Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?

[robartsd]

I'd sell the rental in time to capture the capital gains exclusion and use the proceeds to purchase your new home. I agree with nippycrisp's analysis that property values are too high to make land lording worthwhile; but you could wait to decide what to do with your current home until after you've decided where you're moving. I'd consider renting out your current home for 12-21 months then take the capital gains exclusion again.

[terrifictim]

@robartsd and @nippycrisp - yeah, you identified my dilemma. If I could keep both rentals and have enough money for the down payment on a place with a low commute that would be ideal - but  I'm struggling trying to figure out how to satisfy everything. I like the option to take the capital gains as it gives me a lot of freedom to purchase and still have the current residence as a possible rental down the line. Without the capital gains time crunch I would keep on renting, but the 15-20% haircut from losing that exemption is significant. I've still got a few months to decide (renter is in until Feb), but so far no one is telling me it's a slam dunk the other way.

[GoCubsGo]

I say selling the 2nd condo in February is a slam dunk.  The tax reasons combined with it being a 'meh' rental per the numbers are the big reason.  Also, if the market is in a bubble, at least you get to capture some of that appreciation now and lock in that gain.  You might be buying your long term house in a bubble but if you plan on living there a long time it has time to re-appreciate after a drop.

A $775k house on your salary alone would make me a little skittish (I'm surprised no one else has said it). A house will add quite a bit to your budget just in upkeep and unexpected repairs, not to mention furnishing, utilities, etc.  I guess if your wife DEFINITELY commits to going back to work it's maybe ok (although 2 kids will add a lot into your budget as they get older).  The school district should definitely be top of mind when choosing between houses as you will be fully utilizing them. 

If this is a long term house, I might be persuaded that you should buy the more expensive one just because rates are soooo cheap and the commute is so amazing.  I think a lot of this depends on your wife's income as life will only get more expensive from here.  You are doing a great job though so keep it up!

[terrifictim]

@GoCubsGo - Thanks for the encouragement! The more I think it over the more I'm agreeing with you and the other posters. Take the gains and get out.

In regards to the $775k house, I agree that it's a stretch. Right now DW is enjoying being a SAHM and if push comes to shove I would rather allow her to be able to keep doing that vs. forcing her to go back to work. Then if she decides she does want to go back to work it's bonus income - but we're not relying on it. There's also the possible option where she decides that she wants to home school - in which case the school district loses some importance. Unfortunately the future house is going to be that triangle of commute, price, and space and you only get to choose 2 of 3.

[terrifictim]

All,

Update since last post. We decided to sell the investment condo in February and just finished closing. Ended up netting ~$140k after all was said and done. Thanks all for the encouragement on selling - we had great experiences landlording for 2 years and am equally happy to give it up for now. Having a significantly larger chunk of cash will give us the flexibility when we decide to purchase. Are currently targeting staying in the current place and not buying while the post pandemic/WFH gets sorted out. I'm hopeful that by the time we're ready to purchase in 1-2 years the market will be a little less frenzied. For now focus is on staying healthy, focusing on time with the little one, and continuing to invest.

Income After Tax, Contributions and Benefits: $6000/mth
Expenses: $3800/mth
Current Cash Flow: $2,200/mth

Other Assets:
$321k Pre-Tax Retirement
$59k Post-Tax Retirement
$72k Taxable Account
$190k Cash on Hand
$480k Primary Residence

Other Debt:
$186k Primary Mortgage

[2KidFIRE]

Congrats on selling the rental!  I enjoy reading your updates and am happy to see you progressing towards your FIRE goals :)

[terrifictim]

Thanks @2KidFIRE . This case study/ very infrequent journal helps me stay on track and provides encouragement when it feels like I'll be working forever to look back and see how much progress I've made.

[legalstache]

I've also enjoyed the updates on your thread. Nice work :)

What's your plan for the 190k in cash? Are you holding that as a possible down payment in case you decide not to sell your current house when you move? If so, that's more cash than you'd need for a down payment and also ties up a pretty significant chunk of your NW in cash while you wait to make a decision. My fear would also be that you'd let that large amount of cash convince you to buy a bigger house than actually makes sense.

If it were me, I'd invest most of that and look to sell your current house when you move (I'm very averse to being a LL though). Even if not, I'd look to invest a significant chunk of it. Otherwise you have like 30% of your liquid NW tied up in cash for a couple years.

