Howie writes in:
My wife and I have been running our own home-based business for three years now. We rent and work out of a smallish 2-bedroom apartment in the very expensive SF Bay Area. One of those bedrooms is an office that we both share as an office. We spend day in/day out working together in this small space.
About a year ago we realized we could afford to buy a house in an outer suburb of the Bay Area now that the prices have come down. After a year of looking, we’ve now found ourselves in contract on a wonderful 4-bedroom house that we love. However, it’s at the top of our price range–about 30% of our income would go to the mortgage.
I realize that typically this would not be a good idea, as at least at the beginning, we would be stretched. However, the biggest reason we are looking to move right now is to gain more space so that we can grow our business. Currently, we feel like we’ve reach critical mass with what we can do in our small office. With this house, we feel it could be an income-generating asset for us in that it will afford us more space for us to grow our business and make more money. I very much feel like if we had more room to operate and a more official dedicated workspace, we could increase our income significantly.
Most financial advisers I’ve been reading say to buy a small, inexpensive home. This would be fine for us if we didn’t both work from home, but we simply need more space to operate our business.
Of course we could buy a small house and rent an office somewhere, but I’ve done the math on that too, and when you combine smaller house mortgage with separate office rent, the cost is essentially a wash.
The other option would be to rent a bigger house. Rents in the Bay Area are still high, and we would spend about $200/mo less doing this. I know every bit counts, but I don’t know if this savings outweighs the emotional benefits that go with working and living in a home that we own. We also want to start a family and are ready to put down roots.
Finally, we could ditch the Bay Area entirely and move somewhere much cheaper, such as Oregon. While there is some risk in leaving a few of our local clients behind, we could do this with not much risk, as most of clients are all over the country. This option would put us where we want to be financially, but as I mentioned, we want to start having kids soon, and most of my family is here in the Bay Area. Moving away seems daunting.
First of all, your emotional argument is clearly in favor of buying the home. Most of the argument you lay out here is one that makes the case for buying above all else.
Most of the time, regardless of the dollars and cents, people operate with their emotions. They’ll find ways to make the dollars and cents work. In fact, that’s when personal finance really cooks – people spend time soul searching, discover the key things they really want, and then stop wasting money on the things that don’t really matter to them.
In this case, it’s clear that the home matters to you. What things are less important in your life that you’re willing to trade for it?
The maintenance costs of home ownership are far higher than renting. When you buy a home, you no longer have a landlord to call when a toilet breaks or a hot water heater goes out. Instead, you’re calling a repairman – or doing it yourself – and all expenses come out of your pocket. You also have lawn maintenance costs. You also have homeowners’ insurance. You also have property taxes. You also may have association fees. Those can be enormous – they can be enough to break the back of someone who thinks they can afford home ownership.
Beyond the financial cost is the time cost. Suddenly, you’re spending time mowing the yard. You’re spending time changing filters and doing maintenance work on your equipment. You’ve also got more space than you had before, so you’re spending more time cleaning.
Paying these costs – in addition to merely writing the check for your monthly mortgage payments – will exact a toll on your life as you currently live it.
In exchange for that toll, you will gain other things – the room to grow your business and the room to house your family.
It’s an emotional decision that you have likely already made. There are just two things I would suggest seriously evaluating before you actually make the leap to buy.
First, do you have an adequate down payment? This is important for two reasons. First, if you don’t have the financial fortitude to save up that payment while living in a rental unit, where the costs are much lower, you may not have the fortitude to handle the costs of home ownership. Second, without a 20% down payment, you’ll be paying a higher interest rate and/or mortgage insurance costs.
Second, do you have a written, clear plan for how you will make ends meet and how you will utilize that space to grow your business? These both may be nebulous concepts for you right now, but if you buy, they will become your reality. Spend some time actually planning for both of these events. Make a home budget. Make a business plan. Make sure you can actually do this with some breathing room (and an emergency fund) intact.
Yes, this seems like a lot of planning that takes away the “fun” of buying a home. Without that planning, though, you’re quite likely to find yourself losing that very house in a few years. A little planning now makes your dreams come true.