Author Topic: I don't want to buy a house, but...  (Read 5726 times)

JJsfr

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I don't want to buy a house, but...
« on: September 29, 2014, 04:06:01 PM »
I want you to convince me otherwise.

Long story short, we are about 10 months from paying off the remaining ~$35k in student loans (avg apr 5.5%) and wife is interested in buying a house after we kill this debt. We have about $140k invested in tax advantaged and taxable accounts. The taxable account is about half of the total portfolio and is in stock indexes (Total portfolio is at 90/10 stocks/bonds). I have always considered the money in the taxable account as "potential down payment" funds, and yes, if a house is on the short term plans, the money needs to be moved out of the market.

We are in our late 20s, live in Denver, both bike commute, and pull in a combined salary of $115k/year. We currently have no plans to leave the area, which lends itself to buying, but the real estate here is so darn expensive. Current rent is $1500/mo for an 700 sqft rowhouse with yard for the pup. The place is about 3 miles from downtown, hence the premium.

It seems that the [bike commute radius] property here is either either extremely expensive and out of our price range or in such a terrible condition that the list price is low due to the work required. Even with the houses in our price range (<300,000), that's still a sizable 20% down and would do some damage to the portfolio.

Since finding MMM, our main goal has shifted from putting money into the market to paying off the SL's. Having our first kid is on the radar (2-3 years) but there is not much more than conversation about that at this point.

We are both anxious at sinking so much money into a house. We are quite proud of the savings we have made at this point and want to make the best financial decision with it.

Is it unreasonable to take so much of those hard working dollars out of the market and put them into a piece of property? How much of our savings should we be willing to part with? Should we be looking at a 2-3 year house purchase timeline to save more money (after paying off the loans) to have less of a % impact?


waltworks

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Re: I don't want to buy a house, but...
« Reply #1 on: September 29, 2014, 05:45:31 PM »
I'd sit down and figure out how much a 15 or 30 year loan on a $300k place will cost you over the long run vs. renting (the NYT calculator is great here).  A 20% DP at your income level is easy and the mortgage interest deduction will knock off some moderate amount of taxes as well. If you don't have plans to move soon/ever and like the area you want to buy, it's probably a good idea to buy a place financially.

I'm certainly not going to start shouting about best ever time to time, buy now or be priced out forever, blah blah blah... but if you like where you live and aren't going to move, prices have to be *really* out of whack with rents for it to make sense to rent long term.

-W

mulescent

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Re: I don't want to buy a house, but...
« Reply #2 on: September 29, 2014, 06:08:36 PM »
I want you to convince me otherwise.

Long story short, we are about 10 months from paying off the remaining ~$35k in student loans (avg apr 5.5%) and wife is interested in buying a house after we kill this debt. We have about $140k invested in tax advantaged and taxable accounts. The taxable account is about half of the total portfolio and is in stock indexes (Total portfolio is at 90/10 stocks/bonds). I have always considered the money in the taxable account as "potential down payment" funds, and yes, if a house is on the short term plans, the money needs to be moved out of the market.

We are in our late 20s, live in Denver, both bike commute, and pull in a combined salary of $115k/year. We currently have no plans to leave the area, which lends itself to buying, but the real estate here is so darn expensive. Current rent is $1500/mo for an 700 sqft rowhouse with yard for the pup. The place is about 3 miles from downtown, hence the premium.

It seems that the [bike commute radius] property here is either either extremely expensive and out of our price range or in such a terrible condition that the list price is low due to the work required. Even with the houses in our price range (<300,000), that's still a sizable 20% down and would do some damage to the portfolio.

Since finding MMM, our main goal has shifted from putting money into the market to paying off the SL's. Having our first kid is on the radar (2-3 years) but there is not much more than conversation about that at this point.

We are both anxious at sinking so much money into a house. We are quite proud of the savings we have made at this point and want to make the best financial decision with it.

Is it unreasonable to take so much of those hard working dollars out of the market and put them into a piece of property? How much of our savings should we be willing to part with? Should we be looking at a 2-3 year house purchase timeline to save more money (after paying off the loans) to have less of a % impact?