[terrifictim]

Thanks @legalstache . You've hit the nail on the head with my current struggle in thinking. On one hand I know that short term money shouldn't go in the stock market - but I also don't want to have excess cash for no reason. Without having the crystal ball of knowing what the next couple of years looks like with the real estate market, I'm being conservative and keeping "dry powder" in the hopes that I don't need to use it all when I do purchase. Also see my previous posts for the struggle between commute time and the cost of the property.

My tentative plan is to do some small scale DCA'ng (~$1k/mth) into taxable (already fully funding my 401k and both Roth IRAs). This keeps me from staying out of the market with the gains - but also keeping the balance of it available for the next property. Ideally I end up paying much less than the full amount for the downpayment in 1-2 years. I'd also keep the current primary as a rental for 2 years and then decide if I want to keep or sell.

I guess my overall thought process is flexibility - keeping enough different options open that I can pivot as needed.

[nippycrisp]

As hot as the real estate market has been in SD, money invested in the market over the same period would have outperformed run-ups in inflation. Past performances =/= future and all that, but.

Keeping your residence as a rental is something I'm not totally sure on the rules of, as far as depreciation, the tax hit when you eventually sell, and the ability to still do the tax-free reinvestment (1031 exchange, I think?), but I am certain that two years of time in market with a third of your liquid portfolio is something I'd not want to miss.

Consider this option: mentally commit to selling your primary residence before (or when) buying a new "permanent" home. Your current property should mirror the local market, hedging you against big run-ups in price. You've got a lot of equity, which means you shouldn't be cash poor for a downpayment when the time comes, and you get the bulk of your cash invested ASAP. If housing declines for some reason, your home might be a better rental proposition (I'm assuming you've refi'd it efficiently), or a piggybank for a cash-out if rates are still good. Regardless, you have more options.

As an onlooker, I see few things that could push the housing market a whole lot higher. Interest rates are likely to increase and are really unlikely to sink lower. Foreclosures have been artificially stymied by legislation. As we emerge from Covid there's going to be some shake-up as people go back to work and/or prize having more space at home. And there's really no way locals can continue to afford price run-ups, as salaries haven't kept pace. Then again, I was saying this same crap last year...

[legalstache]

I agree with @nippycrisp . I'd commit to selling your current house as part of a future move. From what I can tell based on this thread (mostly from other posters), keeping your current house as a rental doesn't make financial sense.

Holding cash gives you flexibility, sure, but at the expense of investment gains. Plus you already have a lot of flexibility as a result of the equity in your current house. Over half of your NW is currently in cash and home equity which seems unnecessarily concentrated. I'd max out your 2021 tax advantaged accounts ASAP and then dump a bunch into taxable, personally.

And full disclosure, we held more cash than we needed to when we were house shopping, but we also didn't already own a home.

[terrifictim]

@nippycrisp , @legalstache  - thanks for both of your comments and insight.

In regards to keeping the residence as a rental - as long as I've lived in it for 2 of the last 5 years gains are tax-free up to $500k/couple. So my thinking there is that I have a 2-year buffer window where I can sell it at any time tax-free, but I don't have to sell immediately. This means that I can take time moving and not juggling both buying and selling simultaneously. I would have to pay whatever depreciation I charged against while renting it if I sold - but that will be pretty small if I only rented it for 2-3 years. I did re-fi in August at a 3% 30-yr mortgage. The new cash flow would be ~570/mth which is pretty good for San Diego. One slight issue with it mirroring the local market is that it's a condo - so it's not quite going to match single family homes.

I guess I need to keep mulling over the mental hurdle of investing this cash now vs. holding onto it. I think I'm doing a form of market timing - and just need to dive in. There's also a part that likes the idea of being a landlord and being able to give my DD down the line a tax-free paid-off property. But the fact that you both are thinking the same is definitely causing me to re-evaluate.

[robartsd]

I would have to pay whatever depreciation I charged against while renting it if I sold - but that will be pretty small if I only rented it for 2-3 years.

