Should I buy a house?

[IPAfan]

I'm self employed and making a decent income for the first time in my life. I've got a 747 FICO score and no debt. We've got about $11,000 in cash, although we could probably beef that up reasonably quickly.

The town we live in costs about $225-$300k for a decent 3/2 entry level home (with a small yard). However, there's a town that's about a 25 minute commute from where we live now that's gotten very cheap recently. The last time I checked real estate in this particular town was about 1 year ago. I just went to realtor.com and was blown away by how far the prices have dropped in just the last year.

Most of these cheap houses are foreclosures so I'm sure there would be some serious maintenance problems. I have a close friend who's a general contractor, and I think he could help me inspect the house, and I could probably hire him to do some repairs with cash (I'd want to finance as much as possible on the home).

Anyway, there are actually one or two houses selling for under $100,000 (I'm sure there are huge problems with these) but probably 20-30 on the market for $120,000-$150,000. These houses are older (like 50s-60s) and have .5 acre lots (I like the idea of having a decent sized yard). I'm not very handy, but would be willing to pay for repairs/improvements if the price is right.

We actually like this (cheap) town, although my commute would increase by about 20-30 minutes a day.

I think financing on a more expensive home might be difficult because I'm self employed, but a $150,000 house would be well below our means and I bet even I could get a loan for $150,000 or less. We're on track to make ~$80,000-$100,000 this year and I believe our income will continue to grow since my business is less than 2 years old and DW will be contributing to our income in 5-6 years.

By the way, I could probably rent out one of these homes for $950-$1,200 a month if it was fixed up. I could see this being a solid investment, and that's one of my main priorities. I'd like to have a bigger yard, but we're happy renting where we are right now at $900 a month.

I figure even if we financed the entire purchase price at 5%, paid $2,000 a year in taxes, plus $1,500 a year in insurance, and .5% on PMI, we'd be looking at about $1,131 a month. (that's what the mortgage calculator is spitting out, and a little higher than I expected). That's about $200/month more than we pay now, but it might be totally offset by the tax benefits (we don't itemize now, but we do a fair amount of charitable giving so we'd get most of the benefit of the interest deduction).

I'm indecisive as always. I've never been a home owner, and I'm kind of nervous to start. Still, I think maybe it's time to start thinking about buying a house. Opinions?

[Sum Dum Gai]

We were in the same boat in terms of out mortgage only being a couple hundred higher than our rent. We went from a 1500 sq ft 2/2 second floor condo to a 2100 sq ft 3/2.5 house with a yard. Of course we also went from being a few minutes away from the beach to being thirty. The difference between our old rent and new mortgage was almost completely made up from tax savings. The mortgage interest deduction can save a decent chunk on a $100k income.

Overall I'm happy with the move, but I don't like to think about the mountain of debt I took on to "buy" this house. That's not even all that bad, it's looking at the total amount I'll pay with thirty years of mortgage payments that's really depressing.

[Deleted]

Generally, I am pro-ownership, but in your case, I might try to stick with a rental for a few more years. Houses have unpredictable expenses (which is why you have emergency funds and yadda yadda yadda), but a rental should be a more stable proposition. If the roof and the water heater and the septic all need major repairs in one year, that will be the landlord's problem.

Over time, the major maintenance costs start to average out, but since you are trying to reinvest your extra money into your business right now, I'd wait a little longer on the house. (Plus, if investing in your business goes as planned, perhaps you can buy a similarly nice home without the major drag of a commute)

[Deleted]

I'd wait until you have more savings to buy but I might go look at the places to get an idea of the cost of the repair work. Btw, you did not include the cost of maintenance. I would budget an additional $500 (for the difference between what you are spending now and what you would be spending if you bought) plus the difference in gas and see if you can afford it. Try that for six months before buying.

[IPAfan]

DarkHonor, I'm on board with you about the high amount of debt. It's not that we can't afford the payments (because I think we can), but I do like having the OPTIONS related to low fixed expenses.

craftysarah, That's exactly what I've been thinking. I do think we can afford a house and any maintenance items that come up out of cashflow, BUT that would cut in to my ability to grow the business. Right now our expenses are low and I can devote pretty much everything to extra advertising, etc.

gin1984, I know we could afford the extra $500 a month, but again it's a question of whether we OUGHT to afford the extra or not. We've got a lot of stuff to spend money on. I'm trying to grow my business (mostly advertising, but I'm also thinking of hiring an employee) and I would like more cash to do that. Also, my wife is going back to school and that will cost about $15,000 a year in tuition. I guess we could borrow for tuition, but the plan now is to pay as she goes.

[midjd]

I agree with those who have said better to wait. It would be a little outside my risk tolerance to buy a house so soon after starting my own business - though it sounds like you've got a good thing going, there are just so many little one-offs involved in both those scenarios that combining them might be a bad idea. I don't think home prices are going anywhere in the next couple of years, you'll have plenty of buying opportunities.

FWIW, I started house-hunting just after I graduated in June 2009, and we didn't close until February 2011 - and it still felt rushed. It's fine to look for a couple of years

ETA even if you can afford to pay for your wife as she goes (which is awesome!) I'd take out at least the Stafford loans. The interest rates are good, and if you can get any subsidized... whoo boy.

[IPAfan]

midwesternjd,

I will probably do the same thing in terms of taking a couple years to buy. I'm going to have a really hard time buying a house unless I know that I'm getting a substantially below market price.

gin1984,

I just checked out your blog and really like it!

