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Once again, I’m finding myself nearing the end of my one-year lease with the need to make a decision about my living situation. I moved to my current apartment in the summer of 2007, at a time when I had been more comfortable living off some of the income from my business. Until that point, I remained fiscally conservative with my extra income, putting as much into savings as possible, not believing earning an income from primarily blogging would be sustainable in the long run.

Accepting the fact that I had a growing income, I allowed myself to move into a bigger apartment in a nicer neighborhood. That was seven years ago. And around this time these past few years, I’ve repeatedly considered whether it’s time for me to buy a house, leaving the world of renting behind.

The popular belief seems to be renting is throwing money away, but I couldn’t disagree more. Renters’ expenses for living are much lower than those of homeowners. The expenses of living in a house, and maintaining the structure and the land, add up and make this proposition very expensive. A house may increase in value over time, but rarely enough over the long-term to beat inflation, and in order to realize any of those gains, owners must sell and downsize.

I can’t even decide where I want to live, so buying a house that I might end up leaving soon isn’t a good decision. I could find myself in another predicament relatively soon — whether to try to sell a recently-purchased home or try my hand as a landlord, potentially from a distance. This doesn’t seem to be the type of lifestyle I would want, not to mention I haven’t yet had the need to develop some of the skills that would enable me to take care of problems around a house.

There is an urge for me to leave. I would like to have more space, not less. I like my neighbors but I’d probably like them more if we weren’t living so close. The reasons to opt for a house rather than an apartment seem to be related to lifestyle, not to the potential of a financial advantage (which is dubious, anyway). So my next course of option may be renting a single-family house.

But there are ways to make owning a house pay. Forgetting for a moment that I don’t know where in the country — or the world — I want to settle down for an extended period of time, owning a house that provides an income might be a good solution for me. The reality is that I could purchase a two-family house or a house with an apartment with cash, though I may still borrow money if the situation is right. I could rent out the apartment, and the rent would cover the taxes (and potentially part of the mortgage payment if I borrow).

I live in New Jersey, and property taxes are high throughout most of the more desirable portions of the state, and those costs reduce the appeal of owning a single-family house that doesn’t generate an income.

A recent article in the New York Times warns against buying the most expensive house you can afford. Doing so involves taking on much more risk. The loss of an income you rely on can drive someone down the path towards foreclosure. An unexpected job loss can occur at any time, regardless of the national level of unemployment.

Yet, there seems to be some situations that warrant buying if not the biggest house you could absolutely afford, something at the top end of your budget. If you meet these conditions, you may be able to make stretching your budget work from a financial perspective. This is the only way it could be smart to extend your reach rather than buying the least amount of house in which you could see yourself comfortable.

  • Even after buying the house, you’ll have assets. You’re not putting all of your wealth into the house.
  • You have a clear plan for using your own home to generate income that, if combined with a conservative percentage of other income, covers mortgages, taxes, insurance, and other expenses.
  • You get a great deal.

That last point is important. And real estate agents are tricky — they want to close as many deals as possible, so they will often convince a buyer a deal is great when it’s not. I like the way Warren Buffett invests in companies. He has a brand, so an investment from Warren Buffett may be worth more than the same investment from, for example, a hedge fund. So companies will cut Warren Buffett a deal. He doesn’t just go out and buy stock in a company like we smaller investors do.

When Bank of America was on the ropes, the company gave Buffett’s Berkshire Hathaway a $1.5 billion discount on preferred shares. In addition, when Buffett decides to divest, he’ll receive a 5% premium on the value of his investment. These sweetheart deals are key to building wealth through investing at a quicker rate than buying and holding broad market index funds for more than three or more decades.

Getting a great deal doesn’t have to mean buying a fixer-upper. There are a lot of motivated sellers who are willing to negotiate, particularly if you have clout, like Warren Buffett. You won’t have that kind of clout, but having cash seems to go a long way in gaining negotiation strength for the buyer.

