Author Topic: What Would You Do  (Read 4818 times)

FarmerAl

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What Would You Do
« on: June 20, 2016, 10:31:51 AM »
After following MMM for a few months and learning a ton about the frugal lifestyle, I was hoping to get some help for the somewhat of a unique situation I have.

• Married – both 25 – both full time salaried jobs – making about $120k per year
• Have about $45k in student loans (interest rates varying, around 4%) – no other debt
• Currently renting an apartment for $635/month + utilities, etc.
• Just hit $50k in total cash savings
• About $30k invested in 401k/Roth
• I put 10% into 401k, wife at 7% currently

Now here is the big dilemma… Parents own a farm and want to give us 2 acres of land to build on, but they want us to build ASAP.

Initial plans are to build in spring 2018 and will need about $60-$70k to put down which we will have no problem having at the current pace of savings. Should be able to save about $35k-$40k per year – maybe more now that we have found MMM.

So with the housing marketing basically on fire (have heard from quite a few people that it would be 20-30% more expensive to build right now than it should be) does it make sense to continue saving for the down payment, while throwing excess cash at the student loans when able, and build in 2018?

Or continue renting (hate paying for nothing in return moneywise) and payoff the debt while waiting out the real estate market? Parents will not like option 2 but they are also very frugal and might understand…

Looking for opinions or maybe different ways of looking at this situation, any help is appreciated.
 

Gondolin

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Re: What Would You Do
« Reply #1 on: June 20, 2016, 10:48:33 AM »
Why do they want you to build ASAP?

Will the land be deeded in your name? Are there any other strings attached? Or any strings they might appear once you've built the house and moved in?

FarmerAl

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Re: What Would You Do
« Reply #2 on: June 20, 2016, 10:54:49 AM »
They want us to build ASAP due to the pre-work that needs to be done.. Cut down trees, excavate, etc. They just turned 61 and want to help with this before they are unable too. Also dad has been farming his whole life, had some recent injuries, wants to help..
Also might help out moneywise and wants to do so before he officially retires - easier to move money around for tax purposes on his/farms end.
 
Land will be in our name (working on now) - no other strings attached.
 

Slee_stack

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Re: What Would You Do
« Reply #3 on: June 20, 2016, 10:56:54 AM »
Were you planning to live on or invest in this farm property anyway?

By the way, renting is sometimes a smarter financial decision than owning.  Owning is not a guarantee of anything.

Its a shame your crystal ball is broken.  Mine is too.

The last thing I would bank on however, is someone saying costs WILL BE or WON'T BE 'X' less or more expensive in two years.  I suspect their crystal ball is also malfunctioning.

You either want to invest in something like this or you don't.

The only 'sure thing' here is that it sounds like you are being gifted land for 'free'.  You should factor in that amount of value vs your opportunity costs if going your 'own way'.

dougules

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Re: What Would You Do
« Reply #4 on: June 20, 2016, 10:58:32 AM »
What will be the difference in your and your wife's commutes?  Don't forget to take that into account. 

If you're doing it to help your dad out, it might be worth it just for family ties alone. 

slschierer

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Re: What Would You Do
« Reply #5 on: June 20, 2016, 10:59:56 AM »
I'm with Gondolin in that I don't understand the hurry. 

In these types of situations with family you need to be sure to have everything in writing so that there are no future misundertandings.  You want to be sure that you own the property outright.  Also, how sure are you and your SO that you can live near your parents?  Regular proximity can be relationship changing!

Honestly, I'm very debt adverse so I would recommend paying off your student loans today.  Why keep paying interest on them?!  Then, save up the money you need for a downpayment to build your home.  It won't take long, and you will be in a better position for it.  I would not rush into building now.

Maybe you could take over the two acres from them now and start the property prep.  There's no need to rush into the actual building.  My BIL and SIL bought a building site from my husband's grandmother about 3 years ago.  They have prepped it to build and maintain it, but they are not building until they have the funds to build the home that they want.

trashmanz

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Re: What Would You Do
« Reply #6 on: June 20, 2016, 11:01:29 AM »
Yeah, if they just need to prep work done, then just do that and buy yourself more time. 

prognastat

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Re: What Would You Do
« Reply #7 on: June 20, 2016, 11:14:27 AM »
Generally I would not be in a rush to pay off any debts under 4% since that same amount invested would offer an equal to greater return in the long run. Any over 4% I would pay off though.

