details in your OP, I have to ask - does your husband like his job?  With a $55k salary and a 20 mile commute, plus $30k/year in childcare ($2500 x 12) you could be better off if he quit and took over the child care duties.  IN fact, my back-of-the-envelop calculation shows you'd be better off financially when you consider the cost of taxes and commuting. 
Likewise, $120k for 28 hours/week of work?  Could you add a day and another day and earn another $30k?

Finally, you didn't mention why you wanted to move, but I'll assume the '1-bathroom and 2-kids' has something to do with it'. If your new home was within commuting distance you could ax one of your cars, which might save you $10k/year or more.

Yes, my husband likes his work. He works for a non-profit on a social cause that's near to his heart. He does work long hours, but can do some of it from home. He has said that he would be unhappy being home full time with children and I respect that.

No, I cannot pick up an extra day in my current position. I am very fortunate with my job, but the pay and hours wouldn't scale to a different company, so jumping jobs isn't a good option for me either.

I would encourage my husband to get a job closer to home and that's an option, but he loves his current company, so it's hard for me to push that too heavy handedly. Although, bring totally honest, this would be my first choice, he's just not currently really receptive to it.

Yes, we want to move due to the four people one bathroom issue. Totally doable, just not ideal.


nereo

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Re: Help with Next Financial Steps - House Upgrade
« Reply #5 on: May 09, 2015, 05:43:14 PM »
Yes, my husband likes his work. He works for a non-profit on a social cause that's near to his heart. He does work long hours, but can do some of it from home. He has said that he would be unhappy being home full time with children and I respect that.

No, I cannot pick up an extra day in my current position. I am very fortunate with my job, but the pay and hours wouldn't scale to a different company, so jumping jobs isn't a good option for me either.

I would encourage my husband to get a job closer to home and that's an option, but he loves his current company, so it's hard for me to push that too heavy handedly. Although, bring totally honest, this would be my first choice, he's just not currently really receptive to it.

Yes, we want to move due to the four people one bathroom issue. Totally doable, just not ideal.
All valid answers, and thanks for taking the time to answer my questions.  Anytime I see someone posting here (a forum that advocates FI/RE) that one spouse's income is roughly equal to their child care + commuting costs I just feel the need to point out that they could quit if that's what they desired.  Glad your husband loves his job.

I'll stick to what Chrissy suggested.  By refinancing your current home, buying your "forever home" (not a term I'm familiar with) and then renting out your current home you should be able to have reasonable mortgage payments plus rental income.  Of course, this requires that you part with a lot of your cash for the down payment, and it will (at least temporarily) tilt your asset allocation very heavily towards those two homes.  Why in god's name do you have over $200k in cash - if that's not your 'down payment' than what is it for?
My biggest worry for you would be loosing your income.  However, you do have a reasonable amount saved up, and you are a dual income family, so that should help.  G'luck.

kelsshep

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Re: Help with Next Financial Steps - House Upgrade
« Reply #6 on: May 09, 2015, 08:58:33 PM »

Why in god's name do you have over $200k in cash - if that's not your 'down payment' than what is it for?
My biggest worry for you would be loosing your income.  However, you do have a reasonable amount saved up, and you are a dual income family, so that should help.  G'luck.
[/quote]

I totally agree about the cash. I'm a little chagrined at how much we've amassed. It was always intended as a down payment, but before we had kids we cut back on a lot of things (cell, cable etc) so we started saving at a faster rate than we anticipated. Then we had two kids, my husband switched jobs and buying a new house just wasn't something we were proactively pursuing due to being in the throes of the baby years. Before we knew it, we had way more cash than we intended to have. Not a terrible thing, but still not he best way to diversify, I know.

Thegoblinchief

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Re: Help with Next Financial Steps - House Upgrade
« Reply #7 on: May 10, 2015, 08:07:17 AM »
Why? I have 3 kids in 730sqft, 1 bathroom. Almost never an issue.

Is there a space in your current spacious house for an extra bathroom, even a 1/2 bath or basic w.c.? Even if you have to hire it out, that would probably be far cheaper than "upgrading" your house.

Really question your "need" for extra space.

Snow White

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Re: Help with Next Financial Steps - House Upgrade
« Reply #8 on: May 10, 2015, 08:18:41 AM »
Consider get a quote for adding one more bathroom if it is possible given your lot size and floor plan.  I'd consider that though if the only issue with your house is needing one more bathroom.  It will ultimately help resale and almost certainly cost less than moving.

waltworks

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Re: Help with Next Financial Steps - House Upgrade
« Reply #9 on: May 10, 2015, 08:58:13 AM »
Assuming your job is relatively secure, you're basically good to do whatever you want assuming you're willing to keep working.

