Q&A: Should I Buy a Bigger House for Roommates?

Following last week's post on the ROI of rental properties, another interesting question is whether you should buy a small one-bedroom condo (for example) to keep expenses low, or a three- or four-bedroom house to gain some rental income. There are two main considerations: ROI and overall financial safety.

As far as ROI is concerned, I think it's very similar to last week's calculations. There are some differences in the details, though. Your principal and interest (P&I) payment will be higher, but when determining the ROI on the rental portion of your property, I think it should be specified as the difference between the large house's payment and the small home's P&I. You would have had the base P&I payment anyway, so it's not really a cost associated with the renters. Similarly for most of the expenses. Property taxes and insurance will be higher for a larger house, usually. Maintenance costs will be higher with the increased wear and tear, and you'll need a larger refrigerator, but maintenance costs haven't risen that much for me. Utilities will be higher, but probably not terribly so.

Your investment amount should be the increase in down payment, or the difference in overall home value. In this scenario, I am strongly inclined to use the overall home value in my calculations. This gets into the overall financial safety aspect. A pure rental property can be abandoned and sold off if you don't want to deal with renters anymore. If you get tired of having roommates, you can kick them out, but you still have to pay for the entire house. Lowering your expenses requires moving and the house-buying-and-selling process and headaches associated with it.

Consequently, I think it is very important to buy a house with many financial cushions included, even when you plan on having roommates. As I mentioned ages ago, I bought my home knowing I could afford the payments and other costs using just my base salary after all my preferred expenses had been taken out - 401(k) contributions, IRA contributions, miscellaneous spending money. Each of these expenses was a cushion, and any rental income was a nice bonus.

And there are other reasons why you may not have roommates anymore. I would guess that most people are single when they contemplate having roommates in a house they are buying. It's possible you meet that special someone that thinks you're a special someone, too. Roommates may get in the way then. It's possible that special someone comes with a second income that's much higher than that provided by roommates, but they might also be going (back) to school, or you might be having kids right away and one of you will be staying home. Either way, it'd be nice to be able to spend your first year together in wedded bliss, rather than struggling to downgrade your home.

For me, it seemed to make sense to buy a bit bigger. It's definitely worked out so far. On the other hand, I'd have a much lower debt than I have now, and might have purchased a standalone rental property already. It's hard to know exactly how things would have been different, but I can't say I've had any major regrets with my house and/or roommate situation.

My failure as a homeowner

So, a couple weeks ago, my failure as a homeowner became official. The neighbor across the street came over and rang the doorbell one Sunday morning while I was asleep. Carrie answered the door, and the neighbor gave her some local church material, then asked if she (Carrie) would mind if she (the neighbor) weeded the front landscaping. Of course Carrie didn't mind, so I woke up to a weeded front garden!

Obviously, this worked out well for me - I got some free yard work. However, I still do feel bad about the whole thing. I asked my dad what the appropriate response was - do I offer computer help in return? Do I pretend nothing ever happened but take better care of things in the future? Do I send a fruit basket? He agreed that not making a big deal out of it was probably the best course of action for now.

And of course, this is just one of my many failures in homeownership. I will skip the documentation of those for now...until they reach ridiculous proportions.

Dining room art

I've been shopping for the past week or so for artwork and/or a mirror to go over the dining room buffet/sidebar. Carrie has expressed annoyance at my selection of stuff so far, so hopefully whatever I get will break that trend. Her mom tells her she will bring some of her father's old paintings the next time she visits, too. I'm interested to see what they are like.

But, so far I have found a couple paintings and a mirror that could work. One place has a buy-one-get-one-half-off sale going through the end of January. I'm only really interested in one painting, there, but my brother has found another one or two that he says would have a place in my house no matter what. I do have plenty of basement walls to fill eventually, after all.

It's been an interesting process. I've had to develop my tastes all in the last year, for the most part. It really has been one fairly major decision after the next. Once I bought the house, I had to pick out a refrigerator. Then I had to get a washer/dryer set. Later I had to get a kitchen table. Then I had to pick out a TV. I made sure my house had room for a ping pong table when I bought it, so then I had to pick out a ping pong table. Most recently, I had to pick dining room furniture. I thought I was done for awhile, but I now apparently need artwork.

So, I've been gathering opinions and analyzing my personality. I don't think most people are as intellectual about it as I am. I feel more like a dream interpreter than anything. Where most people would say "I like that," I look at it and make up a symbolism matching my personality. "The frame is simple, which goes along with my practical nature." I do recognize that there are colors, shapes, and overall styles that I don't particularly care for, though, which is a major step for me. Still, there doesn't seem to be anything that represents the side of my personality that largely doesn't care and that can live with pretty much anything, or nothing, on the walls.

Yet to be decided: my new set of clothes for the next few years. The decisions never end.

Been busy

I've been pretty busy of late, both with work and social life. I'll devote this post to my house, though, as that's where the most significant progress has been made.

