If you're a regular reader you know my husband and I purchased a vacation, rental property in North Carolina a few years ago. While I've written a lot about various decisions we've made over the years I've never written in depth about how we bought our home or the financial aspects of owning it. In this two part series I'll give you the scoop on both.
At the time we bought our second home my husband and I were 28 and 27 respectively. We had no debt other than a mortgage on our primary residence. That mortgage was a 15 year, fixed rate with only 13 years remaining until payoff. We owned our cars outright, paid off our credit card every month and saved regularly to our brokerage account and 401k(s).
We knew the area of North Carolina where we wanted to purchase a property and spent a number of years eyeing sale signs and searching local listings. In 2004 we placed our first bid. We really low-balled the price and the owner came back and said, "no way" to our offer. My husband really wanted the house and immediately decided we should pay the full asking price. I was in complete disagreement, because there was absolutely no way we could afford it. We fought for days about that house and at one point were barely speaking to one another.
You see, I need a fair amount of financial cushioning in my life in order to feel safe. I want to know that we have enough money to pay our bills and continue to save each month. I want an emergency fund and I never want to fear foreclosure. My aversion to monetary risk helps us avoid debt, which is a key factor in helping me feel secure.
My husband is by nature much less risk averse. He's also very compassionate and has a hard time giving on something that he really wants. But at the end of the day I just couldn't figure out how we would pay such a large amount for a second property. A week after making the offer we retracted.
We continued to look casually for property throughout the end of that year and into the following one. It seemed we just weren't meant to buy, because the homes in our initial price range required a lot of work and the homes that didn't require work were well out of our reach.
The following year, while I was out taking a walk on an absolutely beautiful May day I found the perfect beach house. The house looked small from the outside, but the exterior was in amazing shape. The paint, siding, decks and pool were recently renovated. I called a buyer's real estate agent and asked for a tour. When I walked inside I knew I wanted to place a bid.
My husband and I knew the real estate market was unbelievably high and although we didn't predict the bubble bursting we had a feeling that prices wouldn't continue to rise. Having said that, we also knew that this was the house we wanted. The price was $130,000 less than the first house we bid on.
We talked at length about the impacts of this decision before making an offer. For example, we both agreed that neither one of us could quit our jobs or even find lesser paying ones, because both of our incomes were necessary to pay the mortgages. We talked about our long term plans to have a family and decided neither one of us would be able to stay home with a child. We also talked a lot about general ways that we could cut back on daily expenses. We agreed to postpone renovating our primary house and decided not purchase any new vehicles.
We also reviewed all of our monthly expenses. We looked over every bill and stepped line by line through our credit card purchases. We agreed to cut back on buying new clothes and new computers. We decided to focus on cooking at home and cutting entertainment expenses. In essence, we decided to cut back on all discretionary purchases until at least six months after purchasing the property. If we found room in the budget after that point in time we'd consider expanding the budget every so slightly.
In the end we decided to forgo other aspects of our life in order to buy our beach home. My husband and I didn't take a major vacation to anywhere other than North Carolina for over five years. We rarely ate out, we rarely bought new items like clothes, electronics or furniture and we decided not to renovate our primary home, which is in need of upgrades.
A lot of people wouldn't trade travel, expensive dinners and other aspects of entertainment for a beach house. If you want to own a beach house you might want to ask yourself what else in life you might need to give up.
Having said all that I wouldn't trade that decision for anything in the world. In fact, it is the best decision, (other than marrying my husband), that I've ever made in my life.
Tomorrow I'll detail how much it actually cost to purchase our home and how much it costs each year to maintain it.
Labels: rental home