Author Topic: Reader Case Study – Buying a house where we don’t want to live… are we crazy?  (Read 5511 times)

canuck_24

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I am a relatively new online moustachian follower, but was quite excited to find you all this past year, as I seem to come by these shared financial values naturally, (my family has made fun of my “stinginess” since I was a young child and refused to blow all my birthday money on candy, ha ha)!  I thankfully found a wonderful husband who shares my values, and we are at the stage of buying a house.  This is where I am looking for a little bit of advice… or maybe just encouragement?  I don’t know which yet. 

I typed out a query before I found the “case study format”, so I’ve included a breakdown in "case study format" and my original typed out response.  I’ve attempted to keep it as succinct as possible.

Life Situation: DINKs, late twenties, living in Northern Canada

Take home pay: $90k between the two of us (this is after taxes. We don’t have dividends, rental income, etc.  There isn’t anything to complicate this number, so I've left all that detail out.  This is what we get in the bank!)

Current expenses: $30k/year … not entirely relevant to my question, so I won’t bore you with details, unless you need this info, then I will!

Assets: $150k in the bank, no significant material assets

Liabilities: ZERO! (Gosh, I love that!)

Specific Question(s):


Our personal situation:
We have no doubt about being able to afford a house. We are in our late twenties, with no kids, after tax we are taking home around $90k/year between the two of us.  We have not previously purchased a house because we were living abroad after university and could not get a mortgage because we were not permanent residents.  We have visited the bank here to discuss with them what we could get approved for, and they will approve us for a mortgage much higher than what we’d be willing to spend, so that is not an issue.

Our spending:
We have never been “budget” type of people, we just don’t spend much and diligently keep track of what we do spend.  However, we now live in northern Canada, and things are expensive.  There isn’t much I can do about many grocery items being double the price of grocery stores in the nearest city (900km away!).  (If there IS something I can do, short of moving somewhere else, by all means, share the knowledge!)  Utility bills, insurance, etc are pricey, and we do our best to minimize what we can. Still, in 2016 we will probably have spending of around $30k, which is higher than our usual averages. [Side note: I’m not using our historical spending data because I don’t have an accurate depiction to share of our current situation: We lived abroad from 2011-2013, took 2014 off to travel, and completely fell off the bandwagon in 2015 because we were overwhelmed with how EXPENSIVE everything felt back on Canadian soil.  I’m a little ashamed that our reaction to this was to basically put the blinders on and just “not notice” how much we were spending on everyday things and for many months stopped tracking our spending.  We have stopped this nonsense and gone back to our better habits.]

The housing market:
We live in a small, northern community where house prices are cheap and there aren’t a lot of rental options available (we are currently renting in the worst neighbourhood, in a small townhouse, and pay $1300/month; this is the cheapest rent we could find that was not apartment living).  We have contacted the real-estate companies in town and have viewed several houses in varying price brackets.  We are looking at around $250k for a moderate-quality 3 bedroom house.  Alternately we can get a decent mobile home (trailer park style, but the land is included in the purchase price here, so there is no lot rent) for around $130k, or an older “fixer-upper” house for around $175k (our main problem with this is that material prices are THROUGH THE ROOF here so even though we can do most of the work ourselves, it may still cost more than what we would gain in home value).  There are of course houses well above these prices in our town, but they are way more than we need.

The issue:
We don’t want to live here.  This house purchase would be purely of the investment nature; we are tired of shelling out $15k a year to rent.  We moved back to Canada to be closer to our families, but we are still 1500km from our hometowns!  As soon as we can find work closer to home, we will be packing up and moving.  Unfortunately, I work in mining, and my husband is a teacher.  Due to many factors, there are not jobs available in those fields at the moment.  When we were returning to Canada, we wound up in this town because we could both get work, and promised each other it was temporary.  So, we picked a cheap rental, and kept all of our moving boxes.  A year later, we are still here, still throwing money at rent and there are still no prospects of the job markets improving any time soon.  Most of my colleagues who have recently purchased houses are paying similar, or slightly less than us each month in housing expenses including property tax, home insurance, and mortgage (my office mate just purchased a $250,000 house this summer and pays around $1200-$1250 a month, and while I don’t know specific numbers on his down payment, I know he did not have as large of a down payment as we can put down).  So we are thinking: buy a house on an open mortgage, and if we wind up moving, we can attempt to sell it, or if we can’t sell it right away, we hire a property manager to rent it out for us.  Even if we lose a bit on the house, we would’ve lost money in rent anyways.  Worst case scenario, we buy, move right away and can neither rent nor sell the house; then we would need to cover the mortgage of that house, plus living expenses in a new house (either rent or mortgage payments).  One of our concerns is that this is a mining town, and the economy here relies almost entirely on the success of the mine: if the mine doesn't do well, our house value will likely drop.  Another option we have considered is buying a rental property elsewhere and gaining equity that way while we wait it out here... then it is completely unrelated to my main source of income (the mining industry).  Logistically that is more difficult though, because we would have to travel to another town hundreds of km away to look at houses, sign paperwork, etc etc.



