Monday, August 22, 2016

House Lust

House Lust
Back in June, we decided to take out a mortgage on our paid-off home. Why would we do such a thing? Opportunity costs. Paying off the low interest debt on our mortgage gave us a guaranteed return, though not as good of a return as we expect to get in a diversified portfolio of stocks and bonds. Any dollar you put towards one goal can't also be put towards something else, and all that. So we're investing the funds...mostly.

But that's just the sensible, personal finance reason that I'm obligated to state on the blog.

Another reason, the real reason, was that we wanted to buy another house. One in Tempe, close to our friends' new house, with visions of us walking with our future children over to our buddies' place for board games and beverages. If we couldn't use our wealth to buy the kind of life we imagined for us and our family, what's the point?

Still, this is an emotional decision. It's driven by want, and a want that's not entirely justified. We're a whole ten minutes' drive from this neighborhood and our friends anyway. It's not a big deal. And our current house and neighborhood are great. We'd be trading a good situation for a slightly better one.

Counter point: we want it. And we might break out in a Mona Lisa freak out if we don't get what we want. Gimme. Gimme house.

In the past couple months, cooler heads have prevailed, mostly. We know the timing is all wrong: Mrs. Done by Forty is trying to finish her PhD in the next twelve months. It's not convenient right now to pack up all our belongings, haul them across down, renovate our current house, and turn it into a rental. And while there probably isn't any time will great to do all that, trying to make it happen while she's in the academic home stretch seems particularly foolish.

Then there's the financial aspect. While we'll likely turn a decent profit renting out our current home, sans property manager and with just a $100k mortgage, it's not going to make up for the fact that a new $300k home comes with a brand spanking new $240k mortgage, too. Throw in taxes and insurance, and we're looking at a new monthly bill of $1300 for the next thirty years. That's not even contemplating closing costs, maintenance, or the pesky-but-real opportunity costs from forking over a sixty-thousand dollar down payment. 

There's no way we'll be 'done by forty' if we go forward with a buying a new house. It's just too large a purchase, more than doubling our current mortgage. If we stay where we are, we can probably reach financial independence in under four years. With a new, fancy-but-expensive home, it's going to be more like eight.

Like Garth Turner would say, we're house horny. We like the idea of a big new house, one that's renovated, and pretty, and one we can have right now. It's not logical: it's house lust

Here's the latest object of our desire. Cute, right? Four bedrooms, two baths, a pool, and two living room areas. And while the kitchen and bathrooms are not our style, they're good enough for now and big enough to stretch into, once we do some renovations down the line. 

Our logical, frugal minds know our current house is fine. We have a big pile of cash from the new mortgage just begging to be used for bathroom and kitchen renovations. We love our neighbors, who are thoughtful enough to send sympathy cards when they heard about Pepper, and we love our neighborhood, too. We're right by the park where we play kickball, and can ride our bikes to our hearts' content in the greenbelt. 

Might our new home seem as good as these others, once it has fancy stone counters in the kitchen, and new porcelain tiles cooling our bare feet as we step out of the shower?

There's only one way to find out.

Our latest plan, which seems to change every few weeks, is to drop roughly half of our new borrowed funds into renovating the house over the next year. We'll put new tile in the washroom and guest bedroom, gut the guest bath, and do over the kitchen with new cabinets, counters, & appliances. It's a lot of work, and we'll be doing it all ourselves if we want to stay anywhere near our $50,000 budget...which is leading to my hesitancy. 

Might we spend all that money and still want to move? 

In typical fashion, we have more questions than answers. This is our first home. While we own a couple rentals, we're still really new at all of this, and learning on the fly, to boot. Might we love renovating? Hate it? Should we be renters again?

There's no substitute for experience, so I suppose we should just to pick what we think is the best path forward, and try to learn something about ourselves as we go. Though a crystal ball sure would come in handy at times like these, when the siren call of lets us know that the perfect home just came on the market, and it's in just the right neighborhood, and might we like to put in an offer?

*Photo is from Nick Kenrick at Flickr Creative Commons


  1. Hmmm... first of all, 4 bedrooms, 2 baths, 2200 square feet for only $299K? Is that typical there? I guess the housing market must be... um... different than it is here. My neighbor recently sold his 1950's 2 bedroom 850 sq. ft. no basement, not-updated, sorta crappy house. He asked $220K - it was on the market for 48 hours, he got 20 offers and sold it for $235K.

    Anyhow, you can probably guess what I would do - being the lazy soul that I am. Seriously though, it sounds like there are a lot of things up in the air for you at the moment, and that being the case, I would be hesitant to make any big changes. I sorta can't imagine trying to write a PhD thesis in the middle of a big move. And renovating the current place, that almost sounds worse - sorta like taking on another full time job, and trying to do it all while living in a construction zone - I don't think I'd want to go there. But, yanno... I am lazy.

