Risk Taking – Going Back into Debt

by Sandy L on February 27, 2012

During my last Coffee Talk, I spoke about how one of my downfalls was my conservative nature when it comes to spending and investing.  Given the stock market scares me and I already do most of my retirement there, I was looking for an outlet for the extra cash we’ve been saving.   Between wanting to invest it somewhere and my husband’s desire to move to a better school district in a location that can someday accommodate Babci, we’ve officially embarked on operation “Live with Babci someday.”

Babci is 78 and we don’t want to be scrambling to look for another house if she needs to live with us out of necessity.  Right now, she’s healthy and the market is low, so we’re officially house hunting in a leisurely manner. It’s nice that there is no urgent rush to move and we can take our time on the decision.

I only live about 3 hours from NYC, and just south of me is an area that is a very desirable spot for NYC second home buyers.  In fact, it has been so since the industrial revolution and there are 100 year old mansions all over the place. (As an aside, if you’re ever in the Berkshires, you should tour The Mount, Edith Wharton’s Estate. It’s very cool).   As a result, the area has been very expensive to live in, even for a modest sized home.  A comparable house to the one I live in for this area is easily double to triple the value of mine because of the land, amenities and school system.  The schools are amazing because there are loads of tax dollars coming in from second home people and not as many kids.  As a comparison, my son’s school got infested by fleas 3 times this year from students bringing them in on their clothes.  His school is ok, but there are a lot of disruptions that take away from learning and a ton less funding. It was managed swiftly so I didn’t have to send him to school wearing  a flea collar but I feel for the teachers and administrators for having to deal with all this extra stuff that has nothing to do with their learning goals.

Edith Wharton's Digs

So, here it is. I’m taking a risk. We are actually house hunting in the very posh Southern Berkshire area.  Even though I bought my current home way back in  2000, I will likely break even on it given what we put into it.  The downside of being too frugal is that you miss opportunities.  My house didn’t depreciate too much during the downturn, but on the flip side, it didn’t really appreciate in value either.  It was very “safe.”

So, here’s the risk we’re about to embark on in preparation for our retirement.  We are going to shop for a bargain in this area and it will likely mean going back into debt again (even with the home equity we have today).  We can buy a pretty nice house in a different town with very little debt, or we can push our way out of the comfort zone a little and get a place in a primo location while prices are at all time lows.  The upside potential is significant..I’m talking hundreds of thousands of dollars significant if we’re patient.  So that’s going to be the new prong to our retirement strategy. Buy a fixer that we can’t over improve because of the neighborhood it’s in.

Being in Debt is  Simple

If I am completely honest with myself, the other reason I like this plan is because it’s easy and I’m old fashioned like my mom.  Homes are tangible investments and if the economy tanks you still have a place to live in.  Plus, I really love the thrill of the hunt. It’s so much fun. It’s like yard-saling on a grand scale.  Paying off debt is also totally brainless. It’s the simplest thing in the world if you have steady income.  I hated the complexity of trying to figure out how to allocate funds to which investments and all that.  House payments are like a fixed payment plan to your retirement.  Also, paying interest even at 4% and change is still a negative enough deterrent to motivate  me to pinch pennies more than I have been in the last year.

Wish us luck. Babci is supportive and is already praying on the god hotline for a good deal to show up. The first day we were out, she was trying to talk me out of it saying that we are going to waste our best years fixing up dumps. So I was like, but what if we enjoy fixing up dumps? But then the second day even she was high on a few places if we could get them at a lower price point.

So, what do you think? Am I a total sellout that can’t manage without being up to their eyeballs in debt, or do you think this is a shrewd investment move?

 

 

{ 16 comments… read them below or add one }

Nicoleandmaggie February 27, 2012 at 7:58 AM

Good luck!

As to how calculated a risk it is, can’t say without the numbers (or % of your annual salary in debt). It may be fine.

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Sandy L February 27, 2012 at 8:05 AM

Good Point..We are targeting about 1/2 of what the bank says we can afford to borrow, which is still risky to me because banks don’t take into account expensive recurring expenses like daycare , insurances, and retirement savings.