As for taking out a mortgage to build the house:
- I would avoid doing it if you can't get the APR below 4% and preferably lower, the lower the better. If your credit score is pretty good this shouldn't be a problem.
- If you do take on a mortgage make sure you can at least put 20% down to avoid PMI.
- Don't go crazy when building something yourself and make it far larger and luxurious than you need it, larger house generally means higher bills in insurance, heating/cooling etc and takes more effort to keep clean which unless you enjoy cleaning is something to keep in mind.

Also building a house and taking on possibly large amounts of debt is a big decision. I would not rush the process even if you parents would like it to move fast.

JJsfr

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Re: What Would You Do
« Reply #8 on: June 20, 2016, 11:36:08 AM »
Or continue renting (hate paying for nothing in return moneywise) and payoff the debt while waiting out the real estate market? Parents will not like option 2 but they are also very frugal and might understand…

You're not paying for nothing by renting. If $60-70k down is what you need for a traditional home loan (20% down on a $350k mortgage), your rent is a huge steal.

Generally I would not be in a rush to pay off any debts under 4% since that same amount invested would offer an equal to greater return in the long run. Any over 4% I would pay off though.

Would you still recommend not paying off the loans if the money will be going to presumably a savings account for a down payment?


Fishindude

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Re: What Would You Do
« Reply #9 on: June 20, 2016, 11:39:27 AM »
How about taking your time and doing the pre-work out of pocket over the next couple years.
Clear and shape site, install the driveway, fence work, install utilities, etc.   Come time to build the construction would go fast with this stuff already out of the way.

Axecleaver

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Re: What Would You Do
« Reply #10 on: June 20, 2016, 11:51:14 AM »
Your argument that building a house is 20-30% more expensive now than it ought to be is confusing, especially since you don't intend to break ground for another two years. That gives you plenty of time to interview builders or hire a general contractor, then line up subs for whatever rates you'd like to pay. They could be 30% higher in two years. Or the same, or lower. 

What is your budget for building the house? Consider building the basics in 2018 and leaving room to expand later when you have had some time to get your feet under you. Leave room in the budget for overages, which happen frequently on new construction. Don't make yourself house-poor, where you can't afford to maintain and furnish the house after it's built. Another idea would be to save up 20% for 2018, but use anything over that to start building at your own expense and risk, thereby lowering your mortgage costs. You can pour the foundation and drill a well, for example.

You probably want to look at a Construction Draw loan, those require you to pay interest against only the amount of principle that is outstanding. Handy if you run into construction delays and cost overruns (ie, pretty much every house ever built). Some can use the land and any work that has started as collateral for the loan, to keep the rate down. Most draw loans allow you to convert the mortgage to a 30 year fixed after building is complete, saving you the costs of refinancing. Rates are slightly higher than mortgaging an existing home, because the bank is assuming more risk - roughly half to three quarters of a point.

Make sure you protect your credit between now and when you get the loan, and learn as much as you can about the mortgage qualification process.

Many farm families used to do this as their children grew up and married, partitioning off their farm where an extended family lived. I grew up like this, with my grandparent's home partitioned out for two of the four siblings. It was cool growing up with grandparents, an uncle/aunt and cousin nearby.

FarmerAl

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Re: What Would You Do
« Reply #11 on: June 20, 2016, 01:39:54 PM »
·        Commute will be the same as now
·        Have lived close to parents all my life – not a big worry
·        20-30% more expensive was from a friend that’s a real estate analyst – just don’t want to pay $50k more if I don’t have – I realize I can’t control this and should even factor in really
·        Budget for house is 300k-350k with hope that it will be under 300k
·        Credit score is very high

 
I guess the main thing that I look at is… Do I pay off student loans first or build and then start paying off debt like crazy after all is done? I realize there are many more factors than that but I boil it down to that every time.

Wife and I really want to have our own place and not rent anymore..

MrsDinero

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Re: What Would You Do
« Reply #12 on: June 20, 2016, 01:52:43 PM »
Without knowing about your current budget, I would say pay off the student loans now.  Yes 4% is a low interest rate, but if you are planning on doubling (tripling??) rent when you build your home, you will be glad to have them out of the way. 

I would also recommend posting a comparative case study with your current budget and your projected construction budget. 

Tester

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Re: What Would You Do
« Reply #13 on: June 20, 2016, 01:53:38 PM »
·        Commute will be the same as now
·        Have lived close to parents all my life – not a big worry
·        20-30% more expensive was from a friend that’s a real estate analyst – just don’t want to pay $50k more if I don’t have – I realize I can’t control this and should even factor in really
·        Budget for house is 300k-350k with hope that it will be under 300k
·        Credit score is very high

 
I guess the main thing that I look at is… Do I pay off student loans first or build and then start paying off debt like crazy after all is done? I realize there are many more factors than that but I boil it down to that every time.

