copperboxes
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Post by copperboxes on Nov 12, 2015 12:35:25 GMT -5
As for the 'bells & whistles' and buying unneeded sq footage as a KUWTJ - I concluded early on that it's good to own 5000 sq ft or 10,000 sq ft of RE - but don't consume 10,000 ft yourself. But 10,000 ft that is bringing in several rent checks, appreciating annually, and not tied to the calendar (in case of a forced move) - is the exact opposite. Ie, not a cost but an income. Plus a great source of seed money for a stock portfolio. IMO, the 'very very VERY risky' and the 'carries risk' is an important factor in the financial mediocrity of younger generations. Since the information age, people have been exposed to Finance magazines, Planners, Discount brokers, 'How-to' Websites, etc. All of them (correctly) warn of risks and provide their recipe to invest with minimal risk (but only after 6 months of EF, no car payments, no CCs). But that can only lead to mediocre successes, a few $100,000 of no-risk assets. OTH, wealth-building requires risk - risk management, risk mitigation - not risk avoidance. Very little attn is given to risk analysis, risk quantification, risk management. I feel like the younger generation is often full up on risk at the front/income level. Student debt risks, job risks, medical care cost risks. I get the impression we try to compensate by stabilizing in other areas, in case we get caught in stuff like what happened at DH's previous company last year, where 70% of the field techs were let go right after Christmas as a temporary cost saving measure. No obvious notice or warning signs. I watch for stuff like that. They yanked that cord hard and sudden. DH wasn't in it since he was in a different department, but man. Companies do some jenky stuff with labor, even if the economy is pretty strong. We built our financial rig to be super flexible. We've got a cheap, paid off little place in LCOL ($55,000 purchase price) and no debt. That is darn strong in bad times because fixed costs are almost nil, and it roars nice in all times, but especially nice with higher income like we currently have. We stash a very heavy percentage of income into investments. If life spins us, very tiny income pays the bills and allows us to keep contributing to investments mellowly with this set up. We can always swing $670/year in taxes with well water. Given income and "life happens" risks, I'm happy with zero debt, $7000 in cash (several months of expenses if no income came in at all) and buckets of liquid investments that require no additional upkeep costs. If we need to head off to another area for work (like we did in TX last year for DH's promotion) we rent and keep the OK place as our fallback, no big deal. It's not the absolute fastest way forward, but it's got okay speed, and the steering abilities are near top level in case the weather or road gets bad. Tons of debt locks financial gears and brakes into a screaming run, IMO. It's fine as long as a path is straight forward with no obstacles, but that's a pretty big risk to me given what I've observed.
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whoisjohngalt
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Post by whoisjohngalt on Nov 12, 2015 13:11:04 GMT -5
As for the 'bells & whistles' and buying unneeded sq footage as a KUWTJ - I concluded early on that it's good to own 5000 sq ft or 10,000 sq ft of RE - but don't consume 10,000 ft yourself. But 10,000 ft that is bringing in several rent checks, appreciating annually, and not tied to the calendar (in case of a forced move) - is the exact opposite. Ie, not a cost but an income. Plus a great source of seed money for a stock portfolio. IMO, the ' very very VERY risky' and the 'carries risk' is an important factor in the financial mediocrity of younger generations. Since the information age, people have been exposed to Finance magazines, Planners, Discount brokers, 'How-to' Websites, etc. All of them (correctly) warn of risks and provide their recipe to invest with minimal risk (but only after 6 months of EF, no car payments, no CCs). But that can only lead to mediocre successes, a few $100,000 of no-risk assets. OTH, wealth-building requires risk - risk management, risk mitigation - not risk avoidance. Very little attn is given to risk analysis, risk quantification, risk management. But you constantly talk about taking money out of the house and investing in RE. Very few people are knowledgeable enough in both, even with all the information available. So, if someone does what you did - have 4 rentals, pulled money out and invested in the stock market - I can't help to think that one bad tenant or one job loss or illness or stock market crash can make that house of cards fall very deep
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whoisjohngalt
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Post by whoisjohngalt on Nov 12, 2015 13:12:58 GMT -5
Like I said - it is an awesome strategy if you know what you doing and everything works out. It can also be quite disastrous.
When you are over extended on one house - that's bad. When you are over extended on 4 rentals - well.....
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Deleted
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Post by Deleted on Nov 12, 2015 15:20:40 GMT -5
I bought a 160k 1700 sq ft townhome on a 43k salary back in 2002 and was house poor for 4 years until my income increased to 70k.
I have no desire to ever go back to that kind of living. We don't need any more space and can do almost anything we want now that our annual income is more than double what the house is worth today.
