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Just looking to pick people's knowledge as following this site has really opened my eyes to the "personal" side of finance and I respect people's POV. My wife and I are expecting an addition to the family in March (we're both 33) and it's got me thinking about our needs/wants and trying to discern what's the right next step for us to take regarding housing.
We have a 4 yr old and we bought what we thought of as a starter home in 2004 with really the idea that we'd be buying a larger house in the 4-7 year time frame for use to raise our family in.
Initial purchase of $189k. Financed 100%. We paid off the second mortgage earlier this year! (really we had to because it was a 10yr balloon) and have a remaining balance of $128K.
The market we're in has been hit particularly hard, estimates on the existing value of the home is $112k via Zillow and I think that's a fair estimate based on reviewing sale prices in our neighborhood. Our existing mortgage is an ARM currently at 3.25% and resets every Dec off the Libor with a max 2% adjustment each year and cap of 10.25%. We've gotten our current payment PITI down to $900 and ~$325 a month goes to the principal.
In reviewing rental listings, I think we could reasonably rent the place for $1200-$1300 a month. Either way we should be able to cash flow. Property management fees would eat up about 60-80% of that and really not leave a lot of room for variable expenses to make it a clear positive cash flow and I'm not a "handy" man and would be concerned about maintaining the property myself so I'd likely need to rely on pro's to manage.
The only other debt obligations we have is my student loan $4800 @ 3.25% and a $75 monthly payment. Should be paid off in about 5 years. However, with the growing family, in order for us to be able to transport 2 kids and a dog when we travel on the weekends, we're going to need a larger vehicle and our current vehicles have a 105 and 95K miles respectively.
Our income is ~$90k Gross which puts the debt to income at about 13% (I'm accounting for taxes and house insurance obligations in this) which should leave us room to be able to finance a second home and in if we don't overextend on the next house, pay both mortgages when we have a vacancy.
We've rebuilt our savings a bit to $17k since paying off our 2nd mortgage. We think we have the ability to add about $2k a month to savings and a really tight budget and $1500 on a safe budget. We have what I'd call a modest start to retirement at about $50k and I think 800+ credit scores.
The current house and why I feel we need to make a decision, what it lacks:
-updated kitchen (no dishwasher)
-it's a rambler and the main floor is short of 1k sq ft. So, we'd be using all of our 3 bed rooms but have really no other space (I really like to have an office as I work from home on occasion and we're about to loose that)
-we could finish the basement w/ estimates to be about $10-15k
-estimates to fix-up kitchen ~$15k...
-bathroom update, ~$3k
-difficult to consider sinking the money in given the upside down position we're in and it'd be difficult to finance, so it may be a cash proposition only to update.
-schools, it's a diverse neighborhood school district but the schools don't rate well relative to other school districts in the metro area we're in and we don't have roots to this district or community
-Neighborhood, we really only interact with 2 households and really not a lot of young families that we can get good roots with.
-commute is about 20 miles and takes a half hour w/ no traffic and an hour with any kind of accident/snow fall/rain.
The upside/pro's of the current place:
-Love the lot, about a half acre w/ lots of mature trees. I think it'd be difficult to find a yard I like more. We have a screen porch, no house behind us and a park across the street from us.
-The current obligations are low and allow us some pretty good financial flexibility and could allow us lots of room to save/invest or do more of the other things in life. (college savings for the kids is at zero and I really see that being an area we want to help with) We've been paying for daycare so my thoughts as the kids get old enough to get out of daycare, we'd shift that budget line item to each of their college savings.
Other considerations:
-renting out could be a good investment for us, if the rental market appreciates at 2.5% a year (probably an optimistic POV) it would be about the equivalent of $28k in funds a year after the mortgage is paid off and we reach our 60's. I really think investing in generating alternative income streams is critical as most people I know in their 50s has had some form of career disruption... I don't want to be totally dependent on a salary for my income at that stage. I want some diversification in income and I think it's important given my wife's earning abilities(lack there of) and that over the long run, I think it's difficult to avoid periods of employment disruption.
-I understand there are tax advantages I'd be able to take advantage of but policy uncertainty (who really knows where we're going w/ the current fiscal cliff, I'm expecting some form of grand bargain post election) seems like that's not something that dictate my decision, just potential upside.
-Downsides of it not working out (we might have to foreclose on this place but I think since we have the 2nd mortgage paid off and we're in a non-recourse state, our liabilities would be pretty limited). If we can rent it out for the first year or two without incurring any major damage to the house, I don't see this being likely since I think the housing market would likely have rebounded enough to offset.
-My wife's health: she's been diagnosed w/ Bi Polar and her ability to hold/keep a job has been not good. Over the prior years she's had to have been hospitalized more than a handful of times. She's been getting treatment and has been more stable this year than over the past 5 years and was also recently approved for Social Security disability. Things seem to be getting much better for her but if she were to go back to work, I'm skeptical of her ability to make that work for her without facing a setback. If she was working in her career/field, our income would be in the $130-$150k range... but the disability and more stable lifestyle that involves not working and focusing on managing her symptoms seems like something we should continue with for the health of the family. She's attending therapy for 3+ days a week right now so we're still paying for daycare. She's been doing much better and may even be able to watch the kid(s) which would maybe even help us save more (120 a wk for 3 days of care per child).
-Healthcare expenses, have been going up exponentially and we're large users so being able to budget for future increases is difficult. Our premiums, deductibles and max out of pocket expenses have all been going up. ($600, $600, $2000) this past year.
Upside of pulling the trigger is there could be some substantial financial upside. Now seems like as good as time as any to buy/finance a new place and we can potential get something that generates us a small cash flow and build long term equity. We can get into a more suitable house/school district for our mid/long term wants/needs. Downsides are living on a much more reduced margin of income disruption...
I see risks on both ends. I consider my employment to be secure in the 3-5 year range and am in position to continue to get raises, promotions are take my services elsewhere so I think the cash flow from that job will help us weather most of these other uncertainties.
So, those are all the variables... I'd love to hear what others think. I understand how some might find the receiving of Disability benefits as a potential lightening rod but, please refrain from taking this is down a political/personal attack basis. I'm trying to create a financial situation for the family so that we're not dependent and that we can pay it forward. I'm sharing this personal info because I respect that people can place themselves in our shoes and share how they might navigate these decisions.
Thanks for your consideration and feedback on the pro/con analysis. I really value any feedback on this analysis.
Mike
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