Author Topic: Trouble Deciding  (Read 7300 times)

PloddingInsight

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Trouble Deciding
« on: June 20, 2014, 12:51:07 PM »
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?
« Last Edit: June 20, 2014, 12:56:29 PM by PloddingInsight »

frugaliknowit

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Re: Trouble Deciding
« Reply #1 on: June 20, 2014, 12:57:39 PM »
Don't do it.  You know you shouldn't, so just stop now!!  Read what you just wrote.  Then read it again.  While you are at it, why not jump off of a cliff!

Angie55

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Re: Trouble Deciding
« Reply #2 on: June 20, 2014, 01:17:08 PM »
It seems you're not financially ready to buy a house. You mention all your financials in a positive tone but really they are not up to where they should be. Take a step back. You seem to be driven too much by emotions and reaching the "American Dream". Even throwing out reaching early retirement this still is not a very sound idea.

 - 6% to retirement for two people seems very low. Even with a six figure salary this is only maybe 10k per year.

- 100% financing is how the entire housing bubble started. Remember that condo you own which you have no equity in?

- $50 below market rent. How do you know your "market rent" is right on? How do you know you won't have awful tenants which force you to have vacancies for a month or two? Rent only $100 above mortgage/HOA costs is not really smart either. Something will break and it will be right after you drop extra money on move in expenses to your new home.

- 401k loan with hopes to pay back in 5 years. Bad idea... What if your company has unexpected layoffs or reorganizations? Everyone thinks it can't happen to them. But its happened to my family twice in the past 3 years. This is the biggest risk in my opinion. Not flood insurance. If something happens, even a car accident which makes you unable to work you will be starting over.

« Last Edit: June 20, 2014, 01:23:33 PM by Angie55 »

shotgunwilly

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Re: Trouble Deciding
« Reply #3 on: June 20, 2014, 01:25:39 PM »
Are you saying that the condo will rent for $100 more than the mortgage, taxes, and insurance?  If so, then you're ignoring a budget for things breaking, tenants, turn around vacancy, etc.  This could get you into deep shit if you only have $15k in emergency savings. (Which likely wont be 15k anymore once you move and get settled into a new house.)

I read the paragraph about your son and a backyard and friends, and I was even overcome with an emotional decision that you should buy the house.  But step back and look at the financials a little closer/longer.  I don't think you're ready man, as bad as you want to be.

PloddingInsight

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Re: Trouble Deciding
« Reply #4 on: June 20, 2014, 01:43:12 PM »
Are you saying that the condo will rent for $100 more than the mortgage, taxes, and insurance?  If so, then you're ignoring a budget for things breaking, tenants, turn around vacancy, etc.  This could get you into deep shit if you only have $15k in emergency savings. (Which likely wont be 15k anymore once you move and get settled into a new house.)

Mortgage, taxes, condo fee, and insurance is likely $1800.  Setting aside the question of the rent, how much more should I budget for expenses?

Numbers Man

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Re: Trouble Deciding
« Reply #5 on: June 20, 2014, 01:45:29 PM »
It's hard for me to judge since I bought my first home for 3% down. But then again, the job market wasn't as fucked up as it is today. You basically need everything to go right to pull this off. You can't be downsized from your job, the tenants need to pay the rent every month. Nothing major like a roof needs to be replaced or a special assessment at the condo.  If you are sacked from your job your 401(k) loan is due immediately. If you can't pay it then it is income and you will be taxed and penalized an additional 10%.

You're taking a pretty big risk.

Cpa Cat

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Re: Trouble Deciding
« Reply #6 on: June 20, 2014, 01:52:33 PM »
Objectively speaking, this is a big financial risk. You're talking yourself into thinking it's a minor risk, because of your emotions. This is a want, not a need.

Like Numbers Man, I find it hard to judge. My husband and I bought our house for 3% down (and we borrowed half of that from my Dad) and a high interest rate (due to bad credit) back when they were giving everyone with a pulse a mortgage. It ended happily for us. But seriously - people like us crashed the economy, so clearly it was a bad idea.