Actually as I understand it, you have to pay taxes on reclaimed depreciation you could have claimed (even if you failed to claim the depreciation). If you rent it out for more than 2 years after vacating (or any amount of time prior to using as your primary) you also have to attribute some of the gains to investment use (therefore non-exempt). With lots of people now working from home, if they claim a home office deduction, that's another source of depreciation to reclaim and non-primary use gains that cannot be exempted.

[terrifictim]

Interesting @robartsd . I'll have to look into this some more.

[robartsd]

With lots of people now working from home, if they claim a home office deduction, that's another source of depreciation to reclaim and non-primary use gains that cannot be exempted.

I just looked up the rules, apparently working from home for an employer cannot qualify anymore (went away with the expanded standard deduction in the TCJA - I imagine that some people who structured their relationship as on site consultants that now work remotely may have newly claim the deduction). Previously you simply had to use the space regularly and exclusively for business and not be compensated by your employer for use of the space.

[MiatAccountant]

Hi fellow San Diegan,

Enjoy seeing your progress over few years. Keep it up.

I thought I share my 2 cents.
Don't feel pressured to invest your cash balance now. I think you're doing the right thing by thinking things through before you make any significant changes.
I personally you prefer to keep most of the $190K as cash for several reasons.

1. You may purchase a house before you sell your current primary residence. 20% down (more would be better) in San Diego would easily be over $100K here. You won't be able to do this unless you keep the current cash balance or sell the primary residence first before purchasing the new house.
2. Keep the equity in your home and cash balance separate. Equity in home is not a liquid asset. Back in 2008, many thought they were secure because they had equity in their home. We all know how that turned out.
3. You'll still need emergency fund of 6 to 9 months which would be around $30K.
4. Everyone has different set of guidance but I usually follow if I'm not willing to keep my funds in stock for next 5 years, I would not invest these funds in stock.

So what I recommend:

1. Do the DCA that you're doing. Like you said, you're still participating in investing in your taxable account without committing the current cash balance.
2. Figure out your housing situation first. Once you figured this out and settle things down and if you still have excess cash, you can then consider further investing.
3. In today's environment (covid, expensive housing and stock market, potential flux in tax policy, young child, etc), I think it's prudent to keep excess cash than historically recommended balance.
4. Yes, keep cashing may be playing little bit with timing but you also have other reasons to keep cash. Who knows, when the stock market have correction, you may also have more options then as well when you have cash (just ask Warren Buffet).

[terrifictim]

Hi @MiatAccountant , thanks for dropping by! Thanks for giving me a different take on my situation that more closely aligned with my own thinking. I pretty much agree with your recommendations and I agree that once my housing situation gets sorted then everything else will become a lot clearer.

[terrifictim]

Just wanted to say thanks to the MMM community. I don't think I've permanently joined the club - but I just hit the $1M mark yesterday. Crazy to see what steady investing + an intense housing market and stock market have done.

Assets:
$343k Pre-Tax Retirement
$64k Post-Tax Retirement
$76k Taxable Account
$178k Cash on Hand
$524k Primary Residence

Other Debt:
$185k Primary Mortgage

[terrifictim]

Hi All,

Just an end of the year update. Right now we're in the day-to-day slog of dealing with an energetic and defiant toddler, so pretty much all excess time is focused on DD. As part of our end of the year discussion DW and I are still in agreement with staying with our current property at least until she gets pregnant with kid #2, and then we start more seriously looking/considering our next place. But even then we still feel like we're 1-2 years from pregnancy announcement to our house being uncomfortably cozy.

Assets:
$382k Pre-Tax Retirement
$80k Post-Tax Retirement
$89k Taxable Account
$165k Cash on Hand
$524k Primary Residence

Debt:
$182k Primary Mortgage

Expenses for the Year:
$59k

[Gronnie]

Nice, looks like you are over 70% of the way to FI!

[terrifictim]

Uggh! It's been quite the first half to the year. Definitely been feeling it in the finances a little bit - we bought a minivan from FIL for cash + cost of everything increasing. There's also been a fair amount of Amazon purchases for DD that just accumulate over time. I know multiple people on this site have stated that these years are more focus on staying above water. Crossing fingers that the raise coming soon will help give us a little margin and we can avoid more lifestyle creep. Definitely starting to get antsy about looking for a bigger place but can't justify either the cost or the increased commute at these prices.