This question really involves so many factors.  I agree with waltworks that you should run the numbers.  Just be sure to do it fairly.  Compare your rent to equivalent purchases or find out the rent of houses you would buy. 

IMO, though, buying a house isn't really about finances.  It's about lifestyle.  If you really enjoy DIY and are the kind of person who wants to spend a lot of effort making a house theirs, then buying is for you.   If you don't like DIY, then paying others to do all the maintenance will get expensive quickly.

If you do decide to buy, I would wait until you have kids.  It seems silly to buy a house knowing that your priorities will shift in large and unexpected ways in a few years. 

One big mistake would be to buy your 300k house with a 20% down payment that you got by selling 70k of stocks.  After closing costs, you'd have nothing.  You need a cash cushion when you move, because you will inevitably find broken stuff or need a few new/used pieces of furniture.  Taking on a mortgage also means you NEED to have a reasonable reserve to draw on in case of an emergency.  Oh, and you'll owe taxes on the sale of those stocks.  I'd make sure I had 20 or 30k in liquid assets after the purchase of a 300k house.  You don't need to keep that large of an emergency fund forever, but you really don't want to find out that your plumbing is shot or the furnace needs fixing and be broke!

Glenstache

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Re: I don't want to buy a house, but...
« Reply #3 on: September 29, 2014, 07:40:53 PM »
A house is a commodity. It is a commodity that will cost you money to maintain, pay taxes on, and pay a mortgage on (with some possible mortgage tax deduction). Whether or not to buy a house comes down to: 1) Are the long term expected costs of owning higher or lower than renting; 2) Will you stay long enough that the transaction costs associated with *selling* the house are accounted for in (1), and; 3) Do you intrinsically want to both do what you want with the property and take on the upkeep?

2 and 3 are subjective. It sounds like you plan on being in the area for a while, but would the house you buy be the house you stay in? Will you be looking for something with more room in a few years? Are jobs stable?

William Bernstein recommends never paying more than 15 years fair rent for a house as a rule of thumb. If your $1500 rent is fair, could you buy your current accommodation for $270,000? If not, then you should keep renting according to Mr Bernstein. Of course, he isn't the only one who has rules of thumb for buy vs rent, and you should do some research on your own into how you want to calculate it, especially if you would plan on buying a different house 10 years out. YMMV.

http://thetaoofwealth.wordpress.com/2012/09/25/the-investors-manifesto-by-william-bernstein-book-notes/

myrax

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Re: I don't want to buy a house, but...
« Reply #4 on: September 30, 2014, 08:26:20 AM »
How long do you and your wife want to stay at your current jobs? If it is possible that you might start looking for a new job within 15 years, it is also possible that the new job will be outside of bike commuting distance. When you run the numbers on cost, don't forget to consider the risk that you either change jobs and get stuck with an awful commute, or that you get stuck in a job you don't like because you can't find something better within a reasonable commute distance.

The risk really depends on your field and the location of jobs in your region. But don't forget that when you buy you are limiting your ability to move close to a future job or school to keep your commute cheap.

Cheddar Stacker

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Re: I don't want to buy a house, but...
« Reply #5 on: September 30, 2014, 08:28:10 AM »
If you haven't already, you should both read and fully understand these two great posts:

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

If you read them and still agree to buy a house, at least you did your due diligence.

Terrestrial

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Re: I don't want to buy a house, but...
« Reply #6 on: September 30, 2014, 08:57:17 AM »
If you haven't already, you should both read and fully understand these two great posts:

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

If you read them and still agree to buy a house, at least you did your due diligence.

I have read both of these and will second that they are a good read and give an interesting perspective.  It has been a while since I read it but one thing to note is that in jlcollins' situation he was not running his decision numbers based on an 'apples to apples' comparison, i.e. buying versus renting the exact same place.  I believe his numbers reflected 'downsizing' the rental as part of the appeal.

