Should I purchase a bigger (& more expensive) home?

[younginvestor2013]

I guess this is a post to try and help me justify my thinking and potential actions. Or you could say it is a post to help prove me wrong and that I am just looking for an excuse to spend $$. At any rate, I would value your opinion.

I currently live in a major metro in a fairly small (but suitable for my lifestyle right now) condo (900 sq. ft). Eventually, someday (no idea when) I'd like to have at least a 2 bedroom place in the same area I live. Why? I'd like to be able to host guests, have a desk/home office, have house parties, and also have more space if I a significant other were to move-in.

Some background: I am 28, currently earn about $85k per year. My condo value is $240,000, with about $188,000 left on the mortgage. Aside from that debt, I have no other debt. My current assets are as follows: Taxable ($215k), Retirement ($133k), cash savings ($22k), HSA ($7k) home equity ($45k) total: ~$422k ish.

My condo is in a hot / trendy part of the city and I estimate I could cash flow about $150-200 month now if I were to rent it out. There are quite a few new developments in the area so I'd prefer to keep it for appreciation and tax write-off purposes.

Now, this is where my uncertainty comes in. A larger 2 bedroom condo would be about $400-$450k. Depending on the specific property, I estimate my annual increase in housing costs would be about $10k, which would really cut into my cash flow savings (i.e., retirement contributions). I do, however, anticipate income growth in the coming 5+ years, but it is hard to predict what that will be. Since I graduated college 6 years ago, my income has increased 54%.

My thinking / justification is this: Rates are still fairly low and the market has had a very good run. My entire portfolio (taxable portion included, of course) has experienced a nice run lately. It seems prudent to liquidate some funds for a downpayment while the market is still high. I know this is timing the market somewhat, but what if 1) there was a dip in the next 3 years and 2) rates go up. This would make buying a less financially prudent decision than it would be. I could wait a few years to see if my income goes up to support the decision, but rates could also go up, and the market could go down.

Thoughts??

 

[Koolau]

It seems that you are aware of the issues involved. Only you can make the choice. Is having the additional space, etc., worth the potential delay in saving specifically for retirement? Once again, only you can decide so YMMV. Good luck.

 

[Ronstar]

Personally I would sell the condo and use the proceeds as part of the down payment for the new place. As far as I know, there would be no tax due on the sale of the current condo if you use the proceeds for a new place.

You'll need $90k for a 20% down payment on $450k, so you would need to take $40k out of your taxable account.This will leave you about $175k taxable - still a good chunk at your age and would double as an emergency fund.

IMO, this scenario is better than being a landlord.

If you feel the market has topped, change your portfolio to be less aggressive.

 

[nvestysly]

+1 on having the basics in place and a good understanding of the issues involved. As Koolau said, the decision is very personal and cannot be made simply on a financial basis. A different person, less income, less savings, less financially savvy would definitely elicit a NO from me. You appear to understand the issues involved and have the financial wherewithal to "upgrade."

If I were you, I would consider selling the existing place, adding much of the cash you have (retain some cushion) and use some the taxable funds to make the down payment on the new place. Replace the funds in the taxable account as quickly as possible.

In addition, pay down the mortgage as possible in the next 3 to 5 years and consider refinancing if the interest rates remain low. The benefit of refinancing would be to reduce your monthly payment after paying down the loan for several years. I like the idea of reducing the payment if possible even though you may continue to pay down the mortgage at an accelerated pace. if/when you have lean times you can drop off the accelerated payments and go back to the lowered monthly payment.

Rental property can be very lucrative. However, I am not landlord material. YMMV.

Best wishes

 

[W2R]

I agree with the others. It is a very individual decision.

For example, if it was me, here's how I'd address the issues you list:

I'd like to be able to host guests, have a desk/home office, have house parties, and also have more space if I a significant other were to move-in.

Host guests: I'd tell them where the nearest hotel/motel is. It's not the Wild West, and surely they can find lodging. They'd probably be happier with the extra privacy, too.

Desk/home office: If you absolutely cannot fit a small desk into your condo (why not? There's only one of you in 800 sf), then I'd make a project of building one that folds up into a wall.

