Author Topic: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?  (Read 4977 times)

MNstache

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$77K “down payment” money: Buy, Build, or Invest?

Note: I am not seeking advice on how to get out of debt (that has already been accomplished), but rather what to do with $77,000.  However, suggestions to reduce my current expenses are welcome as well.  Please let me know if I've missed anything.  Thanks!

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Income: (monthly)

Gross: $4,458.35
 -401k contribution: $975.00
 -medical ins premium: $187.72
 -dental ins premium:   $12.52
 -US income tax: $377.15
 -MN income tax: $160.07
 -SS tax: $264.01
 -Medicare tax: $61.75
Net: $2,420.12

Additional income:
•   Employer bonus of up to $3,000 annually. Payout in the past 2 years has averaged 90% of possible ($2,700.)

Expenses:
      
$700.00 rent
$22.00 phone (employer pays $50/month)
$35.00 electricity (100% wind energy!) (averaged)
$0.00 heat (included in rent)
$0.00 Internet (shared WiFi with landlord)
$0.00 TV
$140.00 car (gas) (figure is for a worst-case scenario month. I work from home 2 days per week, 15-mi one-way commute.)
$120.00 car (repairs, oil changes) (averaged over past 2.5 years; ’04 Dodge Stratus with 108K miles)
$54.16 car (Insurance) (Progressive, last shopped around 2013)
$12.00 insurance, renters (Am. Family, last shopped around 2012)
$22.00 haircut ($30 every 6 weeks)
$459.33 Roth IRA contributions
$109.69 all recurring: sponsored kid in Africa / memberships / public radio and TV / 7 magazines / one prescription medication
$150.00 all the rest (clothing, travel, gifts)
$350.00 food ($250 grocery at my natural foods co-op, $100 eating out. This is down from $500 one year ago.)

$2,174.18 total expenses
$245.94 "leftover”, currently adding to emergency fund

Expenses in early retirement:
It's really hard to say, given the housing variable.  As for income, 75% of what Social Security tells me I would get at full retirement age is roughly $1,600/month, FWIW.  But that's not in ER stage anyhow.

Assets:
• Employer 401k - $1,350 (just started last month) invested in the lowest-cost funds available, as much index as possible, but still a high ER at 0.97% (thanks, John Hancock.) I’m currently trying to get our plan administrator to consider Vanguard or another lower-cost option.  We have fewer than 50 participants, so I’m not sure how much better we could do.  This is my secondary investing vehicle, since there is no employer match (Roth IRA, below, is my first.)
     o   50% U.S. stock index
     o   25% int’l stock index 
     o   20% U.S. bond index
     o   5% REIT fund

• Roth IRA - $5,750 in Vanguard Target Retirement 2040 Fund (VFORX), 0.18% ER.  I plan to max this out each year ($5,500).
     o   Vanguard Total Stock Market Index Fund Investor Shares - 62.9%
     o   Vanguard Total International Stock Index Fund Investor Shares - 27.1%
     o   Vanguard Total Bond Market II Index Fund Investor Shares - 8.0%
     o   Vanguard Total International Bond Index Fund - 2.0%

• $3,000 loaned to my local co-op grocery store to finance an additional location. 6-year loan effective Jan. 2014, paying 4% simple annual interest.  More kale for all…

• $2,500 emergency fund (with a few FI family members who would help me in a pinch, I don’t feel the need to have this too much higher.  I also have $35K available credit among 5 credit cards.)

• $28,000 cash in my credit union savings account, earning 0.10% interest; see below.

$40,600 total assets

Liabilities:
• None, but it wasn’t always this way.  Read on!