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Nicoleandmaggie February 27, 2012 at 7:07 PM

Just from my BOE thoughts, 1/2 of what the bank says these days is probably fine, assuming you and your DH aren’t employed by the same company, your retirement savings are diversified etc. The idea being so long as you’ll still be ok if you’re hit by an adverse shock.

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Everyday Tips February 27, 2012 at 8:12 AM

I don’t think it is an investment move monetarily at all- but it is an investment in your kid’s future and possible happiness. After watching the housing market be such a mess in recent years, I just can’t bring myself to think of a house as anything other than a place to live, and a possible money-suck. (Even if my house did appreciate, I have put so much money into it over the years.)

You definitely are not selling out. You are just looking for a nice home to raise your family. I agree though, house hunting can be really fun when you have some flexibility. I look forward to watching your house hunting progress!

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Sandy L February 28, 2012 at 5:12 AM

Everyday Tips – I guess I’m not quite as jaded by the housing crash as we didn’t have such a big runup and then crash in prices like some areas did. House hunting is fun and hopefully there are plenty of places we can call home out here. Thank god for a good imagination because a lot of them need a ton of work.

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Molly (Mike and Molly's House) February 27, 2012 at 8:01 PM

It’s tough when you are taking what might be best for your kids. We bought a house 1/2 of what the bank would fund and our so happy. Yes we could have afforded more but 10 years later as we are both unemployed we can still cover our tiny mortgage.

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Sandy L February 28, 2012 at 5:13 AM

I still like the goal of being able to pay it on one salary if push came to shove. That decision last time around really helped us through some tough times and enabled us to buy a second home so my mom could move to town. We still want to retain some flexibility with this purchase.

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Laura @ Move to Portugal February 28, 2012 at 2:20 AM

No not a sell out, this sounds exactly the route I would take; I (still) prefer housing to investing. When it comes to money you should always go with what you know and like you I know a.lot. more about housing/fixer uppers/areas, than I do about investing….we plan to buy another property one day too (in Portugal)

As a side point this area sounds like my perfect place to live!

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Sandy L February 28, 2012 at 5:15 AM

Laura – yes, this Brits love this area. There are many many great restaurants and live theatres here in the summer and the boston pops move in to town for 3 months and do summer concerts for the peak season. It really is country living with big city culture. What’s not to love besides the price?

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Niki February 28, 2012 at 6:39 AM

I am excited for you! It sounds like a great option, not just monetarily, because who really knows when that could come to fruition, but it sounds like a better location for everyone. Sometimes peace of mind and sanity win out and are investments in their own right. Plus, we all know you’re not buying a house you can’t afford. :)

Best of luck to you and I can’t wait to hear the gems Babci will unleash during this house hunting phase.

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Jacq February 28, 2012 at 7:57 AM

Oooh – house hunting! I’ll take my overly long comment and go home to write a post on it. ;-)

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frugalscholar February 28, 2012 at 11:35 AM

I think this is a good idea–partly the schools, but also because your mom can live with you (is that the plan?) and that will more than make up for any price difference.

Are you going to sell her house also? (Sorry–no time to reread post for details)

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Cynthia February 28, 2012 at 3:30 PM

You know, I’m going to echo frugalscholar and say there’s a lot of value in doing the right thing, it seems to me, if I”m not sounding too judgmental. You want Babci to live with you and you’re coming up with a very careful plan. There’s also a huge, hard-to-calculate value in good schools, so all three generations of your family are in good shape. Sounds like a fun adventure!

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retirebyforty February 28, 2012 at 3:57 PM

Go for it! It’s a great time to buy a house and you know the housing market will recover at some point. If you don’t buy soon, you might not be able to move into that area later. Great school and rich friends (connections) are a great benefit to your kids.
The only thing I hate about this idea is the property tax. I’m sure you’ll pay tons.

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Invest It Wisely March 1, 2012 at 11:10 AM

I think that lifestyle wise it sounds like a good plan. Does it fit in with the balance and numbers? If one of you gets laid off or if there is another unexpected event will you have an adequate buffer in place? Are the total housing expenses (taxes, mortgages, etc…) reasonable? If it makes sense and the numbers show that your risk is adequately covered, I say go for it.

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Charlotte @ Out on the Veranda March 2, 2012 at 12:16 AM

In my book, family comes first. It sounds to me like you will make it work, whatever it takes. Good luck finding just the right place.

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