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Deleted
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Post by Deleted on Nov 12, 2015 15:33:57 GMT -5
We built our financial rig to be super flexible. We've got a cheap, paid off little place in LCOL ($55,000 purchase price) and no debt. That is darn strong in bad times because fixed costs are almost nil, and it roars nice in all times, but especially nice with higher income like we currently have. We stash a very heavy percentage of income into investments. If life spins us, very tiny income pays the bills and allows us to keep contributing to investments mellowly with this set up. This was pretty much how DH and I ran things once we got into the LCOL area. It allowed me to take a chance and stay with the merged entity when my company was acquired and it also allowed us to invest a higher % in equities than is recommended for our age. We have a lavish travel budget, but that can be cut back in bad times. If you have mega-mortgage payments, not much you can do about that.
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movingforward
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Post by movingforward on Nov 12, 2015 15:41:32 GMT -5
I just went through pre-approval and was approved for WAY more than I am comfortable with. Technically I could probably do it but that would mean cutting out travel and other fun stuff, not to mention cutting back on retirement savings. That isn't the life I want to live (even for just a few years). Add to that the fact that life throws you curves and it would make me extremely uneasy to purchase as much home as the bank says I can.
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phil5185
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Post by phil5185 on Nov 12, 2015 15:45:20 GMT -5
That's what management skills are for - to catch the cards. But you have probably identified one of the problems. People make the list of problems and stop. A better choice would be to devise a work-around for each problm and quantify it - then define the overall risk as acceptable/unacceptable.
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haapai
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Post by haapai on Nov 12, 2015 16:46:46 GMT -5
That's what management skills are for - to catch the cards. But you have probably identified one of the problems. People make the list of problems and stop. A better choice would be to devise a work-around for each problm and quantify it - then define the overall risk as acceptable/unacceptable. A better article than this one would do that. That article would talk about how stretching might be doable if your front-end and back-end ratios are the same and will not get worse due to financing vehicles or repairs. That article would talk about the desirability of meeting any reserve requirements with cash instead of discounted retirement funds. That article would talk about the importance of choosing a house that would require minimal repair, upkeep, and utilities. That article might mention that stretching to buy a house solo might be a particularly good strategy if you are committed to getting a roommate. That article might talk about the importance of being deadly honest about what your prospects for income growth are and how much of that income growth will be offset by increasing property taxes and health insurance costs. All this article seems to be saying is that buying in Boston is different and you should ignore the conventional wisdom of avoiding being house-poor.
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chiver78
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Post by chiver78 on Nov 12, 2015 17:00:39 GMT -5
That's what management skills are for - to catch the cards. But you have probably identified one of the problems. People make the list of problems and stop. A better choice would be to devise a work-around for each problm and quantify it - then define the overall risk as acceptable/unacceptable. A better article than this one would do that. That article would talk about how stretching might be doable if your front-end and back-end ratios are the same and will not get worse due to financing vehicles or repairs. That article would talk about the desirability of meeting any reserve requirements with cash instead of discounted retirement funds. That article would talk about the importance of choosing a house that would require minimal repair, upkeep, and utilities. That article might mention that stretching to buy a house solo might be a particularly good strategy if you are committed to getting a roommate. That article might talk about the importance of being deadly honest about what your prospects for income growth are and how much of that income growth will be offset by increasing property taxes and health insurance costs. All this article seems to be saying is that buying in Boston is different and you should ignore the conventional wisdom of avoiding being house-poor. thank you. that is exactly what I got out of it as well!
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8 Bit WWBG
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Post by 8 Bit WWBG on Nov 14, 2015 22:07:39 GMT -5
Overextending definitely works in areas where house prices outpace one's ability to earn/save. I feel like I've seen a few cases of "if I'd just bought the bigger place first, I'd have saved in the long run".
What I'm seeing now is how important momentum is. Getting it going early on and building up that buffer can make future successes far safer and more rapid. There will always be setbacks. The question is whether or not you can get through them, or whether you end up ever further behind.
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cronewitch
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Post by cronewitch on Nov 15, 2015 8:09:40 GMT -5
I have stretched a couple of times but I knew going in it meant sacrifice and how much I was willing to do to pay for a house. My first was 14.5% interest $931 a month when my ex was making 12.55hr and I was making 1000 a month. It was so tight I quit smoking the weekend we moved. The next house I was divorced and was a little scared, didn't use heat the first winter then took in a roommate for the next 27 years. I knew I was willing to work all the overtime I could and take as many roommates as needed. I had an ARM at 11.25% so paid it down as much as I could every single month so in 5 years only owed 5K and had paid for two years of college at the same time. Current house I had three mortgages since I borrowed the down payment on a HELOC on the old house, had a house mortgage and garage mortgage until I could sell the old house.
