Author Topic: Opinion on whether to buy a home  (Read 378 times)

OneCoolCat

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Opinion on whether to buy a home
« on: April 13, 2019, 03:46:40 PM »
I'm 32, married with two kids (2 and 1 years old).  Wife owns the condo we live in outright.  It's a high cost-of-living neighborhood.  It's valued at just over 220k according to Zillow.  We are fine with the housing situation - we've lived here 8 years.  Problem is its a little cramped now that there are 4 of us and, more importantly, the school zone leaves much to be desired.  I earn a salary of $130k.  Spouse is a stay at home parent but is expected to get a job in say about 1-years time (expected salary will be $45k).  Neither have debts.  Aside from the condo, we have just under $250k saved/invested.  We are frugal and are on track to save about $75k this year (more if my spouse decides to enter the workforce this year).

If we buy, it will be a home and not another condo.  What we think we want is in the $380-430k range.  We would only put down about $50k (don't want to touch investments at the moment). I won't go into the details but we likely would not sell the condo either and instead "rent" it to a family member to cover the HOA fee + taxes ($600 a month).  So  we would have a loan for approximately $380k.  We would also have PMI, since we wouldn't be selling our Roth IRA funds. 

Just got "pre-approved" with Quicken as I was typing this.  5% down on a $420k purchase.  $0 for points will yield a 4.5% interest rate.  PMI would be $79/month.  Sounds decent for a first pre-approval.  I would shop around if we decide to buy.
« Last Edit: April 13, 2019, 03:48:14 PM by OneCoolCat »

FINate

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Re: Opinion on whether to buy a home
« Reply #1 on: April 13, 2019, 06:10:08 PM »
Do I understand the sarcastic quotes around "rent" to mean that you will be charging well below market rate, e.g. just enough to cover HOA and taxes? If so, be aware that you will not be able to treat this as an investment property for purposes of deducting business expenses and depreciation. The IRS will, rightfully I should add, be extremely skeptical that this is a bonafide investment. Especially since you will be making this favorable deal with a relative. With the recent cap on SALT deductions this could cost you dearly.

Tax issues aside, you need to calculate what it would cost you to have net worth tied up in an underperforming asset (the condo). In other words, there's an opportunity cost to not having that equity put to work in other investments. Let's say it's worth $100k more than the mortgage + transaction fees. Invested this could return 8-10k annually, vs. zero if you're just breaking even on the condo. Additionally, there's the issue of maintenance, wear and tear, and depreciation.

My advice: Don't conflate primary residence homeownership and the landlording business. If you want to trade up to a bigger house and you're okay with the added expense, and what this does to your FIRE plans, then go for it. If you want to be in the landlording business, does your condo actually pencil out as a good investment? If so, then run it as a business. IMO, more often than not it makes more sense to just sell the condo, claim the primary residence capital gains exclusion (assuming you meet the requirements), and cash-in out the appreciation completely tax free.
« Last Edit: April 13, 2019, 06:13:21 PM by FINate »

Buffalo Chip

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Re: Opinion on whether to buy a home
« Reply #2 on: April 13, 2019, 06:34:06 PM »
Speaking for myself, unless there is something profoundly wrong with the condo or area I would stay put. Bigger houses just attract clutter. Find a decent parochial school if the local public schools suck. Itíll likely be cheaper in the long run.

OneCoolCat

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Re: Opinion on whether to buy a home
« Reply #3 on: April 13, 2019, 10:19:30 PM »
Do I understand the sarcastic quotes around "rent" to mean that you will be charging well below market rate, e.g. just enough to cover HOA and taxes? If so, be aware that you will not be able to treat this as an investment property for purposes of deducting business expenses and depreciation. The IRS will, rightfully I should add, be extremely skeptical that this is a bonafide investment. Especially since you will be making this favorable deal with a relative. With the recent cap on SALT deductions this could cost you dearly.

Tax issues aside, you need to calculate what it would cost you to have net worth tied up in an underperforming asset (the condo). In other words, there's an opportunity cost to not having that equity put to work in other investments. Let's say it's worth $100k more than the mortgage + transaction fees. Invested this could return 8-10k annually, vs. zero if you're just breaking even on the condo. Additionally, there's the issue of maintenance, wear and tear, and depreciation.

My advice: Don't conflate primary residence homeownership and the landlording business. If you want to trade up to a bigger house and you're okay with the added expense, and what this does to your FIRE plans, then go for it. If you want to be in the landlording business, does your condo actually pencil out as a good investment? If so, then run it as a business. IMO, more often than not it makes more sense to just sell the condo, claim the primary residence capital gains exclusion (assuming you meet the requirements), and cash-in out the appreciation completely tax free.

Condo not worth keeping imo.  It could bring in up to $1,800 monthly in rents, however it comes with a $345 association fee every month.  Taxes are about $220 a month ontop.  I estimate that it could bring in $1240 income each month.  The reason we would rent it to a relative at no profit is complicated.  My wife bought the house in 2011 in cash outright.  Her parents put in half at the time ($37k).  She was supposed to pay them back but they told her she didn't need to pay them back (I told her to buy them out anyways but she didn't).  The value of the unit has tripled since and we have lived there for 8-years.  Her brother asked if he could stay in the house when he heard we were planning to move out.  I know it sounds suspicious but hes not a leech or anything.  I figured it would only be fair if he got to stay in the unit at the cost to maintain it (HOA fee, taxes and insurance).  He's dependable and its a very close family.  He's 30 and currently lives with their parents (pays rent).
« Last Edit: April 13, 2019, 10:21:12 PM by OneCoolCat »