Glinkonomics, life this week on WSB radio, Ilyce gives advice on buying a house in today’s market and how to raise financially savvy kids.
Hey, welcome back everybody; it’s six minutes past the hour. I’m Ilyce Glink, rebuilding America one house at a time, starting with yours. So I wanted to remind everybody that the show is now on the air 12 p.m. to 2 p.m., because it’s football season.
The number 404-872-0750, I want to take this call and then I want to start talking about some of the things that I think are really important to teach your kids to make them financially savvy… the money-savvy generation, not just the web-savvy generations. And also what happens particularly when they turn 18, there are some things you have to take care of.
Bobby joins me on the line now.
Ilyce: Hi Bobby.
Bobby: Hi, how are you?
Ilyce: I’m great, how are you?
Bobby: I’m doing really well.
Ilyce: Good, what’s on your mind today?
Bobby: Well, my wife and I have a 3-year-old and we would like to move into a better school district. I would just like some financial advice on what would be the best way to move out of this house. I owe little bit over $100,000 on house, and I have enough equity to pay that off and still have a down payment for a new house. Or, since our son is not going to school for another three years, should I invest in a business or something? So I just kind of want to get financial advice of what is the best thing to do.
Ilyce: Well, you’re in a great situation because home prices are still down from where they were, but you have an opportunity to trade up. So I have some friends who sold their house and then moved to a better school district and paid a little bit more for the new house, and sold their house for a little bit less than they might have wanted. But now, two years later, their house has zoomed up in value, the new house. Because it was a better neighborhood and a higher-priced house, the appreciation has been better. So let’s say your house is worth $100,000, and the house in the new neighborhood that you want to go to is $150,000. Let’s just say that that’s the price difference, 50 percent increase. Your house may be down 30 percent in value, that house might be down 30 percent in value. But when that house starts to appreciate again, because it’s a higher- priced house in a better neighborhood, it will appreciate faster than your current residence. So even if you sell your current residence for less and you put the money into the new property in a better neighborhood, it’s a better overall investment. So I think the even though your son, or is it, a son or a daughter?
Bobby: Son.
Ilyce: Even though your son isn’t going to be ready for school for another three years, you want to be ready for him. And so buying the house now when property prices are still down a little bit is a better deal than maybe waiting three years and paying a significantly higher price for the house.
Bobby: Okay.
Ilyce: Do you understand?
Bobby: Yes, and that was the only thing we were considering. With my wife, you know maybe investing in a business for three years, a small business, something that my wife can run. But then looking at a house that’s what we were confused about because I don’t want to have that much debt, so I do not want to do business and a house at the same time.
Ilyce: Well, how much equity do you have in the house that you currently live in?
Bobby: I owe about $120 and if I worked with (inaudible) I would get maybe $150 or $160. But I paid a little over $200 for it.
Ilyce: Okay, so you’re going to take a little bit of a loss on it?
Bobby: Yes.
Ilyce: And in the new neighborhood, what’s the price of the house, roughly, that you would want to spend to move into the new neighborhood you have your eye on?
Bobby: Around $400.
Ilyce: So if you sell your house you’ll have a… what will you have in cash? You’ll have around $150,000 in cash. So you’d get a mortgage for $300,000 versus the $100,000 that you’re at. So the deal is better now, and the reason it’s right to move now is not only is the house at $400,000, but in three years that 400,000 dollar house might be $500,000. Mortgage interest rates instead of being 4.75 for somebody who has 20 percent down, might be 5.75. So you’re going to get hit both ways.
Bobby: I see.
Ilyce: By the way, putting all that cash into a business that your wife can run, may or may not be worth more in three years, and you may or may not make more money in three years.
Bobby: Understood. So would you recommend selling the current house or would you recommend renting it out or doing something else with it?
Ilyce: Well, that’s a great question. How far is this house from where you’re going to be? Is the neighborhood where your current house is improving or not really improving? Are you and your wife built to be landlords? Not everybody is. And is this something that you want to make into a business where you kind of do this and then you buy another house and another house? So these are the kinds of questions I talk about in my Intentional Investor series, because I have nine webinars and nine e-books. And we look at all the different parts of being a first time investor, and what is takes to be a repeat investor and to build this kind of wealth from it. And it’s really not for everybody. So I don’t know you well enough to be able to say, “Bobby, yes you and your wife are perfect investors.” What I will tell you is that if you owe $100,000 and you can rent out of the property to cover the mortgage, the taxes, the insurance, and maybe a little left over to keep the house improved, and you can easily rent it where it is and it looks like that neighborhood is going so be stable or improve, and you still have $100,000 to put on the new house, which is more than 20 percent…. Yes, I think keeping that property and continuing to pay off that mortgage is a really smart idea. Particularly if the interest rate on that property is low. What’s the interest rate on it?
Bobby: Well, I had refinanced about five years ago at five-year ARM at 5 percent. And ARM expired five years ago and because of the economic situation, interest rates just kept going down. So currently I’m paying about 2.1 percent.
Ilyce: Unbelievable. So next year that will go up to maybe 3.1 percent, still a great deal. So right now you have to be able to rent that property to cover what you owe and then some. And so the calculus that you want to make is… can you easily rent out the property, cover what you owe, and then a little bit extra. Take your $100,000 and go buy the $400,000 house, which will give you a $300,000 mortgage. Try to lock that in at 4.75 percent and be done with it. So now you have an investment property that has equity in it, which is great, and you have the new house which you locked it at the lower interest rate and the lower price point and your set. And your wife can manage the investment property as her small business for now.
Bobby: And would you recommend paying more than 20 percent down on the new house, or only pay 20 percent?
Ilyce: I would put 20 percent down; you can always pay that down even further if you want to. If you find that the property you want to buy is 4.25, you know, you may end up right at 20 percent. If you decide you want to put 25 percent down that’s fine too. As long as you have extra cash in the bank for other kinds of expense – an emergency fund. You want to have extra cash in the bank so you’re not always using your credit card to fund regular things. So as long as you have enough in the bank, I don’t really care how much you put down on the property.
Bobby: All right, understood.
Ilyce: All right?
Bobby: This was very helpful, thank you so much.
Ilyce: I’m so glad. Thanks for calling the show and good luck with the property purchase.
WSB Radio’s Ilyce Glink Show – September 8, 2013
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