Author Topic: Reader Case Study – Hour & 1/2 commute  (Read 3443 times)

Longthorn

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Reader Case Study – Hour & 1/2 commute
« on: May 20, 2014, 01:23:59 PM »
Income: Starting Next Week, Gross will be $152,000 for the family; take home after taxes and retirement savings will be: $4750/month

Current expenses:
Water, Sewer, Trash, Electricity, Gas, Internet (I have not had television since 1999).  Internet access is necessary for my job (or I would spend less time with my wife and more at the office).  $350.00
Gas for the long commute (for both my wife and myself): $550/month
Food and toiletries: $200/month for two (lots of healthy foods- fresh veggies, Ezekiel bread, stuff like that)
Lunches with other professionals (about 2/week for myself and for wife at around $10 a meal): $160/month
Eating Out and Entertainment (Dates): $200/month
Mortgage:  $1220/month (includes PMI and insurance)
Insurnaces (life, auto, umbrella, etc): $160/month
Total Monthly Expenses:  $2840

Assets:
$70,000  in his 401k (ineligible for loan)
$12,000 in her 401k (ineligible for loan)
$11,000 in his backdoor ROTH
$11,000 in her backdoor ROTH (cannot be withdrawn because of conditions of a gift for this purpose)
TOTAL retirement assets:  Approx $104,000
Home (Zillow value) $138,000
Liquid Savings: $10,000
TOTAL assets:  $252,000

Liabilities:
Mortgage: $156,000 (20 year mortgage)
Car: $0
Car2: $0
Student Loans: $0
Credit Card/Other: $0
TOTAL liabilities:  $156,000

Specific Question(s):
I have been reading MMM for a while, but I have been intimidated about posting in the forums because I felt like I would need a facemask for all the punches.  I have been turning things around over the past two years, but I have a glaring problem that has set my hair ablaze.  I live an hour and a half from my work (it was not always this way, but the housing crash… excuse, excuse).  Fact is, I am in a house that is upside down, and I do not have enough money to get out of it.  However, my wife’s work is about 1 hour away (in the same direction as my work), and we are spending about $550 a month in fuel.  (Enough to take credit for half a degree in global warming). 

My question is this:  With the current situation, I cannot get out of my upside-down house to move.  However, a situation has come up that may allow me to move out of it to another house.  With my wife’s new job, we have increased income and she is a first-time home buyer (not on the house I owned when we met).  We were looking at purchasing a new house closer to our jobs, while renting out the current house.

With her new income, we can afford to pay for both houses, although it would be a tight squeeze if we did not find a renter.  However, a movie studio is being built near our home that is bringing in a lot of people to the small area where we live.  I know a guy who owns a property management business.  Since he is my client, I can see the inner workings of his outfit, and I know they do a great job and are honest.  Rent in the area should be going up, and he is desperately looking for new houses because he has so many renters lined up right now.  He estimates that our home would rent for $1300-1500, with $1350 being a good rent-it-tomorrow price.

The house has been well maintained, but it would need new flooring.  I am an attorney, so if I did not go through a company, the legal work would be easy.  Unfortunately, other than some basic woodworking, my home repair skills are non-existent.  For that reason, I think a management company would be a better bet for my situation.

An obvious downside would be PMI on a second house, along with having two mortgages and being 97% financed.  Once the first home was rented, we would pay down the second mortgage like crazy, but as the area in which we are looking has decent houses 15 minutes from our workplaces, I would imagine a significant part of the $550 fuel bill would disappear, offsetting some of this loss. 

After paying off all other debt, I do not like the idea of such a huge loan, but the numbers seem to indicate that this would put us in a much better financial situation and allow us to have our first rental home.  Assuming we only free up $300 in fuel to put on this second mortgage a month, we would also have money freed up from having a renter to throw into that debt as well.

I am hoping for insight and ideas as to how to put my family into a better situation than what we have here.  If this escape route seems too dangerous, I want to know.  If anyone can think of better ways to get there, my ears are open.

Some important notes:
I cannot do anything that would destroy my credit like giving the house back to the bank because of work.  It could cause problems with my job.

My wife is told that she gets a bonus with the new position as well, but they were not very clear as to how much.  Obviously, we could drop that on any debt, but since it is a new job, we do not know if her bonus will be $500 or $5,000.  (They hinted that it would likely be around 5% of her salary if goals were met ($2,500), but we do not want to count on this.  Her last company suspended all bonuses right after she was hired.  If it comes: great.  If not, we do not want to count on it.

former player

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Re: Reader Case Study – Hour & 1/2 commute
« Reply #1 on: May 20, 2014, 01:37:41 PM »
Rent out your existing house, rent something small (1 bed apartment?) in the most convenient location for your and your wife's commutes.  Low risk, low cost, reassess how things are going every six months.

Next?