This is all good in theory, but in order to apply it to my specific situation, I still have questions I need to answer. I could give myself more time by renewing my lease and paying an extra free for the freedom to “break” it with notice, but that is the same thing I’ve done for the past several years. I’d like to see a change this year. Here are my questions:

  • Do I want to stay in New Jersey? New Jersey has a bad reputation, but the area where I live is nice, and there are other fantastic places in New Jersey to live. But it is expensive. House prices are high and taxes are high. I have friends and some family nearby. People who live elsewhere can get much more property for the same amount of money, and my income is the same regardless where I live. My money could go farther where the cost of living is lower.
  • If I don’t stay in New Jersey, where would I live? I have family in California — Los Angeles and San Diego — making those locations a choice that makes sense. But California is also expensive. My girlfriend lives in Phoenix and will need to stay there for at least another year, but I haven’t been convinced yet that Phoenix is the best location for me.
  • Am I willing to do what it takes to be at least some kind of landlord? My friends who are or have been landlords mostly dislike that particular choice, but I do have other friends who are able to manage properties part-time. I think a house in which I’d live that has an associated apartment might not be too difficult, and I’m in the position to be able to afford help when it comes to maintenance, but what if I decide to move fairly soon?
  • Would I be better suited to renting a single-family home? That would give me more flexibility and less responsibility, while possibly expanding my lifestyle a little bit.

There’s a lot for me to consider before I need to give my currently landlord my notice at the end of April. I don’t like the fact that indecision and inertia has kept me in the same place for several years more than I would have originally expected. What do you think you would do in my situation?

Photo: Flickr

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Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs).

For more information, read this introduction.

This year, we have four participants who will share their financial reports, exposing the results of their financial choices. Each participant is paired with one of our Certified Financial Planners. The experts will provide insight and guidance that will help our participants take their finances to the next level by the end of 2014. Learn about this year’s participants and experts.

Laura and Leon earn more than $124,000 a year together. Currently, their goal is to tackle their student debt. Right now they don’t have children, but they are considering starting a family soon. They max out contributions to tax-advantaged retirement accounts and are actively trying to change their financial habits so that they are ready for a possible family and for retirement. (Read last month’s update.)

After reading Laura and Leon’s comments, you can read commentary from Roger Wohlner, CFP. Roger Wohlner appears courtesy of The Chicago Financial Planner.

Read the full article →

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Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs).

For more information, read this introduction.

This year, we have four participants who will share their financial reports, exposing the results of their financial choices. Each participant is paired with one of our Certified Financial Planners. The experts will provide insight and guidance that will help our participants take their finances to the next level by the end of 2014. Learn about this year’s participants and experts.

Jake and Allie are 47 and 42, respectively. They have no children, but they pets that they care for devotedly. The two make a combined $140,000 a year and hope to retire early, when Allie is 50. They love to travel, and make it a point to take trips throughout the year. Allie is interested in starting a photography business, and is working toward that goal. Jake wants to start his own business as well. (Read their update from last month.)

After reading Jake and Allie’s comments, you can see a Google Hangout they participated in with Neal Frankle. Neal Frankle appears courtesy of Wealth Pilgrim and MCMHA.org.

Read the full article →

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Wages for the working class tie directly to the performance of the overall economy. When the largest group of consumers feels they have money to spend, they will do so. This spending may be to the detriment of their own quest for financial independence, but it also allows businesses to thrive. It’s always been the policy of more liberal politicians to encourage higher pay for low-wage workers, while it’s always been the policy of the more conservative to spur the economy by directly making it easier for businesses to profit.

Last year, President Obama called for an increase to the federal minimum wage, proposing first a gradual increase to $9 an hour, and later changing the proposal to increase to $10.10 an hour.