    I guess I'd be asking questions like: What are Mrs. DBF's plans for after she gets this PhD? Does she just want to get it and then retire? Does she plan to teach? Do research? Might any of that impact where you want to be living? How far in the future are these future children? What happens if the process of having kids doesn't go entirely as planned? Would you still be happy in a bigger house? Do you really want to have small children around a pool? What happens if the friends you want to be close to decide to move? And how much would it cost to cool a bigger home? Are the renovations you want to make to your current home something you'd want/need to do for it in order to rent it out? Would you make that money back in increased rental income and/or sale price?

    Those are my thoughts... and I have to say, you have SOOOO much more energy than I do to even contemplate all of this! :-)

    1. "I guess I'd be asking questions like: What are Mrs. DBF's plans for after she gets this PhD? ....Might any of that impact where you want to be living? "

      This was my thought. Will a post PhD job search include other areas (of town, the state, the country)? Do you guys absolutely want to be tied to your city? I think you mentioned your job is location independent - when school is over, how will hers be?

      And also, that living through a DIY renovation can be ridiculously stressful (speaking as someone whose renovation is going on 22 months and counting...). If I were Mrs DBF and staring down finishing a dissertation, I might want to let the PhD dust settle before kicking up a bunch of construction dust. Especially if it's going to be your first big DIY project... count on it taking twice as long as you would have originally estimated... at least. And possibly being significantly more expensive than you thought. =P

    2. Cat,

      You know the crazy thing about the home prices now? They're way, way up from where they were when we bought in 2010. So, to us, they seem inflated. As always, perception is everything.

      You're bringing up good questions, none of which we have definite answers to.

      We certainly could be moving in our future. We just don't know where or when. Maybe that uncertainty points to not making big moves, as you note.

      We really appreciate your wisdom!

    3. Mrs Pop,

      Those are really good questions and, seeing how you're finishing up your home renovation, maybe this is not the right time at all to be doing any of this.

      We don't have any real handle on what next steps are. We could be moving if Mrs. Done by Forty finds a good job somewhere. Or it could also be here in Arizona, or location independent, or some other option.

      Maybe we should cool our heels until the future is less murky...

  2. I voted to buy a new house and rent the old one. If you don't like the new place, you can move back to the old house and rent out the new one, then renovate the old house. That's a lot of cash to tie up and mortgage debt but it is a bit flexible. Also, renovations tend to go over budget and take up a lot of time so I wouldn't start them unless I was sure I wanted to stay in that house.

    1. That's true, and something I hadn't considered, Daizy. By keeping the old house, we have the option of moving back.

      However, this new house would be a bad rental, at least by the numbers. At $300k, the rough 1% rule says we should get $3,000 a month for this to be a decent rental. It's probably more like half of that: we'd take a beating.

      Our current house was purchased for just $132k and will likely net about 1% of that a month. Actual figures are a little kinder, since we would manage ourselves and we know maintenance is pretty low with this particular home.

    2. What is this "rough 1% rule" with which you speak of? Link please :-).

      I'm by no means an expert (although I have two rental properties and a third that I live in) but my math goes something like "does the rent provide some (can be minimal) positive net income after covering mortgage and tax payments" combined with the qualitative assessment of, "do I believe in the future growth (jobs in particular) and/or supply restrictions of the market?".

      By 1% rule, do you mean things like rent to value ratio, which varies wildly by locality and I'm aware of no major metro that is that low. In my market (Seattle), it is not even close and if I lived by that figure I'd be paralyzed into inaction.

    3. Hi Tin,

      The 1% rule is a VERY rough rule of thumb that says a rental property should get at least 1% the purchase price in monthly rent. So a house that will rent for $800 shouldn't cost more than $80k, a house that will rent for $1000 should not cost more than $100k, etc.

      Paula Pant has a good writeup:

      Now, this is definitely not any substitute for actually running the real numbers on taxes, insurance, utilities, likely maintenance, etc. But, for a quick and dirty first pass, the 1% rule is not so bad.

      For example, both our properties in Indi fit that rule (one was purchased for $82k and rents for $1000, the other was purchased for $92k and rents for $1125). I believe our home would just barely meet the rule, but we purchased in 2010 when prices were bottoming out.

      I suspect that most houses don't meet the 1% rule...but most houses are probably not good candidates to be rental houses, either.

  3. "Counter point: we want it. And we might break out in a Mona Lisa freak out if we don't get what we want. Gimme. Gimme house."

    LMAO! Gotta give you props for self awareness at least :)

    Well, you know what option I'd choose...'cause you know, it's me. :P That being said, 300K for a house is unheard of in Toronto, so in that market, even I might be persuaded to buy...

    But then again, probably not ;)

    1. I hear you, FireCracker. It's funny: we think $300k is crazy expensive for a house now that we're used to Arizona prices and have 'set our barometer' when we purchased back in 2010. Back then, when we first moved here from San Diego, we would have thought $300k was cheap. Amazing what a few years will do.

