Biting off more than we can chew?

[youngwildandfree]

Hello! Long time lurker, first time posting.

Life Situation: Married, 28/30, No kids. He is in school full time (pursing engineering bachelors), I'm in grad school part time (engineering masters).

Gross Salary/Wages:
Me: $66,300
Him (Part time, variable income): $10K
(Monthly: $5525/$850)

Individual amounts of each Pre-tax deductions 401k, HSA, FSA, IRA, insurance, etc:
401K(with 1.5% match): $383
HSA: $292
Insurance: $257

Adjusted Gross Income (2019): $60,337

Taxes: Federal, state/local, and FICA: Monthly Federal: $323, FICA: $309, State: $191, Medicare: $72

Take-home Monthly: $3781(me)/$400-$800 (him)

Current expenses (monthly average over 2019):
Food/Dining (includes eating out, bars, networking dinners, treating family, etc. Need to break out more): $1,500
Travel (family lives around the globe, we travel a lot): $1,184
Shopping (includes buying things for house, clothing, gifts, sports/fitness, etc): $500
Education (Tuition, books, etc): $500
Bills (internet, cell phones, electric, etc): $325
Medical (surgery last year): $500

Average spending per month: $5500

Assets:
Primary house market value: $175,000,
401K (his): $83,128,
401K (mine): $9,655,
Cash: $12,775
HSA: $2,667
Company Stock: Currently worth nothing, could be worth 100-500K if we sell.

Debts: None

We have lived a non-traditional lifestyle of work hard, play harder for the last 10 years (example, we flipped a house in our early 20s leading us to be mortgage free right now). I currently work as an engineering project manager for a start up biotech company (have for >3 years), and my husband is going back to school studying engineering. We feel the need to grow up a bit and start taking our finances more seriously. So we have put an offer in on another project house for $380K.

Specific Questions:
1) Our broker says the mortgage rate we have locked in (3.25%) is for a $350K loan. We can use our cash + our home equity line of credit for the additional $30K if we cannot talk the sellers down based on repairs needed. For reference, fixed houses in the area go for 410K-475K. HELOC rate for current house is 1.49% until July, then goes to 4.02%. We can take up to 80K from this line for repairs on new house. Does this seem like a reasonable financing option?
2) We are trying to decide between renting our current house (approx $1,200/month) and selling it. The area is gaining about 10% per year so it seems like a shame to sell right now without trying out being landlords.
3) It's probably unwise...but we have thought about living off our HELOC for the next few months while maxing out my 401K now that the market is down. Talk us out of this?

[marty998]

So your spending exceeds your income and you need $1.5m of capital (or more) to cover your spending at 4%.

Well at the very least your travel bill will be nil for the foreseeable future, so there is $15,000 a year saved for now.

It’s the perfect time to learn to cook more meals at home. Hopefully what you spend on eating out isn’t going to be replaced by takeaway / delivered food.

Well done being mortgage free. That’s a big plus and a big headache solved in this environment.

[youngwildandfree]

Yup! Definitely been a life of luxury for the last couple of years, and we have chewed up a bit of savings with our spending. Not sustainable, but no regrets.

I need to find some type of cooking that I enjoy. My husband likes to grill, so we are thinking about less expensive grilling options as well. We are certainly guilty of buying things and letting them go bad because we had social engagements pop up and didn't bother to freeze perishables. We will work on that.

[zolotiyeruki]

You have zero debt.  That's fantastic! You're also living way beyond your means.  That's awful!  Especially considering your lack of debt and lack of children.  Heck, we feed our family of eight (including teenagers!!) for less than you spend on just the two of you.

No, I would not advise borrowing money for your living expenses so you can invest more in the stock market.  Cut your food spending by 75-80% and your travel to $0 instead, and you'll have $2500/mo extra to plow into the market.

Your listed expenses are still $1000 less than your total average expenditures.  Where is all that going?

What it looks like to me is that you're hemorrhaging cash (due to lots of spending), and you're wanting to incur a whole bunch of debt in order to invest either in the market or real estate.  This doesn't seem like a wise course of action.  This is how a lot of people ended up broke about 90 years ago, and also about 13 years ago.

I'd suggest you first get your spending under control, then use the resulting excess cash flow to either save for a down payment or invest in the market.

[lhamo]

I don't understand -- your current primary home (which presumably is just fine to live in) is worth under $200k but this "project house" you want to buy is $380k for something that still needs work?  Seems extremely out of balance.

If you want to upgrade your housing then sell your current one and buy something a little bit nicer/more expensive that will be worth more if you put some work into it.  But making that big of a leap when you are already spending most of what you earn and when the housing market might be about to tank is taking too much risk for my tastes.

Also, get your spending under control BEFORE you take on additional debt.  We also have family overseas and spend 10-20k/year on travel, but we are a family of four.  Your food spending is insane for two people.

