Reader case study: When can I buy a house?

[Joe Motion]

This case study has two purposes: 1) Trying to figure out when I can buy a house, per the subject title, and 2) trying to figure out an activity that will generate additional income. I'm 27 years old, living alone in the suburbs near a major metropolitan area in the northeast United States.

Income: Job 1: $475 take home weekly, $25k annually
Job 2: Variable but ~$125 take home weekly, $6500 annually
Total: $31,500/year, $2625/month

Expenses: I've taken Mustachianism to heart.
Rent: $725/mo, $7/mo home purchases = $732/mo
Car: $200/mo. This is 2014 numbers, will decrease significantly due to lowering insurance rates + walking instead of driving to work with new job. Estimated 2015 expenses: $120/mo
Food: $150-200/mo total, about half of that is groceries, rest is restaurants/alcohol
Bills: $61/mo gas+electric, $41/mo internet, $13/mo phone = $115/mo
Student loans: $185/mo
Miscellaneous expenses (entertainment, clothing, health purchases, travel, gifts, credit card annual fees, tax returns): $200/mo
Total: $18,600/year, $1550/mo

Net earnings: $12,900/year, $1075/mo

Assets:
Cash: $1800
Emergency fund: $10,500
(old) 401k: $16k
Roth IRA: $5900
(old) HSA: $3600
Taxable investments: $37,800
Car value: $4000
Total: $79,600

Liabilities: None. Student loans are not in my name, car is owned, and any credit card debt is paid off every month.

Short-term goal is to max out my Roth IRA contribution in 2015 (will take this out of my emergency fund in January, most likely). I'm also looking for a hobby/interest/side job that will start making some income for me. I don't make much at my second job (retail, in a stock room) and I think my time is better spent doing something else, but I'm not exactly sure what that would be. I'm only there right now because I know that time would be spent doing nothing. Long-term, I'd like to purchase a home in the next three years or so, before I turn 30. My job is half a mile from my home, and I enjoy it enough right now that I'd like to stay nearby. Houses in my area through a quick search on Zillow are roughly $150-200k, but most are 60-80 years old. I'd also consider getting a slightly bigger house than I need and renting out a room for some passive income. I've been researching home ownership and the process on and off, but I'm still mostly clueless on how much I would need for the initial sale beyond 20%+ down, and on a month-to-month basis. Property taxes are pretty high in my area too, about 3%.

Would appreciate any help that I can receive here. I can provide any further information requested, probably. Thanks in advance.

[lizzigee]

A quick student loan question. You say it is not in your name but you are making payments towards it.  Is it for study you undertook, regardless of who borrowed the money? If it was for you, and you are expected to make these payments, then count it as a liability.

[La Bibliotecaria Feroz]

When can you afford to buy a house? When you can double your income. A traditional rule of thumb is not to spend more than three times your annual salary on a house, and a better way to build wealth is not to spend more than twice your annual income on a house. Obviously, those are extremely blunt numbers, and it helps that your expenses are very low. But your income is just not even close to being enough to buy a $150-$200K house.

[MattC]

I get that you're in a situation where you've got more time than money; or at least you would drop your second job if you could have something else that would earn you more money. 

IF you know a little bit about home maintenance/construction (or at least if you have a strong desire/aptitude to learn) and if you could manage some rental properties, you ought to consider getting a multi-unit fixer-upper property.  You've got enough non-retirement-tagged cash on hand that you might even be able to make a property purchase with cash and no financing.  Then, with a little elbow grease, you could make repairs, get the place rented out and significantly increase your net worth in a relatively short period of time.  Just be conservative with budgeting for renovations, as they always cost more than you think.  Also, get a friend who knows what he's doing to advise you through the process.  For example, if you can get a 3-unit 50k fixer upper property that needs 500 hours and 15k of materials; it looks like you could buy it with cash and then fix it up on your schedule.  Try to get a unit rented out right away to make it cash flow positive (or at least less cash flow negative than renting); live in the nastiest unit yourself, etc.  In a few years you could own a 150k house outright that earns you a few thousand dollars a year; maybe even 10k a year in the rents minus expenses and that houses you for free.

However, if you DON'T know about home maintenance/construction and don't want to learn it on the job, so to speak, I wouldn't pursue home ownership.  You'll simplify your life to just continue renting.  As is, you're saving money, and eventually the money you've saved away will keep working for you and increasing your income/net worth.  If you buy but don't want to do construction work yourself, you'll get eaten alive with repair and maintenance bills and in the end be worse off than if you just rented.