I got my washer and dryer! It's a high efficiency front-loading washer. One thing I wasn't counting on was having to get all new high efficiency laundry detergent formulated to work with less water and the like. I gave my laundry detergent to a friend at work, so at least it'll get used.

Either today or tomorrow I plan on going to Nebraska Furniture Mart and picking up my breakfast area table and chairs, along with some bar stools for the kitchen counter area. My grandparents said hey want to make my kitchen table set a housewarming gift, but pretty much all gifts are hard for me to accept, let alone a $700 one. But, I'll go with it on this one.

Speaking of the kitchen, it's amazing how little cabinet space there really is in there. Alternatively, it's amazing how much stuff Carrie has. It is a very good thing that I have a roommate, or I'd be completely embarrassed at the empty nature of every room. She moved her big stuff in this weekend, too, which means I will soon have to move my couch into the basement.

Which means I need to get a TV for the basement! So far, my favorite is Toshiba 65" DLP at Newegg.com. If it weren't for Amazon.com charging taxes in 4 states, including Kansas, I would be able to get it cheaper there. Also, TV stands are ridiculously expensive. I'm disliking that whole situation and halfway considering throwing together some ugly plywood and making my own stand. But, as anyone who's seen my desk knows, that won't look very good. I'm making an effort to get out of college mode, but $300-$400 for a piece of wood that just sits there is discouraging.

Having a TV will be great for watching DVDs, but I will also need to get some sort of live TV feed. Comcast cable is horrible, in general, so it's between DIRECTV and AT&T's Uverse. I would like to go with Uverse because it comes with 3 free receivers, including one DVR, while DIRECTV charges $5/mo for extra receivers and more for DVR. Plus, with Uverse, I'd get cable and DSL without having to buy a phone line for some reason, so it would be cheaper. Unfortunately, my address comes up on their website as not having Uverse available. Houses down the street have signs in their yards about it, though, so I will have to call on Monday.

Also, I got my new wireless/gigabit ethernet router and gigabit switch. The router is pretty nice, but I can't get wireless encryption to work with Carrie's laptop. I will have to try configuring it with my laptop from work, sometime, to see what the problem is. The gigabit switch is primarily for LAN parties, for now.

That's all for the moment. I will try to update a bit more often.

Made an Offer

Last Sunday, I went to open houses, as usual. I found [1386311 - 20981 W 116th St - $310,000], which has an amazing backyard. It's got a two-story deck with a screened in sun room (which they filled with a hot tub that wouldn't stay). The yard continued on into a park with sand volleyball, community pool, and a basketball court and playground. The location is fairly ideal, and it's got a lot of cool things about it. My mom found the kitchen to be a bit small, and I found the basement to be a bit smaller than I'd like.

We also found [1376482 - 14557 S Greenwood St - $289,000], which was better than [1375753 - 14116 W 53rd Tr - $288,500] from last time, and in a better location. I still wasn't in love with it for any reason, but it had a decent yard, and was surrounded by nicer houses (which can help resale, apparently).

On Friday, JD and I went to 7 houses, including [1385690 - 15969 Clairborne St - $299,950]. It's a very open house, has a large basement (in two main sections), and large bedrooms. While walking through it, I kept asking, "Where are the negatives?" The only two we could find were the small backyard and the tandem garage. But, the backyard doesn't have a fence to the right, so it opens into the neighbor's yard, which is nice for now. A three-car garage would help while having roommates, but it's not necessary, really. If you go look at the listing for this house, don't worry about the two bedrooms in the basement - they're actually on the top floor with the rest.

Yesterday (Saturday), JD, Carrie, my brother Brian and his girlfriend Aimee, and my parents all joined me in visiting these top three houses. We saw them in reverse order. Everyone liked the Clairborne house and found the Greenwood house lacking. As much as we liked the 116th St house a week ago, it just didn't compare to the Clairborne house. It's considerably smaller, a bit more expensive, and more cut up into actual rooms, instead of areas. The greenspace was the main selling feature, we felt. But, you can't add openness to a house, or much size. For the price difference, I could add a pretty nice deck to the Clairborne house, if I really wanted to. The basement wasn't as nicely finished in the Clairborne house, but it was much bigger, should I ever want to upgrade it.

So, I went back to my parents' house and watched some tennis until JD showed up with some paperwork. He talked about how the comparable houses in the neighborhood have been selling for more, often, and how the subdivision is ending its new construction, which means houses in the area should start to appreciate more. Basically, that this appears to be a pretty good deal. So, we drafted up the paperwork and I signed an offer for $280,000. This includes a home warranty, but little else. Being vacant, there is no washer, dryer, or refrigerator to negotiate over. Once we agree on a price, we can add in closing costs so I can finance those as well. The owners bought the house for $265,000, though, so at $280,000, minus 6% in agent commissions, they'd only be taking in $263,000. The $299,950 asking price is after coming down from about $330,000, so I'm not sure how much lower they can go. We'll find out, though!

