Housing Dilemma….Part 1

As I have mentioned in previous posts in 2017, I am struggling with a Housing Dilemma which has paralyzed me for the last month and a half. It took me some effort to break out of it and write this post. In this post on my Housing Dilemma (Part 1), I will try to detail two big dilemmas I am facing. Your feedback will be very much appreciated. In Part 2 of the post, I will write about my decision…which hopefully will give me some peace and closure.

Looking back…

I discovered Financial Independence…kind of by accident around 2003. My first blog post ever via this blog was on 07/21/2014. I re-read that first post again and realized that my goal of FI was 10 years from 07/21/2014 i.e. by 07/21/2024, I should have achieved Financial Independence . To be honest, it was more of a stake-in-the-sand kind of goal rather than a well thought out date based on pure math. But, setting this date has got me far ahead of my expectations from when I started this blog.

My goals when I started this blog…

I went back to read what Financial Independence meant to me. From there, I got the following goals. These early goals were refined a bit more…but they still are the main pillars of my FI strategy.

  1. Emergency Fund for 12 months of expenses
    1. Achieved
  2. Multiple Passive Income Streams that produce $50000 per year for years 50-70
    1. On hindsight, this goal was too aggressive at my current funding level 🙂
    2. Depending on my housing decision, I may need additional funds OR more time. But I am happy with the current progress (Jan 2017) and will surely continue with this goal!
  3. College Fund for my kid
    1. Will be achieved in the next 8 years
  4. A retirement fund that covers 30 years of expenses for years 70-100
    1. Will be achieved in the next 8 years
  5. A paid off roof for my family
    1. The biggest question mark 😦 More on this later
  6. A $100K medical fund to help fix emergency health issues…not sure about insurance with preexisting health issues.
    1. In 10 years, if I do not dip into the emergency fund, that fund will be folded onto the medical fund. And I will need to add some more money of course.
    2. But, will surely be achieved.
  7. Life Insurance to cover my family.
    1. Note that this is insurance coverage outside of work to protect my family.
    2. Achieved!

Biggest Question Mark

Financial Independence to me meant that the family abode was paid off. Basically, zero debt with a healthy passive income to boot was my dream. I have come to realize that the big decision of buying a family abode is comprised of a few smaller decisions:

  • Location:
    • I live in a HCOL (high cost of living) area…can we move out of here to a LCOL (low cost of living) area?
    • For various reasons, moving is not an option for our family. All our connections (family and close friends) are here and uprooting everything is not practical.
  • Money:
    • The best case scenario for me is a mortgage amount of somewhere between $425K to $525K. I analyzed this in three posts….the final one was this. Links to the other two are within.
    • No mortgage => no tax deduction on the mortgage interest. I have been paying more tax than needed for the past couple years while I was building my passive income engine. Need to correct this.
  • Kid’s Deadline:
    • We have moved 3 times within the last 7 years and that has taken a toll on my kid the most…3 different schools and zero long term friends. My kid enters middle school next year and I want to drop down roots before that…most possibly another school change but hopefully the last one until high school. So, I have appx 1.5 years left to buy a house.
  • Satisfaction:
    • After visiting many open houses and considering the needs and wishes of our family (size, school district, space, layout, etc), I have come to the decision that a “satisfactory” house is a 3B/2B SFH in a reasonably good school district with low crime. This will cost me anywhere between $850K to $950K…depending on how far into suburbia I am willing to move to. Trust me, you will not get a mansion for this…welcome to my HCOL area 😦
    • In waiting to buy a house, our family spent a few vagabond years. We were saving up for the down payment as well as building the passive income streams. Whatever house we buy will be the one we will stay for the next 18 years atleast. So, the criterion of a 3B/2B SFH is not something I can relax.

So, it seems to me that the only criterion I can relax are:

  • Money
  • Kid’s Deadline

Depending on which of the above two criterion I relax, there can be a few different directions I can go in. And here comes the dilemma.

Housing Dilemma 1: Relax Money criterion and stick to Kid’s Deadline

A mortgage size between $425K and $525K will fit into my FI window. Assuming the worst case cost of $950K for a house, I will need a down payment of $325K to even bid for the house. I have some down payment money but accumulating $325K will take me many many more years.

Vivianne suggested one way: sacrifice some retirement funding to build this down payment up.The stock market is at insane levels…so, perhaps not investing in 401K for a year is not a bad idea. Cons are:

  • Even if I stop investing in 401K and stop adding new funds to my passive income streams, I can save a max of $20K to $25K over the next year and a half.
  • 401K funding is the only tax-efficiency move I have going for me….don’t want to lose this…
  • Can I sacrifice my passive income streams? Hmm…..

