Author Topic: Reader Case Study - Should I buy a house in Los Angeles?  (Read 4699 times)

Navin_Johnson

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Reader Case Study - Should I buy a house in Los Angeles?
« on: March 29, 2014, 08:51:34 PM »
Hello Mustachians!

I've been reading the blog for about 2 years now but this is my first forum post. I would love to get some feedback since my wife (27) and I (25) are currently at a new stage in life: we just became debt free! For the past 2 years we've been aggressively tackling student loan debts that totaled about $100k. The total as of right now is $5500. Okay, so we're not technically debt-free but we've decided to hold onto the remaining loan balance because the interest is 2.9% and I've read that having a bit of installment debt can help your credit (is that true?).

We've learned a lot from MMM and for the past 2 years have been completely focused on getting rid of that debt. But now that we've reached our goal, we're not really sure what to do next. Invest? Buy a house? We live in Los Angeles and real estate is pretty high. Currently, we live in a small one-bedroom apartment and pay $1200/month. But after living in it for 4 years, we're looking to get move out in the next couple of years to somewhere with a bit more room and a nice quiet small yard. If we were to get an 2 bedroom apartment with a yard or a balcany, our rent would probably be around $1800-$2000/month.

The New York Times Rent vs. Buy calculator has been very helpful (http://www.nytimes.com/interactive/business/buy-rent-calculator.html) but I guess I'm just looking for some more tailored advice and guidence on buying a house. The thought of buying a house and having a giant debt over my head again is kind of terrifying. Plus, I don't really know anything about buying a house. Is there a suggested price range we should be looking at? Most listings I've seen are $400,000+

We do plan on staying in Los Angeles for at least another 5 years, probably even longer. Although it's hard to say if our income will always be as high as it currently is. (We're currently DINK, but we're not sure if we'll always be that way)

Here's where we are right now:

INCOME (net): $10,000/month (because of our side job incomes, this number can flucuate. $10,000 is our monthly average from 2013).

Current expenses: $5000/month (monthly average from 2013) We currently are working to trim some of this fat. With smarter spending, I'm hoping to reduce our spending to $4000-$4500.

Assets: $53,500

            Roth IRA (mine): $10,000 (we plan on maxing out our two Roths every year)
            Roth IRA (wife's): $10,000
            401k (mine): $2500 (we JUST started the 401ks but plan on maxing them out this year)
            401k (wife's): $1000
            Cash in savings account: $30,000

Liabilities: $5500 student loan debt. 2.9% interest.



Any help or suggestions would be much appreciated. Thank you!

« Last Edit: March 29, 2014, 09:35:18 PM by Navin_Johnson »

mxt0133

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Re: Reader Case Study - Should I buy a house in Los Angeles?
« Reply #1 on: March 29, 2014, 09:56:16 PM »
To help you decided what are your long terms goals?  Do want to FIRE?  Do you want to have kids? Have one parent stay home and raise them?  How much do you like your jobs?  How confident are you that you would be able to get another job with the same pay if you were laid off tomorrow?

I know you say you want a bigger space but how does that 'want', not need, rank against your other wants?

Since you say, you don't know anything about buying a house, I would suggest you get familiar with what is involved.  Don't just go to a mortgage broker and ask how much house you can get, because with both of your incomes you would qualify for around a $800k loan, i'm making a lot of assumptions here. You need to know how much closing costs will be. What your projected utilities will be, bigger place higher utilities costs.  Average yearly maintenance costs.  Once you really get familiar with the home buying process and all the costs involved you might reconsider why you want a house in the first place.

spoonman

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Re: Reader Case Study - Should I buy a house in Los Angeles?
« Reply #2 on: March 29, 2014, 11:41:40 PM »
It's all about understanding your long term goals.  We recently sold our place because it wasn't going to align with our long term goals.  If I had to do it all over again, I would have never bought a place.  When we sold our condo we got lucky and managed to come out slightly ahead, but I think the majority of the time in order to make the math work out you have to hold on to the place for much longer than 5 years, specially now that prices have been going up.