The 401(k) loan is the killer here. I wouldn't do that, no matter how emotional I was. Do you have other money? If $15,000 is all the money you have in the world outside of retirement accounts, then this is an extra bad idea. You basically have no buffer if you lose your job.

shotgunwilly

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Re: Trouble Deciding
« Reply #7 on: June 20, 2014, 01:53:44 PM »
Are you saying that the condo will rent for $100 more than the mortgage, taxes, and insurance?  If so, then you're ignoring a budget for things breaking, tenants, turn around vacancy, etc.  This could get you into deep shit if you only have $15k in emergency savings. (Which likely wont be 15k anymore once you move and get settled into a new house.)

Mortgage, taxes, condo fee, and insurance is likely $1800.  Setting aside the question of the rent, how much more should I budget for expenses?

Alot of people in real estate use something like a "50% rule."  It basically says that over a period of time, the expenses of a rental work out to be about 50% of your monthly rent collected.  The expenses that they include are: Taxes, Insurance, HOA, repairs, and property management fees. 

So, for example, if your mortgage (Principle and Interest) is $600, rent collected is $1200, then you cant expect to break even over a good period of time.  Of course, no one can predict actual repairs needed, etc, so this is an estimate.  But it's worked out to be about right for people.

 Maybe some real estate gurus can chime in and help you out a bit more.

PloddingInsight

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Re: Trouble Deciding
« Reply #8 on: June 20, 2014, 01:57:52 PM »
It's hard for me to judge since I bought my first home for 3% down. But then again, the job market wasn't as fucked up as it is today. You basically need everything to go right to pull this off. You can't be downsized from your job, the tenants need to pay the rent every month. Nothing major like a roof needs to be replaced or a special assessment at the condo.  If you are sacked from your job your 401(k) loan is due immediately. If you can't pay it then it is income and you will be taxed and penalized an additional 10%.

You're taking a pretty big risk.

Sometimes I feel this is true, but when I look at each risk individually it seems pretty trivial.  It's difficult to weigh a collection of risks that individually are pretty small.  My job security seems very good.  My condo is in an area that attracts professional-type people, and I have the savings to weather probably a year's worth of vacancies.  The condo's roof was just replaced and the house we're interested seems to be in very good repair.  My savings are also big enough to pay back the 401k loan immediately, although if I lost my job I'd probably opt to pay the 10% fee and income taxes on it in order to preserve liquidity.  Which I could do.  My job provides disability insurance and my wife and I both carry life insurance.

I guess multiple things could go wrong all at once... but isn't that always true?

I can see both sides of the issue.

PloddingInsight

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Re: Trouble Deciding
« Reply #9 on: June 20, 2014, 02:00:04 PM »
Are you saying that the condo will rent for $100 more than the mortgage, taxes, and insurance?  If so, then you're ignoring a budget for things breaking, tenants, turn around vacancy, etc.  This could get you into deep shit if you only have $15k in emergency savings. (Which likely wont be 15k anymore once you move and get settled into a new house.)

Mortgage, taxes, condo fee, and insurance is likely $1800.  Setting aside the question of the rent, how much more should I budget for expenses?

Alot of people in real estate use something like a "50% rule."  It basically says that over a period of time, the expenses of a rental work out to be about 50% of your monthly rent collected.  The expenses that they include are: Taxes, Insurance, HOA, repairs, and property management fees. 

So, for example, if your mortgage (Principle and Interest) is $600, rent collected is $1200, then you cant expect to break even over a good period of time.  Of course, no one can predict actual repairs needed, etc, so this is an estimate.  But it's worked out to be about right for people.

 Maybe some real estate gurus can chime in and help you out a bit more.

Wow that seems really conservative.  I've sought answers on this before and seen things like expect one month of vacancies per year and 1% of the property value in repairs per year.  50% of the rent would be a lot more than that.

Sunflower

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Re: Trouble Deciding
« Reply #10 on: June 20, 2014, 02:06:14 PM »
Why not rent a house instead of buy? Your emotional objective is to have a yard and a space to congregate with family and friends - that's cool! Now, separate that from all of societies ingrained pressures (you must own a house; it must be x-square feet; it needs to be in y neighborhood) to figure out how to achieve the actual goal without completely screwing your finances. If everything goes wrong with the condo/house/tenants/floods/job/etc., I bet there will be more stress for your whole family than not having a yard.