Average Income/mth (After 401K and Taxes): $5800
Average Expense/mth: $5700
Cash Flow/mth: $100

Assets:
$344k Pre-Tax Retirement
$77k Post-Tax Retirement
$88k Taxable Account
$133k Cash on Hand
$566k Primary Residence

Debt:
$180k Primary Mortgage

[smisk]

I appreciate your regular updates to the thread - I'm a couple years younger and in a similar place financially: also in a HCOL area (though on the opposite coast), recently married and looking at kids in a couple years, and my wife has been wanting a larger house! So reading through your posts definitely gives me some perspective and encouragement.

It's a rough time to contemplate buying, since the stock market is down and housing values have plateaued, but not really plummeted. Bet you're glad you kept the $ you got from the rental property out of stocks now! Keep up the good work, I think you're in a good place.

[terrifictim]

Thanks @smisk . It's helpful for me to post just to remember what I was feeling at given times and to also stay the course. Best of luck with your decisions as well!

[afuera]

Its crazy to see your progress over the last 5 years!   I'm posting because my family is in a pretty similar situation to you. 
We had our first baby 2021 and my husband FIRE'd to be a house spouse.  Then we had our second surprise baby a few months ago and are starting to look at moving across the country for a new job closer to family.  We are trying to balance the desire to buy a house in the new place (which won't be our forever location) against the higher interest rates and transaction costs.  We are definitely in the treading water phase of our financial plan and trying to give ourselves grace when we give into expensive convenience purchases that make life a little easier with two under 2.

Are you still planning to FIRE by 40 like you alluded to in your thread title?

[terrifictim]

Thanks @afuera and double congratulations to you! Yeah - grace is the key for this phase of life, I know that they won't be this age forever and so trying to enjoy it even if it means financial priorities get put on the back burner. That's a tough call to make balancing housing, family, and everything else. No real advice on how to make that choice - just good luck with the decision!

In a perfect world I would still like to retire by 40 and both Personal Capital and Mad Fientist's Lab show that as a possibility (obviously depending on the next couple of years performance). However the items that will significantly whack that plan are 1A. if we have a 2nd kid and 1B. if we move into a bigger house. The flip side is I'm really happy with how we've really saved alot of retirement savings, so it's encouraging to know that even if I have to take the foot of the gas all those little green workers will still be working behind the scenes. Check back in a couple years to see what happens!

[terrifictim]

Hey all,

I'm hoping for some wisdom/advice from the group. If you reread my earlier posts you'll continue to see real estate questions keep popping up (since I got engaged back in 2018). Especially with the HCOL in San Diego, definitely on my mind.

So we've been in the condo I bought in 2015 (1100 SF, 2BR/1.5BA), taking advantage of a re-fi to lower rates in 2020 and seeing the property value continue to climb. It's been nice seeing our housing payment continue dropping to a lower % of our budget (currently ~10%- also just got a nice Inflation adjusted raise). It's also been nice with it being so close to work (8 min) and allows me to maximize my time at home. It's also allowed DW to be a SAHP without stressing our finances. We're also close to FIL/MIL (20 mins) which has been helpful for child care.

However, we now have a rambunctious 2-year old and DW is feeling trapped in the space. Because it doesn't have a garage and just a small fenced in back-patio, it's becoming increasingly difficult to keep the child entertained and the house clean. As a result we're constantly getting/getting rid of kid's stuff and also it's been difficult to have people over since the living room is also the main kid area (DD's bedroom is small and on the 2nd floor so she doesn't spend much time there during the day). So specific complaints about the current property are:

• I bought it prior to meeting her so she still feels like it's not really hers
• Feeling squeezed in the space and has specifically brought up that she couldn't envision having a 2nd child in the space. Specifically this is a concern because we only have a few more years where having a 2nd kid would be relatively low-risk.
• FOMO - watching friends buy houses the last couple years and feeling like the friends are growing up and we're still stuck
• Frustration - watching the housing prices climb and feeling like we missed our window to buy a house we were excited about

Being an engineer and not being home all day I would be content to stay in the current space for a while longer, but I'm also not the one at home with the kid. Our finances are strong so we could afford up to a $1M house, but that would definitely impact our budget/quality of life in other areas. I'm also watching the market start to drop with the current mortgage rates and wondering if now is the time to start looking. DW is very much a "seize the day" person, so FIRE thoughts don't excite here nearly as much as the here and now. That being said she's not materialistic, so doesn't need the bells and whistles, but wants to be in a home she can be excited about.

