My wife and I (ages 32 and 35, with 4 kids) are close to making an offer on our first single family home. Can I get some feedback on this?
We have owned (and lived in) a condo for 8 years. No equity due to past bad decision making and very bad timing. The plan is to rent out the condo after we move. I estimate the rent would be about $100/mo over the holding expenses (including a wild guess of $1000/yr landlord insurance). I just want it to break even while we pay down the debt enough to sell the place without having to dip into savings.
For the new place we would be doing 100% financing, including a 401k loan to cover the fees.
Yup, you read that right. But read the rest.
This would be while holding onto our $15k in emergency savings. (was $23k but we just pre-paid next year's tuition) After moving we would have about $566/mo in additional cash savings in the budget. I'm also contributing 6% to my 401k to get the maximum company match. Retirement savings are on track. After paying off the 401k loan and the second mortgage, which I would try to do in a 5 year time frame, we'd be looking at about $1521 in monthly savings.
In addition, my numbers are pretty conservative. I track every penny we spend and prospectively I assume pretty large figures for things like auto repair and home maintenance, etc.
Why would I make this seemingly un-mustachian move? Why not save for three years and make a 20% downpayment? Well my oldest and my only son is about to turn 8. I've run the numbers on more extreme early retirement approaches and it seems like to matter what I do, I don't retire until he's walking out the door. It just doesn't seem worth it. These are years I'm not going to get back no matter how much savings I end up with. I still want to retire early but right now it does not stand up to having a back yard to play in and the space (especially a dining room) to invite other families over to build community. Inviting other families to visit our 6 person family in our condo is sort of ridiculous. Also the new place is much closer (0.4 miles rather than 10) to the kids' private school, and I'm not budgeting the car savings. That's just gravy. We've been looking at houses for some time, and the particular house we're looking at has a rare combination of the things we want, everything from the location to the architecture to the price.
Major sources of risk:
Vacancies for the rental: Seems unlikely that we would have long vacancies, as I'm going to go $50/mo below market rents to insure against it.
Flooding: House is in the 100yr flood zone although it was apparently fine during many recent events (this is NJ so we just had Hurricane Sandy and before that Irene.) There isn't even a sump pump. The house is very well cared for cosmetically, so it seems very unlikely to me that it needs a sump pump and the owners have just neglected to put one in in the past seven years. They've clearly been spending money on the rest of the house. I might put one in out of an abundance of caution, but I tend to believe the owners when they say there are no water issues.
Flood Insurance Premiums: I hear they may rise significantly in coming years, but it differs by property. I believe it's a relatively low risk property but I can't do anything to ensure the government actuaries see things the same way. I consider this a major source of risk.
Job: Single income family, but my job is fairly secure. I have gotten a raise and bonus every year for 10 years. I'm not budgeting for any raises or bonuses. I make six figures, my wife made $40k before we had children. She was a teacher, so it's likely she could return to work if necessary.
We have great credit, and no debt other than $8k in student loans which I haven't paid off because the interest rate is about 2%.
Even though the numbers appear to work, we would be increasing our exposure to risk and unknowns in a dozen different ways, all at once. That and increasing our debt load substantially. Are we nuts to buy this house?