Wife and I really want to have our own place and not rent anymore..

I highlighted a very dangerous statement.
Make sure you budget this correctly.
And after you budget it, budget it again.
And add 30% on top.
And then add another 15%.

It might be just me, but that bit me so I am trying to prevent it from happening to you.

Make sure you can get the building to the state to be able to live in it without having to pay mortgage and rent at the same time...

And now the most important part: Make sure the stress won't affect your health. I allowed that to happen to me and it is not nice, not even close to nice.
And if you ask me what stress? You will get stressed with the building...
« Last Edit: June 20, 2016, 01:59:08 PM by Tester »

Trudie

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Re: What Would You Do
« Reply #14 on: June 20, 2016, 02:26:28 PM »
I would pay off the student loans now and continuing building your stache so you have a minimum of 20% down.  Budget a "buffer" and beware of this, especially if you are entering into a contract for time and materials.  Understand the different types of construction contracts (fixed versus time and materials).  Take the time to interview a few different contractors.  Decide up front what you are looking to them to do.  If you feel that you just want them to be the best project manager possible, then select one accordingly.  If you're looking to them for design advice and acumen, then select accordingly.  You often don't get everything you want in a contractor.  Also, make sure they understand it's YOUR house and do not try to impose their will on you.  It's their job to explain options to you and what they cost and -- presumably -- to use energy efficient techniques.  But at the end of the day it's YOUR house and not theirs.

(I have built two homes.)

Depending on what you envision it will take a good amount of time to design, prep the site, and build.  1-2 years for the preliminary work isn't out of the question.  Perhaps your parents could start helping with that now.  I would think they would understand if you explained your financial goals to them.  The last thing you want is to get in over your head.

2Birds1Stone

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Re: What Would You Do
« Reply #15 on: June 20, 2016, 02:32:42 PM »
With rent so low compared to your income you are not paying for "nothing" by renting.

That rent covers taxes, maintenance, opportunity cost of having your capital etc etc.

I would think long and hard about tying up so much $$ in a house at this point.

prognastat

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Re: What Would You Do
« Reply #16 on: June 20, 2016, 02:38:01 PM »
·        Commute will be the same as now
·        Have lived close to parents all my life – not a big worry
·        20-30% more expensive was from a friend that’s a real estate analyst – just don’t want to pay $50k more if I don’t have – I realize I can’t control this and should even factor in really
·        Budget for house is 300k-350k with hope that it will be under 300k
·        Credit score is very high

 
I guess the main thing that I look at is… Do I pay off student loans first or build and then start paying off debt like crazy after all is done? I realize there are many more factors than that but I boil it down to that every time.

Wife and I really want to have our own place and not rent anymore..

300-350k budget seems excessive when you are even being gifted the land and it sounds like you and your family are planning to do a decent bit of the prep work yourselves. If you were making 150-175k a year and was for both the house and the lot not being a gift I would say 300-350k is on the slightly high end of what I would go for, but still within reason. I don't know the exact situation and what the builders market is around there, but financially that seems high for your income. Maybe not by an average American standard, but by a mustachian standard it would be.

Even more so considering you are seeing this as a cost saving matter. However if you are spending that much on the house chances are you will be spending a decent bit yearly on taxes, maintenance and utilities.

At your income I would not consider tying up more than 250k in to my house.
« Last Edit: June 20, 2016, 02:40:20 PM by prognastat »

dougules

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Re: What Would You Do
« Reply #17 on: June 20, 2016, 03:34:53 PM »
$300K sounds really high to me, too.  I didn't notice that the $60-$70k was just the down payment.  Maybe I'm just biased by construction being less expensive in the South, but I would think building a house on existing land would be a lot less.  How much square footage are you looking to build, and how fancy are you going?  I like the plan of building a small modest house that's designed to be expanded and upgraded if needs be. 

The interest payment of a mortgage is basically just rent on money, and owning comes with a lot more random extra expenses than renting.  It seems like renting is actually cheaper if you can't bring your construction costs down, although you should play around with the buy-rent calculator and see where the chips fall. 

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=2


And if it were me I would make the student loans a priority, personally.  Any other debt I wouldn't mind leveraging at that rate, but student loans can't be discharged in bankruptcy.  That would make me very uncomfortable given that they will hang over your head even if the end of the world comes. 

gaja

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Re: What Would You Do
« Reply #18 on: June 20, 2016, 03:46:43 PM »
Can you ever sell the house, or does the "family land" situation make that topic toxic? Because then you are throwing 350k into a hole in the ground; any increase in value is theoretical (and even a bit annoying).

