62

My wife and I are very frugal. We've been living abroad for several years and saved a decent amount of our salaries. We've decided to move back to the US this year.

We've found a modest home that needs some work, but has good bones and is livable. We could buy the house outright in cash with our savings, but that would leave us with only a few thousand in savings. With that money we would also need to find transportation (maybe a car loan - yuck), buy used appliances and furniture and live on until we find gainful employment. It would be the most broke either of us have been since we were in college. We don't have any credit card debt, so we could rely on credit in an emergency, but neither of us like the idea of that. We'd also have to put off any repairs or updates to the house. The house is VERY low on taxes - $390/year. However, it's in a small town which will likely be a 1-hour commute from where I will probably find work. My wife could probably find work much closer.

The other option would be to rent a place. We could obviously rely on our savings until we find employment and not have to rely on credit for emergencies or buying reliable transportation. It just seems like throwing money away. On the other hand, it would be a very low-stress situation.

This decision has been so hard for us. Any advice would be appreciated.

  • 13
    I'd definitely rent closer to your work (ideally for both of you). You'll spend a LOT of money over time on transportation costs. Some food for thought... jlcollinsnh.com/2012/02/23/… and perhaps this for a more extreme view on transportation LOL mrmoneymustache.com/2013/04/22/curing-your-clown-like-car-habit – topshot Feb 5 at 14:00
  • 3
    1 hour commute? Will this commute be by private vehicle? – Harper Feb 5 at 16:51
  • 3
    Can you rent the house you wish to buy for a few/6 months until the new jobs & transport are squared away? – CrossRoads Feb 5 at 17:28
  • 8
    "We've been living abroad for several years ..." BTW, you may be shocked to discover that, no matter how much cash you have on hand and no matter how high your income is, you simply won't be able to get a mortgage until you have a long credit record / employment history in the US. – Fattie Feb 5 at 19:54
  • 32
    So your options are either buy a house 100% in cash, or don't buy a house at all? Not one for middle ground, are you? Only a Sith deals in absolutes. Mortgages, home equity loans, sleeping on a friend's or family member's couch till you get jobs, or anything else besides all-or-nothing are all impossible options for you? – Shane Feb 5 at 21:45
131

Because you don't have the jobs lined up, it makes more sense to rent for a few months for a couple of reasons:

A: You should never deplete your emergency fund of 3 to 6 months for non-emergencies

B: Once you land a job, you can make a better judgement as to where to live for the commute.

C: Car loans and credit cards are expensive forms of debt that should be avoided if you want to build wealth (the fact you have neither of these consumer debts is awesome, don't wreck that by putting your financial future at risk).

With rent, you're buying patience. There's a house on every corner so don't get house fever over this one property. Renting will provide you with the least risk and most options until you can get your feet under you after the move. Spend a year getting to know the neighborhoods, find employment and building up more savings for a larger down payment. If you find a home a year later you can buy for cash (over and above your emergency fund) even better!

Financial Expert, Dave Ramsey, has this to say about renting vs buying: https://www.daveramsey.com/blog/buy-vs-rent-myths-busted

The link covers what's mentioned above.

Keep up the great work!

  • 5
    I appreciate your wisdom. It really helps to bounce stuff like this off a neutral party for an outside perspective. – krayziesensei Feb 5 at 7:05
  • Welcome to Money.SE. A link, in and of itself, isn't such a bad thing, but links break. In this context, I'd suggest you just add a few lines to summarize what the linked article offered. – JoeTaxpayer Feb 5 at 10:01
  • 1
    The link re-iterates the reasons I gave, but has additional useful information that was not pertinent to the question. I'll edit to clarify that the link says some of the same things. – Adam Klump Feb 5 at 13:03
  • 1
    @FixedPoint A car loan would be considered expensive because you pay interest in addition to depreciation. Your net position at the end of an auto loan is worse than paying cash. The vehicle is an expense either way, so no need to add insult to injury by way of interest. By comparison, home mortgages preserve capital (typically) and in the 15 year range are a good deal. 30 year mortgages usually cost 150% or more the amount borrowed. – J E Carter II Feb 5 at 17:31
  • 1
    For the side topic of credit score in the comments, you do not need a credit score to get a mortgage. If you have a credit score then you want it to be good when you get the mortgage or it'll be sub-prime. However, if you have no credit or credit history, then you'll need to find a mortgage company that does manual underwriting. Once they verify everything is in order, then you should get the same rate. But not all mortgage companies do manual underwriting. I hope @krayziesensei has not opened any credit accounts as it'll take a bit more time to build the credit to get competitive rates. – Adam Klump Feb 7 at 4:20
31

@Adam Klump gave the advice I would personally follow, but I want to give a third possibility.