I think it comes down to pretty simple math.  Pick the level lifestyle you want (house, townhouse, condo, etc).  If your cost after everything (prop tax, maintenance, mortgage, less reasonable lost opportunity cost from money not in market, plus reasonable gain in home value) is less with buying, and you plan to stay there for a reasonable ammount of time, and as others noted you dont mind doing maintenance (some people like me like renovating/working on the house) go for it.  If you can do better renting an equivalent place, do that.  A pretty simple spreadsheet should hash out the rough numbers pretty quickly.

Then make SOME allowances for the intangibles that can affect the decision.  There is no hard and fast rule on these everybody weights them differently.  For some these are a HUGE deal, for others, not at all:

Intangible pros to owning:
- Ability to reno/modify house to suit your tastes (this is not a financial based decision, but a lifestyle based one).
- If you live in a very desirable neighborhood, rent can go up fast over the long term, or what I found when we were in a similar circumstance is that rental availability for decent stuff just isn't there, if it's really desireable you may find a large % of owners.
- If you really like your house/neighborhood nobody can make you move when you own (can get booted from a rental at end of lease).  I'm assuming of course that foreclosure/tax lein is not an issue.

Intangible pros to renting:
- If you're not thrilled with the place it's very easy and painless to move.
- Better ability to absorb unexpected thing like job loss, or ability to take exciting new opportunities like job offer in different city or even other side of town.
- Even if after running the calculations the 'net gain' of your assets is the same between buying/renting, by renting your assets stay much more liquid at the very least.



AlanStache

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Re: I don't want to buy a house, but...
« Reply #7 on: September 30, 2014, 09:17:12 AM »
If you two did not grow up with parents/family that owned you might want to talk to friends/coworkers about owning and how much labor they actually put in as well as the basic process of buying. 

I find the labor/expenses come in spurts, nothing for 6 months then its a new hot-water heater, then nothing for a year and it is a HVAC maintenance call.

frugaliknowit

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Re: I don't want to buy a house, but...
« Reply #8 on: September 30, 2014, 09:31:55 AM »
Mostly it boils down to:

1.  Are you as sure as possible that your family income will not drop (as in changing to a career that pays less)?
2.  Are you as sure as possible that you will stay at least 10 years (not needing something bigger, better, etc.)?

If yes to both and the numbers work, then I say go for it.  You will need to maintain good reserves as capital replacements (both expected and unexpected) tend to be very uneven (nothing for 2 years, then $20k for a roof an hvac system...).

JJsfr

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Re: I don't want to buy a house, but...
« Reply #9 on: September 30, 2014, 01:16:21 PM »
Thanks all for the responses. I appreciate the time each of you took to respond, pointing out both the financial and non-financial advice or lessons you have learned.

Most of my hesitation in this whole process is primarily based on the initial amount of money required to jump into home ownership, especially when looking at a market like this one and not wanting to put less than 20% down. I'm not DIY averse; I actually spent a couple of summers renovating houses while in school so I'm no stranger when it comes to more than just putting on a fresh coat of paint.

At this point, we are still at least a year, maybe two (to build up more cash) out from a purchase if it were to happen. Incomes are not expected to drop as the wife just changed careers, taking a pay cut, but has room for growth with the current company. I am in public service (vested) and do not plan on leaving as I both enjoy and support the work I do.

I understand that priorities may change, especially when/if a kid comes around. We've always lived in pretty small spaces. While anything more than 1200 sq ft seems a mansion to us now, who knows how that would seem later on. It seems that there are arguments for both buying and renting, but if we actually are serious about settling down long term in this area, it's worth it to put the money toward the house as all of the calculations I have done favor buying.

waltworks

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Re: I don't want to buy a house, but...
« Reply #10 on: September 30, 2014, 01:35:33 PM »
I think one of the big difficulties for many of the folks who are anti-buying/pro-renting is that there are so many subjective/unquantifiable factors. If you invest in stocks/bonds, you pretty much know what you're getting into, and you can sell them anytime for cash. You can select the volatility/risk profile you want, you can hedge, you can geek out like crazy, and people here like to geek out like crazy.

