Mustachian w new family - buy a condo?

[bikerdood]

Hey all,

My wife and I are expecting our first baby this September ( :D ).

Our financial situations are:
me: +45k (401k, IRA only)
her: -90k student loans

We live in the Washington DC area.  The reasoning behind staying in DC...
1) My family lives here - my mom is willing/eager (we're a tight-knit South American family) to take on daycare while we work.  This is a TREMENDOUS boon.
2) Our job situations are pretty stable.

So.

The plan as of now:
Buy a condo w/in 1 mile distance from my mom (my work will be about as far away as well).  Specs: 2 bedrm, 160k mortgage, 400$/mo condo fees.  The idea is I take on the loan and my wife pays off her student debt ASAP over the course of the next 2-3 years.  The condo in question is w/in walking distance of my mom's, a possible new j-o-b (find out next week), grocery stores and public transportation.

I've searched high and low.  Places for comparable rent or less ($1600 or less) get to be way away from public transit and my family's place.  Stand alone houses w/in walking distance to my mom's begin at about 300k.

So two questions:
1) Anyone see anything wrong w the buy a condo for 160k and 400 HOA idea? 
2) The rate we've been quoted is 4.5% for a 30yr mortgage of 144k (10% down from my 401k).  I would have more $ generated in the stock market so I should just make the minimal payments?

Thanks!

[frugaliknowit]

You don't say what your Household income is nor your downpayment source.  If the dp source is retirement accounts, fagetaboudit.

[bikerdood]

Really?  No half-of-401k-for-downpayment??  Dont you then just 'pay yourself back'?

My income is 74k.  Wife makes 67k which she'll be directing almost exclusively at her loan payment.

[MayDay]

Does your 1600$ a month payment include the HOA fee?  If so, and that price is cheaper than rent, then maybe. 

If not, run far, far away and rent until you save up a real DP and/or can afford something without such a high HOA. 

Maybe an HOA that high is typical for DC, but that seems crazy to me.  My brother just bought a condo in a different city, higher purchase price and larger condo, and his fee is 155$ a month.  I hope that 400$ gets you a pool and a gym and a playground and a butler. 

[bikerdood]

Hey MayDay,

That's the thing.  1600 = mortgage + HOA.  From my research thus far, that is typical in this area.

And I believe it just gets you the ability to live in the building X( .

I've found a few places for a little less (100k mortgage) and the HOA fees are about the same.  This is primo location though.

Renting has proved impossible because none of the places near my job / parents' place in the comparable rent range allow dogs (we have a 60 lb shepherd).

DC and the surrounding burbs are tremendously expensive.  It can be a bootcamp for frugality muscle building.

[bikerdood]

One option I'm considering...

Amass a DP for a rental property by the university of Maryland.  4 bdrms for 250k exist out there.  Get a positive cash flow right away there then buy said condo in Silver Spring to live in.  In vague brushstrokes...

[frompa]

Since you asked:  I don't get the seeming inevitable movement toward purchasing a home, whether house or condo.  I should think you are in a much safer financial position if you rent, pay off wife's debt and save up for down payment if you decide to go that way in a few years.  I get that your having a dog complicates rentals for you, but that is small potatoes compared to the kind of hell you are putting yourself in by overextending yourself.   Having a child is an intensely emotional experience, and although the "general wisdom" may be to have kids and buy a home, you are setting yourself up for some serious stress and fuckup if you bite off more than you can chew based on your own particular circumstances.  To my way of looking at it, your joint income isn't high enough, given the high cost of living in the DC metro area and your high debt level,  for you to take on a whole lot of risk. (And if you borrow against your 401(k), you take on the risk of having to pay it all back at once should anything happen to your job. I've seen a lot of people take a BIG penalty from getting caught in this trap.)   You are safer by far to move slower with decisions about buying a home.  Keep adding to your retirement accounts, put away stash for eventual purchase, and focus on GETTING RID OF THAT huge STUDENT LOAN DEBT.  Consider that debt repayment as a crash course in flexing your mustachian muscles. 

[bikerdood]

Frompa:

I really appreciate the advice.

The reason I'm considering taking on the mortgage is that places to rent come out to the same cost (we currently pay 1600/mo. for a 1 bdrm actually, not as good location).

Are you saying it is simply not worth it from a risk perspective to take on a mortgage? 
I do admit I was making these calculations in a more theoretical physics sort of way - ignore air resistance, friction, etc.  'Big unforseen financial problem [job or otherwise]' being the correlative to friction lol. 

More face punches are welcome, more details the better.

[MayDay]

So the cost of owning will be 2000$/ month for two bedrooms in a good location. Right now you are renting one bedroom in an ok location for 1600$/month. If you found a one bedroom that allows a dog, why can't you find a two?

I don't know. I can see why you want to buy. But I would be pretty wary given that you don't have a DP.

[bikerdood]

Hey Mayday,

Actually the 1600/mo includes the HOA.  So the comparison is actually:

1) buy 2 bdrm condo for 1600/mo (all expenses) in good location
2) stay renting 1 bdrm in bad-ish area - commute to my parents' is 30 min drive, 1 hr public transit.  This commute will be happening every workday

You sound much more sympathetic than Frompa and I'm curious why.

As to why we can't find a 2 bdrm... ask the market in this area... DC seems to have a few places, of which ours is one, that allows our 60 lb dog.  The moment we move toward my mom's - for some reason - everyone has either a no dog or < 25lb dog pet policy.

[frugaliknowit]

To answer your earlier question, no NEVER use or borrow from retirement accounts to buy a home (maybe from a roth if you have very low debt levels...)