So with this information would you recommend I:

• Try to work through some of the issues and continue toughing it out in the current space? We're saving ~50% of after-tax salary. If so any suggestions for how to work through some of these issues? We've pretty much used the space to max efficiency, and with it being a condo there's really no avenue to increase the square footage.
• Start looking at properties. Per some of my previous posts would likely need to compromise on the commute in order to get a house we were excited about. My initial thought is to start looking over the 2022 holiday time-frame. I anticipate by then property values will have adjusted even more based on the mortgages, but there will still be sellers looking to get out while they can still get some money. Goal would be to be in the new house by Q1 2023.

Thoughts? Am I being inflexible, overly optimistic, etc.? FIRE is still a goal but not at the expense of the family.

[ixtap]

Wait, why would more space be easier to keep clean?!?

[terrifictim]

@ixtap - we wouldn’t have the kids area and the living room area being commingled so she could have a space that didn’t feel so kid focused. Right now she can’t escape DDs presence as her stuff is in every room of the house.

[Dicey]

Fellow Californian, so I'm used to our crazy housing costs. I would absolutely wait a while longer, because things are definitely cooling off, mostly because people are scared and they believe all the doomsday predictions. Even rising interest rates don't scare me much, because it knocks a lot of marginal buyers competition out of the game.

I get pings from Zillow and Redfin every time prices drop in the markets I track. Today I got four in a row. Intrigued, I opened them. Seems they're brand-new houses and the builder is lowering the price. Absurd! Normally builders will do backflips to avoid dropping prices: Interest rate buydowns and "free" upgrades are typically offered in lieu of actual price drops.

Don't be in a rush.

And damn, you've made a lot of progress. Congratulations!

[terrifictim]

Thanks @Dicey , I really enjoy your voice and your wisdom so much appreciated that you’re chiming in.
With the understanding that you don’t have a crystal ball, any thoughts as to how long to  wait/what metric to look for? I’m going to have a much easier time selling more waiting if I can give a timeline versus just keep on waiting. I know metrics for investment property, but for a primary house not sure what to use. And thanks for the encouragement!

[nippycrisp]

A month ago you wrote you were cash flowing about a hundred a month. Now you say you're saving 50% of your post-tax. Am I missing something, or do these statements not jive?

Going by your last set of numbers, if you're pulling $6K a month take-home, and you have, for example, a $600K mortgage on a $1M property, your PITI are gonna be about 60% of your salary, maybe more. You're also incurring transaction costs, increasing your tax basis, trading a lower interest rate for a higher one, and buying into a market where prices are actively dropping, while interest rates are rising, albeit towards historically normal averages. (Also, you may be considering adding a second kid to the mix, but that's only relevant as a hypothetical)

Imagine you were presented these facts for someone else - how would you advise them?

[terrifictim]

Hi @nippycrisp ,

I probably should have been more explicit in my previous post, the $100 per month cash flow is after 401k deductions. So my 50% post tax is really saying that I’m saving about 40k a year ( 20.5k 401k + 2x 6000 Roth IRA + 4800 principal payoff). And I did round up my savings rate a little bit. And my salary from last months post jumped up so now I’m making just over $11k/mth gross.

And to your comments-I absolutely agree and it’s why I’ve been holding off on purchasing. We would definitely be dropping to an almost 0% savings rate for a little bit and lose a lot of flexibility. But whatever plan I end up doing has to have the DW on board. And yes a 2nd kid is hypothetical but also can’t completely discount it.

[TacheTastic]

I'm in the UK, so I cannot look at this from a financial perspective, as I don't have more than a basic grasp on the US financials. From an emotional/logistical perspective however, I think it might be time to think about the housing situation. You and your wife initially thought about looking to move once the baby was one and mobile. You've passed that stage. Maybe have a good long think between you about whether number two and number three are hypothetical or actual plans, and also about whether your wife is going back to work. Then buy something as close to your work and this good school area as possible. It might feel like a lot of money, but if you plan to be in the house for 10 or more years, it's going to be worth it for the time you spend with your kids rather than commuting.

