Author Topic: Should I buy the house I've lived in for the last ten years?  (Read 2327 times)

kristof

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Should I buy the house I've lived in for the last ten years?
« on: August 14, 2019, 10:15:13 PM »
Looking for some advice on a buy/no buy decision. The owner of the house in which I've been renting a room for the last ten years is planning to sell it. She has asked if I'm interested in buying it from her so we can both avoid agent fees. It is a two family in the Boston area with a 2 bed / 1 bath unit and a 4 bed / 1.5 bath unit. The two extra bedrooms in the second unit are a bit funky (it's like a converted attic - I'm 6'6 and can't stand up straight in them). The house is dated (weird wood paneling, old kitchen cabinets, etc) but we've had no major issues since I've lived here.

All else equal, I would prefer not to own real estate and had no plans to purchase anything in the immediate future, if ever. As you can tell from my description of the house, I have very little expertise in this area and not much interest in acquiring it and had been planning to just stay in index funds forever. The main reason I've lived in this place so long is because of my relationship with the owner who has benefited from having a stable tenant and so has given me a solid discount on the rent throughout my time here (I've done all the tenant/roommate searches since I moved in). The place would also be out of my price range if I wanted to buy it by myself.

What has me thinking is that a good friend has expressed interest in buying the place together. I know her because she was one of my roommates here for two years and we've kept in touch since. Out of the 20+ people I've lived with over the years, my relationship with her was one of the best. I also know that she has her financial shit together more than most people I know, and is one of the very few people I would seriously ponder doing something like this with. She bought a place not far from here two years ago, but is not a big fan of her neighbors (she's also in a two family) and has been thinking about selling and moving somewhere else. Her place has appreciated solidly in the time she's owned it, partly because of work she's put in - she's pretty experienced and skilled with all the home improvement stuff that would give me nightmares (and is another reason I haven't been interested in buying). My income is somewhat higher than hers but more variable (all 1099 for the past three years), I have more liquid assets so I'd probably be able to contribute more to a down payment. My net worth is $350k pretty much all in VTSAX/VTIAX and my income is around $100k per year.

From a purely financial standpoint, I don't think the numbers favor buying under what I think are reasonable assumptions but I might be wrong. The owner's initial asking price is $900k. The current total rent for the house is $4,750. As I mentioned this includes a pretty hefty discount for me, so I think it could rent (in its current state) for $5,250 without too much trouble. Even so, we're well below the 1% rule (barely above 0.5% if I'm doing the math right). That said, the NYT rent vs buy calculator tells me it's worth buying if rent is above around $4,500 even with some aggressively pro-renting assumptions (9% investment return rate, 2% home appreciation rate, 2% inflation, 4% mortgage interest rate). The house is currently a 15 minute walk from the nearest transit station, but there will be a new one opening about 3 minutes' walk from here within a year or two, which is also likely to increase the rent. I am guessing I could also work the asking price down a bit (the Zillow estimate on the house is $815k). If I bought it I'd likely continue with the same living arrangement I currently have, live in one room and rent out the others, and she would live in the other unit and probably do the same. Which is exactly the setup we had and enjoyed when she lived here.

Overall I'm still leaning towards 'no' but a couple of questions I'm pondering that people here might be able to help with:
1. Setting aside the ownership structure, do the numbers justify even thinking about this any further? Are there other calculators/rules of thumb worth playing around with to gauge whether it might be a good deal?
2. Any particular pitfalls to look out for in terms of buying with a friend, especially from those with experience? There would obviously be a lot of questions to talk through both in terms of the legal structure and logistics of the purchase, ownership share between the two units, and the various scenarios of sale/marriage/death etc but curious to hear any less obvious ones.
3. Any other benefits/downsides of buying directly from the owner of my current residence? I see mostly pros here since I've known and trusted this person for a long time so it seems like that would make things smoother if I were to move forward.

former player

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #1 on: August 15, 2019, 02:53:43 AM »
Does your rental figure of $5.2k include the rent out rooms option, including notional rents for you and your friend?  I would have thought that would bring in more than a straight rental, so if not it would make the figures for buying look better.