I'm not from the US, but it seems to me that you don't have to buy the house outright in cash, you still have the possibility to take a loan. You'll still be able to pay it off whenever you want, and may be able to negotiate low interest rate and have the money to pay it off in only 10 years instead of 15/20/25... It should enable you to minimize total interest.

You would be able to keep a big part of your savings while still owning your home. The difference to be aware of between my solution and @Adam Klump's is whether it is cheaper to rent for a few months/years than to pay interest on a loan. That, and the difference in mobility, of course.

  • 11
    Taking a mortgage is not a horrible solution. @Adam Klump mentioned Dave Ramesy, who points out that a mortgage is a hedge against inflation. A 15-20 years mortgage defrays the housing cost, and the money you pay with is progressively less expensive thanks to inflation. – J E Carter II Feb 5 at 14:25
  • 1
    @MatthieuM. I'm not a banker but I wonder if hearing "I have enough to pay you back right now but I want to delay a bit" is not better than "I earn money so I hope I'll be able to pay you back on the long term" for a bank. – Echox Feb 5 at 16:35
  • 1
    @Echox: I am not a banker either, however I would note that the very reason you take a loan is to use the other money elsewhere. There are quite a few stories about people getting a big payment (lottery, inheritance, ...) and spending it all in a few months or years; and even without going so extreme, without any revenue, this lump sum of money is going to shrink over time as it's spent for necessities: food, electricity, phone, ... – Matthieu M. Feb 5 at 17:17
  • 2
    I don't believe that "mensualities " is an English word. – Acccumulation Feb 5 at 18:25
  • 2
    @Acccumulation Agreed. It appears to be a French term meaning "monthly payment" – Brian Feb 5 at 19:47
23

You are overlooking the real cost of automobiles

People have a strong tendency to wildly delude themselves about the true, total costs of automobiles. AAA tallies up the total, real ownership cost of a reasonably recent car. It came out to $8,841 last year for a 15,000 mile/year car, with SUVs pulling up the average.

You didn't say where you aim to live. But I am guessing the under $400/year property tax doesn't fund a robust public transit system that makes life without a car workable as it might be in Brooklyn, West Hollywood, Little Five Points, city center Detroit, Jefferson City, Santa Cruz, etc.

Notably none of these places are an hour away from where all the jobs are. So you have plainly identified a location in rural or exurban America. It doesn't havetransit. It may not even have Über. It may be very nice in other ways, and you may have family support there. But you need to deal with the "car" thing.

Let's be generous and say you've found a sweet spot in value around $7000/year for presumed normal 15,000 mile/year use. A job an hour away - 2 hours driving a day - that means 40-120 miles a day, for 10,000 to 25,000 miles a year just for commuting. In rural areas, everyhting else is faraway too, so I would fudge 10,000 miles for non-commute driving. So you'd be looking at 20,000 to 35,000 miles a year. You are madly burning through your warranty and depreciation (purchase price - resale). Including insurance - the insurer cares when you drive a lot of miles.

Given your financial status, I gather you would pursue a used car, which means you would run afoul of Harper's Law: Never owe money on a car that's out of warranty. Because then you are really sunk: a broken car is worth nothing, so your note is upside down (and they may call the note when they see the tracker stop moving), and you need another car ASAP.

What I do is drive a 90s econobox and maintain the heck out of it all myself. I know my costs. But in a rural area I would buy several same-model cars for parts, because the picking yard is far, far away. In your situation I could probably contain vehicle costs to under $6000/yr. (fuel, insurance, increased repair tempo). That's sweat equity and great MPG. There's no free lunch.

This kind of overextension is exactly how people enter the death spiral that leads to 470 credit, payday loans and being unbanked.

The cost of transport must be factored as part of the cost of home ownership.

Especially if this house is a "fixer", you will need to regularly transport building materials. I'm not saying "run out and buy an F150" because then, fuel costs alone on the 1-hour commute will murder you. You would need to rent a truck or pay for the building supply to deliver, so there's that cost too.

Also, have you priced health insurance? It's not free here and you pay two ways for it. Also make sure you understand all our taxes, including state and FICA/SE. You can easily pay more taxes here than there, and pay your own healthcare and education to boot.

All this points out how wealth isn't cash, it's situation

Wealth is when your life and your assets are set up to work in your favor and save/make you money.

Simply having a pile of cash isn't wealth. Simply saving money isn't wealth, especially when the money-saving strategy causes difficult-to-contain expenses.

So for instance, I would not want to see you moving into a deteriorating trailer home that you can keep holding together. I would want to see you move into a good flipper candidate, so you can use your own skill assets to multiply sweat equity, yielding a property that is worth a lot, which you then sell and do again.