I had some bad times, lost the first in a divorce then he lost it but when I left all the payments were up to date. I lost a job 4 years into the next house and two years into the current house and several since then. I took some major pay cuts yet haven't missed a payment in 30 years, I would still take in roommates first or sell a car or take a job.
The problem is when the Dave Ramsey followers hear stretch for a house, they will stretch for the house, then buy furniture, have a baby, buy a car then lose the job, run up credit cards and have no willingness to work hard or take roommates but make excuses until they are so far behind they are desperate then find Dave Ramsey and attempt to dig out. They will not make major life changes like not owning all the cute pets they want or driving a car they hate until they can afford the house. Some will change but many will think they are trying but keep making excuses, they should have gotten the cheapest house they could find.
My great nephew is going to be in a world of hurt if he buys a house that is even as much as rent. His girl friend and he have a dog and a cat the landlord doesn't know about and she wants another puppy and hates her job. He is national guard so can buy nothing down but you know they will want a fence and to pay vet bills and new furniture so the first job lose will make them behind.
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TheHaitian
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Post by TheHaitian on Nov 15, 2015 8:22:39 GMT -5
Overextending definitely works in areas where house prices outpace one's ability to earn/save Hey, looking at what sells in my neighborhood for what we purchased my house last year: I am glad we overextended for a short time.
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8 Bit WWBG
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Post by 8 Bit WWBG on Nov 15, 2015 8:36:17 GMT -5
It is also that timing which lets people make great leaps forward. Get in at the right time, and sell for a profit, and you can add quite a tidy sum to your coffers.
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TheHaitian
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Post by TheHaitian on Nov 15, 2015 8:50:49 GMT -5
It is also that timing which lets people make great leaps forward. Get in at the right time, and sell for a profit, and you can add quite a tidy sum to your coffers. Yep... Or use the profit as a down payment on a new house!
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8 Bit WWBG
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Post by 8 Bit WWBG on Nov 15, 2015 8:53:13 GMT -5
That is always the thing right? If you are making a killing in a sellers market, then so is the person from whom you are buying your next house! So unless you are downsizing or moving to a lower COLA, it is very quick to eat up the profit. I am at the point in my life where I want to upgrade, and I'm hoping to be able to do it without selling this house (which I wouldn't really make much on anyway).
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haapai
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Post by haapai on Nov 18, 2015 21:48:02 GMT -5
I'd like to encourage those who have found themselves house-poor (or over-extended due to other factors) to share their stories. It would be a public service, especially if you skip the self-flagellation bit and go heavy on how you got out of that mess. Any details that you can provide on the opportunity costs incurred by being dead broke for years would also be helpful.
FWIW, I seem to have forgotten the details of just how expensive being dead broke was. Not remembering is probably good for my soul but it isn't helpful to others.
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DVM gone riding
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Post by DVM gone riding on Nov 22, 2015 12:42:22 GMT -5
Soo. I am not "out of the mess" yet but fairly certain we "stretched" a little further then ideal. But my house has unique advantages. I can rent some land out, I can raise hay and sale it, I can rent some bedrooms out---this to me is actually the easiest and I often fail to understand why others don't do it more.
My DH (sorry I think that is the first time I posted that here!) Was REALLY house poor. He had the house and the loan types that were EVERYTHING that was wrong with the housing crises. His house in terms of monthly costs was more than mine while he was making about 35% of my pay, AND I had a roommate! His housing costs not counting utilities were 1/3 of his income. So we aren't doing so bad. Our new house is 25% of our combined income with a value of about 3x our annual income, but the horses are here so we aren't paying what I was to board them. And we are going to get a roommate (maybe 2) Mainly so I can continue on our save/invest plan and to pay off debt.
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TheHaitian
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Post by TheHaitian on Nov 22, 2015 14:51:03 GMT -5
Soo. I am not "out of the mess" yet but fairly certain we "stretched" a little further then ideal. But my house has unique advantages. I can rent some land out, I can raise hay and sale it, I can rent some bedrooms out---this to me is actually the easiest and I often fail to understand why others don't do it more.
My DH (sorry I think that is the first time I posted that here!) Was REALLY house poor. He had the house and the loan types that were EVERYTHING that was wrong with the housing crises. His house in terms of monthly costs was more than mine while he was making about 35% of my pay, AND I had a roommate! His housing costs not counting utilities were 1/3 of his income. So we aren't doing so bad. Our new house is 25% of our combined income with a value of about 3x our annual income, but the horses are here so we aren't paying what I was to board them. And we are going to get a roommate (maybe 2) Mainly so I can continue on our save/invest plan and to pay off debt. Congratulations!!!!
