Who: Mark Daley, 44, is an IT analyst/PM and his wife, Magdalena, 42, is a preschool educator. They have a 5-year-old daughter.
Location: Charlotte, N.C.
What They Want to Buy: We’re looking to buy a two-plus bedroom duplex in a popular area of Charlotte as an investment property in the next month or two. Our goal is to build retirement wealth long-term.
Our main priority with this investment is to have the rent we charge be at least 1% of the total purchase price. We plan on managing the property ourselves.
In addition to an investment property, we’re also looking to buy a house in Charlotte as a primary residence sometime this year. We plan on buying versus renting because of the investment aspect. Our priorities are location (we’d like to be close to work and our daughter’s school) and number of bedrooms (three-plus).
Where They Stand Now: We have $3,000 saved for a down payment, but are aiming to have $5,000 by the time we make the purchase. We’re looking to spend approximately $100,000 on the income property.
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We currently don’t have anything saved for a down payment on a primary residence, but are aiming to have $10,000 by the time we make the purchase. We’re looking for a house in the $200,000 price range.
Our combined income is $90,000 a year. We have $8,000 left on our student loans, $7,000 on our car loan, and $200 worth of credit card debt.
We’ve been renting a three-bedroom house for the past three years and currently pay $900 a month in rent.
Magdalena and I don’t have retirement savings yet, but we’re getting ready to open two Roth IRAs.
Our emergency fund would cover our current lifestyle for three months.
What the CFP® Says: I’m proud of Mark and Magdalena for having goals and dreams. This is the first step in making financial progress. There are, however, a few things I think they should do prior to purchasing a home or investment property.
First, they should strive to get at least six months’ worth of emergency savings built up. This may help them manage the unexpected costs associated with home-ownership. They also should work toward having a sufficient down payment of 20% of the purchase price, if possible. This can help them avoid costly mortgage insurance premiums.
The monthly mortgage on a $200,000 home will probably be more than what Mark and Magdalena are currently paying in rent, so they should also make sure that payment fits inside their current monthly budget. To figure out how much house they can afford, they can multiply their gross income by 2.5 (which is a loose calculation) or have a close look at their expenses and run them against their take-home income to see what might fit comfortably in the family budget.
I’d also recommend they hold off on the purchase of investment property until they’re sure they’re able to manage the mortgage on a primary residence. They could instead focus on using their investment dollars to help fund their retirement accounts.
*Names have been changed.
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