      I like acknowledging that our wants aren't rational (hey, that's kind of what makes them wants). That's okay: I don't need to be a purely rational, frugal being, either. But this purchase is large enough that it has me doubting...

  4. I'm with EcoCatLady and Mrs. Pop. Stay put until things are less murky. You guys are close to some big life changes, and those life changes (Mrs. DB40's graduation/job and kids) might make you see things entirely differently. Kids especially tend to do that. :-)

    1. Good point, Laurie. We have no point of reference for what kids will change in our wants. Who knows, maybe once we have them, we'll want a different kind of living situation altogether.

      I notice a trend: all the wise women readers are pointing to caution and patience. I should probably listen.

  5. I'm not a market timer but you mentioned in one of your above comments that the prices seem inflated. I wouldn't want to buy into a bubble... Of course 300k is unheard of here in NYC as well but just make sure you know your market! Plus, the dreams of hanging out with your friends and future kids is still in the future so no need to rush into it. But a house personal is obviously a personal decision so only you can really decide. And if you really want it and it will bring value and happiness to your life then you do what you want to do.

    1. True, the actual kids playing is many years away. As with most of my irrational wants, I just want it, and now. It doesn't make a whole lot of sense...but the desire is still there, you know?

  6. We did almost exactly what you are talking about, but moving from Chandler to Tempe (about 4.5 miles moved). Went from lousy neighbors to great ones though. Bought in 2011, rented old house until market recovered. Have since sold first house and almost paid off new one with the proceeds.

    Two big considerations for moving to that location in Tempe -- increased taxes and proximity to McClintock High. The taxes will jump a LOT - get a lot of services though. Free Orbit shuttle goes right by. Are your friends close to the high school too - what about noise from marching band practice and sporting events?

    1. It sounds like you bought at a great time and waited to sell until the market came back. Well done! Most people don't have the patience to try to ride the local real estate market down (to buy) and then up (to sell). Of course, being able to rent the old house for a profit in the interim is the key bit.

      You're right about taxes: they'll double to about $2k in the new house. Still, pretty low all things considered, at least compared to most rates I hear about nationally. Orbit, while nice, probably isn't going to be much value to us.We have the free Scottsdale trolley down the street and we've yet to ride it once.

      You make a good point about the marching band practice and high school games. I might ask our friends how that plays out this fall...

  7. Just wanted to say I relate to this post. My wife and I went back and forth for years about whether to put money into our house to make it the house we want, or buy a house that is already "done". We too jumped on the ER bandwagon quickly, only to realize later that it doesn't magically erase all the irrational 'wants' in life.

    During this analysis paralysis, we got the worst of both worlds: a house we weren't fully comfortable in, but not committing fully to finding a better place.

    One day we just decided: we're staying here. We didn't know if it was the right decision, but just making a decision -period- has changed everything. We're making the fixes we want to the house and not even looking at real estate anymore. It's made us very happy, and made me realize sometimes you just need to make a decision and stick with it, even if you aren't sure it's the best.

    1. Sorry for the delayed reply, EA Mann. I'd typed out a response over the weekend and it seems the Blogger monster ate it up.

      I think you hit the nail on the head: we just need to make a decision. The reason this is a pain in he ass is that I'm sitting on the fence, and fence posts poking through my butt crack is uncomfortable. Got to jump down on one side or the other.

  8. Call me a market timer if you wish, but don't buy primary home real estate right now. Throughout most of the US it's a touch overpriced (using the metric annual rent prices vs average home prices), and every single real estate investor that I've spoken to in the last 6-12 months has said, "I'm being extra cautious with purchasing right now." It seems most are bracing for a market correction, and they don't want to be overleveraged. They also want cash on hand when prices correct.

    In terms of DIY renovations, it takes a lot of energy. We've been doing them for nearly two years now. We've got one bathroom, all doors, and baseboard left. Shockingly, we're under budget, but only because my husband should be flipping houses instead of studing materials science (he disagrees).

    1. At least compared to when we bought, Hannah, I completely agree: prices are way up from 2010. I don't know whether that's the right benchmark to use but it's the only data point I really have. Hard to know if prices will continue to climb or when they'll head down.

      For now, the easiest (and cheapest) thing to do is just stay put.

  9. Oh, I can relate! I get house lust any time one of the bigger houses in our neighborhood goes up for sale. I would love something roomier and nicer, and I truly enjoy picking out paint colors, decorating, etc.

    What holds me back is cost. We have an extremely small mortgage on this house, and it's due to be paid off in a several years. How can I throw that away? I really can't - even though part of me will always want to.

    1. I'm glad I'm not the only one lusting after bigger, better houses, Holly. :)

      Like you said though, when you have a good financial situation it's hard to walk away from. Maybe it's supposed to be that way.

  10. Buying a home is always a personal decision. It very rarely makes "financial sense" as investing the money has higher returns (unless you are in a bubble/speculative/crazy market).

    It really comes down to what sort of life you want to live. Retire to a small home, or continue working in a bigger home near a friend?