Are we crazy?  Do you have any sage advice for us?  How do we make sure we are making the best investment if we do buy (ie. How do we know which house will have good resale value, or which one will sell fastest if we decide to get out of here)?

snacky

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Re: Reader Case Study – Buying a house where we don’t want to live…
« Reply #1 on: December 03, 2015, 11:04:32 AM »
don't buy a trailer. they never appreciate, and with low commodity prices/ a coming real estate adjustment you will lose money.

don't buy a house to rent out when you leave, unless you have trusted friends to be your property managers. you don't want to be long distance landlords. too many ways that could end badly.

probably you're stuck with what you're doing now, unless someone else has a bright idea.

Axecleaver

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Start by reading the excellent http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
This will make you feel better about renting. If you still want to buy...

Could you look specifically for a property that would make a good rental? Then you can buy it, fix it up and live in it as long as you like, and turn it into a viable rental when you're ready to move on. In this scenario you should put down only enough to give you the best rates on the loan, so as not to tie up all your equity in the property. Be careful that you don't overimprove it while you're living there.

The timeframe also matters. If we're talking about a year or two, just keep renting to keep your options open. If it's 3-5 years, or maybe longer, owning starts to look like a better option.

You should also consider moving at least a portion of your huge stash out of the bank and into investments to get it working for you.

mozar

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Sounds like you're life is too up in the air to buy. What's wrong with an apartment?

canuck_24

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Re: Reader Case Study – Buying a house… are we crazy?
« Reply #4 on: December 03, 2015, 12:51:26 PM »
Sounds like you're life is too up in the air to buy. What's wrong with an apartment?
There's a couple of reasons, the main one being we really really don't like apartment style living, the other one is because most of the apartments in this town are old and run down.  It's a personal choice more so than "something wrong" with it.  We both grew up in rural areas outside of small towns, with no neighbours for miles.  It is uncomfortable enough living in a town, let alone sharing a building with 100 other families.  Nope, just not interested.  As it is, we are in a "townhouse" that houses around 6 families all in a row, and we don't like that either, but it's a compromise to save a bit of cash.



Start by reading the excellent http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
This will make you feel better about renting. If you still want to buy...

Could you look specifically for a property that would make a good rental? Then you can buy it, fix it up and live in it as long as you like, and turn it into a viable rental when you're ready to move on. In this scenario you should put down only enough to give you the best rates on the loan, so as not to tie up all your equity in the property. Be careful that you don't overimprove it while you're living there.

The timeframe also matters. If we're talking about a year or two, just keep renting to keep your options open. If it's 3-5 years, or maybe longer, owning starts to look like a better option.

You should also consider moving at least a portion of your huge stash out of the bank and into investments to get it working for you.

Thank you for the link!  It is an interesting perspective for sure, as are some of the other links they allude to in the "addendums".
Timeframe is unknown.  I would love to be able to nail that down and say, "we'll be outta here in 8 months!", but the reality is that it is a little bit out of our hands.  We were hoping we'd only stay a year, and in that time we'd find jobs closer to home, but the market is getting worse and worse.  I am worried that if we keep saying "one more year and we'll leave", we'll look back in five years and say "geez, we should've bought something".

And in regards to our "huge stash"... first off, thanks!  Some days it feels like we are saving well and other days it feels like it will never be enough, it's good to be validated. Second - we have more than half of it in overseas accounts from where we were living, the interest rates on savings accounts there are high (~4% in a no risk savings account), so we have been comfortable leaving it there while our lives were up in the air.  We wanted easily accessible cash while we took a year off to travel in case we ran into issues, and also for getting set up back in Canada when we came home.  A significant portion of the rest of it is in TSFAs here in Canada. Now that we are looking at real-estate, we thought we would delay investing until we make a decision on what the heck we're doing.   