My story:
I’m 36, single, and live in Saint Paul, Minnesota.  FICO score is currently around 795.  In 1998, at age 21, I got my first credit card, a Citibank Visa with a $500 limit.  As Citibank so graciously increased my credit limit, I, in turn, increased the balance on that card, and subsequent cards.  Combined with a worsening drinking problem, and a series of drinking-related job losses from 2006 to 2009, I had accumulated a total of $22,000 in various forms of consumer debt, mostly credit cards with interest rates from 8 to 22%.  With the help of a family member who incrementally loaned me cash at 4% to pay off each account, I started tackling the debt in 2010, and even while I didn’t completely quit drinking until Dec. 2012 (one day at a time…), I managed to make my last debt payment in May 2013; 5 months later, I paid off my car loan as well (used, $4K purchase price.)  So, I have been debt-free since September 2013 – the first time since January 1998.  I actually came across MMM right around the same time, and have read probably two-thirds of the articles, and about half of the forum posts in the housing/landlording category.  I am exceedingly grateful to the MMM community for helping me steer my freed-up $650/month into savings instead of extra spending.

At the end of 2013, my parents told me they would be giving me the first installment of money my grandparents had set aside 20+ years ago to be used for a housing down payment.  I had known there would be money, but while I was still drinking, it was off-limits, and besides, I didn’t want to buy anything until the “bad debt” was all gone, and not until the drinking-related cobwebs had cleared my brain a bit.

The total amount I’ll be receiving is $77,000.  I received the first $28,000 in December ($14,000 from each parent, for tax purposes, apparently.)  I will receive an additional $28,000 this year, and the remaining $21,000 early next year.  While the money was intended to be used for housing purposes, there is no restriction that I must use the money for housing.

To thicken the plot a bit more, my housing situation will likely be changing next year.  I currently live in a rented 750 SF 1-br+den apartment, in an owner-occupied, two-unit duplex, and the owners are planning to sell early next year (quasi-early retirees themselves!)  While I wouldn’t necessarily have to move, new owners throw a fair amount of uncertainty into the mix: Will they keep the rental, or make it part of the main house? (it was originally built as a single-family dwelling in the late 1800s.) Will they raise my rent?  Likely, since it’s been at $700 since I moved in 3.5 years ago.  Based on my recent informal analysis of Craigslist ads, and being a renter in the same general area since 2002, this apartment could easily rent for $900/month.

My goals:
While I actually enjoy my job and look forward to going to work most mornings, financial independence/early “retirement” is my eventual goal.  After being a slave to debt for so many years, I never want to go back into that trap.  I cherish my newfound freedom from debt, even though I am still dependent on wages for my food, shelter, and clothing.  I realize housing debt may be more “productive” than consumer debt, but interest payments are still interest payments (← wise quote-of-the-day…)

One more consideration:
This is so vague that I’m not sure it’s even worth noting, but my grandparents, who created this $77K in the first place, started their working careers at the height of the Great Depression, and even though they likely faced a disadvantage salary-wise throughout their careers as a result, they still managed to save and invest and always live quite modestly to the point where the passed along a good chunk of money to their only child.  A few years ago, my parents started dropping in conversations that there was a “sizable” inheritance coming to me and my two older sisters, that we had “nothing to worry about”, sometimes with a gleam in their eyes (and we are not a people prone to exaggeration, not unlike Garrison Keillor’s Lutherans in Lake Wobegon.)  My parents survived the ’08 crash pretty well, since they had been retired for a few years, and already tilted towards bonds and other lower-risk investments.  So, there could be a sizable inheritance coming my way, but I have no way of knowing how much, or when.  Longevity has been prevalent on both sides of my family, though one of my parents is currently battling a fairly aggressive illness at age 73 (they are each in their early 70s.)  Given the illness situation, and other variables, I feel it would be terribly inappropriate to ask about this amount at this time.

My question:
What the heck do I do with this $77,000?  I have been thinking about:

