Figuring Things Out

[hoyahoyasaxa]

Hello Fellow Mustachians,

My wife and I will hopefully be going through some life changes in the next year and are somewhat concerned about what our financial situation might become.  We currently rent a one-bedroom apartment in Queens, NY and work in the city.  I am 28 and she is 27 and our combined income is $96,000 (I earn $60,000 per year as an office administrator for a university and she earns $36,000 as a manager at a museum).  This amounts to about $5700 per month in take home pay.  A year from now (or at least at some point in 2014) we hope to have bought our first home and have had our first child.  My wife has a very close extended family who all live near each other in the Rockland County, NY/Bergen County, NJ area and we would like to raise our kids in that atmosphere.

Where we are now:

$43,000 in savings
$30,000 in 5-year CD at 2% (we have 3 more years on this I believe but the early withdrawal penalty is extremely low and we'll make interest even if we withdraw early)
$30,000 in my Vanguard Roth IRA
$5,000 in wife's 403b

Our current average monthly spending is about $3500 per month which includes $1525 for rent and $400 to pay back a student loan at 0% interest (wife's parents bought out the loan).

Given the housing prices for 3br/2ba homes in the area we'd like to live, we're probably looking at monthly payments of $1750 for our mortgage and property taxes (provided we get a home in the $275k range which is about average for a very modest home in the area).  On top of this, if we both continue working, we're looking at $800 per month in transportation costs to the city (monthly NJ Transit + monthly subway).  And on top of this, if we both continue working, we'll have childcare costs that will probably run us at least $1000 per month.  This comes to $3550 per month and when you take into account our other expenses (food, utilities, etc.) I feel like we'll be able to save very little.  And if my wife stops working, we'll save $1400 in childcare and transportation costs, but we'll also be losing her $2100 take home income.

Does anyone have any thoughts on this and how we can live near family while also being able to save a good chunk of our income each month?

[Use it up, wear it out...]

Some ideas (in the spirit of brainstorming):

• Live with your in-laws, either in their current home or a new one both households agree to together
• Stay where you are, at least for a few years. It takes kids time to grow out of a 1-bedroom apt. If you're close enough to commute to NYC daily, presumably you're close enough to visit your in-laws from NYC
• Find a smaller home than 3-bedroom, 2 bathroom - I agree that size would be nice but it's not really necessary
• What does the cost of renting look like in your target area?
• Get a job closer to your target area - surely there are office administrator jobs out there
• Get a better-paying job. Even MMM recommends thinking about this if you're earning under $100K
• consider moving somewhere in-between. Jersey City? Hoboken?
• Buy an apartment instead of a house

[hoyahoyasaxa]

Thanks for the ideas.  Some of my responses below.

- As much as I love my in-laws, I wouldn't ask to move in with them given that they're getting close to retirement and deserve to have the home to themselves.  Not to mention that we'd want some independence and be in our own home with our kids.

- We'd like to eventually have 3 or 4 kids and aren't interested in having a "starter home" but one that we'll stay in for good so I think a 3br/2ba is what we're looking for.  For this reason, I don't think we'd be interested in a smaller place or apartment.

- I imagine renting would be more expensive than owning as it is in most areas, not to mention that we'd be throwing money away by not putting equity into a home.

- I'd love to have a better paying job, but don't foresee that happening for several years.  I am looking at getting into grant writing to try to get a side income going.

- I think we'd be willing to hold out in Queens for another few years if we thought it would be worth it.  But that's several years of not putting equity into a home, and it's not going to change the costs of childcare - it would only solve the transportation issue.

[brewer12345]

You are probably hosed unless you can figure out how to earn more money.  One way to solve a bunch of problems would be for your wife to find a job in Bergen County that pays at least what she is earning now.  Then you would avoid the monstrous commuting costs for her.  If you can do the same, it would remove a lot of expense ($700 a month or so) from your budget.

I ultimately fled the area for a place with far lower costs and no substantive looming legacy issues (corruption, massively underfunded pension systems, crazy taxes, etc.).  If you are unwilling to do so, you will nee to figure out how to boost your earning power.

[Use it up, wear it out...]

I think you're going to need to expand your conception of the possible somewhat to make this work. Some things to consider:

- As much as I love my in-laws, I wouldn't ask to move in with them given that they're getting close to retirement and deserve to have the home to themselves.  Not to mention that we'd want some independence and be in our own home with our kids.

Depends on the house. I know several people who live with parents/in-laws in various configurations that allow reasonable levels of privacy. A duplex is one way, for example, to actually have completely separate living space but still reduce home ownership expenses.

- We'd like to eventually have 3 or 4 kids and aren't interested in having a "starter home" but one that we'll stay in for good so I think a 3br/2ba is what we're looking for.  For this reason, I don't think we'd be interested in a smaller place or apartment.

First, something less than 3br/2ba is not necessarily a "starter home" - people have raised good sized families in smaller space for many years. Second, the economy being what it has been and looks to be for the future, the likelihood that you'll stay in a single house "for life" is pretty darn unlikely. Also, apartments are not necessarily "smaller". I've seen apartments with 4br/3ba(!) that were less expensive than the equivalent house. Also, it's often expensive to buy big things based on your conception of what life will be like in the future, rather than based on actual experience.

- I imagine renting would be more expensive than owning as it is in most areas, not to mention that we'd be throwing money away by not putting equity into a home.

Instead of imagining, why not actually find out before rejecting it out of hand? Also, you're only "throwing money away" if the home will appreciate faster than the rate of return you would've gotten for that money in another investment. If you save and invest the money, you may actually come out ahead.