[youngwildandfree]

zolotiyeruki, agree, we certainly need to pull the food and travel spending back to minimums. We certainly do not eat and drink this amount between the two of us, much of it goes toward treating family and friends to meals and hosting BBQs/Brunches/etc at our place. We both come from large (6 siblings each) families, and we often host siblings, friends, and extended family who have less means than we do. These expenses have been paid for with savings during some months. We will shift toward more potluck style gatherings for a little while.

We need to buy a new house either way to be closer to the university my husband will start at in the fall (he has been at a different school nearby until now). With this in mind, do you recommend us selling our current house rather than renting it out or borrowing from the HELCO account?

The plan is certainly to restructure our costs moving into this new house. We have lived on tight budgets ($1500/month total spending) in the past and don't mind moving back toward that. If you were confident that we can live within our means, would this change your advice about our best path forward? Do you think it's unwise to borrow from the HELCO at all even at 1.49%?

[youngwildandfree]

I don't understand -- your current primary home (which presumably is just fine to live in) is worth under $200k but this "project house" you want to buy is $380k for something that still needs work?  Seems extremely out of balance.

Yup! I should have clarified that we need to move closer to his new school no matter what (current commute would be an hour by car), and houses closer to the U are more expensive. The house is a little bigger than what we have now, but it's the location driving the costs up. He wants to be within biking distance so he can commute by bike as he does now.

If you want to upgrade your housing then sell your current one and buy something a little bit nicer/more expensive that will be worth more if you put some work into it.  But making that big of a leap when you are already spending most of what you earn and when the housing market might be about to tank is taking too much risk for my tastes.

Also, get your spending under control BEFORE you take on additional debt.  We also have family overseas and spend 10-20k/year on travel, but we are a family of four.  Your food spending is insane for two people.

Yes, our siblings and parents live in several different locations, and last year we traveled 4 times to go see them + some came to see us. Not sustainable I agree.

[zolotiyeruki]

Wait, you travelled internationally four times last year to visit family?  Yeesh.

lhamo is right--you need to get your spending under control first.

Here's one way to look at a potential move:  You're currently paying only property taxes on your home.  If you choose to sell your current house and move, not only will you be doubling your property taxes, you'll also be taking on $200k in new debt.  I don't know what your property taxes are like right now, but the PI payment on $200k is something like $900/mo.  That's almost $11k/year, after taxes.  Assuming 250 days per year, you'd be effectively paying $43 per day (after taxes!) for the privilege of DH biking to work, not to mention the increase in property taxes.  That said, an hour+ commute would stink as well (and it's not free, of course), but it's worth running the numbers.  Are there no other options that would provide a short commute *and* lower property values?

lhamo is also right about making such a huge jump in home value, especially if you're considering holding on to your current home.  You're clearly ok with buying a fixer-upper, which is great!  Is there something even more fixer-upper-ish you would consider?

[Laura33]

Yeah, sorry, you can't afford a new house right now -- even if it is a "project" house that you plan to rehab and ultimately sell.  You have $12K in cash available.  The only job you have right now that you can count on makes $65K/yr.  You spent significantly more than you made last year, even with no mortgage at all.  And with all that background, you want to take on debt and increase your monthly expenses even more? 

It seems to me that you've decided you need to back off on the various exciting things you've done over the years to be more fiscally responsible, and so now you're looking to replace that excitement by finding interesting ways to make your money make more money.  If you really want to "grow up a bit," then stop chasing excitement through debt and spending -- and by that, I am including both things like 4 big trips a year and those things that you think will make you money in the end (a new home, investing on margin).  Saving money isn't exciting, and you shouldn't be looking at your investments as a way to feed that urge; you get wealthy by making a series of small, responsible choices day after day after day.  Hell if you're doing it right, your money should be the most boring part of your life! 

Keep your money boring, and earn it before you spend it, not after.  Cut your budget first and find cheap/free ways to add excitement to your life.  Use the extra to build your savings.  If you need to move closer to the new university, fine; do what all the other students do and rent an apartment for the couple of years it takes him to graduate.  Then, once you have your downside risk covered and the cash in hand to cover you, look for your next opportunity -- whether that is investments or a house to rehab. 

[youngwildandfree]

Thanks for the feedback all! Lots to think about, and we appreciate it.

Just to clarify, we haven't had any debt for 5 years (since paying off my student loans), and our current net worth is $255K (after market crash). We have never had a year with a decrease in net worth (but this year would be the first with this purchase). In the past we have had years where our salary was >$100K, but we made choices in the last couple years to intentionally spend more freely, return to school, and give back to our families. We understand these choices are not sustainable (they were never meant to be) and considered by many to be unwise. We certainly like challenges and risks, but I don't think our financial risk score is as concerning as it seems from this snapshot. Point taken though, with the current numbers, this house is a large and risk ridden purchase, and I agree that net worth should be a slow and steady increase not a series of high risk/reward bets.