1. Buying an existing home.  I do not want a large home.  I will not be having children, and am actually quite happy as a single guy.  (Relationship status may change, yes, but it seems silly to change my criteria for such an unknown.)  During my drinking days, I got used to living in small apartments with minimal “stuff”.  After all, who can afford nice furniture when renting a barstool for $100/night?  Even with my current 750 SF place, only about two-thirds of it is actively used or contains “stuff”.  I could easily live in 500 SF.  Since I have ruled out condos and townhomes (too many common walls, dealing with non-Mustachian association members, etc.) I’ve been looking at small (+/- 800 SF, 2br/1ba) older (1920s, average) homes, which are selling for $150-$200/SF in decent condition in stable (not trendy, but not dangerous) neighborhoods of Saint Paul, and even that Minneapolis place next door.  I have also considered portable, tiny houses, but strict zoning laws don’t allow them anywhere in our metropolitan area.  I’ve also considered manufactured housing (“mobile home”) parks, but they are mostly located in 2nd-ring suburbs, far from the upscale suburb where I work (Edina), and come with lot rents around $450/month, on top of buying your always-depreciating unit for $20K and up.
Potential drawback to buying:
 o I am not a “handyman” type.  I enjoy solving problems, but as a lifelong renter, I have no experience with fixing things, and I own very few tools.  I am not a creative/artistic type, and my interest in developing those skills is very limited.  I struggled through art class in grade school (really!)  Therefore, I would likely be outsourcing major repairs and renovations, and with buying an older house, even in “decent” condition, I fear never-ending expenses.  I do not want home ownership to become a part-time job, unless I knew with a fair amount of certainty what the “job requirements” would be in terms of time and money.  Newer homes in the suburbs are large, anti-Mustachian, and generally depress me.
2.   Building a new home. This is the option I have been leaning towards, as it greatly reduces the drawback of buying existing that I noted above.  Also, it allows me to build using the latest technologies and materials.  Energy efficiency is very important to me, not just for cost-savings, but for environmental and philosophical reasons as well.  I’ve interviewed two design-build firms so far, and have another two or three I’m working to connect with.  They all specialize in green building practices.  So far, I’ve been given two cost estimates: $175-$225 per SF, and the other said she could do closer to $175 per SF.  Interior finishes are of little concern to me.  I want a solid shell to keep in the heat (gotta love a Minnesota winter), and to keep out the noise and dirt of the city.  I don’t really care about resale value, as I see myself holding onto the property and renting it out should I want to move at some point.  Even if I were to sell, the property would most likely appeal to someone similarly green-minded, and we don’t care about granite countertops, fancy trim, etc.

Variation: I have also thought about building a duplex, as we call them here:  a two-unit, up-and-down structure (I like being up high.)  The one rental unit would be on the first floor.  Minimum dwelling unit size in Minneapolis is 500 SF, with a 22’ minimum foundation width; I believe Saint Paul is the same.  So, the rental could be 500 SF, maybe a bit more, with a similar second floor footprint, and then a third half- or full floor that’s maybe 250 SF, with a terrace on the other half.  (Keep in mind, as stated above, I struggled through art class, but I swear I have seen a design like this somewhere.)  That leaves me with a 1250 SF structure.  At $175/SF, cost to build is $219K.  Lots are going for around $4/SF in the areas I’m looking at, so for a standard 1/8th-acre lot in the urban core, add $25-$30K for the lot.  So, $250K altogether.  I haven’t thought much about a garage, partly because I think they are ugly and tend to be crap-magnets that get broken into often, but I would add one if it would make financial sense for some reason.  The rental unit could bring in, conservatively, $800/mo depending on the neighborhood (if anyone here knows the Twin Cities, please let me know if that estimate seems right.)
Potential drawback to building:
 o Even though the numbers don’t necessarily show this (which makes me think I am running the numbers incorrectly…), building new seems like the most expensive option, and that just buying a turnkey existing house and moving in would somehow be cheaper.

3.   Continue renting and invest the $78K (in a taxable account?), trying to keep my monthly rent costs down as much as possible.  This adds a big element of uncertainty, since I would probably have to move to accomplish this goal, as the new owner of where I currently live would likely increase the rent.  To maximize my rent savings, I would need to rent a room in someone’s house, which, for basic accommodations, would run at least $450/month to be within reasonable commuting distance to work.  However, previous experiences with having roommates (3 different years since 1997, once each in an apartment, townhouse, and small single-family house) have not gone well, in no part due to the roommates, but rather my need for my own space as an introverted Scandinavian-German.