Space for SO to move in later on: A future SO might have her own large house. She might not like the house you choose. If you marry and have kids, your SO will definitely want some say in what house you choose at that time.

So the only reason left is house parties. Is it worth this much money just to throw parties? Maybe it is an important part of your life. It isn't for me.

I'd just stay put if it was me. But it's not me... .it's you.

 

[Rambler]

Everyone has their own opinions about this, I'm sure, but from the time i was in college, I decided that once I had a mortgage free home, I'd always have a mortgage free home, so I'd always have a roof over my family's head. If I wanted a bigger home, I'd save up the extra I needed before trading up. You've not paid off your home yet. If it was me, that would be higher on my priority list than trading up...but that's me. Then again, if you have prospects of a SO moving in, esp with kiddos, you may want to think about that differently. Only you can make the decision, but that would have been my line of thinking.

 

[evilanne]

W2R,

Don't most condos have facilities or a clubhouse you can reserve or rent for parties?

 

[Another Reader]

Do you have a good handle on the expense side of landlording? Your profit is not the rent minus the PITI and HOA. There is vacancy and collection loss, property management, repairs and maintenance, and capital improvements. The HOA takes care of some repairs and maintenance, but the rest is up to you. The general rule of thumb is a minimum of one percent of the property value in monthly rent. A little more for condos, because of the HOA. Another rule of thumb is all of your expenses, including the HOA, will add up to around 50 percent of your income. Tenant screening is very important, especially in condos. The close quarters magnify tenant problems and HOA's do not like tenants. Analyze your income and expense realistically before you decide to make this unit a rental.

In your shoes, I would probably sell your unit to make the move up. I would not rob your investments to do this. Not enough cushion for me.

 

[W2R]

W2R,

Don't most condos have facilities or a clubhouse you can reserve or rent for parties?

Gosh, I have no idea! I have never lived in a condo. But I like the idea you propose in your response - - maybe he should check into that if he thinks his parties are the type he could hold in the condo clubhouse.

 

[daylatedollarshort]

I agree with the others. It is a very individual decision.

For example, if it was me, here's how I'd address the issues you list:

Host guests: I'd tell them where the nearest hotel/motel is. It's not the Wild West, and surely they can find lodging. They'd probably be happier with the extra privacy, too.

Desk/home office: If you absolutely cannot fit a small desk into your condo (why not? There's only one of you in 800 sf), then I'd make a project of building one that folds up into a wall.

Space for SO to move in later on: A future SO might have her own large house. She might not like the house you choose. If you marry and have kids, your SO will definitely want some say in what house you choose at that time.

So the only reason left is house parties. Is it worth this much money just to throw parties? Maybe it is an important part of your life. It isn't for me.

I'd just stay put if it was me. But it's not me... .it's you.

I was thinking along the same lines. One of our kids' apartments wasn't much more than 800 sq feet and I know that the neighbors and landlord, not apartment size, were the only things that put a damper on his parties.

For the desk maybe you could look at modular furniture to get more useable room. It would be a lot cheaper than a paying hundreds of thousands more for an extra room or two:

 

[Scuba]

A contrarian point of view perhaps, but if I were you I'd definitely trade up to a 2 BR condo. Easier resale and gives you a home office/guest BR. If you live in a desirable area and your rental can cash flow, keep it. Just remember that you need to factor in maintenance, HOA, property taxes, etc to ensure it is at least break even before appreciation. Could be a nice supplement to your retirement income. I don't recommend paying off your mortgage at your age. With rates low, why not keep a mortgage and invest the assets?

 

[38Chevy454]

How important is a single family house to you? A condo is great for low maintenance and almost no time taking care of the outside. Downside is the monthly fees since those services are provided. You may or may not have an enclosed garage space, might be just a carport or worse, open space. What do you value for your home space?

I am one that hates apts/condos/townhouses, so the extra expense for a single family house and yard is well worth it to me. The bigger the lot the better.

 

[FlaGator]

I was involved in aspects of real estate and real estate finance for 30 years and lived through 2 complete market cycles both professionally and as a homeowner. A few random thoughts:

-the real estate price cycle has historically been 15-ish years. With the last peak at 2006 or so, we're closer to the end than the beginning. I think now is a good time to move up - values are attractive if you're selling, and not yet stupid if you're buying. Just realize there is a price decline/flat lining down the road, and they seem to happen when one most wants to sell.

