Reader Case Study - To Homeown or not to homeown?

[LosAngeleno]

Hi there. Could I trouble you all for some advice? New here - longtime lurker. Lifetime of bad habits that have started to change in the last 6 months, but not there yet. We have gone nuclear on our spending for the last 6 months and it has been wonderful. Long way to go still. But here's the situation:

Life Situation: Married, early 30s, living in Los Angeles (have to be here for the work I do, but I also love it)
Gross Salary: I grossed around 80k last year as a freelancer, my wife 104k in her job.
Pre-Tax deductions: health insurance, wife's job contributes (not matching, just contributes) to 401k ~ 15k / year


Current expenses: Rent $2900, Auto lease (I know) $300, my freelance equipment is owned outright at this point, so my hard costs are very low.
Assets: Around 16k in 401k, 19k in cash (not moved anywhere just yet, pertinent to question)
Liabilities: 9.5k in credit card debt, 18%

Notes: I was renting a separate workspace for around $600 / month but we moved to a place that could accommodate the work I do. I am really uncomfortable with how much we are paying in rent, but it is a little bit less than what I was paying for living space and separate work space.

Question: We are considering whether or not to buy a house, vs do something else with the cash (like pay off the credit cards and put the rest away). We have found a house in the city that could accommodate my work for 560k. We could use our cash for a 3.5% down payment. Our monthly living expense would go to close to 3600 but at least it would be contributing to a mortgage and not just getting burned in rent.

Ordinarily, I think the best course of action would be to move somewhere cheaper, pay off the credit cards, and then buy a house when we at least at 10% to put down. But my workspace is set up already, and even if we moved to a much cheaper place to live, I would still need to rent a work space, which I have never seen available for less than $600 / month and that was over a year ago.

What should we do? Buy the house and then immediately focus on paying off the credit cards, or stay put paying rent until they are paid off and we can put down at least 10%?

Thanks...

[humbleMouse]

Good lord, I would get rid of the credit card debt IMMEDIATELY.  Get instant return of 18%. 

If your freelancing is doing well, your stuff is paid for, and you have space to do it, I would assume your income would be going up this year?  Just stay in your rental, save money, pay those credit cards, and re-assess the situation in a year.

[Dicey]

If you had no CC debt, a better down payment and a paid-for car, I'd vote yes, but I don't think you're quite there yet.

Ask yourself how you'd feel and how you'd manage if your potential house dropped in value significantly. (That's why so many people just walked away from their loans in the not-so-distant past.) Then consider what you'd do if one or both of your incomes dropped significantly. (Insert same parenthetical here.)

I'm not entirely against your wish to purchase, but you need to examine all of the risks and what-ifs very, very carefully.

[MsSindy]

So, when you say your freelance Gross income is $80k, is that after ALL expenses?
Let's just assume that it is, you're still wanting to purchase a house that is ~3X your combined salary, AND you have CC debt AND a car lease, AND the bare minimum down, AND no emergency fund AND no house repair fund.  Come on now, what do you think the right thing to do is?

I know that there is something about owning a house that is appealing, but you've chosen one of the most expensive markets to live, so home-ownership is not cheap/easy.  Plus, you're most likely going to have to buy a fixer-upper (or older home), so be prepared for possible heavy expenses.  Home ownership isn't just about the mortgage/RE taxes, it's about all the things that go into maintaining a house.

Take your cash and payoff that damn CC, then go back to saving until you have a proper down payment, have enough money for closing costs, a smallish emergency fund, and some money put aside for house repair/maintenance. Please don't put yourself in a financial tight spot to own a house....it really isn't worth it.

[Gondolin]

If you had no CC debt, a better down payment and a paid-for car, I'd vote yes, but I don't think you're quite there yet.

+1

From the information given I agree with the above. However, it's hard to say without more information on your spending than what you've given.

If you're grossing ~184k, netting ~130-140k after taxes, paying ~35k in rent, where is the other 100k /year going? 

Note that your rent is only around 25% of your net income. Not high at all relative to your income and federal guidelines. 

At your level of income it should be easy to be completely debt free with a 10% downpayment (50-60k) in just one year which is the safer route to take.

[ShoulderThingThatGoesUp]

That 19k in cash should immediately be used to pay off your 9.5k in credit cards. Instant 18% investment return! I can't process anything else while that's on your balance sheet.

[LosAngeleno]

Thanks for the input everyone. My big question was whether purchasing a house before we are ready is worth doing in this case in order to stem the bleeding from our high rent, but it sounds like you are all saying that of our options, the best one is to just stay put and to otherwise get our financial picture in order. I think you're right in that we should be able to do this within a year. All the money we actually have saved has happened probably in under the last 6 months as a result of us waking up one day realizing that even though we have finally begun to hit our stride work wise, we basically burned through it in lifestyle inflation. Reading this blog and others has been really influential in making us both feel sick about that, which in turn has fuelled drastic changes. We're not there yet, but as long as we have the discipline to continue (which I believe we do), I suppose another year or so of this rent is not going to kill us. Thanks again.

[ShoulderThingThatGoesUp]

And before you posted that you transferred the cash and paid off the card, right?