Being so new to the concept of owning housing, and with so many variables, I’m not sure how to determine which would be the best decision financially, i.e., what gets me to financial independence most quickly, while most closely maintaining my current standard of living?  My brain has been awash in calculators and spreadsheets for a couple months now, so I feel I need to step back from the keyboard and let the MMM community weigh in.  What would you do in my situation, and why?

Asking these questions has been a long time in the making, and I hope the answers will at least give me a better sense of direction.  I’ll check back often, and look forward to your input (but hopefully not too many face-punches!)

MDM

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #1 on: March 22, 2014, 03:58:07 PM »
Very good summary of your situation - nice work!

I'm going to go with your option 3, "Continue renting and invest the $78K".  Reasons:
 -  You have at least a year with your current rent.  Owners may not sell, new owner may be happy to keep you and thus not increase rent (too much), etc.
 -  Not a big financial cushion under you now, and tying that up in new real estate just doesn't seem best. 

Separately, you could
 -  check your federal withholding.  Might have fat-fingered numbers from your post but I got Federal AGI of $39,400 and 2014 tax of $3,933.  That would be only $328/mo you would need to withhold if correct.
 -  Increase 401k to $1,458/mo ($17.5K/yr).  Cutting out the $100/mo dining (or any other $100/mo expense cut), together with federal withholding changes to avoid a next-year refund, would put you very close to cash flow neutral from salary but doing a great job between 401k and IRA investments.
 -  Put the $28K cash in something at least a little better: e.g. GE Capital gives 0.9% with no conditions.


« Last Edit: March 22, 2014, 04:03:14 PM by MDM »

TomTX

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #2 on: March 22, 2014, 07:40:02 PM »
Agreed.

Do you WANT to learn more about doing house stuff? If so, tell your current landlord that you would like to help out with maintenance. Or volunteer for Habitat for Humanity. This skillset should come in handy even if you continue renting - as a negotiating tool for keeping rent low.

MNstache

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #3 on: March 23, 2014, 11:10:22 AM »
Very good summary of your situation - nice work!

I'm going to go with your option 3, "Continue renting and invest the $78K".  Reasons:
 -  You have at least a year with your current rent.  Owners may not sell, new owner may be happy to keep you and thus not increase rent (too much), etc.
 -  Not a big financial cushion under you now, and tying that up in new real estate just doesn't seem best. 

Separately, you could
 -  check your federal withholding.  Might have fat-fingered numbers from your post but I got Federal AGI of $39,400 and 2014 tax of $3,933.  That would be only $328/mo you would need to withhold if correct.
 -  Increase 401k to $1,458/mo ($17.5K/yr).  Cutting out the $100/mo dining (or any other $100/mo expense cut), together with federal withholding changes to avoid a next-year refund, would put you very close to cash flow neutral from salary but doing a great job between 401k and IRA investments.
 -  Put the $28K cash in something at least a little better: e.g. GE Capital gives 0.9% with no conditions.

Thanks for the input, especially the reminder to move that $28K into higher-yield savings while I wait to make my decision.

MNstache

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #4 on: March 23, 2014, 11:18:00 AM »
Agreed.

Do you WANT to learn more about doing house stuff? If so, tell your current landlord that you would like to help out with maintenance. Or volunteer for Habitat for Humanity. This skillset should come in handy even if you continue renting - as a negotiating tool for keeping rent low.

I actually do want to learn more, and become at least somewhat more self-sufficient.  I've offered twice to help my landlord with anything around the house, especially as he undertakes repairs in preparation of listing the house for sale, but he has not taken me up on the offer, except for some window-washing this summer.  I probably need to let him know I don't expect much in return, i.e., I just want experience.  He also may not know yet what he wants to fix before listing the house for sale.  Thanks for the HfH suggestion as well.

Jack

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #5 on: March 23, 2014, 11:52:24 AM »
Do you like where you're living now? If so, you could consider buying out your landlord and making his unit the rental instead of yours.

2527

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #6 on: March 23, 2014, 12:51:12 PM »
My ideas are to not do anything until you are sure it is what you want to do, and to do volunteer work with HFH.  You will learn skills that will come in handy as a homeowner.  If it is price competitive, I like the idea of building a a duplex, and renting half. 