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8 Bit WWBG
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Post by 8 Bit WWBG on Nov 22, 2015 16:42:17 GMT -5
...:::"I'd like to encourage those who have found themselves house-poor (or over-extended due to other factors) to share their stories. It would be a public service, especially if you skip the self-flagellation bit and go heavy on how you got out of that mess.":::... haapai I bought an almost $400K house on about an $80K income, and DW contributing a bit, but nowhere near enough. Although buying pre-crash meant I missed out on getting a good price, at least I benefited from pre-crash standards in lending. We also increased spending, of course. We'll skip the details and the rants -- the low point was me staring at $40K in CC debt, and minimal hope of getting ahead. There was also a brief under-employment in there which cut DW's income in half for over a year. It was mostly just dedication and commitment to the cause that fixed the problem, and it was slow, but it worked. DW was good about balancing her contribution and cutting expenses, which allowed me to attack my CC debt faster. I did some 0% transfers to lock in low rates, and attacked it bit by bit. I got a serious blow when my highest balance card raised my rate, thereby reducing the effect of my payments by $100/mo. I harassed them every month to lower my rate, and after I'd made enough progress, they finally did. Those extra dollars accelerated payments. As balances shrank, finance charges did too. I got some more help when I was able to refinance and take $400/mo off my mortgage payment. Thanks to some good comps, I got the number I need. More money retained in my pocket means more advancement. Luck, good and bad took place. I got a promotion. DW got promotions and side work. We also had our HVAC go, and that was another $6k on the CC. We were very lucky to have not had any ship-sinking emergencies like major illness, car repairs, another job loss, home catastrophes... But we didn't take any lavish trips or buy really nice things for a long time. And once I got those cards paid off, I immediately directed that to retirement. Today we are a $200K household, we save (though not as much as I'd like). We do have our excesses, but those could be trimmed if necessary. Very boring, I know, but that is how it worked for me.
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taz157
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Post by taz157 on Nov 22, 2015 20:51:20 GMT -5
Congratulations DVM!
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tcu2003
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Post by tcu2003 on Nov 22, 2015 21:59:45 GMT -5
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Ombud
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Post by Ombud on Nov 23, 2015 13:32:48 GMT -5
Unless I sell my house what it's worth is only a piece of paper. It doesn't do me any good if I can't pay all the rest of my bills b/c I am trying to cover my mortgage! .... If done right yes overextending yourself can be a valuable tool, but you have to know how to use that tool otherwise you'll end up hurting yourself. Warrants repeating. I was overextended after my divorce. Required working 24 hrs every other weekend in the hospital in addition to my regular job until I was promoted to director. .... now no matter how much I have on paper I feel that I need to work longer, harder, not spend
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Post by Deleted on Nov 23, 2015 17:54:30 GMT -5
I was overextended after my divorce. Required working 24 hrs every other weekend in the hospital in addition to my regular job until I was promoted to director. When I was divorcing, a woman in my therapy group was struggling because she'd bought her Ex out of his share of the family home. Worse, she kept allowing him back in to repair and maintain it. My attorney asked me a couple if times if I'd consider buying out my estranged husband. I told her heck, no.
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Ombud
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Post by Ombud on Nov 23, 2015 19:19:35 GMT -5
I was overextended after my divorce. Required working 24 hrs every other weekend in the hospital in addition to my regular job until I was promoted to director. When I was divorcing, a woman in my therapy group was struggling because she'd bought her Ex out of his share of the family home. Worse, she kept allowing him back in to repair and maintain it. My attorney asked me a couple if times if I'd consider buying out my estranged husband. I told her heck, no. Smart. All I did was work & care for kids for over a decade
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violagirl
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Post by violagirl on Nov 24, 2015 20:46:37 GMT -5
400k house on 80k income! You have more nerve than me.
We bought 280k house on about 115k income. That was the maximum we were williing to go. Because it isn't just the mortgage which is about 1500/month including property taxes. It is the larger maintenance, larger heating costs etc that come with having a bit more house that catch people.
I find the problem now when I'm looking at houses is I want to have a nice house with all the bells and whistles but I don't want a 5,000 square foot house. I just want a small house with a big kitchen.
You also have to know your market though. In my area, you dont' usually lose money on a house, but you dont' make large leaps in equity. We might be able to get 335-350 for our house now, but we'd probably have to do a kitchen and bathroom remodel to hit the higher number. Our increase in value is mainly due to our neighbour chopping down all his trees and giving us a large panoramic water view for free.
I also know some people down the road from me who spent too much on their house. It is beautiful, but too many upgrades for the area and does not have a garage. They are stuck because they need to get 50k more than the house is worth in order to be able to sell. So real estate didn't really turn out in this case for them.
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