-if rates going up 2-3 points make big difference in one's ability to afford, you're closer to the margin than I would like to be. Run out the payment on a few rate scenarios to test your reaction.

-owning rental property you personally manage is not an investment, it's a job. Maybe part-time, but a job that brings responsibilities that can't be put off, like dealing with your tenant's broken water heater on a winter weekend.

-if your long term goal is to build the resources and liquidity to retire early, keeping your fixed expenses down gives you flexibility with your cash flow as your career develops

-as W2R stated, bringing someone into your life is highly likely to change housing preferences, so what looks like a logical step today probably won't be the right choice later. Suggest you think carefully if that opportunity is nearby.

-for me, a house has been a place to live and I consider it a consumption expense. Current abode is the nicest one I've owned, but it was bought for a specific purpose - provide a comfortable home for my kids to finish growing up. When the kids are launched and that need no longer exists, I expect to be moving.

Decisions like this are never simple, and I compliment you for the discipline and thoughtfulness you're showing You're also waaaay ahead of where I was at 28. Keep it up!

 

[evilanne]

<snip>
I currently live in a major metro in a fairly small (but suitable for my lifestyle right now) condo (900 sq. ft).

Some background: I am 28, currently earn about $85k per year. My condo value is $240,000, with about $188,000 left on the mortgage. Aside from that debt, I have no other debt. My current assets are as follows: Taxable ($215k), Retirement ($133k), cash savings ($22k), HSA ($7k) home equity ($45k) total: ~$422k ish.
<snip>
Now, this is where my uncertainty comes in. A larger 2 bedroom condo would be about $400-$450k.

Based on your numbers, you have slightly less than 20% equity in your current condo. I wouldn't recommend purchasing a new home without at least a 20% down payment ($80-$90K). Although you could swing it by dipping into your taxable investments, a condo 5X your current income is more than I would be willing to take on. Then you have closing and moving expenses with higher maintenance cost in new place plus your current expenses for existing condo (3X Income) that will need to be put on the market before those costs will be covered. I think rentals are great for long term investments but not sure if now is the right time given your situation and the impact it would have on your retirement savings (I'm sure your risk tolerance is much higher than mine). It seems like you are trying to rationalize your desire to get a bigger place...just be careful not to get in over your head. Maybe look around and see what other options are available in your area.

Most of the recent articles I have seen on home prices indicate that most market have fully recovered from the 2008-2009 crisis and are reaching new highs. Before making a decision, I would strongly recommend researching how the rental market and homes in your area weathered the last crisis.

Best Wishes in whatever you decide to do

 

[1-31-18]

Personally I would sell the condo and use the proceeds as part of the down payment for the new place. As far as I know, there would be no tax due on the sale of the current condo if you use the proceeds for a new place.

You'll need $90k for a 20% down payment on $450k, so you would need to take $40k out of your taxable account.This will leave you about $175k taxable - still a good chunk at your age and would double as an emergency fund.

IMO, this scenario is better than being a landlord.

If you feel the market has topped, change your portfolio to be less aggressive.

+1

But I never moved myself except to change jobs. When I felt the desire for a different residence, I figured that eventually I would change jobs, and I deferred the house change to coincide with the job change. Fewer moves that way. Moves are disruptive and expensive.

 

[athena53]

I'm pretty risk-averse when it comes to real estate so take this with a grain of salt. My history of buying and selling over the years (all primary residences) is 50-50. Two houses where I made fat profits (Bergen County, NJ, 1997 and 2003) and two where I probably didn't get even back what I put in in improvements (Passaic County, NJ in 1982, Johnson County, KS in 2015). With interest rates going up, that in itself can depress prices since people can borrow less for the same monthly payment.

And, a thought on someone moving in- they may bring additional income to the table and/or have different ideas about where they want to live so at that point you might want to pick something together. I'm on the side of staying where you are.