So, lets say I relaxed my mortgage limit and took a $625K mortgage (analysis)…the jumbo loan limit in my HCOL area. This means my FI plan will need to be extended to 15 years at least. Say, I am agreeable to this as well. So, what is the dilemma then? Buying at the peak.

One of the good articles that explain what I am trying to say is Case-Shiller House Prices Bubble 1.0 vs today. 2006-2007 was the largest housing bubble in history. And in my HCOL area, prices today are much much more than 2007 prices. If 2007 bubble was the largest bubble, what does it make the house prices we have today? It is really insane 🙂

I concur with the above article as I have personal proof of it. Here is one example of a sfh that a friend bought in Dec 2007….

  • Dec 2007: 922K
  • Dec 2009: 699K
  • Dec 2013: 883K
  • Dec 2016: 1200K

Even if I assume that 2016 is Bubble 2.0, if the bubble pops, I cannot expect the prices to go back to 2009 prices…at best, the prices might settle around 883K (2013 prices).

Conclusion: With this background, is this the right time to bug a house? Is this the right time to commit to a huge mortgage that will require mandatory full employment for the next 15-20 years? Even if we deduct mortgage interest deduction of $20-$30k ($625K mortgage @ 4.5%), if the house price drops by 200K, would it be a smart buy? I am not so sure….especially since even refinancing will be ruled out for underwater homes.

Housing Dilemma 2: Relax Kid’s deadline and keep Money 

Lets say I will wait for the house prices to fall to a reasonable value…say appx $800-850K for a sfh 3br/2b home in a reasonably good school district with low crime. Let us say that this price reduction will only happen in 2020 i.e. three years from now. I can save money for the home down payment and still stick to the $525K mortgage. But, this means I have to continue to rent and potentially move again for my kid’s middle school i.e. continue the Vagabond family life 😦

I hate to put my family through another temporary move, but lets see what this option of delaying a home purchase till 2020 brings us.

  • I can save enough money for a down payment to let me pick a $525K mortgage i.e. stick to my FI schedule of 10 years….
  • I am not buying at the peak of the market….a peak which is really really historic. I have seen my close friends struggle in the 2008 housing bubble , lose jobs and houses and saw first hand what devastation it can cause for families.

So, what do I lose by postponing my purchase?

  • Obviously, I feel that I am not being a responsible parent and husband by elongating the vagabond life by another three years.
  • I am going to lose the tax benefits of a mortgage…most probably in the highest earning years of my life….i.e. when I could most benefit from a deduction in taxes.
  • House prices may rise up even more….hey, anything is possible 🙂

I cannot do anything about the first con and the third is not realistic in my opinion. But I can do something about the second. What if I purchased one or more cash-flow positive rentals in a LCOL area? Here are some positives:

  • Use leverage to add one more income stream
  • Diversify my income stream to include rental income along with dividend income
  • Get the mortgage tax deduction

Some negatives are:

  • The rental purchases also will be at the top of the housing market bubble…unless I identify a market that is not so frothy.
  • Remote rental management…lack of time is so prevalent in my life now…so, how does one manage remote properties? Can I identify a rental management agency to help me out? Doable but will take some work.
  • If housing market falls in 2018, I will not have enough money to take advantage of it.

Conclusion: With this background, is this the right time to postpone purchase of family residence and buy a rental property instead? I will be getting the tax benefit and hopefully get the renters to pay off most of the mortgage. And over time, diversify my passive income stream as well. Am I being too selfish in signing up my Kid and wife for few more years of Vagabond life?

Readers

If you have read this far, I truly appreciate it! As I said before, the above two dilemmas have paralyzed me for the last month and a half. If I may ask one favor, do you have any thoughts on how I can solve my dilemma? Which option should I pick: Dilemma 1 OR Dilemma 2? Am I missing any pros/cons in each dilemma? Feel free to share your valuable opinions! Thank you very much!

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10 thoughts on “Housing Dilemma….Part 1

  1. I’d use the money from your taxable account for a down payment, but I wouldn’t buy a single family house. So if 3beds, 2 bath is $900k, perhaps you could find 4-6 beds, 3-4 bathroom with at least 2 units for $1M-1.2M, you’ll live in 1 units and have tenants pay for most of the mortgage. That way you can rebuild your passive income stream.