Remember that "passive income" is definately a misnomer when it comes to renting out real estate, whether it's rooms in your house or apartments.  There's nothing passive about thawing frozen pipes or a repairing a failed hot water heater.  It's a part time job.  Make sure the money you make from it is worth the hours you will put into it.  Think about the lifespan of all the components of a house, versus what it costs to replace them (the roof, the hot water heater, the appliances, etc) and you'll see that any house is going to cost you thousands of dollars and dozens to hundreds of hours a year to keep it going. 

[Joe Motion]

Thanks for the replies so far. Addressing things:

A quick student loan question. You say it is not in your name but you are making payments towards it.  Is it for study you undertook, regardless of who borrowed the money? If it was for you, and you are expected to make these payments, then count it as a liability.

The important thing to note is that this wouldn't count in a credit check. I think your argument is just semantics, but you are technically correct.

I get that you're in a situation where you've got more time than money; or at least you would drop your second job if you could have something else that would earn you more money. 

IF you know a little bit about home maintenance/construction (or at least if you have a strong desire/aptitude to learn) and if you could manage some rental properties, you ought to consider getting a multi-unit fixer-upper property.  You've got enough non-retirement-tagged cash on hand that you might even be able to make a property purchase with cash and no financing.  Then, with a little elbow grease, you could make repairs, get the place rented out and significantly increase your net worth in a relatively short period of time.  Just be conservative with budgeting for renovations, as they always cost more than you think.  Also, get a friend who knows what he's doing to advise you through the process.  For example, if you can get a 3-unit 50k fixer upper property that needs 500 hours and 15k of materials; it looks like you could buy it with cash and then fix it up on your schedule.  Try to get a unit rented out right away to make it cash flow positive (or at least less cash flow negative than renting); live in the nastiest unit yourself, etc.  In a few years you could own a 150k house outright that earns you a few thousand dollars a year; maybe even 10k a year in the rents minus expenses and that houses you for free.

However, if you DON'T know about home maintenance/construction and don't want to learn it on the job, so to speak, I wouldn't pursue home ownership.  You'll simplify your life to just continue renting.  As is, you're saving money, and eventually the money you've saved away will keep working for you and increasing your income/net worth.  If you buy but don't want to do construction work yourself, you'll get eaten alive with repair and maintenance bills and in the end be worse off than if you just rented.

Remember that "passive income" is definitely a misnomer when it comes to renting out real estate, whether it's rooms in your house or apartments.  There's nothing passive about thawing frozen pipes or a repairing a failed hot water heater.  It's a part time job.  Make sure the money you make from it is worth the hours you will put into it.  Think about the lifespan of all the components of a house, versus what it costs to replace them (the roof, the hot water heater, the appliances, etc) and you'll see that any house is going to cost you thousands of dollars and dozens to hundreds of hours a year to keep it going. 

I guess "passive" was the wrong word to use, but this post was very helpful. I do have an interest in learning how to do my own repairs, but I am starting from basically nothing to learn it. Are there any books or websites you can recommend that would be helpful?

[wtjbatman]

I noticed that you seemed to ignore frugalparagon even though you replied to a post before and a post after. I will reiterate the excellent point that fp made. You really shouldn't buy a house that costs 5-7x your annual income. That's just asking for trouble. Even with the idea that you may rent out a room, because you never know if that will actually work out. Or if you will outgrow having a roommate/tenant a few years later and be stuck with one because you can't pay the mortgage on your own.

If your income is going to hover in the 31k a year range, you should be looking at houses for 90k or less. Not 150k-200k.

[Seņora Savings]

Thanks for the replies so far. Addressing things:

A quick student loan question. You say it is not in your name but you are making payments towards it.  Is it for study you undertook, regardless of who borrowed the money? If it was for you, and you are expected to make these payments, then count it as a liability.

The important thing to note is that this wouldn't count in a credit check. I think your argument is just semantics, but you are technically correct.

This sent up some major red flags.  There is a big difference between when you can convince someone to loan you money for a house and when it is a good idea to buy one.  This is particularly true if you want to convince someone to lend you money without giving them a complete view of your finances.

[MattC]

For home remodeling resources, I'd buy a general home remodeling book; probably just check amazon reviews for a good one.  And maybe a book about residential electricity and wiring.  But basically everything you can just google and find on youtube.  And preferably make friends with a couple folks who know what they're doing.

Like others have said, don't drop 150k on a single family house when you're making 30k.  But 50k; even 100k with some rental units you ought to be able to handle with some elbow grease.   Just make sure the numbers really work in your favor.  If I were you and if you do look for a house, I'd post up here for advice with whatever house and your estimated financials for whatever you plan to buy before you put in an offer.  You're probably going to overlook something that the community can point out for you. 

And also like others have said, if you're going to pay a debt off, it kind of is your debt, whether credit reporting agencies see it or not, but in any case, $2k a year/a $20k student loan debt isn't the end of the world one way or the other.