Suggestions to avoid potential pitfalls (I bought a house in London with my brother so have experience, although it worked out well for us over a period of about 10 years) -

1.  An agreement on the conditions for when to sell.  Possibly put an absolute bar on selling within the first couple of years when you are most likely to have a loss because of transaction costs?  Maybe put an end date on the arrangement, such as 10 years, after which the property will be sold unless you both agree to keep it, so that neither of you feels locked in for life.
2.  An agreement that if a partner moves in they pay rent at market rates.
3.  An agreement as to how rent increases are to be agreed, including increases of notional rents for each of you.
4.  A defined split in ownership, based on 1) capital costs, 2) mortgage payments and 3) other payments and payments in kind - meaning management time, maintenance costs, personal time spent in maintenance and improvements (sweat equity).
5.  A formal "management" meeting every year to review how things have gone and affirm in writing the year's expenses and any changes in the split of ownership.

You need to do your due diligence on the house, just as you would if buying somewhere you had not been living in.  I would wonder whether the extra unit and those two bedrooms in the extra unit are legal or not - check for whatever your equivalent of both planning and building control is.  If the conversion was not fully legal the property is not worth nearly the same amount - which could mean a chance to get more of a bargain, especially if the current owner would not be interested in doing work themselves, which is what it sounds like, and you and your friend are.

The biggest negative is that you don't want to own real estate.  Frankly, I think that's reason enough not to do it, all by itself.  Why tie yourself into something you have no interest in doing for future years of your life?  Avoiding the temporary hassle of moving to a new place and then paying market rent is not reason enough.

A Fella from Stella

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #2 on: August 15, 2019, 09:30:21 AM »
Since you don't want to own real estate, it's probably a bad idea.

What do you think?

kristof

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #3 on: August 15, 2019, 11:54:02 AM »
Yeah, I think the responses makes sense and thanks for the detailed breakdown of your experience! Even if I don't buy, I do still have a strong interest in facilitating my friend purchasing the property instead of someone else, as that would allow me to keep living here and in a desirable arrangement. It's been pretty much a dream scenario for me to have a reliable but flexible owner. I feel like I've been able to have both the benefits of owning - they've been OK with us doing pretty much whatever we wanted in terms of painting/changes/etc - and of renting - they've been super responsive with fixes and I get to put all my savings into equities. Having a friend who's also lived here in the past buy it and move in would be potentially an even better version of this, as opposed to moving and starting a new relationship with an owner.

So, she and I talked a bit more today and one thing I suggested that may be more mutually beneficial is for me to make a personal loan to her to increase her down payment and reduce/eliminate her rate and PMI. This would be contingent on her being approved for a large enough loan on her own without me having to be part of the sale or co-signing, but it looks like that's probably the case (she's talking with a lender today). Another variant of it if she isn't approved solo is to buy it together with a plan in place for her to buy me out within a set timeframe. If anyone has experience with this kind of arrangement, I'm all ears.

Megma

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #4 on: August 15, 2019, 02:30:10 PM »
Be really, really careful in lending your friend money to purchase solo or entering into any agreement where you put down more than half of the down payment in a joint purchase.

Generally, I would say if you don't want to own RE, don't. It can be a good financial decision but it can also be a drain/PITA and if you don't want it, it might be more of a PITA.

To your specific questions...

1) If you rented somewhere else in a similar situation at the market price, would it change the math in favor of buying this one? For example, if you were renting a market room at 1,000 but could have a 5,000 mortgage on the house where you also collected 4,500 in rent from others, that would give you a 500 budget for repairs/extra savings a month.
2) There are too many to list. Your friend loses her job and stops contributing, your friend and you have different ideas about renovations or who to rent to, your friend gets married and wants to sell, you get a job in another city and want to sell. I personally would not do this. It is a recipe for resentment and lost friendship imo.
3) I prefer to negotiate with people I don't know because it's easier to be unemotional about it. The main benefit here would be if the current owner gives you a good deal. Keep in mind by selling to you without an agent she is saving the 6% commission - that is 54,000. If she is willing to pass some of that on to you, then it's a good deal for you but if she wants you to pay her full list price (which the market might not even give her) then it's not a good deal for you to save the commission fees.

Dicey

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #5 on: August 15, 2019, 05:00:04 PM »
What intrigues me most is the new station that's set to open soon. That could be h-u-g-e. The biggest turn-off so far is the seller's initial asking price. If she's not paying a commission, she should be below the redfin guesstimate. Just for fun, What's Zillow's opinion?