Cpa Cat

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Re: Reader Case Study – Hour & 1/2 commute
« Reply #2 on: May 20, 2014, 01:46:51 PM »
Rent out your existing house, rent something small (1 bed apartment?) in the most convenient location for your and your wife's commutes.  Low risk, low cost, reassess how things are going every six months.

Next?

Seconded.

Simple, right?

Sell a bunch of your stuff while you're at it. You two will be happier than newlyweds with all that commuting cut out. Save money for the next house so that there's no PMI.

Longthorn

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Re: Reader Case Study – Hour & 1/2 commute
« Reply #3 on: May 20, 2014, 01:49:15 PM »
Rent out your existing house, rent something small (1 bed apartment?) in the most convenient location for your and your wife's commutes.  Low risk, low cost, reassess how things are going every six months.

Next?

We were actually thinking about buying the next rental home as our next home.  That way, we can fix it up a bit and maintain it well.  We would minimize closing costs by moving from rental home to rental home.  The goal would be to get 4 of them by the time we retire.  We would aggressively pay off the mortgages, as I would not want more than two homes with debt at a time.  I am ok with PMI if I can pay down the mortgage fast enough and get rid of it soon, since at least I am not tossing money away in rent to someone else.  Thoughts?

Prairie Stash

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Re: Reader Case Study – Hour & 1/2 commute
« Reply #4 on: May 20, 2014, 01:57:26 PM »
You have so much free cash! What's the problem? From your post you have $1910 every month free after all expenses and a significant savings rate.

Can you buy 2 houses? If it's a good idea to buy one it should be a good idea to buy 2.  Put emotions aside and just look at your budget, rent etc. I think answering the question will help you assess your numbers.

totoro

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Re: Reader Case Study – Hour & 1/2 commute
« Reply #5 on: May 20, 2014, 01:57:41 PM »
Yes to moving and renting out your current place.  That is an easy win and should be done asap. 

Lack of handy-man skills does not mean you will need a property management company.  You are an attorney and you can manage the rental agreements and screen tenants and you are close enough to self-manage.  You do not need to be handy, you need to have your house fixed before you move out and make contacts with local repair people.  Get recommendations from people you know - put out the word.  This will save you the  10% of rents (?) charged by the property management company ($1400 a year - or would it be more?).  Chances are with a well-maintained property you will have very little to do.  Get a one-year lease if you don't want the uncertainty of month to month.

How much is the next house and what will make it a good rental when you leave if this is your plan?  Would it be cash flow positive if rented out after all expenses?  Choose that one wisely. 

Also, your house may be underwater but prices are absurdly low compared to your income.  And rental return is fabulous compared to most areas.... where are you?

bugbaby

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Re: Reader Case Study – Hour & 1/2 commute
« Reply #6 on: May 20, 2014, 04:46:03 PM »
Your net monthly income will be 4750x12 =57k.... that's 95k on tax and retirement. ? 

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Longthorn

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Re: Reader Case Study – Hour & 1/2 commute
« Reply #7 on: May 20, 2014, 07:08:18 PM »
You have so much free cash! What's the problem? From your post you have $1910 every month free after all expenses and a significant savings rate.


Starting next month, yes.  This month there is little extra.


How much is the next house and what will make it a good rental when you leave if this is your plan?  Would it be cash flow positive if rented out after all expenses?  Choose that one wisely. 

Also, your house may be underwater but prices are absurdly low compared to your income.  And rental return is fabulous compared to most areas.... where are you?

We have not selected the next house yet, but we would do so with the idea that it would become a rental house.  It would likely be smaller than our current house.  My mortgage is low because I had an 80/20 loan at 6.5% for the 80 and 9.5% for the 20.  I paid it off as quickly as I could and was able to get a refinance a year ago to a 4% loan.  Original loan was $220,000.  Part of the reason the home value is so low is that the builder went bankrupt after building 30% of the homes in the neighborhood, and I am surrounded by foreclosures.  The house is a 5 bedroom, 3 bath, so I am not sure the rental rate is too great.  (I had an ex who was a realtor that convinced me the property could only go up in value... right before the bubble burst).  My bad.  :-) 

The house will not be cash flow positive at first (since we would need a 2nd mortgage), but at our current salaries, we could pay that down very quickly if the first home rents out.  The idea would be to get a place where the place would be cash flow positive once the second mortgage is paid off.  If we were talking about moving down the street, I think it would be a bad idea, but to cut an hour and fifteen minutes off of the commute and drop a chunk off of our $550 a month fuel cost, I am leaning towards it.  It sounds like you agree with this strategy?

Your net monthly income will be 4750x12 =57k.... that's 95k on tax and retirement. ? 


We come very close to maxing out both 401k accounts, and we do backdoor Roths.  Because I own a business, there are a lot of taxes I have to pay in every quarter.  We got a CPA to help with this, but it is legitimate.  Because it is way off topic, I will not go into too much detail.  The bright side is that this will not last forever, as we are in a growth phase, but the company will be on solid footing in short order.


Thanks to all that have contributed thus far!