[Sum Dum Gai]

It's not that we can't afford the payments (because I think we can), but I do like having the OPTIONS related to low fixed expenses.

Totally! It's that scene from Knocked Up where they're talking in the restaurant about hearing she's pregnant for the first time and the guy talks about how he can't just wake up and decide to move to India anymore. We probably never would have rented a trailer or something to keep our expenses super low and save up for something else, but there was something nice about knowing we could have. That's gone now. We're totally locked into our current cost of living.

Over time, I expect our housing costs to grow much slower than general inflation so our current cost of living will get cheaper and cheaper to maintain, but right off the bat it can feel pretty limiting.

[phil5185]

As a part of your down-select decision, evaluate why you want a lower cost house. To avoid spending (a generic tendency?)? To avoid a future loss? Fear? Other?

1. I don't look for cheap houses, I look at houses that will add the most money to my NW.
2. And we utilize what we need - we sometimes own 7000 ft of houses with a $5000/m expense. But we utilize about 2000 ft and draw income from the other 5000 ft - ie, we wouldn't buy a mcmansion as a way to own lots of real estate.
3. I buy 2 to 8 yr old houses, they have modern electrical service, modern plumbing, insulation, modern H/Cooling, and reinforced concrete foundations. The water heater, disposal, stove, oven, HVAC, flooring, is all near-new and service free for a decade.
4. The foreclosures, even those only 2 to 8 yrs old, need carpet/flooring, paint in & out, replace ceiling fans, garage door openers, door knobs, new SS appliances & countertops, some bathrm fixtures. Takes flooring crew, painters, Sears appliances, about 10 days, usually 5 workers on site - plus about $20,000 to to $25,000 to get a foreclosure house ready for sale or rent.

In your case, your utilization is a 3/2 with a yard. So the question becomes what will the two choices be worth in 10 or 15 years? Ie, you might buy a near-new $300k unit that will be worth $600k in 10 yrs. Or a $100k (plus $25k of work) that will be worth $200k in 10 yrs. Obviously the $300k house will add way more to your NW. And, of course, 50 miles/day times 10 yrs is about 125,000 miles - almost one entire car unit, $75,000.

[debtheaven]

I don't know what to advise you. But, I think I would advise you to buy a smaller home closer to where you live. If I remember correctly, you have small kids, and your wife is thinking of going back to school to get her law degree.

Personally, I'd rather live in a smaller place closer to where I work than in a bigger place further away. But, I'd favor buying. Your kids are still little (I think), they can share a room. I am a firm believer in buying, but I would buy something more modest, and closer to your clients, until your kids are old enough to all be in school FT, and until your wife gets her degree. You can reevaluate things then.

A long commute zaps a LOT of energy, as well as time and gas.

[IPAfan]

Phil,

Good questions. I guess I've got a few reasons that I'd consider a lower end house. 1) Even though I can "afford" a more expensive house, I might have trouble convincing a bank to lend me enough. I'm self employed and don't have a long income history. Perhaps in 2-3 years I could buy a $300,000 house, but right now it would definitely be tough. 2) I'm absolutely concerned with increasing my NW. That's the only reason I'd buy a house instead of renting. But I thought a smaller 3/2 would be more appropriate for a rental in a couple years when I upgrade. 3) I'm not sure which house would have more upside potential in 10 years (but I totally agree with the way you're thinking). I feel like $300,000 is a LOT considering the avg. income where we live. I could probably rent out a $120,000 house for $1,000 a month, but I highly doubt I could rent a $300,000 house for $2,500 a month. 4) I think that your strategy of getting a fairly new house makes more sense for me since I'm not great with repairs. However, we don't have a lot of affordable housing that's been built recently where we live. There are other cities in CA with dirt cheap new houses, but most of the new houses are in the town we live in now. Again, we'd be looking at $250,000+ and I really don't see the potential for these houses to double in the next 10 years (where I do see the possibility of the $120,000 house doubling in 10 years or less).

debtheaven,

I do have three kids, and the oldest is 6. My wife is planning to go back to school if everything works out right and I'm going to make it a top priority financially to support her in that decision. My kids DO share a room (we live in a 2/2 condo right now that we rent). Right now all three are in the same room, but we have 2 girls and a boy. We'd like to have separate rooms for boys/girls in the not too distant future (that's why I want a 3 bedroom house).

The interesting thing about the community I'm looking at is that it's actually not a longer commute to court in the county where I do 60% of my work, but it's an extra 30 minutes for the other 40% of my cases. Also the commute to my office would be longer, but I could toy with moving my office as well. I'm not sure exactly how much extra commute it would add and I'd have to crunch some numbers to find out.

[cronewitch]

You don't seem to have time to be a homeowner. Since you probably spend more hours working than a wage earner and your business isn't right where you are thinking of buying you will hate the commute. Your wife needs spare time for homework and you both need time to spend with children. Giving up any minutes will be hard for the family. A house is also more labor even if you hire major things done. There is almost endless yard work with over half an acre. I have a little more and it needs mowed, we just cut down a tree and split the wood that needs to go to the woodshed, this week we killed blackberries and sprayed ants.

As a first time owner you would want to paint, buy furniture and other time consumming things. Stay where you are until your wife is out of school and has a steady job and your business is more stable. Spend your spare time learning more about being an employer and how to manage your employees, pay employment taxes and other things that will help the business.

You don't want to deal with a fixer upper, your time is valuable and you don't have the want to learn to clean gutters even. Put it off as long as you can and save your money. In 5 years house prices might be up a some but you will have a more steady life and might be able to get a near perfect house with great yard and short commute.