I've not had kids, but my parents always said to borrow the most you can to buy a house, as then you can save/invest the rest, and after the first 18 months it feels cheap in comparison to before. I am probably more risk averse than they were, but I agree with the 18 month thing. At first you feel a bit stretched and worried, but then it just becomes more manageable once you have settled.

Congratulations and good luck, it's been lovely reading your journey over the last five years in a morning. :)

[Dicey]

Thanks @Dicey , I really enjoy your voice and your wisdom so much appreciated that you’re chiming in.
With the understanding that you don’t have a crystal ball, any thoughts as to how long to  wait/what metric to look for? I’m going to have a much easier time selling more waiting if I can give a timeline versus just keep on waiting. I know metrics for investment property, but for a primary house not sure what to use. And thanks for the encouragement!

Very hard to predict. I watch DOM (Days on Market), I watch price reductions, I go to a lot of open houses, and I know a lot of Realtors. I have purchased ten houses in my lifetime and have always trusted my gut. Do enough research and you will "know" when you have found a good one.

True story: My parents lived in a small 3+2 with five children. They finally moved into a bigger, brand-new house when mom was 8.5 months pregnant with #6. However, they did this during a huge market slump. The house they bought was the last one in a new subdivision and it had fallen out of escrow twice. Dad bought it with his GI Bill. They couldn't sell the first one and made two mortgage payments for 10 long months. I remember them checking their pockets and mom finding a $50 bill. (We suspect my far-away grandmother had tucked it there on a previous visit.) They lived in the 5+2.5 happily for the next 40 years. They made a nice profit when they sold it at the peak of the market in 2005. It's been foreclosed upon twice since then. The RE market has always, always been cyclical. (Fun fact: parents also had a weekend hideaway in Leucadia. They made very little on it when it sold, but they enjoyed the hell out of it for 30 years.)

Don't be in a rush. One thing to thoroughly discuss with your wife is how you would feel if you bought a house that lost value. Lots of folks walked away from houses during the Great Recession only to see the values soar not very many years later.

[JupiterGreen]

Fellow Californian, so I'm used to our crazy housing costs. I would absolutely wait a while longer, because things are definitely cooling off, mostly because people are scared and they believe all the doomsday predictions. Even rising interest rates don't scare me much, because it knocks a lot of marginal buyers competition out of the game.

I get pings from Zillow and Redfin every time prices drop in the markets I track. Today I got four in a row. Intrigued, I opened them. Seems they're brand-new houses and the builder is lowering the price. Absurd! Normally builders will do backflips to avoid dropping prices: Interest rate buydowns and "free" upgrades are typically offered in lieu of actual price drops.

Don't be in a rush.

And damn, you've made a lot of progress. Congratulations!

May I ask how you get a market update in Zillow? Is it through the saved search option?   

[nippycrisp]

Re: the current SoCal RE scene, I have two recent anecdotes: last week, received two cold calls from realtors (probably from the "sign in here" thing at open houses) looking to drum up business. Six months ago you couldn't get a call returned. This suggests that things are changing rapidly, at least by real estate standards. 

Anecdote #2: We're friends with a different realtor. She advised us to wait. I rarely hear realtors say this. Now, words are words, but there's more to this: the realtor friend is also looking to buy, but their rental was recently sold and they needed somewhere to live. Instead of buying, they went back into the abysmal rental market. They went from a really good situation (like $2200 for a 2BR) to $3400 for the something similar.

My point isn't that this they know something we don't, but to show that this professional believes in the near-term future of the market so little that they were content to accept a much less optimal rental situation rather than buying now.

Most people buy homes based on two things: can I make the downpayment and how much is the monthly payment? That second part is largely a product of interest rates. Interest rates going up will be compensated by prices dropping. Powell has said they're not screwing around on rates re: getting inflation under control. If these efforts weaken the job market further that's going to soften demand. Markets impacted? Same effect.

There's no crystal ball here, but we can make the best bet we can.

[Dicey]

Fellow Californian, so I'm used to our crazy housing costs. I would absolutely wait a while longer, because things are definitely cooling off, mostly because people are scared and they believe all the doomsday predictions. Even rising interest rates don't scare me much, because it knocks a lot of marginal buyers competition out of the game.