FWIW, we just did a deal with a partner, and the deal blew up. We came out better for it. We still can't believe it. Most important is working with someone you can trust. It seems like you have that, so I would definitely continue doing the research.

kristof

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #6 on: August 15, 2019, 09:03:11 PM »
Thanks for the responses. Yes, I think her asking price is on the high side -- the Zillow estimate is $815k (Redfin just says not enough info for an estimate). Then again, the Zillow estimate of the rent is also way off (it's just over half of the current total rent). I also talked to a friend of mine who owns a similar house on the same street just a couple doors down and and it sounded high-but-not-crazy to him.

Another thing we threw on the brainstorm pile today if we buy together is converting to condos to reduce financial entanglements (and I suppose potentially increase sale value). I could take the smaller unit so I have less money tied up and would be free to sell as needed.

Does the 1% rule apply here? I'm confused about why the NYT calculator spits out a pro-buying recommendation under almost any plausible scenario even though monthly rent isn't even close to 1% of the price. I guess I just need to start my own spreadsheet to clarify things.

kristof

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #7 on: September 04, 2019, 08:14:18 AM »
So after a little more time and getting some mortgage quotes I think I've narrowed it down to three options. Pretty undecided between them so any input helps.

1. Do nothing and move out next summer

2. Buy the house myself with 15% down (~$135k). I'd need to liquidate most of that from existing investments in my brokerage account in VTSAX/VTIAX. According to the NYT calculator with the most pessimistic assumptions that still seemed realistic, i.e. low appreciation on the house, high maintenance costs, and high opportunity cost on the capital (2%/1.5%//8% all after inflation), selling the house after 5 years, and no increase in rent during that time, I would end up having lived almost or entirely rent free. That keeps the current hassle of finding tenants every year (including for the second unit) and adds more time in managing maintenance and the financials involved in ownership. Plus the risk of something shitty happening to the market and not being able to sell when I plan to (house is literally next door to a large, old university and there's also the subway stop coming in, so not super worried about this but you never know).

3. Lend my friend about $100k for the purchase and lock in a guaranteed low rent as part of the contract in addition to the interest I get from her. We haven't discussed specific numbers yet but I believe she would be willing to do something like a 6% annual rate with repayment over 5 years. Basically this means shifting a chunk of my assets from equities to "fixed income" for that time period, and decreasing my rent from what I'd pay on the market for that time. The downside compared to scenario 2 is I probably end up paying more overall, but avoid the risk and hassle of managing ownership, and can always walk away sooner if life circumstances change. Basically some financial shenanigans in exchange for being able to stay with my current (pretty sweet) setup with a housemate I know I really like. Plus she would probably make improvements that I wouldn't bother with  / have the skills for.

Thoughts on this? What is the rate that would get you to move $100k out of equities to fixed income for a 5 year period?

Dicey

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #8 on: September 05, 2019, 10:19:09 AM »
I think I'd have a very hard time giving up control of so much of my hard-earned money. Therefore, Option 2 seems more appealing. Is there some way to create a hybrid of 1 & 2?

Megma

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #9 on: September 12, 2019, 09:42:20 AM »
So after a little more time and getting some mortgage quotes I think I've narrowed it down to three options. Pretty undecided between them so any input helps.

1. Do nothing and move out next summer

2. Buy the house myself with 15% down (~$135k). I'd need to liquidate most of that from existing investments in my brokerage account in VTSAX/VTIAX. According to the NYT calculator with the most pessimistic assumptions that still seemed realistic, i.e. low appreciation on the house, high maintenance costs, and high opportunity cost on the capital (2%/1.5%//8% all after inflation), selling the house after 5 years, and no increase in rent during that time, I would end up having lived almost or entirely rent free. That keeps the current hassle of finding tenants every year (including for the second unit) and adds more time in managing maintenance and the financials involved in ownership. Plus the risk of something shitty happening to the market and not being able to sell when I plan to (house is literally next door to a large, old university and there's also the subway stop coming in, so not super worried about this but you never know).