Numbers Man

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Re: Trouble Deciding
« Reply #11 on: June 20, 2014, 02:11:03 PM »
It's hard for me to judge since I bought my first home for 3% down. But then again, the job market wasn't as fucked up as it is today. You basically need everything to go right to pull this off. You can't be downsized from your job, the tenants need to pay the rent every month. Nothing major like a roof needs to be replaced or a special assessment at the condo.  If you are sacked from your job your 401(k) loan is due immediately. If you can't pay it then it is income and you will be taxed and penalized an additional 10%.

You're taking a pretty big risk.

Sometimes I feel this is true, but when I look at each risk individually it seems pretty trivial.  It's difficult to weigh a collection of risks that individually are pretty small.  My job security seems very good.  My condo is in an area that attracts professional-type people, and I have the savings to weather probably a year's worth of vacancies.  The condo's roof was just replaced and the house we're interested seems to be in very good repair.  My savings are also big enough to pay back the 401k loan immediately, although if I lost my job I'd probably opt to pay the 10% fee and income taxes on it in order to preserve liquidity.  Which I could do.  My job provides disability insurance and my wife and I both carry life insurance.

I guess multiple things could go wrong all at once... but isn't that always true?

I can see both sides of the issue.

Then Godspeed, looks like your eyes are wide open. Personally, I would sell the condo unless you really want to become a landlord.

Dodge

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Re: Trouble Deciding
« Reply #12 on: June 20, 2014, 02:23:38 PM »
Under no circumstances would I recommend this move with your current financial situation. I also re-read the paragraph about the backyard and friends a few times, so I could fully understand your perspective.

Unfortunately, I just can't get there. I'm currently sitting on my apartment balcony, relaxing in the sun, and I can't help but notice the excited screams and yells of kids playing on their bikes and scooters, while running around on this beautiful day. On the weekends, and after school on weekdays, it's not uncommon to see dozens of kids outside playing.

There's also a park nearby, a place for BBQs and picnics, and a game room in the building where you can invite other families over and play board games or just talk all night.

From what I can see, kids can be just fine without a house and a backyard. They don't even notice, yet I've seen many parents fall into this trap, and end up creating an atmosphere of stress and financial instability, that cause real harm.

Kids notice that.

I cannot stress this enough. Don't do it.

former player

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Re: Trouble Deciding
« Reply #13 on: June 20, 2014, 02:55:11 PM »
So, you've been looking at houses for some time but haven't saved anything towards a deposit?  Sorry, but that tells me that at the moment your (housing) eyes are a lot bigger than your (financial) stomach.  This is not surprising, given that you are a six person family (is that 4 kids, or are there pets in there?), paying for private school, with student loans still outstanding and a wife who isn't working.  That is a lot to fund, even on a six figure salary.

Flood risk is a serious issue.  Not flooding in the past doesn't mean no flooding in the future: you have no control over patterns of development and drainage issues in the neighbourhood which could easily make an existing mild flood risk into a future serious one.  A house is a long term investment and there is no long-term security on flood risk: weather extremes are becoming more frequent and more severe.  And if the house does flood even once, your chances of selling it go way down and your chances of selling it at anything but a loss are pretty much nil.  If you have a choice, and you do, always always always buy outside a flood risk area.

If you need (or want) a house for your family the obvious thing to do for the moment is rent a single family house with a yard.  Rent for a year, save a deposit, then think about buying.  Personally I'd sell the condo, either when you move out or when you want to buy the house: nothing you are saying about it suggests to me either that it is a good long-term rental or that with a family to support for the next 15 or 20 years you should be basing so much of your finances on investing in real estate.

Exflyboy

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Re: Trouble Deciding
« Reply #14 on: June 20, 2014, 02:55:57 PM »
401k loan?... Please tell me your kidding?.. OK clearly your not.

There is nothing good about your plan. As others have mentioned above, you are right on the hairy edge with this plane while in the meantime taking out a 401k loan!

Get this into perspective.. Houses are NOT good investments.. On average houses just about keep up with inflation.. And thats assuming your not forced to sell in a dip in the market.

On the flip side of this you are taking money OUT of the one great investment you have.. i.e your 401k. Stocks make on average 8 or 9% ABOVE inflation.

If you get to the happy place where you can retire there are ways to withdraw 401k money without the 10% penalty prior to 59.5. But you are a long way from FI so have lots of time to save. So put your 401k money into stock ETF's with low fees ad start contributing as much as you can to it.