 

[Maenad]

The "hosting parties" comment jumped out at me, since I've hosted many in the last 20 years, of varying sizes (6-100). There are a number of factors to consider:

1. How loud are your guests? How loud is your music? Our first small party in our first apartment resulted in a couple of our friends wrestling on the floor and annoying our downstairs neighbors. Loud music in high-density housing (like apartments or condos) is always tricky. This is an argument for a detached house rather than a larger condo.

2. Does your current building have a party room? We have friends with a lovely condo that can easily host their family holidays, but prefer to use the party room because then they don't have to clean their home, and they don't have that slight "violation of privacy" feeling. They also have a clean space to retreat to for the night before returning to the party room to clean up the next day. Opening your bedroom door to party trash can be annoying.

3. What's the parking situation, or mass transit accessibility? Hosting parties has more logistical concerns than just physical space. How about getting all that food and drink into your place?

I don't think there's only one right answer, and you may find if you get a larger place that you like some aspects and don't like others, which will help you refine your housing likes and dislikes as you go through life. Keep thinking about it, that's the best thing to do!

 

[mrfeh]

Buy the residence you need, not what you want or can afford. The 50 year old you will thank the 28 year old you.

 

[ChicagoGal]

I did much the similar thing at a similar age. Sold a one bedroom condo and bought a 2 bedroom house (and later an even bigger one). I wanted to host family when they visited (the alternative is that they would stay with my sister, which meant to see them I'd have to spend all my time over there). I wanted to have family holidays at my house.

Did it delay my retirement? No question. Do I regret it? Not for a minute. It's part of balancing the "living now" v. "saving for later" dynamic. Now, 25 years later, I'm ready to downsize and wish that process were easier/faster. But that's a whole other story!

FWIW, I wouldn't be interested in being in the landlord business, so that part of your proposal is beyond me.

 

[Music Lover]

I would never buy a house for someone I hadn't even met or to make it convenient for my friends to party or to crash overnight.

 

[daylatedollarshort]

I would never buy a house for someone I hadn't even met or to make it convenient for my friends to party or to crash overnight.

One way to look at this would be to estimate the annual costs of putting guests up at a hotel and renting a room at a bar or restaurant for a party if you don't have a club house compared to buying a bigger place to live in 24 X 7. We have always liked the idea of buying a condo in Hawaii, but running the numbers of buying vs. renting for vacations for how often we would stay made renting the obvious choice.

 

[ExFlyBoy5]

Buy the residence you need, not what you want or can afford. The 50 year old you will thank the 28 year old you.

This x1000.

I am not in your shoes, but if I was, then my answer would be NO. Guest room? Wasted space (as discussed previously). Home office? Is that *really* needed? Do you have a desktop computer? Some of my *best* w*rk has been done in my recliner or my kitchen table. I *do* have a dedicated office space but it's rarely used and really is wasted space.

I am also of the mindset that real estate (especially your primary home) should never be used in calculating NW and the condo market is just too volatile for my liking. BUT...that's MY opinion. There are LOTS of folks out there that would disagree with me. I won't say they are right or wrong, but for me, I would stay put.

 

[Music Lover]

One way to look at this would be to estimate the annual costs of putting guests up at a hotel and renting a room at a bar or restaurant for a party if you don't have a club house compared to buying a bigger place to live in 24 X 7. We have always liked the idea of buying a condo in Hawaii, but running the numbers of buying vs. renting for vacations for how often we would stay made renting the obvious choice.

I completely understand the logic of renting a room for a party, but I don't understand why one would feel obligated to pay for someone's hotel stay.

 

[Fedup]

One way to look at this would be to estimate the annual costs of putting guests up at a hotel and renting a room at a bar or restaurant for a party if you don't have a club house compared to buying a bigger place to live in 24 X 7. We have always liked the idea of buying a condo in Hawaii, but running the numbers of buying vs. renting for vacations for how often we would stay made renting the obvious choice.

I'm glad I never did. My brother is now bored with Hawaii.

 

[jkern]

Growing up and living in the SF Bay Area, I have a very different view point than most of the forum posters. The typical approach here is to buy your first home (condo, townhouse, starter SFH....) as soon as you can afford it. Once your finances allow you to move up, you do so and continue moving up until you reach your permanent home.