3. Lend my friend about $100k for the purchase and lock in a guaranteed low rent as part of the contract in addition to the interest I get from her. We haven't discussed specific numbers yet but I believe she would be willing to do something like a 6% annual rate with repayment over 5 years. Basically this means shifting a chunk of my assets from equities to "fixed income" for that time period, and decreasing my rent from what I'd pay on the market for that time. The downside compared to scenario 2 is I probably end up paying more overall, but avoid the risk and hassle of managing ownership, and can always walk away sooner if life circumstances change. Basically some financial shenanigans in exchange for being able to stay with my current (pretty sweet) setup with a housemate I know I really like. Plus she would probably make improvements that I wouldn't bother with  / have the skills for.

Thoughts on this? What is the rate that would get you to move $100k out of equities to fixed income for a 5 year period?

I would do option 2 personally but I don't have your aversion to RE, so am probably biased.

Regarding choice 3, do you really think your friend would be willing to pay you 6% interest? I realize that she doesn't have the money for the down payment and otherwise can't buy they house but I feel like she will get one mortgage quote from a bank and by like "why is my friend charging me 6% and a banker I've never met offering me 4.5%...I thought we were friends." The answer of course, is risk but she might not see it logically. Also, would she really be able to pay you back over only 5 years? That would be a large monthly payment for her in addition to a house payment and maintenance.

kristof

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #10 on: September 23, 2019, 06:15:26 PM »
After doing more research and talking to potential lenders, it looks like buying the place myself would only be possible if I put 20% down and got an ARM. This jacks up the risk to a point I'm not comfortable with - that's more than half my net worth for the down payment, and I'd need to pull some of it out of a Roth and lose the tax-free growth on that money. So that option is out.

If I give her a loan, my friend is willing to pay me 7% interest  and discount my rent by about $200/mo off the market rate until it's paid off, if that allows her to make the purchase. That comes out to about a 10.5% rate if I were to stay here the full length of time. We went over her current budget and this is equivalent to what she currently pays for housing and so seems reasonable. Her salary is around $80k so the repayment would be around a third of her income. What could go wrong?? :) The rate seems good but I'm a bit worried that I'm not taking the risks seriously enough (her mom gets sick/sister steals her identity/she goes crazy type of stuff). Tell me your horror stories.

Another scenario we've discussed is buying together as tenants in common at whatever split our contributions to the down payment come in at. It would be around 80-20 probably, depending on how much her place goes for. With an agreement in place to sell within five years and her having right of first refusal / option to buy it at the appraised price at that time. In this case the total down payment would only be 15% so I'd have the chance to get in at a discount and get out quickly, and she'd have a shot at buying it in a few years if she can save up enough. Seems like less risk and greater upside, but more hassle since I'd need to manage the property for that time.

I'm having an appraiser come by this week so I can get a sense of how good of a discount the asking price actually is. We're also both getting some referrals for lawyers so we can start hammering out an agreement if we choose to move forward. I'm going with the assumption that we should each have our own lawyer to look over whatever agreement we make, does that make sense?


BikeFanatic

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #11 on: September 23, 2019, 06:59:51 PM »
I do think the appraisal is the way to go. I am familiar with the neighborhood prices are sky high there, and with the green line coming I think you should be seeing increased home values in the near future, good luck

kristof

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Re: Should I buy the house I've lived in for the last ten years?
« Reply #12 on: October 30, 2019, 03:04:33 PM »
OK, we've decided to go with the arrangement where we purchase together but she buys me out on a set schedule which amounts to me giving her a loan with the house as collateral. I get a 9% rate on the cash I'm lending her and the payment schedule is over 4 years, after which I sign over my share of the house to her if all goes well.

If it doesn't (i.e. if she's ever over 30 days late with a payment) the co-ownership agreement states we put the house on the market, and if it doesn't sell for enough for me to get my money back, I keep it (this is the worst case scenario since presumably I'd be underwater). As long as I'm living in the house, she pays the full mortgage and collects all rent, but I'll have what amounts to a $300/mo discount off market rent in addition to the interest on the loan, which brings the actual rate (assuming I stay here the whole time) to over 15%.

Question for anyone that's a CPA/has familiarity with tax laws -- what would be the best way to manage this for tax purposes? I'm thinking I can treat the loan as a loan and declare any interest I make as regular income; there may be nothing to declare since me paying 'rent' would just be cancelling out part of her repayment to me. Then once it's paid off, I sign a quit claim deed to transfer the whole house over, and she refinances the mortgage to take me off it.

From a tax perspective, is there anything I'm overlooking here, or a better way to do the accounting?