This is after you have a cash emergency fund. Make sure you can pay off your debts before the interest rate climbs.

Don't even think about this plan... You seem to casually write off the risk of buying a house in the flood zone, well your piling risk upon risk and its highly likely you'll you'll lose a job and then both houses if unhappy events collide.

Frank



feelingroovy

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Re: Trouble Deciding
« Reply #15 on: June 20, 2014, 03:35:45 PM »
Don't do it.

I have all the other reservations, but the one that stands out to me is the flood zone.

We used to own a house in the 100-year flood zone, from 99-2005, so before the rates went up.  I don't remember what we paid for flood insurance, but it was more than twice what homeowners was.  I think about $1500/year.

Even so, someone I talked to said the flood maps were out of date, and we had very little chance of flooding--the army core of engineers had done something to the nearby creek that would make flooding very, very unlikely.

Well, this winter, the street flooded.  It wasn't major--just about a foot of water in the yards.  No storms--it was from a creek nearby that backed up when the mouth of the creek froze in the super-cold temperatures. 

We were SO glad we sold that house.  True, the insurance would have replaced the furnace that was ruined in the flooded basement.  But I work with someone who lives in the neighborhood still, and it was a major, major stressor--hauling sandbags.  It's not worth it.


Exflyboy

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Re: Trouble Deciding
« Reply #16 on: June 20, 2014, 03:36:28 PM »
+1 on being a landlord.

I have been fantastically fortunate with my renters over the years, but there was one time I seriously expected to be without any income at all while I went through the costs of the eviction process.

In Oregon at least the law is very much on the side of the renter, and if they trash your house (one buddy of mine had the sheetrock torn off the walls!) that will be a LOT of money and even more time before you can rent again.

You will always be fixing stuff.. or paying to have it fixed.

Having said that I did pay off my mortgage in less than 7 years because I had renters, but you will not be in the position.. You will be relying on rent just to keep your head above water!

Prairie Stash

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Re: Trouble Deciding
« Reply #17 on: June 20, 2014, 03:48:40 PM »
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%.
I hate the way people say this, a single sentence contradicting itself.  I have NO Debt...then you list a debt; student loan and neglect your other debt; the mortgage on the  condo.  Although in fairness you listed the mortgage debt in another paragraph.  Why not just own it and say you have some debts at low interest.

The first step to FI is being completely honest and logical about money, there's no need for trying to minimize or trivialize debts.

Post better numbers and I might agree to buying the house, I like being reckless sometimes.  I read a lot of emotional reasons but not a lot of financial reasons.

imustachemystash

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Re: Trouble Deciding
« Reply #18 on: June 20, 2014, 08:13:21 PM »
I agree with the person said you should just rent a house. I know a few people who have rented out their underwater condo and rent a larger single family home.  You are not financially ready to buy a home.

Chuck

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Re: Trouble Deciding
« Reply #19 on: June 21, 2014, 06:39:07 AM »
Don't do it.

The condo is a huge liability and you have a very tiny margin of safety (which you are about to make smaller).

Please, stop and think about this without the fairy tale backyard propaganda that the NAoR invented and subsequently shoved down your throat.

PloddingInsight

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Re: Trouble Deciding
« Reply #20 on: June 21, 2014, 03:07:58 PM »
Not sure who the NAoR is...

In any case, thanks everybody for the comments.  It's been helpful.  I'm beginning to wonder if we could sell the condo instead.  Then we'd be making a lateral move, since the house we're looking at is approximately the same value as the condo, and we don't have any equity either way.

WannabeDone

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Re: Trouble Deciding
« Reply #21 on: June 21, 2014, 03:30:32 PM »
NAR is the National Association of Realtors.

They're a very credible group who tells you when the best time to buy or sell a house is.  Apparently there's never ever been a bad time in history to buy or sell a house.  </sarcasm>

Dee18

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Re: Trouble Deciding
« Reply #22 on: June 21, 2014, 10:06:44 PM »
Keep in mind there are many more expenses with a house and yard than with a condo.  And more time is required, in my experience.  If you absolutely feel compelled to live in a single family home, try it out by renting, as others have said.  You simply do not have the money to buy now....and buying in a floodplain adds more risk.