Author Topic: Case study: Should I buy?  (Read 3762 times)

Connemara

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Case study: Should I buy?
« on: September 05, 2015, 06:41:53 PM »
I'll start off by saying that buying a house was a more long-term prospect for me prior to a unique opportunity arising. I'm fairly happy with my current urban neighborhood of old rowhouses. This enables me to walk to work in about 7 minutes. I have a reasonable monthly rent payment for a mediocre 1BR apartment.

To cut to the chase: my father found a foreclosure in a desirable suburb that he would like to buy and fix up. After discussing it, we realized it would be a good fit for me for a few reasons:

-4.8 miles (13 minute drive, 20-25 minute bus ride) to the office;
-5 minute walk to the bus stop;
-1,100 square feet, which for a single guy like me is a reasonable size;
-Small yard, would require minimal maintenance;
-Walkable neighborhood.

Now, the house needs a lot of work. If we buy it, one foundation wall will need to be removed and re-poured. My father has done this on prior flips and knows a good contractor for the job. The home also needs a new roof and we would like to rip up the ugly old carpets, refinish the hardwood floors underneath, remodel the kitchen, and paint throughout.

After accounting for these expenses my father would be able to sell it to me at cost, which would be around $120-$125K. Comparable homes in that town sell for $150-$175k. He is a mortgage broker and calculated a ~$1,000 month mortgage including taxes and insurance. No PMI.

Here are the case study notes:

Market Value: $150K
Original Purchase price: $85K ($120K after reno)
Original Mortgage Amount: $120K
Interest Rate: 4%
Mortgage Term: 30 yrs
Term remaining:
Amount remaining on mortgage:
Gross Rents:
Mortgage: ~$1,000
HOA costs: None

Some personal facts:

-27 year old single male;
-Current net income is $2,868 per month and will be approximately $3,500 month starting in December;
-Debt: $26,000 student loans @ 4.5%, $215 per month. I'm employing the "debt avalanche" method to pay these off;
-Savings: $6,000;
-After a mock-up of my current budget with some adjustments I have a $900 surplus each month. At the new salary of $3500/month, the surplus is nearly $1,550.
-Current rent: $750.

I wouldn't really consider any other home at this stage in my life but the gift of instant equity and the reasonable mortgage have forced me to think. It's in a neighborhood I like and is small enough that it will require minimal upkeep. Also, taking care of the big problems during the reno could mitigate any Murphy's Law related incidents.

What do you guys think? Thanks for the input.


justajane

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Re: Case study: Should I buy?
« Reply #1 on: September 05, 2015, 08:20:57 PM »
It wouldn't be a bad choice, especially since you wouldn't have to do any repairs. It does seem like more house than you need, though, since it is just you. Do you intend to stay in the area long term? Is it a house that you would want to stay in if you married or moved in with somebody?

Any chance for a roommate? That would make it even better for you, at least until you pay off those students loans.

Connemara

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Re: Case study: Should I buy?
« Reply #2 on: September 06, 2015, 06:58:54 AM »
Jane, it's not a very big house. There are three bedrooms but they are on the small side. One full bath. The kitchen is spacious and I would consider extending the counters and cabinets as I enjoy cooking.

I don't see myself leaving the area. A roommate is a good idea but for me it partly defeats the purpose of buying a home. I want my own space at this point in my life. I have a one bedroom apartment but there are people below, above, and on each side of me. The city life is getting old. I'll miss the ability to walk to work and to the coffee shop, but I don't go to out to bars any more and, again, this new place is a short drive, bus ride, or bike ride to the office.

Of course the suburbs have their own noise with lawnmowers, snowblowers, etc., but I would be able to enjoy a quiet home. No upstairs neighbors playing music at 10pm!

justajane

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Re: Case study: Should I buy?
« Reply #3 on: September 06, 2015, 07:12:43 AM »
Well, we'll just have to agree to disagree on size. Three bedrooms is a lot for one person, at least by Mustachian definitions. Our house was 1,100 sq ft with 2 bedrooms and 1 bath (until we put an addition on it), and we lived comfortably in it for years with two adults and two kids. It's fine to buy a house that size for a single person, but I would encourage you to see it as a house with room to grow, rather than a small house that is perfect for a bachelor. I guess my point is that it would be better for your long term bottom line not to feel like you have to gain 1,000 more sq ft in 3-5 years if you marry and/or have a kid.

We made the transition on our own home from seeing it as a "starter home" to seeing it as a "forever home", and we have flourished financially because of this change in mindset.

Connemara

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Re: Case study: Should I buy?
« Reply #4 on: September 06, 2015, 07:28:58 AM »
Jane, I see what you are saying now and I agree. In accordance with Mustachianism principles, I wouldn't go looking for a 3,500 sq. ft. McMansion to "grow into" if a wife came into the picture. Assuming steady growth of income, I would rather continue paying the relatively small mortgage on this house and invest the difference.

If I were to get married (there's a new girlfriend in the picture so who knows) it would be quite spacious for two people. Homes in my area of upstate New York don't get much smaller than 900 sq. ft. so it would be a bit of a challenge to downsize from 1,100.

We learned there's nice original hardwood floors under the gross wall-to-wall carpeting. Another plus...

justajane

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Re: Case study: Should I buy?
« Reply #5 on: September 06, 2015, 07:36:47 AM »
We learned there's nice original hardwood floors under the gross wall-to-wall carpeting. Another plus...