MrsDinero

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Re: What Would You Do
« Reply #19 on: June 20, 2016, 04:12:29 PM »
Can you do a tiny or mobile house on the land?  Or does it have to be a permanent structure?  If you can do a tiny or mobile house it is possible that you could end up paying less in rent than you do now....not counting property taxes. 

Apocalyptica602

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Re: What Would You Do
« Reply #20 on: June 20, 2016, 04:27:33 PM »
350k seems very high considering you're being gifted the land. 350k in building materials and labor? Even 100% general / sub contracted with absolutely 0% DIY work that seems high. Although I'm not sure how that goes in your area.

FarmerAl

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Re: What Would You Do
« Reply #21 on: June 20, 2016, 05:38:07 PM »
We plan on keeping the house under 300k. With getting the land gifted it will obviously help a lot. I really have no idea how much the house will cost at this point. I just don't want to think it will be 250k and then we find out it will be 350k. I would rather be surprised with it being lower.

Thank you everyone for your input tho. I am definitely going to focus more on the student loan debt.

Choices

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Re: What Would You Do
« Reply #22 on: June 20, 2016, 11:53:21 PM »
Agree with knocking out those loans before building a house as well as planning for the house to cost significantly more and take significantly longer to build than you initially anticipate.

More importantly, though, is this land part of a family estate or special to the family for some reason? If so, you're going to be pouring money into something you're stuck with forever. You can never sell it if you want to move, and you can't have random renters in there either. It's a much, much better idea to buy your own house somewhere without the family strings attached so you can sell it if your circumstances change.

Emg03063

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Re: What Would You Do
« Reply #23 on: June 23, 2016, 09:10:16 PM »
Agree that $300k house is pretty unmustachian for a couple with a combined $120k income.  One thing you didn't mention:  do you WANT to move from your appartment to a house, or do you enjoy your current lifestyle (from an ease of maintenance, commute, lifestyle amenities perspective, not from a financial perspective)?  Run your numbers, but from a financial perspective I doubt moving from a mid $600 rent into a $300k house is going to buy you much financially, if anything.  I would think the interest on the mortgage alone would exceed your rental cost (to say nothing of property taxes, and higher operation & maintenance expense).  Whatever it did buy wouldn't be worth it to me in terms of the loss in flexibility.  If I were going to build, I would build the smallest house I could live in, with flexibility to expand in the future if that were something I thought I might want or need down the road.  Unless you're planning to have roommates or renting out rooms on Airbnb, there is no financial upside to having idle capacity.  Also, I would seriously consider moving a mobile home onto the land and living in it while I built myself if I were to build a house, but if you're in the US, you can buy a used home right now practically anywhere for less than what it costs to build new.  Case in point, my current home was purchased for $40k last year, but I'm forced to carry $160k worth of insurance on it because that's what my insurance company says it would cost to rebuild if it were destroyed.

Another potential option to consider:  does your parents' farm contain any idle barns that they would be willing to part with that are suitable for conversion?
« Last Edit: June 23, 2016, 09:17:09 PM by Emg03063 »

Mrs. S

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Re: What Would You Do
« Reply #24 on: June 24, 2016, 12:16:28 AM »
Have you looked into the kind of home you want? Is it possible for you to get a smaller house built and further expand it over the years if you need to?
If I were going to build, I would build the smallest house I could live in, with flexibility to expand in the future if that were something I thought I might want or need down the road.  Unless you're planning to have roommates or renting out rooms on Airbnb, there is no financial upside to having idle capacity.  Also, I would seriously consider moving a mobile home onto the land and living in it while I built myself if I were to build a house, but if you're in the US, you can buy a used home right now practically anywhere for less than what it costs to build new. 

Basically what Emg03063 said. There are a lot of cheaper ways of building energy efficient buildings and if you end up with timber from the lot you should be saving on construction.
That being said I would finish off the loans before I would start construction. It is a stressful and time consuming process even if you hire a contractor. Also have you had a look at modular homes?

DeltaBond

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Re: What Would You Do
« Reply #25 on: June 24, 2016, 06:04:08 AM »
Wow, I've heard of family pressure but this one takes the cake.  To pressure someone into spending several hundred thousand in any situation is extreme. 

Your original plan before this offer/pressure came up was a good one, pay things down, build or buy in just a couple of years.  You will be very happy if you stick with this plan.  They can always clear the land without you needing to build on it right away, what's wrong with that???