If you are looking for a tax write off, just max out your retirement accounts.

fixer-upper

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Re: Reader Case Study - Should I buy a house in Los Angeles?
« Reply #3 on: March 30, 2014, 01:00:06 AM »
Many people make a mistake buying what they want long-term instead of a starter home.  You can save $100K+ in interest if you're willing to consider five years in a $200K starter condo as a stepping stone to the $400K house you want. 

The key is to pay on the condo like you were already in the house.  Without the interest charges of that extra $200K in debt (plus PMI, higher taxes, etc), you should be able to pay off the condo in 1/4 to 1/3 the time it would take to pay off the house.  Once you've retired that debt, you can cash out the equity to jump into the larger house.


Thegoblinchief

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Re: Reader Case Study - Should I buy a house in Los Angeles?
« Reply #4 on: March 30, 2014, 07:06:24 AM »
More details are needed.

How much is your rent?

How much do houses in the area cost?

Definitely leave your SLs alone. It's not about helping your credit, it's that long term investment returns will outperform the debt by several percentage points.

Unless your market heavily favors buyers, I would stay a renter until kids arrive (if they ever do).

mm1970

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Re: Reader Case Study - Should I buy a house in Los Angeles?
« Reply #5 on: March 30, 2014, 08:15:46 AM »
I would recommend you think about your long term goals.

First, make sure you can make the payments on one income, or that you have enough in savings to cover the mortgage for a long period of unemployment.
Then, decide how much maintenance you are up for.
Also consider location - where do you want to live, where will your kids go to school, how much driving will you do?
(Because you know, I just got back from Disneyland, traffic in LA sucks)

Navin_Johnson

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Re: Reader Case Study - Should I buy a house in Los Angeles?
« Reply #6 on: March 30, 2014, 06:44:04 PM »
More details are needed.

How much is your rent?

How much do houses in the area cost?

Definitely leave your SLs alone. It's not about helping your credit, it's that long term investment returns will outperform the debt by several percentage points.

Unless your market heavily favors buyers, I would stay a renter until kids arrive (if they ever do).

our current rent is $1200/month for a one bedroom. A two bedroom is around$1800-$2000/month.

Houses cost around $400-$500k for a 2 bedroom.

Navin_Johnson

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Re: Reader Case Study - Should I buy a house in Los Angeles?
« Reply #7 on: March 30, 2014, 06:58:27 PM »
Thank you everyone! You all bring up some great points. My wife and are going to give a lot more thought and discussion to our long term goals. The time commitment it takes to buy, own, and keep up a house seems a bit daunting. We both currently really enjoy our work but our jobs are also very time consuming. Which would leave little time for house maintenance.

If we were to have a kid, my wife would like to stay home for the first couple of years. She'd probably do part-time work until the child was in school, and then she'd try to return to full-time work.

The want of more space is indeed a want but it's a dream of ours to each have a small studio. We're both artists and having dedicated spaces for our work (other than the bedroom and living room) would be amazing. But perhaps we could find this through a rental.

Overall, the suggestions about us figuring out our long terms goals is very helpful. It's a lot to think about! Much appreciated.

waltworks

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Re: Reader Case Study - Should I buy a house in Los Angeles?
« Reply #8 on: March 30, 2014, 07:03:33 PM »
So the price/rent ratio is super, super in favor of renting. Do you have a specific reason to buy (ie expecting kids, want to knock out walls/DIY like crazy people, etc)? Otherwise it's pretty hard to see how it makes sense to buy right now.

-W

More details are needed.

How much is your rent?

How much do houses in the area cost?

Definitely leave your SLs alone. It's not about helping your credit, it's that long term investment returns will outperform the debt by several percentage points.

Unless your market heavily favors buyers, I would stay a renter until kids arrive (if they ever do).

our current rent is $1200/month for a one bedroom. A two bedroom is around$1800-$2000/month.

Houses cost around $400-$500k for a 2 bedroom.