Great! Also, the fact that it is a 3 bedroom (even though they are small) instead of a 2 bedroom (with larger bedrooms) is much better for the value of the home. There are homes on our block with the same sq footage but with 3 bedrooms instead, and they are worth about 15-20K more. If you could add a 3/4 bathroom to the basement and even a small area for a tv or small home office, the value would go up even more.

It sounds like a good opportunity for you.

undercover

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Re: Case study: Should I buy?
« Reply #6 on: September 06, 2015, 07:56:49 AM »
Well it's obviously a good choice on paper. The problem lies within the $35k reno and the foundation work which is risky. You could get into a huge mess. People flake out too. The risk is something you have to decide on yourself. But you're young and it sounds rather promising so I'd say go for it.

I agree with justajane about the size in some ways, but at the same time going with a 3 bedroom house for your first one makes way more sense. You can rent rooms or rent the whole thing out down the road if you wanted to. Plus, the thing is that you really don't pay that much more for a proper house. I'm all for downsizing and living in spaces that are "just enough" for who's living there, but you have plenty of time for that.

Connemara

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Re: Case study: Should I buy?
« Reply #7 on: September 06, 2015, 10:07:54 AM »
Thanks lhamo. Those are great points to consider and I will talk to my dad about the risks in the reno. I would add that the ~$1,000 mortgage includes taxes and insurance. That would be about 29% of my monthly net pay, which is not an uncomfortable range for me.

Another factor: I may be able to reduce the mortgage by $10,000-$15,00 if my grandfather is willing to gift me the money. My dad thinks he would be amenable to that.

And I will think more about roommates.

Connemara

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Re: Case study: Should I buy?
« Reply #8 on: September 06, 2015, 11:11:49 AM »
I should also add...we think we can get the house, a foreclosure, for $85k. The foundation work will cost $10k and the roof $6k or so. Ripping up the carpets is the only other must-do renovation. This provides a $19k cushion between my max of $120k and the actual must-do renovations.

waffle

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Re: Case study: Should I buy?
« Reply #9 on: September 08, 2015, 09:23:06 AM »
Have you considered the perks of living in an apartment that you may be giving up? Will you now have bills for water, sewer, trash, heating, etc... that you didn't have before?

My last one bedroom apartment cost me less than 30/month for electric (all other utilities were included). Now I am married +2 kids with a 3 bedroom house and my utilities run 150-200 a month because we have to pay everything now. It was worth it for us, but without a family I would have just kept renting a cheap apartment.

Connemara

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Re: Case study: Should I buy?
« Reply #10 on: September 08, 2015, 06:31:12 PM »
Good points, waffle. I have considered that but apartments here are not cheap. A decent 1BR is $900+. I pay $750 right now, but my electric baseboard heat brings my utility bill to $250-300 a month in the winter. And that's with keeping the thermostat at a Mustachian level and wearing many layers.

So I looked at the house. It's very rough around the edges, which is what I expected, but as someone who has not been through this process before the amount of work seems scary. But my father (experienced home buyer and home flipper), the realtor, and the contractor seem to think this is a pretty standard job. The fact that the house is on the small side means none of the jobs are particularly large or time-consuming.

Basically, we would do the following:

-One wall of foundation taken out and repoured, one wall shored up. Trench dug around basement floor to catch any water and a drainage pipe from the gutters to the trough near the street.
-About 1/3 of basement floor is asbestos tile. Would need to be abated. No asbestos on any pipes.
-A small portion of the upstairs has intact vinyl flooring which is probably asbestos. I would carpet over this.
-New roof.
-Gut kitchen - new counters, appliances, floors, cabinets, etc.
-Reno the bathroom - new vanity, toilet, shower.
-New paint throughout house.
-Rip up disgusting shag carpets and redo the hardwood floors. We ripped up a big chunk of the living room carpet and the hardwood appears to be in great shape.
-New asphalt driveway.
-Siding is aluminum and needs either a paint job or replacement. This is not a must-do and I could hold off and just pay cash for it down the road.

It seems that we can do all this for $35K-$40K which would get me to a mortgage of $125K-$130K. If we can get the property taxes lowered a bit the mortgage, insurance, and prop tax escrow would wind up at $950 per month.

I am leaning towards yes...my father is assuming all of the risk and I'm not going to get a renovated home around here for $130K. But this is my first experience with homebuying and it is hard for me to see beyond the shabby paint jobs and all that. I also need to keep in mind that this doesn't need to be a forever home.

justajane

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Re: Case study: Should I buy?
« Reply #11 on: September 09, 2015, 06:21:53 AM »
If the hardwood is in great shape and has been covered all these years, could you not refinish them? IMO people often refinish when it's not necessary, but I personally like a little patina on my floors. Plus you can only refinish your floors a discrete number of times and then you have to replace them entirely. Just a thought. Usually people throw down area rugs anyway, so if there is a stain in the center of the room or where you're going to put a couch it's likely going to be covered anyway.

Connemara

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Re: Case study: Should I buy?
« Reply #12 on: September 09, 2015, 11:05:08 AM »
That's a great point. I also like old floors with a nice patina.

Connemara

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Re: Case study: Should I buy?
« Reply #13 on: September 16, 2015, 08:04:54 AM »
Well, our cash offer is under review. I'll report back when I hear anything.