KBecks

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #7 on: March 23, 2014, 01:55:26 PM »
I would suggest reading up on buying an existing duplex that is in good condition.   You can learn some basic home maintenance skills, it can't be that hard.  There are simple books and goodness, the Internet, where you can learn about simple things, and you can hire a handyman to do more intensive work for you.

Maybe you do want to buy the duplex you are in when it goes up for sale.  You might also get a deal from the owner and learn from him/her about land lording, and the kind of maintenance the property requires.  Would it be in your price range?   The owner may enjoy having a simple transaction with you.

You can read up at bigger pockets.com about buying a live-in duplex as an investment.  What would the bottom of your place rent for?  Would it cash flow?

You should not have to live with roommates, and maybe a single family home is too much for you.  If you like two-family living, that's your answer. 

Good luck!!

MNstache

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #8 on: March 24, 2014, 01:10:18 PM »
Jack and KBecks - I've considered buying the property when my LL sells, and renting out his part of the house, and staying in my "apartment" unit.  With my income in the mid-50s, and purchase price estimated by my LL at $350K (estimated), and my 20% down payment, I would be very dependent on the rental income.  The rental income would be around $1,500.  I worry about not having a tenant (or having a not-good tenant), and then the prospect of  maintaining a 3,100 SF house that was built in 1888.  I would also need to check with zoning, since there is a legal non-conforming status of some sort on the property (the house used to be 3 apartments.)  I'm definitely a "measure twice, cut once" person, and diving into this option without a lot more research would feel like not even measuring at all!  I will check out biggerpockets.com; thanks.

Thegoblinchief

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #9 on: March 24, 2014, 02:58:25 PM »
Since you've got a couple years before you get the full stash anyways, I'd invest the money. Be conservative if you want, but get something better than 0.10%

Personally, I'd sit tight and see what happens with your rent under the new owners. If your existing one is going to sell for that much, DON'T buy it. Consider other duplexes, but definitely not that one. Too much house for your income.

As long as you keep rent low versus a comparable house, I'd stay a renter unless:

Are you planning on retiring in MN? If so, a duplex may be a good investment now.

MNstache

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #10 on: March 24, 2014, 03:37:18 PM »
Since you've got a couple years before you get the full stash anyways, I'd invest the money. Be conservative if you want, but get something better than 0.10%

Personally, I'd sit tight and see what happens with your rent under the new owners. If your existing one is going to sell for that much, DON'T buy it. Consider other duplexes, but definitely not that one. Too much house for your income.

As long as you keep rent low versus a comparable house, I'd stay a renter unless:

Are you planning on retiring in MN? If so, a duplex may be a good investment now.

Thanks, chief.  Just yesterday, I moved the portion of the stash I have now ($28K) into a 0.90% savings account with Barclays.

Retiring in MN?  Why, yes!  Who doesn't love interminable winters?  But in all seriousness, I'm not sure yet.  I would like the ability to spend the winter season (just the 3 coldest months) in a warmer climate.  As a MN native, I enjoy the remaining 9 months here pretty well: climate, quality of life, and friends (I don't expect to have many family members in the area by that time.)  I have a vision of getting some kind of portable, tiny housing that I could bring to a TBD location in the southwest quadrant of the country during those months.  Being single, or partnered at most, and no kids, will give me a fair amount of flexibility.  In general, flexibility, mobility, and ability to adjust to changing economic and environmental scenarios (i.e., climate change) are important to me.

Thegoblinchief

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #11 on: March 24, 2014, 03:43:29 PM »
Not sure what bond funds are giving lately, but I'd be more aggressive than that. And I'd personally put at least 50% into stocks. If principal evaporates short-term, so be it, wait for it to recover, but the upside is what will help you reach your goals.

Compounding is your friend.

KBecks

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Re: Reader Case Study: $77K “housing" money: Buy, Build, or Invest?
« Reply #12 on: March 25, 2014, 06:57:14 AM »
If you need it in the next 3 years, do not put it in the market.   There is not time to recover if the market takes a dump, and right now things are getting bubbly in stocks.  It is impossible to predict, and you don't want to lose this family gift.