Even buying for cash is over-rated. I would much rather see you take a mortgage to buy a triplex where transit does work, close to jobs, and where the rental on the other two units mostly pays the mortgage. Rents go up, mortgage payments do not.

The point is to engineer wealth into your life.

  • 2
    The average (currently ~13,500 miles/year) includes commute, suggesting a 60 mile commute would be an additional 15,000 doesn't make sense, commuting is the bulk of driving for most. Also, an hour commute doesn't mean you're living somewhere rural, in most major cities the traffic moves quite slowly. For a while I had a 10.8 mile commute that frequently took 1 hour due to traffic, and some places are much worse. I'd like to see that dated AAA data, guessing they include depreciation in that figure and base it on new cars making it of little use. – Hart CO Feb 6 at 15:56
  • 4
    @hartco when you lived at the 10.8 mile commute, was your property tax $400? No it was not lol. That, and being an hour from jobs... Both strongly flag "rural". I know rural people with hour commutes, it's 60mi and it's a car killer... Depreciation is a real thing that does matter. Automotive TCO is expensive and people are crazy self-delusional about it, it's almost impossible to get them to honestly tally their true costs. I drive a pre-OBD manual-everything no-A/C econobox, and I do my own tranny swaps for $150, so my TCO is as low as humanly possible, yet still $4k/yr. – Harper Feb 6 at 17:15
  • Can't assume much by property tax, varies wildly by state. Depreciation is a real thing, but taking it over 5 years and ignoring the longer useful life of a car in a TCO calculation is a bit rubbish. I agree cars are expensive and people often don't calculate the true cost, but it's easy to come in well under $7k/year. In either case, your "15,000 to 30,000 additional miles a year" claim still doesn't make sense. – Hart CO Feb 7 at 15:55
  • 1
    I didn't mean to condescend, but you are being unrealistic yourself. Your crux is that $7000 is an unreasonable TCO for a 2-3 year old car for 5 years. I'm at $4000 with my nil-depreciation near-nil-self-repair junker. Your car needs to be insured for collision because it's too valuable not to. Finance rate will be higher than new, and the loan will outrun the warranty which violates Harper's Law and exposes you to a catastrophic repair bill. Regardless, it will need regular repairs which must be done or erode resale value. $3000/year for those? Easily. – Harper Feb 7 at 18:14
  • 1
    @HartCO ah yes, that explains it. I won't invalidate your experience, although you did violate Harper's Law, so you're not fully accounting for your risk exposure to a catastrophic repair: you got lucky. But yeah, the low mileage helps contain costs a lot. I didn't consider it because I think and write answers in the context of OP, whose situation is the diametric opposite: due to his mad commute, he'll be burning through depreciation, warranty and repairs like a man on fire. – Harper Feb 7 at 19:24
6

My advice is to cost-compare buying vs renting before making the plunge to buy a home. Where I live, it's much more cost-effective to rent. Brother and I thought about buying a house. Even if we bought the house out-right with cash, we'd still have insurance and taxes to pay (not to mention any home repairs that might come up). The taxes + insurance alone was more then the cost of renting. Plus, the houses we could afford were located in inconvenient places where we work (the commute would be bad).

We live in a very mobile economy these days. The idea of buying a house is still part of that American Dream that people hold on to from the past, when people would get employed by a company and work there until retirement. (EG: people working at the same steel mill all their lives, or for the same headquarters corporate office all their lives).

Companies come and go based on global demands (eg: taxes lower in one country, they shift their headquarters to it. Labor is cheaper in another country, they shift all their manufacturing to it).

Being anchored to a house can prevent you from being mobile and taking advantage of the mobile world economy.

Also, some people still have it in their heads that houses appreciate with age (ie: gain value). This isn't always the case. Neighborhoods age. If they age gracefully, then the property value may go up. But, where we live, a lot of neighborhoods are just getting run down. A $200k house in a neighborhood back when is now valued at $150k, simply because the neighborhood is older, the houses are older, and the neighborhoods are becoming more run down. Instead of sticking around and fixing up old houses, people are moving to new houses and the neighborhoods run down. The commercial / businesses around the area are also changing. There used to be nice businesses. But, when the businesses near a neighborhood turn into pawn shops and pay-day loans.. the neighborhood has run down.

When renting, you're just locked in until your lease is up, and the landlord is responsible for all repairs. If rent goes up, or you get a job some place else, you just move.

If you have a house, you have to worry about a longer commute if your job moves. You can't jump on jobs that are across the country / globe, because you have a house to get rid of. You can try to turn the house into a rental property, but that can be an extra headache. In a buy'ers market, you will either have to sit on the house or sell it for a loss.

A house can just be a headache. But, it all depends on what your long-term goals are and the market you live in. For folks wanting to start a family, a house can be great. But, for one or two adults, renting may still be the better way to go.

