Car/house option advice

[moto017]

First, thanks to all who provide advice here. I have been planning possible future endeavors and have learned a lot from this forum... I'm just starting out, now that I have paid off most of my debt and could use some input.

26 y/o
Debt: 10.5k auto loan @ 2.89%
Savings: 5k emergency, 2.5k 401k

Current living: renting a room, spend <1500 mo., save 1300 mo. +401K

Plan: Save for down payment, buy a house, rent rooms to pay mortgage, live rent free, pay off house in 5-6 years.

At the current rate, I will have a down payment towards the end of 2014.

1. Pay the car off: set me back 7 months.
2. Save down payment and purchase
3. FHA loan 3.5% down, rent rooms, pay off car loan, pay mortgage off

End goal would be to possibly get into buy/hold real estate. Might use equity from home purchase later down the road to purchase more, keep 30 year fixed if payments are low and profit, or pay off house and roll profit into next home purchase.

Problems
1. 2 years of rent that could be going to home purchase
2. 1 1/2 years to save down payment + rent
3. PMI, possibly re-fi to lower payments to profit when I rent the house and purchase another (interest rate will probably be higher than now + closing costs)

[lorraineb]

Not sure why these are problems? There never is going to be a perfect scenario and you will have to make sacrifices in some area or another. The thing you need to be sure that you are going to be staying in the same area for a long period of time. A sudden or unexpected move could really hurt your whole plan.

[riverwed070707]

First, thanks to all who provide advice here. I have been planning possible future endeavors and have learned a lot from this forum... I'm just starting out, now that I have paid off most of my debt and could use some input.

26 y/o
Debt: 10.5k auto loan @ 2.89%
Savings: 5k emergency, 2.5k 401k

Current living: renting a room, spend <1500 mo., save 1300 mo. +401K

Plan: Save for down payment, buy a house, rent rooms to pay mortgage, live rent free, pay off house in 5-6 years.

At the current rate, I will have a down payment towards the end of 2014.

1. Pay the car off: set me back 7 months.
2. Save down payment and purchase
3. FHA loan 3.5% down, rent rooms, pay off car loan, pay mortgage off

End goal would be to possibly get into buy/hold real estate. Might use equity from home purchase later down the road to purchase more, keep 30 year fixed if payments are low and profit, or pay off house and roll profit into next home purchase.

Problems
1. 2 years of rent that could be going to home purchase
2. 1 1/2 years to save down payment + rent
3. PMI, possibly re-fi to lower payments to profit when I rent the house and purchase another (interest rate will probably be higher than now + closing costs)

I'm a little confused about what your question is, but given the info you've provided, here are my general thoughts:
*You're behind on retirement. Use your low rent living situation to your advantage by contributing a *Minimum* of 15% to retirement, not including any company match. General rule is you want to have 1x your salary by the time you're 30. Neglecting this while youre young will hurt you far more in the long run than renting a little longer.

*Ditch the mentality that renting= throwing away money. I don't know what you are paying to rent your room right now, but I can assure you that you will be "throwing away" far more money in interest payments each month if you take out a mortgage with 3.5% down

*Please don't buy a house with 3.5% down. You need a 20% downpayment. If you aren't happy with the amount of time you will be able to save for your purchase, then pick up a second job or find a way to further cut your living expenses.

*You're still young, but at some point you're going to get tired of running a bachelor pad. Don't buy because you think its going to be a money maker for you. Circumstances change and you may not be able to count on that income for the duration of your mortgage. Buy because you want to settle down in a house, youre ready to be a home owner and you can afford it on your own -- if you happen to rent out some of the space to offset costs for a while thats great but it shouldn't be your primary plan.

*Lastly, while no debt is better than some debt, I wouldn't make the car a priority. Its low interest and I'd rather see you put that money toward catching up on retirement.

[parafly]

*Lastly, while no debt is better than some debt, I wouldn't make the car a priority. Its low interest and I'd rather see you put that money toward catching up on retirement.

+1

Given your emergency fund is at an adequate level, and your car loan is at a very low interest rate, you should focus on contributing toward retirement instead of paying off the car loan aggressively. You are definitely behind in retirement at this point in time.