Part of how I found the MMM website was in starting to determine what exactly we were going to do to make this money work for us.... and that is probably worth a whole other post!  Neither my husband nor I have any experience investing and don't generally like the typical answer from the banks (we've been to several that have said things like "You're young! Go enjoy your life, you don't need to worry about retirement savings right now!" and it makes my skin crawl, as our retirement goal is to retire before our future children start school).  We partly are delaying out of sheer indecision and fear of the unknown, and partly delaying because we are trying to take the time to learn about what is out there and what is the best decision for us.  We realize that the sooner we jump in the better, but I'm rather pedantic about decisions (you should see how long it takes me to order a meal at McDonalds! ha ha!)

pbkmaine

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Given all that you have said here, buying a house is not a good idea for you right now.


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former player

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Re: Reader Case Study – Buying a house where we don’t want to live
« Reply #6 on: December 03, 2015, 01:10:07 PM »
I don't get why you want to buy a house, other than that you can.

As for buying where you are currently living, buying a house would be an anchor in a place where you don't want one, and given the cost of materials for repairs keeping it as a long-distance rental seems like an expensive nightmare.  There is a good reason why there are so many run-down rentals in your current town!

How about buying a rental in the place you do want to live in in the long term, with the aim of moving in when you find jobs there?  It might give you the push you need to make the move happen - you are sounding a bit fatalistic about your location at the moment and without a definite goal in mind I can see you staying where you are year after year.

yyc-phil

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Mining is cyclical and typical of a boom-and-bust industry, as you probably know it. I was lucky to purchase a house in Yellowknife for under $200K back when the gold mines were closing and a big diamond project was in the works, but not yet approved. Sold it ten years later for $450,000, in less than 3 hours, before the realtor had even time to put it on MLS. At the time, there were less than a handful of moderately-priced house on the market and I could have got $500K, but I was in a rush to leave town and accepted without blinking the first offer that came. I came back to work up north two years ago when jobs were plentiful, the economy was hot, and the returns to investors were excellent. However, two years later, we can see some signs of economic troubles on the horizon, and the short and medium term prospects are no longer favorable to buying anything: new mining projects are going nowhere, the owner of one existing diamond mine is hinting at shutting it down, who knows what will happen to the territory, let alone the city where most of the economy derives one way or another from mining. I have no doubt that new projects will come up, but nothing really big in the next five years. Because I came back for a quick three-year contract just to top up my retirement savings, it wasn't worth for me to relocate my family here, especially considering the price of real estate, taxes, utilities, etc. or rentals which go for $1300-1500 for a crappy suite next door to drug dealers. So instead, I decided to tough it up and commute back home every few months, at my own cost. For lodging, I found house-sitting gigs practically full-time since I got here, and when I have nowhere to live, I can stay comfortably in my office where I have everything I need. Except my wife. But the money I don't spend on housing here is more than enough to offset the cost of my $400-$500 plane ticket once every few months.

To conclude, I'd personally be very reluctant to buy property in any mining or resource-dependent town, especially if you have no intention of spending your life there.

Mmm_Donuts

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Buying a house for emotional reasons is a really bad idea. Don't do it!

To shake this idea off, and educate yourself on the current state of canadian real estate, read Garth Turner's blog:

http://www.greaterfool.ca

canuck_24

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Buying a house for emotional reasons is a really bad idea. Don't do it!

To shake this idea off, and educate yourself on the current state of canadian real estate, read Garth Turner's blog:

http://www.greaterfool.ca
It's not at all emotional, I mentioned in the OP that we are are questioning from a financial perspective if this was our best decision.  However, I am keen to read up on the link you posted.

I'd personally be very reluctant to buy property in any mining or resource-dependent town, especially if you have no intention of spending your life there.
Hi Phil! We lived in YK for a short while, and loved it there!  Nice to see a fellow Canadian and northerner responding, thanks!  The cyclical nature of mining is a huge part in our hesitation.  I feel like we're putting all our eggs in one basket, as my wages and the value of our house would depend on a single commodity.  However, it is unlikely that until we retire, we will live anywhere except in a mining town.

I don't get why you want to buy a house, other than that you can.