So, you should consider why you want to buy a house. If you're chasing the American Dream (ie: everyone says you should), you should look around and see how that American Dream is working out. There are home owners that are stuck with mortgages, or with houses they've paid off that are in rundown neighborhoods where the home has lost value. (A house is not an investment. It's a tangible good that can depreciate in value.) The American Dream of owning your own home and retiring is becoming more and more unobtainable and/or impractical for most folks. I did the math a long time ago, and figured out I could either have kids and own a home.. and work the rest of my life. Or, rent, save my money, not have kids, and retire one day comfortable. I decided retirement sounds better.

So, you really need to map out your long-term goals, and compare them with current market values and estimated future markets to see what meshes with what you want.

Since my brother and I looked a while back, I have since settle down with a wife, but even we're sitting here renting, because it simply makes more sense to rent right now. We eventually want to get a home, but the city we live in is a massive metroplex, and the "sweet spot" locations in the middle of the metroplex are insanely expensive. Everyone is moving to the burbs, and the burbs keep pushing out furhter and further with urban sprawl, but that would put us at 2 hour commutes both ways to get to jobs. We decided renting and living near our jobs was much less stressful, and we spend less money, too.

4

I found myself in this situation recently and bought the house, it had a lot of work that needed doing (still does). The masonry of the house are good and the joists etc are fine. The house is freehold.

The benefits of doing this is:

1) You have somewhere to store your stuff. Don't underestimate the value of this. For me it allowed me to remove a lot of clutter from my other place.

2) You'll never be homeless, unless the property burns down or there's a natural disaster.

3) You will feel a lot more confident in life generally.

4) It will be paid off and you'll have no outstanding debt.

The negatives of doing this:

1) The renovation costs about 2x the amount of money i anticipated.

2) I am living somewhere else while saving to fix it up this is a bit tedious.

3) There's some minor up keep with tax. Not much, but some.

Decision factors:

1) Make sure you have some shops nearby,

2) that you're on a transport route with buses / trains,

3) make certain that the building's masonry is good, once the brickwork goes, the entire property is at risk

4) don't buy leasehold, shared ownership or timeshare.

5) don't buy property threatened by natural disasters. If the house is in hurricane alley and made of balsa wood, you're throwing money away.

For me, my property ticked all the boxes and there was a couple of months of worry waiting to get a job, but it worked out, so the whole thing turned into a brilliant decision. But it could have gone either way realistically. Don't buy on a whim, i studied the areas i was interested in for years first even though the house purchase itself was a drunken impulse purchase on the day.

  • 2
    +1 for looking at the public transport maps before buying. In fact, when house shopping, do it on transit. If it takes 2-1/2 hours and 3 bus changes and a mile walk to get to the showing, then you won't be caught by surprise like most Americans the one time they need to use public transit and it turns out to suck. I chose 2 blocks from some major trunk lines, and the area is my oyster. Not literally, I don't live in London, – Harper Feb 7 at 19:37
3

One important thing to consider is why you're buying a house. Don't buy one as a financial investment. Houses are notoriously non-liquid assets, and a surprisingly large amount of money goes into maintenance, so even if you avoid wiping out your savings by getting a mortgage (which, as noted, might be more difficult if you've been abroad), comparing the mortgage payment to rent isn't always a fair comparison. Home ownership is an investment, but it's more in terms of stability than in finances, and it's not one to be bought at the risk of the other.

2

Cash reserves are something very important to have; {better have it and don't need it than need it and don't have it :) } Even if you both had jobs lined up, i would suggest to get a mortgage (maybe a fha 203(k) which allows you money for repairs / upgrades ), so you can keep your cash; if you don't have jobs, for sure rent until your job situation is stable, and then get a loan, and put 20% down or so... good luck

0

Get a low interest unsecured loan to buy all/part of the home which is to be paid off after you all are gainfully employed again. I'd also open up credit cards with local banks and credit unions to have something to fall back on. You may even be able to float the home purchase for 1.5 years (or longer) at no interest using balance transfers which you can then pay off in full. I'd also shop around and make sure the home is the best deal you can find in your target area. If there are multiple homes that might be suitable then you could offer low until one of them accepts and then you will be at less financial risk and have more equity. You might also want to look at buying a foreclosure at the courthouse steps to save extra money but you will want to see that the home is not occupied. I could have saved about 40k if I had bought from the courthouse steps one time rather than when it came to the MLS but I didn't have the 90k at the time. Keep in mind that banks are usually less willing to negotiate big price swings than private sellers and private sellers may need to do a short sale to get the price you want and also satisfy their mortgage (these are sellers that are usually desperate to sell so they can salvage their credit)

Don't do this unless you are 100% confident you will find good jobs.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.