The general advice is to contribute to your 401K up to the maximum company match, then max out a Roth IRA ($5500 / year maximum), then increase 401K contributions until you reach a total of 15% gross income going toward retirement.

In terms of your home purchase plan, don't rush into anything, and don't do it simply for the sake of not wanting to rent anymore. Based on your total monthly expenses, it seems like your monthly rent is fairly low. You should never consider providing shelter for yourself as throwing away money.

If possible, try to save up a 20% down payment to avoid paying PMI, which is truly throwing money away every month. If you are dead set on buying a home prior to saving up the full down payment, go with a conventional loan over an FHA loan. You will need a slightly bigger down payment (5% minimum), but it gives you much better flexibility in getting rid of PMI once you reach the 80/20 threshold.

[moto017]

Thanks for the response. So, if I contributed 15% until im 30, i'll have 30k saved. I won't be getting anywhere close to rich in my profession so, below the rule of thumb, but decent yeah? Point is, with little income, as much I can invest the better and real estate cash flow seems like a good long term strategy.

On to rent. I figure if i spend 550 in rent, why not pay 550 to mortgage payment. If i continue to live the same lifestyle, a mortgage payment say with 5-10% down to qualify for a loan of say 100k house would be approx. 800-900 after tax/ins/PMI. Renting 2 rooms would pay the mortgage leaving me with the 550 to pay on top of the mortgage payment. If situations change, I could afford the house on my own. Why would renting not be "throwing money away?" Im currently living the same lifestyle as I would without my own home now.

On the other hand, saving 20% would put instant equity into the home and lower payments for instant cash flow. But take 2 more years for me to save "throwing away" 550 a month in rent that could be going to... well interest for the mortgage =) if the situation changed to not wanting to rent rooms to pay mortgage

If i really got serious about paying off the mortgage for the rental income cash flow, 5-6 years would be mortgage free, dependent upon renters paying the mortgage.

Or once a large enough portion of principal is paid, re-fi for low enough payments, pull a little equity for down payment onto another home with minimal cash flow from first house to roll into second.

[amarowsky]

*Please don't buy a house with 3.5% down. You need a 20% downpayment. If you aren't happy with the amount of time you will be able to save for your purchase, then pick up a second job or find a way to further cut your living expenses.

*You're still young, but at some point you're going to get tired of running a bachelor pad. Don't buy because you think its going to be a money maker for you. Circumstances change and you may not be able to count on that income for the du
ation of your mortgage. Buy because you want to settle down in a house, youre ready to be a home owner and you can afford it on your own -- if you happen to rent out some of the space to offset costs for a while thats great but it shouldn't be your primary plan. nt.

This is funny because it is EXACTLY what I did. And It sounds like I make the same income as the OP. I'M 26 bought my house 2 years ago with 3.5% down. And my roommate's pay my mortgage 3 of them at 300 a month per person. My mortgage is 700 escrow included. I have been in this situation for 2 years now. And I can say I'm happy. And since then I have managed to save 15 k in my EF/brokerage account and bring my 401k from 6k at the time of purchase to about 18k now with no debt. I'm also saving for my next house which I WILL make sure I have the 20% down.

I wish I had the 20% at purchase time initially for my frat house. But I did the 3.5% down and think I may have came out on top. Although I'm paying an extra 60$ a month for PMI. I think this because I pulled the trigger early before I had enough saved, but I got the house at an amazing deal at 75k. Now it's worth I would guess about 90k. So if the deal is right sometimes it seems logical to strike while the iron is hot. Living with roommates does wear on you at times, bit in the end a free mortgage is worth it if you can manage the patience with them. And living with people is way way more fun and exciting than living alone IMO.

Though I do hate PMI, that's why I'm saving until I have 60k for my next house eta of age 30 (4 yes roughly). So I'll have 20% for my next house. Then depending on market I'll either sell my first house, or preferably turn it over to a property management company and rent it. Approx rent for my size house at my location is 1100-1300. That would be best case, but if rent market takes a dive which will be triggered by returning house market then I would be content selling for no less than a 30k profit.

For what it's worth if it helps your decision. I'm quite happy with my decision. Bit I have the best roommates. All friends of over 10 years each. And make sure the house you buy, whether or not its your dream house, our should be at least a house that should you have to, would be content and happy staying in for a long time.