Houses are just not as predictable. You are buying some emotional stuff (stability, your own shade of chartreuse for the bathroom, knocking out walls to make it easier to play indoor soccer, whatever) as well as making a (sort of) investment. You have to predict the behavior in the long term of both the housing AND rental markets to make a guess at the end value of the "investment", too, which makes it twice as impossible.

So I guess for me, the value of stability/living how and where I want (especially now that I have kids) is enough that as long as I'm not overpaying crazily, I'd rather own. YMMV.

-W

Debt Free in Alabama

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Re: I don't want to buy a house, but...
« Reply #11 on: September 30, 2014, 04:14:56 PM »
Buying a house when broke (and after the down payment and taxes on the $70,000, you will be broke) means that you will invite Murphy into your spare bedroom and he'll bring his 3 friends: broke, desperate, and stupid!

Either find a much less expensive place ($150,000-$200,000?), or keep saving up.
A great rule of thumb: buy what you can afford on a 15 year fixed rate mortgage, where the payment = 25% of your TAKE HOME pay.
THat will help guide you in the decision.
Of course, a larger down payment/less expensive house helps change the equation to fit the 25% rule.
The point: "things" you can't even imagine are going to break, once you buy a house, and the 25% rule on a 15 year fixed rate is designed so that you'll have enough money to fix them without going into debt to do it!

Hope this helps!

Dicey

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Re: I don't want to buy a house, but...
« Reply #12 on: September 30, 2014, 05:00:35 PM »
When I was 21, I was diagnosed with a rare form of cancer. I made a bucket list that included buying a house for the security it represented. Housing costs were high in my area, so I took an unconventional route to achieving my home ownership goal, as detailed elsewhere on this forum. Fast forward several decades. I am cancer free and have purchased five homes. I am FIRE as a result. The arguments are about 50/50 as detailed in other threads linked above by CS, with merit on both sides. What sways it for you, IMHO, is that with your skill set, you can buy a fixer and add value, which is impossible in a rental. OTOH, I don't think renting is a completely bad idea, provided that you are able to save like hell and invest wisely. I think that's beyond most people's ability, as there is so much temptation to buy shiny new things out there. If you have a mortgage, you pay your mortgage. Sometimes I wish I hadn't bought a house, because making the payments was difficult at times, but I know I wouldn't be retired now if I had not. The discipline kept me on the straight and narrow, for which I am very grateful.

There's no harm in waiting until you are sure you want this and can pull it off. Keep saving and use this time to learn about the market. Go to open houses, learn the best areas, follow MLS on the internet, decide what you want your imaginary home to look like and where it will be. When the right deal comes along, you will be sure of it and you won't look back. Take your time and did I mention, keep saving?

Rebecca Stapler

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Re: I don't want to buy a house, but...
« Reply #13 on: September 30, 2014, 05:15:41 PM »

I understand that priorities may change, especially when/if a kid comes around. We've always lived in pretty small spaces. While anything more than 1200 sq ft seems a mansion to us now, who knows how that would seem later on. It seems that there are arguments for both buying and renting, but if we actually are serious about settling down long term in this area, it's worth it to put the money toward the house as all of the calculations I have done favor buying.

Having a baby in the near future is one reason why I might wait on making your actual home purchase, unless you're familiar with your future family's needs. There are a lot of things about housing that I didn't care about or think about until I had a child (eg, location of kids' bedroom to master bedroom; benefit of having a dedicated playspace for the kids; the value of a good school system and open public spaces, etc.)

We don't own and have a 4 year old, but are hoping to buy in the next year so he can go to a better public school than where we live now. We haven't minded renting up until now; it's worked for us, and it's zero home maintenance -- which is great when you have a little kid!

JJsfr

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Re: I don't want to buy a house, but...
« Reply #14 on: September 30, 2014, 07:46:46 PM »
As I go over the responses again here I really was able to confirm a few of my suspicions (we shouldn't be spending all of the savings on a house, it's not always a slam dunk to buy, build up more of a cushion, etc).

Thanks again for all your advice. We'll keep chugging away at those SL's for now while getting to know the market. 
« Last Edit: September 30, 2014, 07:48:49 PM by jsfr »