As for buying where you are currently living, buying a house would be an anchor in a place where you don't want one, and given the cost of materials for repairs keeping it as a long-distance rental seems like an expensive nightmare.  There is a good reason why there are so many run-down rentals in your current town!

How about buying a rental in the place you do want to live in in the long term, with the aim of moving in when you find jobs there?  It might give you the push you need to make the move happen - you are sounding a bit fatalistic about your location at the moment and without a definite goal in mind I can see you staying where you are year after year.

All completely valid points, and the same things we have been questioning... I'll answer what I can:
The main reason we want to buy a house is so that eventually we can reduce the largest part of our annual spending to nearly $0.  We currently spend $30k/year, $15,600 of that is on rent.  For argument’s sake let’s say renter’s insurance and home insurance is similar, and utility bills will be similar.  Once a mortgage is paid off (if we buy cheap enough I reckon we can do it in 4-5 years if we are aggressive), our only annual expenses will be property taxes and maintenance.  Taxes for 2015 on the property currently topping our list were $3300.  So we can start to realistically look at annual spending of under $20k without changing any other lifestyle choices. The trade off is of course that we will have sunk most of our stash into a house, and will be starting to save from $0 again. 
 
Other, smaller reasons off the top of my head:
- security of having a reliable residence knowing the rent isn't going up
- to have a garage and yard
- to be able to get a pet
- to not have to call and ask the landlord every time we want to hang a picture

Yes, I realize that there are rentals out there that allow pets, or have a garage, but they are few and far between.  We've been renting for 11 years, and had 8 different rentals between the two of us and have never had the luxury of those "amenities".


Lastly, we definitely considered buying closer to our hometowns and renting it out until we can move, and that may still happen, but it is difficult to arrange at the moment because we'd have to travel long distance to view houses and make the deal, so in the interim we started looking into buying where we live now as a short term investment, which if nothing else gains us more knowledge and insight.

former player

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Re: Reader Case Study – Buying a house where we don’t want to live
« Reply #10 on: December 04, 2015, 07:04:20 AM »
Just to say, housing is not a "short-term" investment.  Even aside from the hefty transactional costs, it might take you a long time to sell at anything like the price you paid for it.

The reasons you have for buying a house are entirely understandable, but they are a mixture of long-term financial aims and short-term lifestyle aims.  If you buy in your current location, you are potentially shooting yourselves in the foot if you do try to move, and you are prioritising smaller lifestyle aims (hanging pictures) over bigger ones (living where you want to).

If you buy where you are, I think you are mentally, financially and practically committing yourself to spending the majority of your working life in that location.  If that is what you want it's OK, but you need to be aware that is what you are doing before you do it.  If it's not what you want, I think you should be prioritising new jobs/careers in more acceptable locations and using your stash to facilitate it.

Thegoblinchief

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2 additional points:

1. A paid-off house isn't "free". Putting aside maintenance costs, for every $100,000 of assets tied into the property it's costing you (at least) $4,000 of passive income in perpetuity. So your $250,000 house really costs $10,000 p.a. before ANY insurance, utility, upkeep costs.

Make sure to ALWAYS compare opportunity cost and extra capital maintenance costs of owning when doing the buy vs rent calculation.

2. I wonder what the "worst" neighborhood of a small city in northern Canada looks like....

Definitely don't put a boat anchor around your neck.

MayDay

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If you plan to move as soon as you can find jobs in another town, it is a terrible idea to buy a house. 

That is pretty much the only relevant factor.  None of the rest really matters. 

KittyFooFoo

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If you plan to move as soon as you can find jobs in another town, it is a terrible idea to buy a house. 

That is pretty much the only relevant factor.  None of the rest really matters. 

2 additional points:

1. A paid-off house isn't "free". Putting aside maintenance costs, for every $100,000 of assets tied into the property it's costing you (at least) $4,000 of passive income in perpetuity. So your $250,000 house really costs $10,000 p.a. before ANY insurance, utility, upkeep costs.

Make sure to ALWAYS compare opportunity cost and extra capital maintenance costs of owning when doing the buy vs rent calculation.

2. I wonder what the "worst" neighborhood of a small city in northern Canada looks like....

Definitely don't put a boat anchor around your neck.

I think these two sum it up nicely.

canuck_24

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Re: Reader Case Study – Buying a house… are we crazy?
« Reply #14 on: December 04, 2015, 02:02:31 PM »
Thank you thank you thank you!  NOW we're getting somewhere..

