The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: cbee6390 on September 15, 2016, 05:48:40 AM
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All,
Apologies if a similar question has been asked before.
Here are my details:
Debts: zero (other than credit card paid off in full every month, used instead of debit card for the points and credit-building)
Income: 90K annually pre-tax, about 60K post-tax and FSA/401k contributions
Savings: 33K in a CapitalOne 360 Account; 120K in a Raymond James portfolio (gifted)
I've been living with my parents in Washington DC for a year to save the above-mentioned 33K for a potential down-payment on an apartment. I grew up here and plan to live in the DC area long-term... (And in the city itself for at least 10 years.) My partner and I would like to raise kids in the area and both our parents are here. It's pricey, yes, and not very Mustachian... (And we may decide to move in 10 years or so, etc... who knows.)
All that aside: DC is an expensive rental market AND expensive real estate market. It seems silly to put $1800 a month into a rental when I could be paying the same (approx) on a mortgage. 1BR apartments usually go for 300-350K in the city, and have HOAs, etc... (lots of downsides)
A few alternatives to buying I can think of:
- invest the 33K in Wealthfront or Betterment and continue living with parents and/or partner indefinitely (he lives in a rental, eventually we plan to move in together and split costs - his current rental is pretty small for 2 people but would be manageable for a year)
- continue saving for down payment while living w/ parents, wait until market crashes .... ?
- buy apartment, rent it out, invest rental income
The issue of the Raymond James portfolio:
- I'm at an age where I probably need to tell my parents that the (not-diverse) inherited stocks need to be sold and re-invested in index funds. The capital gains would be a beast but my income is low enough now that it's probably better to do now, and then re-invest in Wealthfront or Betterment early, yes?
- Unless I should sell some of the RJ portfolio and somehow use part of income to buy apartment with higher down payment (e.g. more than 20% down) to reduce interest...
I've seen some articles recently that recommend *never* buying and just renting, and putting the savings/down payment into index funds/Vanguard etc. *BUT* the NYTimes 'Rent or Buy' calculator is definitely in favor of 'buy' - as I come out ahead if I can't find a similar place for below about $1,200 a month (similar places for what I'm looking at - 1BR apartments - rent for about $2,000 a month or more). So now I'm torn.
Thoughts?
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Sorry you didn't get any responses. You might want to try a different forum like "Ask a Mustachian" since you have financial and real estate questions.
As far as DC goes, realize the market there is completely driven by federal contractors. That means no one likes uncertainty, and when elections happen or economic upheaval/contract funding environments change you can get some big swings. Unless you work for one of them, I would watch for big election cycle changes that can have an effect on that market, or policy changes in what gets funded (basically are we going to be at war or peace, and who is getting the funding). For example, 2016 Presidential election, or if the economy downturns and we don't get a two termer 2020. You can also watch midterm elections. Big swings between parties can throw a lot of people out of work. Try to avoid the spring/summer sale market for this reason (and the rental market). I would pay attention to fall and winter sales and rentals. October tends to be a slow time for the stock market, and there is often a downturn. You can't always time the market, but you shouldn't rush in when it is flush either.
Some other questions to ask yourself:
Saving 33k while living at home for free is easy. How will you afford repairs and upkeep? How much could you save if you paid rent? I assume you would split with a partner so assume 1100 for rent and utilities. That gives you a savings margin (in addition to the retirement) of just under 20k. That's def a good start, but your down payment is pretty small still for that high priced real estate market. Do you intend to put 5% down for FHA, or will you try to get out of PMI?
Putting 1800 into a rental each month with NO additional maintenance is not equivalent to a mortgage at 1800. A year or two of renting at this price point will lose you the property tax deduction, but with your retirement savings you might not really benefit from it as much as you would think. Also, you will likely save thousands of additional dollars on maintenance and other costs etc each year you rent. Meet with an accountant to look at the tax situation. But if you are the partner are married and both high earners filing jointly than you likely would.
If you and your partner haven't lived together, I would rent for a year first and see what you actually need in a space. You would then have the flexibility to change out properties if you decide you do or don't need two sinks/two bathrooms/a different neighborhood/don't like the commute (some couples realize it is better to have only one partner commute rather than split the difference), etc. Also, where you want to live will change when you have kids (when they are small you will want convenience; when they are school age you will want good schools).
My advice would be to rent for 1-2 years. Then reevaluate. Don't rush buying a house unless you find a killer deal you can't pass up. If you rent 3-4 years that places you in DC for maybe only 5 more years, which if prices come down could be a great deal, but if they don't might save you tons on maintenance, transaction fees, etc, especially since childcare in DC is so expensive you may decide to have one partner stay home, or move to a cheaper area sooner. It's good you are thinking about these things, but don't worry about them. Give yourself some time, and live in and explore the present.
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I live and work in the DC area. I would agree that the area is a renter's market and not an owners market. Plus the value of prices continues to go up. Also I do not like HOA fees which are hard to cap... I do NOT plan to live here long term. You stated you 'plan to live in the DC area long-term'.
With that being said I would buy one of the 300-350k houses. Timing is everything in the DC area... I would wait until after the election in Nov (market uncertainty) and during the winter/fall time (skipping the summer peak). More properties may flood the market. Keep looking around and don't be in a rush to buy. My father used to tell me the rule of thumb is to look at 10 places before you decide which one to buy.
Recently a friend bought a house in DC. Their first two offers on other places were unsuccessful because people were buying with cash and there was bidding wars.
Also pay more than the minimum mortgage. Ensure that your significate other is also paying a fair share and it is going towards the mortgage. A goal should be to pay off the mortgage... After all a 1 bedroom place isn't really raise a family. Then incentive for the DC area would be to buy another place after you get your mortgage paid off for a few hundred more.
Too many people in DC just buy the 800-2 Million dollar house they want. If I wanted to own in DC I would do a tiered approach of getting something a little bit bigger each time. Just my advice but I wish you the best of luck!