    The best way to tackle high cost housing, is probably buying a fixer upper, and put in some Swear Equity. It’s like a side hustle, but you could buy a duplex or a triplex or a quad plex at 20-40% off. You’ve already made a “profit” at the time when you buy, not when you sell. That way you don’t feel bad when the housing market sink because it might just come down to the level where you bought it.

    Once the mortgage paid off, voila, extra passive income.

    I spent a lot of time hunting for the right building. If you have to stay around your community, then your community might help you renovate your house?! 🙂 just a thought.

    Liked by 1 person

    • This is actually what I would do and actually did :). I lived in a crazy HCOL area also and bought a 2F where the other apartment helped pay for the mortgage. 13 years later, its bringing $1500 in passive income a month.

      Like

    • Apologies for the delay…was out of town for work for a week and wanted to do some home work before replying.

      Super thanks for the advice! I took your advice and visited 7 multi-family open houses in our area. 5/7 properties were 2B/1B duplexes and triplexes…around the 1-1.2 million range. 2B/1B is not going to work out for our family and the schools in all of these areas were below the minimum standard we were looking for. 1/7 was a 3B/2B and 2B/1B combo and the last one was a 3B/2B duplex. Both of them were in good areas with reasonable school districts but the cost was around 1.5 million…20% of 1.5mil is 300K….gulp. Will keep on the lookout for such properties and see if any falls into my lap!

      As a side note, I think before kids, I would not have hesitated at all…but before kids, I was not luck enough to come across FIRE! Better late than never! Thanks much for the awesome advice.

      Like

      • Find the duplex that you like, it doesn’t matter that’s it’s $1.5M, make a bid for $1.2 and show them your approval paper. The worse they will do is reject your offer. You don’t lose anything. More than likely, they bought it for $500-600k, $1.2M is double of what they had paid for. It only takes 1 of them to say yes to your offer.

        I went and saw a lot of houses before making my buys, I always low ball them. I look at so many houses, that I know even if I only 89% like the house, I would not lose money on it, because the price is $1.5M, I pay $1.2M, yes?

        Best of luck!

        Liked by 1 person

  2. Hi,
    Will just have one comment, regarding the space you need, or rather – a tip from another side of the Atlantic Ocean.
    I live in a part of the city, that could be considered as an equivalent of your HCOL.
    Familly of 4, we needed at least 3 bedrooms flat, with the living room and the kitchen, and based on this requirements we were 25% above our budget.
    So we calculated thing in another way : we bought 100 square meter (1 000 fs ?) flat, for very attractive price – because it’s arrangement was crazy : only one bedroom (20 m2), kitchen (20 m2), entrance hall (20 m2) and double living-room (40 m2). Because of this arrangement the price of the sqm was lower, almost 20% under market price. OK, for 2 years kids was splitting the room and we camped in the leaving room, but 2 things happened :
    1. the % of the mortgages went really down in France (we went from 3.6% to 2.4 % and now we are negotiating it to 1.8%)
    2. we were able to put some money aside and rearrange the flat, with help of smart architect, and to create 3 bedrooms, an office, kitchen opened to the living room etc. I know that the living space in US is usually huge compared to France, but considering a rearrangement of “smaller” house into living area with european dimensions for all you family members could be a hint ?

    All the best

    Like

    • Thanks for the kind words…apologies for the delay. I was out of town and promptly got sick….the kiddo viruses are the most nasty ones. Your tip is a good one. When I started going to open houses, I used to look for the exact match of what I wanted. Just like you mentioned, I have started looking at other alternatives now…2B/2B with a den instead of 3B/2B, 2B/2B with the garage converted to an additional guest room/office, etc. We are also taking a family friend along who has done a few house modifications on his own for ideas….lets see how things work out.

      Thanks once again.

      Liked by 1 person

    • Smart question ATL. Thanks for dropping by and apologies for the delay. Was out on work and got sick after coming back.

      My portfolio has appx 4000-5000 stocks across all my mutual funds, spanning at least 30 countries around the world. So, giving all the risk diversification for one single plot of land sounds scary. But, all of my portfolio is paper money….so, part of my mind says that it is better to put some of that money towards a real asset i.e. a home that we can touch and feel and possibly bang our heads on 🙂 So, I am searching for a mid way….shift some portfolio assets to a house. Vivianne’s idea to shift some resources onto a house that earns some money is definitely tempting. Lets see how it goes.

      Thanks once again for your advice!

      Liked by 1 person

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