I'm pretty excited about the house. It's over 4200 finished square feet for under $300,000. It's located right around 159th and Ridgeview, so it's close to at least one friend from work. The basement has a little exercise room or den, which would be perfect for our LEGO room. At 151st and Ridgeview is Garmin, so it's possible my brother can keep me with a supply of roommates. So, my brother can come over and play ping pong or darts after work, and it's got fairly ready access to I-35.

So, probably a $290,000 house, $230,000 in debt, an extra little bit in monthly income, and lots of maintenance. But, I'll have a house of my own, and I'm pretty happy about that.

Housing Update, Again

[1335619 - 15312 S Blackfoot Dr - $244,000] is now my favorite house in the <$260,000 range. I'm unlikely to find anything much better for the price, so that's encouraging. I'm sure if I had started looking at three bedroom houses, or houses under $200,000, this would seem huge. But, since I pretty much started looking at $300,000 homes, this house looks a bit small. It's not very open on the main floor, and the rooms upstairs are fairly small and blocked off. It's nice to know that I have a viable option that leaves me money in my pocket, and that I can more comfortably afford without roommates.

Still, my ideal house right now is a bit more north, and a bit larger. So, for the next few days, I will be picking out more houses to go see. They will be on the more expensive side, almost certainly. I will also plan my Sunday open house marathon, since I don't want to waste my time with the agent getting me into houses that will be open the next day. I must maximize my time.

Financial Benefits to Homeownership

I've been compiling a list of benefits to owning my own home. The list is a bit longer than I expected, actually.

• Interest paid is tax deductible. Based on a $300,000 home value, this will be about a $13,500 deduction, which is about $3375 in saved taxes. Of course, this benefit diminishes over time.
• PMI premiums are deductible. This will not apply to my house purchase, as I plan on putting a full 20% down, but it's an added bonus, if you have to pay for PMI.
• Home appreciation. When I first buy my house, I will own 20% of it. However, any increase in value becomes my profit as though I owned the entire house.
  
• Immune to inflation. My mortgage payments will end up being rather large, given $240,000 in debt. But, this payment will not change. As time progresses and money becomes less valuable, my mortgage payment just gets easier.
  
• Rental income. Being single, I have the flexibility to rent out rooms in my house. While this probably isn't as financially secure as having a wife with a second income, it certainly doesn't hurt anything.
• Credit building. Due to my parents including me on their credit cars for the past 8 years or more, I have an excellent credit score of around 794. I can claim virtually no credit in this achievement, but it's kind of cool. The point, though, is that making regular payments on time helps your credit score.
• As opposed to paying rent. When you pay rent, your money goes to the landlord (which I will be!). When you make your mortgage payments, you build equity. You become a little more your own landlord every month.
• Tax deductible property taxes. Yep, property taxes are tax deductible, too. Of course, you still have to pay them.
• Points are tax deductible. If you improve your interest rate, points are tax deductible. Which is kind of like getting 25% off the cost of points. Not bad.

Did I forget anything? I feel like I did. Leave a comment and notify me!

House Shopping

So far, I've seen about 25 houses through real estate agents and open houses. I've found a few I like, too. My favorite is almost certainly about to be sold. My third favorite is also in the process of the final paperwork. My second favorite, so far, is available, as far as I can tell, but it's not my ideal house right now.

I suppose I should start with the basics. I am looking for a 4-bedroom house for myself and two roommates I have lined up. I would like it to be somewhat close to work, or at least within easy access of the highway (and then preferably against rush-hour traffic). I require a fireplace, but I don't think I've seen a house without one, ever. Wood-burning fireplaces are becoming rare, however. My final hard requirement is a big basement. I'd like to be able to play ping pong (and also pool?) while having a TV area. A wet bar would be an added bonus.

I've recently decided that a finished basement is not needed if it knocks the price of the house down by $30k. I can finish a basement for less than that, plus it would be done exactly how I want it. Of course, that cost to finish the basement is out of pocket, as opposed to financed. I used to also want a large backyard in which to play volleyball at gatherings. My brother brings up a good point, though: you have to mow it.

Now, given all these requirements (4-bedroom being the main one), I am definitely spending over $200,000, and most likely around $300,000. I've run through the numbers a few times, now. If I purchase a $340,000 house, I can make the monthly payments on my own, but money would be very tight. I have a few built-in cushions, though. First, I don't plan on spending the full $340,000. Second, roommates paying rent should help considerably. Third, performance bonuses and raises should happen at least a bit - that is, my income should rise with inflation, while my mortgage payment should not. Finally, if I end up having to dip in to savings just to keep my house, I can always reduce my 401(k) contributions down to the matching percentage.

So, given that I can afford a house, I now just need to pick one out. I am going to see more houses on Saturday with my agent. I sent him a list of houses I found online, and he looked them over for any major problems (such as one that backs to US-69 highway). I have 18 from this list left to see. We'll probably get through 6-10 houses on Saturday, depending on how close together they are. Then I'll hit up the open houses, as usual, unless my agent says we should continue the concentrated search that day. It's just such a long process.