We also just had my husbands brother call us and ask if he can come to live with us (and pay rent) for the next 6 months, so that also adds a fun twist to our plans as we consider our response. This community is appreciated, it's rare to find people who state their true opinions on finances. 

[youngwildandfree]

Cut your budget first and find cheap/free ways to add excitement to your life.

Would love more thoughts on this front! We love hiking, free concerts in the park, and backyard BBQs with friends. I have been googling other options of course, and I do want to focus on cooking at home more (thank you quarantine for bringing that up the priority list), but I would love to hear some of what you guys do for excitement/fun that doesn't cost money. Things I want to do more of that currently seem like they have a too high an investment cost:

- Gardening
- Beekeeping
- Photography
- Mountain Biking
- Kayaking

Currently my hobbies are

- Swimming
- Running
- Traveling
- Backyard campfires (we do this often enough I'm considering it a hobby...)

 

[RFAAOATB]

How much more school does your husband have and what is his projected income after?  If you want to spend like that he needs to be bringing in the income like that.  What’s your projected income after your masters?  Of course don’t count on it until the job happens and the direct deposit hits..

In a two income household the safe option is to live off 2x the lower earner’s income, which is pretty much drags you into poverty/student wages until he can start bringing it in.

[zolotiyeruki]

Cut your budget first and find cheap/free ways to add excitement to your life.

Would love more thoughts on this front! We love hiking, free concerts in the park, and backyard BBQs with friends. I have been googling other options of course, and I do want to focus on cooking at home more (thank you quarantine for bringing that up the priority list), but I would love to hear some of what you guys do for excitement/fun that doesn't cost money. Things I want to do more of that currently seem like they have a too high an investment cost:

- Gardening
- Beekeeping
- Photography
- Mountain Biking
- Kayaking

Where are you located?  That will have a big effect on what kind of hobbies you can afford to take up.  Gardening doesn't have to be expensive.

[lhamo]

Gardening can be done on the cheap, especially if you have a space where you can make your own compost.  Join local gardening groups (Facebook has a ton of them in my area) and use sources like Buy Nothing and Nextdoor to get free plants (90% of  my perennials are things I have obtained from neighbors who are splitting theirs -- and if you have a large perennial garden you will soon be the one giving things away), seeds and seedlings (many people overdo it with seedling starts and have lots more to give away than they have space to plant themselves) and various gardening supplies.  When you buy vegetable seeds focus on getting open pollination varieties -- not hybrids -- and then you can save/share the seeds of things that work in your environment in perpetuity. 

Observe what thrives in the natural environment around you and incorporate those plants into your own garden/landscape.  Here in the PNW we have abundant blackberries and salal.  I have let one huge blackberry bush grow up through the hedge in our front yard, which acts as a natural trellis, and from July-October I can walk a few steps out my front door and harvest a handful of berries from that and the wild strawberry plants that thrive in its shadow to throw in with my granola and yogurt for breakfast or lunch.  Our friend @Jon_Snow enlightened me to the value/taste of salal berries, which thrive in the shadier portions of my backyard, so I am letting them grow and can harvest several cups of berries from them every season.

My biggest investment in my yard and garden was a large load of great compost three years ago that I used half of to redo my lawn area.  The rest I am just using up this year.  Not including that, I've probably only spent about $200-300/year and I saved more than that on the vegetables I didn't buy last year.

[youngwildandfree]

Thanks for the encouragement! I dipped my toe in gardening today. Spent $37 on seeds/plants/dirt/etc and had an enjoyable afternoon in the sunshine. Will see how green my thumb turns out to be in the coming weeks. I planted tomatoes, beets (for the greens), spinach, and carrots. Now I want basil, bell peppers, cilantro, green onions, and cucumbers. One thing at a time...

In response to the locations and projected incomes, I'll be vague for privacy purposes, but we are in the southeast and our projected incomes after finishing school are near to just over $100K each.

[zolotiyeruki]

Careful with the cilantro.  I planted one little sprig of it five years ago, and have since completely neglected it.  It keeps coming back (and spreading) year after year.  We're still a couple months from planting, but we already have cilantro growing around our garden beds. :)

[mistymoney]

plant cilantro from seed yearly - not much luck with the volunteers. At least - not enough for our palate!

[LightStache]

I was like you in my late 20s! My first two rentals were 100% leveraged and I was living on the edge for sure. Super fun when I moved to the other side of the planet and had a property manager flake on me, leaving the properties empty and -$4K/mo cash flow. It worked out though.

You're definitely on the wrong site if you're looking for advice that supports doing this. MMM is all about high savings rate, a nice pile of FU money, and not leveraging up for high-risk projects. Basically the opposite of the way you seem to do things.

A lot of people lost their shirts in the great recession, and if SHTF again, you could too with your plan. So I guess you have to go in knowing this potential outcome -- short sell both houses in 3 year's time with a subsequent 7 year credit hit.

But on the other side, people who take outsized risks are usually rewarded. Nothing ventured, nothing gained, but YMMV.

(Also, trim your spending!)