I get pings from Zillow and Redfin every time prices drop in the markets I track. Today I got four in a row. Intrigued, I opened them. Seems they're brand-new houses and the builder is lowering the price. Absurd! Normally builders will do backflips to avoid dropping prices: Interest rate buydowns and "free" upgrades are typically offered in lieu of actual price drops.

Don't be in a rush.

And damn, you've made a lot of progress. Congratulations!

May I ask how you get a market update in Zillow? Is it through the saved search option?

Probably. I search a several very specific areas frequently, and I do save searches for those areas. Also if you "Heart" a listing, it updates you when the house goes pending and when it sells.

[JupiterGreen]

Fellow Californian, so I'm used to our crazy housing costs. I would absolutely wait a while longer, because things are definitely cooling off, mostly because people are scared and they believe all the doomsday predictions. Even rising interest rates don't scare me much, because it knocks a lot of marginal buyers competition out of the game.

I get pings from Zillow and Redfin every time prices drop in the markets I track. Today I got four in a row. Intrigued, I opened them. Seems they're brand-new houses and the builder is lowering the price. Absurd! Normally builders will do backflips to avoid dropping prices: Interest rate buydowns and "free" upgrades are typically offered in lieu of actual price drops.

Don't be in a rush.

And damn, you've made a lot of progress. Congratulations!

May I ask how you get a market update in Zillow? Is it through the saved search option?

Probably. I search a several very specific areas frequently, and I do save searches for those areas. Also if you "Heart" a listing, it updates you when the house goes pending and when it sells.

Okay great thanks!

[terrifictim]

Hi all,

Thanks so much for the feedback and advice. We talked it over last night and agreed to continue watching but to not feel any need to rush (will revisit in January). For her the biggest peace of mind was knowing that we’re not in our current location forever so she can tolerate waiting a while longer. Goal now is to continue saving and keeping an eye out so that when we are ready to pull the trigger we can make as best a choice as we can. Appreciate everyone taking the time to write and offer feedback. You all are awesome!

[terrifictim]

Hi All,

So of course about a month after that conversation she sees a house she falls in love with and sees as a forever home...

Here's my question. I internally wrestled with purchasing at this time (market timing vs. buying when you need to) and the property. We just started escrow so still are in the inspection/appraisal phase where we can back out if needed. Rate has been locked so I can feel reasonably confident on costs. Where I've landed on this is that I know that in the short term we are going to be house poor. And I know that if someone else presented these numbers I would likely tell them to keep looking. But is going temporarily house poor but planning on refinancing in 1-3 years too optimistic or reasonable? We both have talked pretty extensively and understand the sacrifices we will have to make in the short term in order for this to work. I also know that this is going to significantly impact my possible FIRE date, but am okay with that trade.

Current Balance Sheet(Pre House Purchase):
Primary Residence: $540k value, $180k debt
Cash: $140k
Traditional IRA/401k: $300k
ROTH IRA: $80k
Taxable: $81k
Total: $960k

Planned Property:
$745k
4 BR/3BA 2000 SQFT in good location (parks, school district, etc.)
10% Downpayment
6.99% Rate: Monthly Payment (P&I, Property Taxes, Insurance, PMI) = $5390

Existing Condo (Turning into Rental):
$540k Zestimate
$180k existing mortgage
3.00% Rate: Monthly Payment (P&I, Property Taxes, Insurance, HOA) = $1600
Estimated Rental Income: $3,000

Planned Budget:
$9,700/mth W2 net (reducing 401k contributions to $500/mth to get company match)
+ $3000 rental
- $5400 new house expenses
- $1600 old house expenses
=  $5700 for everything else
- $500 groceries
- $200 utilities
- $180 Auto insurance
- $350 gas
- $150 internet/phone
-$200 fast food/restaurants
-$250 household expenses
-$150 child expenses
= $3,720 Net

However, for every percentage point we can refinance off our housing costs drops by ~ $500. We also know that we have fall back options to sell the current house or have DW go back to work.

Hi all,

Thanks so much for the feedback and advice. We talked it over last night and agreed to continue watching but to not feel any need to rush (will revisit in January). For her the biggest peace of mind was knowing that we’re not in our current location forever so she can tolerate waiting a while longer. Goal now is to continue saving and keeping an eye out so that when we are ready to pull the trigger we can make as best a choice as we can. Appreciate everyone taking the time to write and offer feedback. You all are awesome!