Overall, it sounds like the market in which you live and work is too expensive relative to your income and debts.  Buying that property will only exacerbate the problem (taxes and assessments could go up or one of you could lose your job...).  You need to "tough it out" until your debts are paid, savings are built up and or your income increases.

[bikerdood]

Re a DP -

I'm fairly new to MMM (started reading 2 yrs ago, made big changes like selling brand new car, downsizing, etc).  I got serious around september of last year and I've upped my NW from 15k to 45k.  That's about ~3.6k per month and the I've only gotten better at keeping my expenses low since then (more like 4k increase in NW per month now).

I've pretty much maxed my 401k for the year so I can:
1) reduce 401k contribution to just what my company matches until the year runs out
2) divert those new paychecks for a DP - I would have a 5%, 10% or 20% in 2,4, or 8 months respectively

Job-wise, I'm in software development.  So that feels pretty secure.

[bikerdood]

Thanks for the advice, frugal.

That may have to be the way.  DC is a tremendously expensive city (I think it actually recently ranked most expensive relative to income?).

[Freedom2016]

With only 10% down, you will have to pay PMI. You don't want to pay PMI.

[DeepEllumStache]

Would the purchase of the condo mean that you can sell a car?  If you're dropping the commute/travel, how does this impact your monthly expenses?  The HOA is pricy, what does it include?  What about property taxes? 

I get the desire to get rid of the commute and live close enough to family (especially with the baby on the way).  You also sound like there's a very low chance of moving in the next 5 years.  On the other hand, you have some major red flags - raiding your 401K for the dp, having to pay PMI, and no mention of assets outside of the 401K.  Yes you could put something on credit cards for the short terms in emergencies, but you don't mention any non retirement investments or emergency fund that could be used.  That leaves you with no financial flexibility for the emergencies (a baby and a condo increase your risk of needing that cushion).

[MayDay]

Hey Mayday,

Actually the 1600/mo includes the HOA.  So the comparison is actually:

1) buy 2 bdrm condo for 1600/mo (all expenses) in good location
2) stay renting 1 bdrm in bad-ish area - commute to my parents' is 30 min drive, 1 hr public transit.  This commute will be happening every workday

You sound much more sympathetic than Frompa and I'm curious why.

As to why we can't find a 2 bdrm... ask the market in this area... DC seems to have a few places, of which ours is one, that allows our 60 lb dog.  The moment we move toward my mom's - for some reason - everyone has either a no dog or < 25lb dog pet policy.

Sorry, read that wrong.

I am sympathetic because if you can truly be out the door with 1600 expenses a month for the condo, then it might be a pretty good deal to buy.  I am assuming the 1600 also includes paying back the 401k loan. 

The flip side is you are increasing your risk- that you have to move and rent it out for a loss, that having a baby turns your life upside down and you no longer want a two bedroom condo for whatever reason, that you lose your job and have to repay the 401k loan immediately.  Basically you are overextending yourself, and there is a potential for reward, but there is also a list if bad things that can happen. 

I think most Americans have a hard time looking at the pros and cons without letting emotions get in the way.  I know that is true of me!  Selling a house is really expensive so it is not easy to undo the decision, so extreme caution is warranted. 

[StarryC]

I think you should do some investigating with your Realtor to about the HOAs.  High HOAs can actually be a good sign- they are putting money in reserve and taking good care of the place.   

Don't do the 401K loan. It would be better to save by reducing 401K saving for a few months.  20% would be much better than 10%, so if you can wait that long I think it would be a good idea. 

Do you already have an emergency fund?  Before you buy or have a baby, you should try to have a plan to fully fund the maternity/ paternity leave, pay any copay/ birth expenses not covered by insurance, and have an additional 3-6 months of expenses.   

Do you think you will want to live in this condo for 5-10+ years?  With a second baby, for example? 

Yes, you are taking on a risk.  I think sometimes people forget some of the risk of renting too- you can be forced to move by the landlord with just 30-60 days notice (maybe at the end of the lease, or any time if month to month).  Your rent can rise a lot if you don't have rent control.  You can be trapped if you want to move if you have a lease.  The dog also makes renting much harder. 

If you feel like the total cost (mortgage+ PMI+ HOA+ condo insurance + transpo costs) is the same or less then renting, then I think it's a good deal, assuming a 5+ year horizon.  I am not a magician, but it doesn't seem to me that DC is a shrinking city.  2 bedroom home prices have not dropped below 2000 levels since then.  The low point in 2010 was at about the 2004 level.  Also, it seems likely that rents will keep rising.  The biggest concern is that condos drop in value due to aging. 

[Neustache]

Just kind of throwing this out there...


Any chance of living with mom in the short term while you clean up you wife's student loan debts?  Pay her, IDK, $500 a month in rent and quickly pay off SL and then save for a DP? 

I go back and forth on kids living at home with parents.  But if I had a determined kid with a new family doing things right with their money, I'd do it in a heartbeat for them.  Oh, and some babies don't even need a room.  My boy rarely slept in his crib and only now at 2.5 routinely sleeps without me.  I'd hate for you to rent or buy a house for a baby only to find that baby sleeps with mom in the bed everynight (safely, has to be done safely, look it up if you are interested!). 

[Jags4186]

Yes, you are taking on a risk.  I think sometimes people forget some of the risk of renting too- you can be forced to move by the landlord with just 30-60 days notice (maybe at the end of the lease, or any time if month to month).  Your rent can rise a lot if you don't have rent control.  You can be trapped if you want to move if you have a lease.  The dog also makes renting much harder. 

I would only add that depending on the laws of where you live (I don't know DC laws) your landlord cannot force you to move.  In NJ for example it is almost impossible to get a paying tenant out of a property.