Another way to help workers in low-wage jobs is to ensure they are getting the overtime pay they’re entitled to. My first major job after graduating college was with a non-profit organization. It was a salaried position, but the salary was pretty low. It was enough so that I wouldn’t be considered living in poverty, but living expenses in New Jersey were, and continue to be, high. During most of the year, I worked eighty hours a week. It wasn’t always difficult work, but there was much to do and few people to do it. And everything was urgent.

At one point, I calculated how much I was getting paid per hour, and it was right around minimum wage. While that put me in a much better position than your average fast-food worker who also wasn’t paid for working overtime, it didn’t necessarily reflect the unique, specialized work I was doing. You make these kind of personal sacrifices when you’re working for a mission, but it’s not a situation that is right for a recent college graduate who sees financial stability as a goal.

Obama is asking the Labor Department to issue new rules pertaining to overtime, ensuring more people — though probably not those in the nonprofit sector — receive overtime pay. This could be even more effective than a minimum wage hike if the goal is getting more money into the hands of worker-consumers who might be able to use it to build wealth over time.

The most important factor in terms of overpay is ensuring companies are complying. If there are any companies breaking the law by withholding overtime pay, this needs to be addressed first. A group of McDonald’s workers have recently files a class-action lawsuit that claims that the company is avoiding paying employees full wages by using underhanded tactics, like not starting the clock until a customer enters the restaurant instead of when workers arrive to begin their day. Regardless of whether overtime is expanded, these incidents need to stop.

The usual reaction from the middle class to situations like that is, rather than encouraging businesses to adhere to the law, is to suggest those in bad working situations find a new job. Unfortunately, that’s not always a possibility. If a shift at McDonald’s is followed by a shift at a clothing store, and perhaps even a third job following that, all just to earn enough money to feed and shelter a family, it’s no surprise people can get stuck in low-wage jobs.

Obama’s new proposal would expand the requirement for overtime pay. Currently, employers can get around overtime laws by offering salaried workers more than $455 a week. That annual salary of $23,660 still falls beneath the poverty level, so there are people living in poverty who are not qualifying for overtime pay. Two states, California and New York, have set their own overtime exemption minimum at $600 per week. Raising this level can effectively raise the total wages for millions of workers.

It seems to me that most companies would want to attract the best employees, and one way to do that is to offer competitive compensation.

There was a revolving door of employment at that nonprofit organization where I worked. The organization would attract highly-motivated young people initially, but these same overachievers quickly found that their skills were in demand and that they had many more opportunities for personal growth elsewhere. In some cases, the labor market appreciated the same traits that made them great at their jobs in nonprofit, and compensated them appropriately, and in other cases, the individuals used their skills to build their own companies and enjoy the fruits of their own labor.

Small businesses tend to be unable to offer competitive compensation because profit margins tend to be tight. Many will look for other ways to attract the best employees, but non-monetary compensation can only go so far when you need to pay rent and buy food.

As regulations call for higher pay for low-wage workers, businesses will continue finding ways to avoid the increases. If McDonald’s is finding ways to shave hours off employees’ time cards, you can be sure other low-wage employers are doing the same.

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How Much is the Obamacare Penalty?

by Luke Landes
Take up thy stethoscope and walk

The Affordable Care Act requires most American citizens to have health insurance or health care starting in 2014. Many of those required to have health insurance will owe additional tax if they are not enrolled in a plan. It’s no surprise that many citizens are not happy about being told by the government that they ... Continue reading this article…

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Can You Sue Your Parents for College Tuition?

by Luke Landes
Crying baby

This story has all the makings of something viral. It fits right in with our fascination with people doing things that normal Americans wouldn’t even consider doing. We gawk at reality television shows and follow the stories about their stars, like the recent news about the couple from the “Real Housewives of New Jersey” show ... Continue reading this article…

16 comments Read the full article →

Naked With Cash: Laura and Leon, January 2014

by Luke Landes
Laura and Leon - Naked With Cash

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

5 comments Read the full article →

Naked With Cash: Brian, January 2014

by Luke Landes
Brian - Naked With Cash

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

0 comments Read the full article →
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