[Gronnie]

Feels to me like this will make you pretty house poor.

How much of an upward trajectory do you see your income (and also how secure)? Does she plan on working at some point or no?

[terrifictim]

Hi @Gronnie ,

Income has been pretty consistent at about 4% per year increasing for 10 years (first couple of years were closer to 6-7%). Job is reasonably secure - it's a medium sized aerospace company that didn't have to lay anyone off during the GRC and prioritizes taking care of employees. DW does plan on working at some point, she knows she isn't cut out to be a SAHM long-term. To this point we've decided that being a SAHM is better than working and doing child care.

[Gronnie]

I'd think long and hard about this - your budget seems very optimistic.

How did you come up with $200 for utilities? That seems awfully low for SoCal.

[terrifictim]

Hi @Gronnie ,

We've been averaging just under $5,000 month currently (or $3400/month without housing) - but we've also been a little slack with our spending (i.e. Amazon) because we knew we had some buffer. So I think our budget is optimistic but not unreasonably so.

$200 for utilities is a guesstimate - we don't have numbers yet from the seller, but they do have Solar and have updated windows and doors so it should be fairly energy efficient. In our current place we don't get charged water so don't have numbers for that either. Hoping to get some better numbers for this amount.

[Gronnie]

Ah yes, solar. That would indeed make it much more reasonable :)

[firestarter2018]

Existing Condo (Turning into Rental):
$540k Zestimate
$180k existing mortgage
3.00% Rate: Monthly Payment (P&I, Property Taxes, Insurance, HOA) = $1600
Estimated Rental Income: $3,000

Planned Budget:
$9,700/mth net (reducing 401k contributions to $500/mth to get company match)
+ $1400 rental
- $5400 new house expenses
- $1600 old house expenses
=  $4100 for everything else
- $500 groceries
- $200 utilities
- $180 Auto insurance
- $350 gas
- $150 internet/phone
-$200 fast food/restaurants
-$250 household expenses
-$150 child expenses
= $2,120 Net

Is your math correct here? If your rental income is $3,000 and rental mortgage is $1,600, then your net income for the rental is $1,400, but here you added in $1,400 and then still subtracted the $1,600 mortgage payment. Seems like you double counted? If you just factor in your net rental income then your total after all mortgages but before other expenses is $5,700.  I don't think you're fully accounting for all possible expenses in this quickie budget (clothes? health care? home maintenance? car maintenance? travel?), but $5,700 makes this feel more doable than $4,100 for sure.

[terrifictim]

Hi @firestarter2018 ,

Doh! Yup - definitely double counted the existing mortgage. I went ahead and updated my previous post.

Agreed - that the existing budget is probably barebones. I went back and ran our overall expenses for the year and after subtracting out our current mortgage we are at $41,000 for the current year to date or roughly $4,300 per month. I know there's some definite fat in that budget, so I think we can be down to $3,700 which would give us $2k/month surplus.

[Dicey]

Being house poor made me rich. CA real estate is a whole different beast, one that even some very smart mustachians just can't grok. My advice would be to put 20% down, because you can and because PMI sucks. Also, you must know yourself well enough to be sure of how you will react if the market continues to soften and your down payment goes poof! It could happen, but if it's really your forever house, it won't matter in the long run.

[terrifictim]

Hi @Dicey ,

Agreed it’s crazy- I wish I had better understood it’s craziness a few years ago and bought back when I got married in 2018. Oh well.
I do feel like I can handle the market softening and knowing that is temporary. I haven’t changed my investing in the stock market this year so I believe I have the stomach for it.
To remove the PMI what would you recommend I sell? My initial thought about doing 10% is that I only have to touch my on hand cash and can leave all my other assets alone and not trigger any taxes. This also gives me a starting out 4-5 month cash buffer which will help with any first year costs until I can rebuild it.

[Gronnie]

Being house poor made me rich. CA real estate is a whole different beast, one that even some very smart mustachians just can't grok. My advice would be to put 20% down, because you can and because PMI sucks. Also, you must know yourself well enough to be sure of how you will react if the market continues to soften and your down payment goes poof! It could happen, but if it's really your forever house, it won't matter in the long run.

I lived in SoCal, I get it. I still think it's extremely risky -- CA can't get a pass on math forever.