- I think we'd be willing to hold out in Queens for another few years if we thought it would be worth it.  But that's several years of not putting equity into a home, and it's not going to change the costs of childcare - it would only solve the transportation issue.

Actually, according to your numbers, it would save on both transportation and housing, not just transportation. As for equity, see above... plus the transaction costs of buying a home and moving!

In short, something has to give - you can't have privacy, and your dream home for life, and a SAHM or full-time childcare, and live in the town you want, and have 3-4 kids, and a job that pays $60K per year. As I would say to my own children - I've given you some ideas about how to make it work, but what are YOURS?

[BPA]

I think you're going to need to expand your conception of the possible somewhat to make this work. Some things to consider:

- As much as I love my in-laws, I wouldn't ask to move in with them given that they're getting close to retirement and deserve to have the home to themselves.  Not to mention that we'd want some independence and be in our own home with our kids.

Depends on the house. I know several people who live with parents/in-laws in various configurations that allow reasonable levels of privacy. A duplex is one way, for example, to actually have completely separate living space but still reduce home ownership expenses.

- We'd like to eventually have 3 or 4 kids and aren't interested in having a "starter home" but one that we'll stay in for good so I think a 3br/2ba is what we're looking for.  For this reason, I don't think we'd be interested in a smaller place or apartment.

First, something less than 3br/2ba is not necessarily a "starter home" - people have raised good sized families in smaller space for many years. Second, the economy being what it has been and looks to be for the future, the likelihood that you'll stay in a single house "for life" is pretty darn unlikely. Also, apartments are not necessarily "smaller". I've seen apartments with 4br/3ba(!) that were less expensive than the equivalent house. Also, it's often expensive to buy big things based on your conception of what life will be like in the future, rather than based on actual experience.

- I imagine renting would be more expensive than owning as it is in most areas, not to mention that we'd be throwing money away by not putting equity into a home.

Instead of imagining, why not actually find out before rejecting it out of hand? Also, you're only "throwing money away" if the home will appreciate faster than the rate of return you would've gotten for that money in another investment. If you save and invest the money, you may actually come out ahead.

- I think we'd be willing to hold out in Queens for another few years if we thought it would be worth it.  But that's several years of not putting equity into a home, and it's not going to change the costs of childcare - it would only solve the transportation issue.

Actually, according to your numbers, it would save on both transportation and housing, not just transportation. As for equity, see above... plus the transaction costs of buying a home and moving!

In short, something has to give - you can't have privacy, and your dream home for life, and a SAHM or full-time childcare, and live in the town you want, and have 3-4 kids, and a job that pays $60K per year. As I would say to my own children - I've given you some ideas about how to make it work, but what are YOURS?

I agree.  You seem to be yabutting.  I will point out though that buying an apartment condo might seem cheaper, but actually cost more because of condo fees.  Is putting off having children an idea you are willing to entertain?  That way you could rent longer, save more, and be in a better financial position.  Also, I lived with my ex and my daughter in a one bedroom apartment until shortly before my son was born.  It worked for us.

[hoyahoyasaxa]

Perhaps I'm thinking about this wrong when it comes to rent vs. buy, so correct me if I am.

Say for instance that we purchase a $275,000 home at 3.5% interest and property taxes are $4,000 per year.  All told, this will be about $1665 per month (I thought it would be closer to $1750 but Zillow corrected me).  Now say instead of that, we pay $1850 per month in rent (which is the Zillow estimate for monthly rent for the same home).  In thirty years, the home has not moved - it's still worth $275k (no appreciation) and it's now paid off.  Our equity in it is $275k.  On the flip side, pretend we've rented it for 30 years for $1850 per month ($666,000) instead.  That's money that we're never getting back while the $275k is money that we can get back if we sell.  You say I'm only throwing money away if the home is appreciating faster than the rate of return I would've gotten for that money in another investment, but we're going to have to pay a housing cost one way or another - isn't it better to be putting it into a home rather than paying a landlord rent?

[BPA]

But you don't need that house right now.  You could continue living in your one bedroom and save the commuting money.  That money is substantial. 

And you haven't factored in upkeep expenses.  Maybe that's because you are good at doing things yourself though.

[Use it up, wear it out...]

I'm a big fan of the NYTimes rent vs buy calculator - it will help you get a petter grasp of the possibilities

+1 to BPA's points

[englyn]

Remember that mortgage payments are a lot of throwing money away at the bank and a tiny bit of repaying the house.

If you can stay where you are for a few years while saving a larger home deposit your mortgage payments will be a lot lower enabling a)other savings b)paying off student loan faster c)paying off house faster d)less money thrown away in interest, more repaying of house or e) several of the above.

[Freestyler]

I'm a big fan of the NYTimes rent vs buy calculator - it will help you get a petter grasp of the possibilities

+1 to BPA's point

Thatīs a great tool. Thanks!

I also think that OP needs to consider a compromise that better serves his goals and maybe itīs an overall better solution in the end.

Would the close extended family help to (partially) offset daycare? Otherwise thereīs the possibility that you donīt even get to see them that much (for significant time on a daily basis) and, as mentioned, commuting to see them may be a better and more efficient option than commuting to work.

[hoyahoyasaxa]

Just wanted to thank everyone here for their input.  After talking it over with my wife, we agreed that the numbers just aren't working out and it's better to continue renting in Queens for a few more years rather than buying right now.  We'll have a free commute (we both bike to work) and can pile up cash as much as we can (we should be able to save more than half of our income for the foreseeable future).  And a few years down the line, hopefully one or both of us might be able to transition to a job in Bergen/Rockland so when we do move, we won't have to pay a huge rate on transportation.

[Use it up, wear it out...]

Seems like a good decision - hope it works out for you.