Just to say, housing is not a "short-term" investment.  Even aside from the hefty transactional costs, it might take you a long time to sell at anything like the price you paid for it.

The reasons you have for buying a house are entirely understandable, but they are a mixture of long-term financial aims and short-term lifestyle aims.  If you buy in your current location, you are potentially shooting yourselves in the foot if you do try to move, and you are prioritising smaller lifestyle aims (hanging pictures) over bigger ones (living where you want to).

If you buy where you are, I think you are mentally, financially and practically committing yourself to spending the majority of your working life in that location.  If that is what you want it's OK, but you need to be aware that is what you are doing before you do it.  If it's not what you want, I think you should be prioritising new jobs/careers in more acceptable locations and using your stash to facilitate it.

This sums it up in a way I can get on board with. 

2 additional points:

1. A paid-off house isn't "free". Putting aside maintenance costs, for every $100,000 of assets tied into the property it's costing you (at least) $4,000 of passive income in perpetuity. So your $250,000 house really costs $10,000 p.a. before ANY insurance, utility, upkeep costs.

Make sure to ALWAYS compare opportunity cost and extra capital maintenance costs of owning when doing the buy vs rent calculation.

2. I wonder what the "worst" neighborhood of a small city in northern Canada looks like....

Definitely don't put a boat anchor around your neck.
Point 1 - okay!  These are numbers I need to hear and see.  This is exactly why I was posting this question.  I was looking for the "missing pieces" we hadn't thought of.  Just to make sure I understand: this just the amount we'd potentially be gaining if the money was invested somewhere other than a house?

Point 2 - Oh gosh, it is not even a bad neighbourhood at all!  We don't mind living there!  It is all of 5 min away from where the other residential neighbourhoods are, but, to the people born and raised here it is the "scary" part of town and that stigma helps to drive housing prices down (both rental and purchasing) a significant amount.

yyc-phil

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Mining is cyclical and typical of a boom-and-bust industry, as you probably know it.

In today's news, this is quite à-propos:

http://www.cbc.ca/news/canada/north/n-w-t-s-snap-lake-diamond-mine-to-cease-operations-immediately-1.3350770

My own job is directly related to that mine. I am not personally affected as I was going to pull the plug in the spring. However, younger colleagues and people all around me -most of whom are not mustachians and didn't expect this sudden turn of event, are freaking out, understandably. I feel very sad for them.

Thegoblinchief

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Point 1 - yep, exactly. The technical term usually used is "opportunity cost".

canuck_24

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Re: Reader Case Study – Buying a house… are we crazy?
« Reply #17 on: December 04, 2015, 02:25:27 PM »
In today's news, this is quite à-propos:

Ohhhh, that is awful to hear!

norabird

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Just wanted to echo some up thread who said there is nothing wrong with an apartment. I suggest you rent an affordable one and save homeowning for when you are ready to settle in a place long term.

ooeei

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http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 is a good calculator that shows the impact of all sorts of factors on renting vs buying.  With purely default settings on a $250k house staying 2 years, it suggests renting is better if you find somewhere for less than $1700 a month.  Staying for 1 year and you're better off renting for less than $2700 a month.  This does not take into account the possibility that the house won't sell, or being unlucky with repairs.  FYI, 4 years is the point where the calculator suggests you'd be better off buying than paying $1300 in rent.

Your friend may only be paying $1200 a month, but they paid around $15-25k in closing costs (or will when they sell).  Over 2 years that's an extra $500-1000 a month they're "throwing away."  Any repairs they have are also money being "thrown away."  Their taxes and interest are being "thrown away."  You get the picture. Very little of their payments on the house are building them equity, especially this early in ownership. 

I've had friends buy houses and it works out great and they make money, and I've had others get completely screwed by it.  Just try not to discount renting as throwing money away, there are plenty of advantages.
« Last Edit: December 04, 2015, 02:48:41 PM by ooeei »

pbkmaine

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I have bought and sold 4 houses in my life, and only one of them represented a large capital gain for me. That capital gain was due to a difference in the economy. With two houses, I would say I broke even once repairs, improvements and transaction costs were taken into account. With the fourth, I lost money. Overall, I think I would have been better renting instead of buying, and in fact the 10 years I rented were the years I saved the largest percentage of my income.


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