It might be more helpful to post a full case study. Your savings/NW is pretty low given your income (and I'm assuming you've both been working in some capacity for a decade+, since you've owned a house for that long). You also need to tell us more about your goals (ie, do you want to pay for college? Have more kids? Travel the world with the kids? Move somewhere cheap once the kids are in school? Etc.) in order to get useful advice.

-W

kelsshep

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Re: Help with Next Financial Steps - House Upgrade
« Reply #10 on: May 10, 2015, 09:26:02 AM »
Assuming your job is relatively secure, you're basically good to do whatever you want assuming you're willing to keep working.

It might be more helpful to post a full case study. Your savings/NW is pretty low given your income (and I'm assuming you've both been working in some capacity for a decade+, since you've owned a house for that long). You also need to tell us more about your goals (ie, do you want to pay for college? Have more kids? Travel the world with the kids? Move somewhere cheap once the kids are in school? Etc.) in order to get useful advice.

-W

Ten years ago I was making $45,000 per year and my husband was earning $30,000, so our incomes have risen fairly significantly in the last decade, but we've also added two kids in that time. We live in a HCOL area as well. Maybe that addresses your comment about NW - what would your expectation be out of curiosity? I've also taken five months of maternity leave with each kid.

Our goals are to allow me to stay working a reduced schedule until our kids are in their teens. We are done having kids. That will mean staying at my current job, most likely. The issue would be if I lost my job, it would change our lifestyle considerably for me to go back to working 40 plus hours per week. We'd also like to be able it retire by 60 and travel.

Upgrading homes is certainly a luxury as others in this thread have pointed out. The root of the issei here is that I realize that I would have a hard time replacing my income per hour worked at any other job and so I'm perhaps more conservative than I might be otherwise. My husband is more apt to take the risk and jump to the upgrade now.

waltworks

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Re: Help with Next Financial Steps - House Upgrade
« Reply #11 on: May 10, 2015, 10:06:42 AM »
I don't know all your specifics, but if you poke around here, you'll see that a 50% (of gross) savings rate is sort of the bottom-line mustachian level. That's not to say there's anything wrong with spending more, but most people here are looking to retire at ~40 (or less). And yes, many of us have kids too.

Assuming you got raises at a relatively linear rate, your savings at 50% over the last decade would be in the range of $650k. That's assuming zero investment returns.

So at your rate of pay, with some very conservative/modest effort to invest your savings, I'd expect you to be right around millionaires at this point and close to FI. With some aggressive saving you'd be done with work forever already.

-W

BPA

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Re: Help with Next Financial Steps - House Upgrade
« Reply #12 on: May 10, 2015, 10:35:05 AM »
Why? I have 3 kids in 730sqft, 1 bathroom. Almost never an issue.

Is there a space in your current spacious house for an extra bathroom, even a 1/2 bath or basic w.c.? Even if you have to hire it out, that would probably be far cheaper than "upgrading" your house.

Really question your "need" for extra space.

I thought the same thing, Chief.  There are four of us in a 1200 square foot, 1.5 bath house.  I'd probably just add another half bathroom in this case. 

It may be that we desire FI more than a house upgrade.   I know that I sure as hell do.  :)

To each his/her own, I guess.

RexualChocolate

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Re: Help with Next Financial Steps - House Upgrade
« Reply #13 on: May 11, 2015, 03:41:27 PM »
200k in retirement accounts, 320k in cash, and 140k in home equity. Your asset allocation is more conservative than is wise for people in their 60's assuming you're 100% in stocks in the retirement accounts.

You need to read www.bogleheads.org for investing advice, and some more mustachian articles for spending advice. 3x your gross income means you can techinically afford

Also, saying 'big companies are moving into the area and house prices will only go up!' is dangerously na´ve. The tide can and will shift and no one can predict when or how. Cities ebb and flow all the time.

Optimally from a financial perspective you stay in the first house, save enough to retire, and move to a more reasonable COL area to retire. You're free to make your own luxury purchases (which is what this is), but it will significantly delay your retirement date. If a bigger house is worth that, then no one else can make the decision for you.

MsPeacock

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Re: Help with Next Financial Steps - House Upgrade
« Reply #14 on: May 11, 2015, 03:54:31 PM »
If you like the area you are in, would you consider a remodel to add an extra bath or a family room?

My house is 1200 sq feet - however, the basement is completely finished with another full bath downstairs. It does make a huge difference. Additionally, about a year ago I had the kitchen/dining room reconfigured. Sometimes just working the space better can make the house better for you w/o bumping out any exterior walls.