unemployed and buying a house...

[Zunow]

... but there is a little more to the story.

What would you do:

I'm 33, married, and have a 8-week, 2-day old baby.

I've been working on a startup business since July 2008 with no income. It's my 3rd startup. We're planning on (and hoping to be) a single income family. If needed, I'm pretty employable and could probably find a job in 1-6 months and would expect my salary to be at least $125k/year.

Due to a previously successful business, we have about $450k in the bank. No debt and we're not big spenders.

We're currently renting a home for $2,000/mo, and our total expenses are about $7,000/mo (including "financing" this startup).

We've found a home near my mother-in-law that we'd like to purchase for $275k and put $30k into. Not that it matters, but it sold for $530k in 2005.

The plan would be to pay cash for the home, and then (in order of preference):

(a) start collecting a salary from this new business sometime this year, and continue as normal. We really like the idea of never having a mortgage again.
OR
(b) call it quits and go get a "real" job (HOPEFULLY near by, as we do want to stay in the area [family/etc]).
OR
(c) Possibly take a first mortgage out on the home ($100k?) to increase our cash reserves if needed. (Fico is 800+, but current salary is $0...?)
OR
(d) If we have to move, we could probably rent this property out at break even (or better) (compared to cost of a mortgage or the interest that $275k can earn in a stable investment).
OR
???

So, given my employment situation (or lack thereof), are we crazy to consider buying a house? We actually like the house a lot, and I feel like it's well within our means (considering earning potential), but right now our situation is a little up in the air. But, given the past 10 years of my life and choice to pursue startups, my "current situation" is ALWAYS up in the air...

And, I keep telling myself, even if I had a nearby "real" job with a big company, I could lose that job at anytime too, so nothing is really for certain, right?

Thoughts?

[TBH]

Since there's at least some possibility you'd be moving out of the area if you did need to pursue a regular dayjob type thing, it probably makes the most sense to stay liquid and not buy.

But I would hate to see that $2000 per month going down the drain.

One way to think of it:
If you buy the house, say it costs you $325K including closing costs, all improvements, moving expenses, a few purchases like appliances, a lawnmower, etc.

Now you have $125K in the bank. Your monthly expenses were $7000 per month while renting, and you're not paying rent any more but probably you'll be paying property taxes, homeowner's insurance, etc, so your expenses are now $6000 per month.

That means the $125K represents about 21 months of living expenses. If you got down to the point where you had only a year's worth of living expenses, you might start looking for a regular job. If you're right that you could earn $125K per year if you got a job, then the house seems very affordable, especially without a mortgage. I would advise against borrowing on the house unless you had a job. That seems dangerous, to drain equity out of your home to fund a business that's not profitable yet and may never be.

But what about retirement? Do you have anything saved for retirement?

I don't know. I personally would be worried about being in a 1-income family where the only income came from somebody who had a penchant for start-ups. I'm not enough of a risk-taker to be able to handle that.

I don't have an answer for you, I'm just telling you what comes to mind.

Good luck! Sounds like an interesting financial picture and I hope you keep us updated.

[disneysteve]

If you have no documentable income, you can't get a mortgage today so option (c) is unlikely.

I'd want to see the big picture. How old are you? How much in retirement accounts? Does your spouse work? If so, how much does he earn?

You've got monthly expenses right now of $84,000/year. That's pretty significant. How much do you anticipate your new business bringing in this year?

[Zunow]

> How old are you?

33

> Does your spouse work?

No, new baby and we'd like for her to stay home. Worst case she could and would earn about $40k/year.

> But what about retirement? Do you have anything saved for retirement?

Not really - $30k retirement, $450k cash. (sort of flipped from normal, I know, that's why I'm here...)

> How much do you anticipate your new business bringing in this year?

Not much - it's a long term opportunity. My hunch is:

(a) continue to bootstrap and get the company to at least breakeven w/o me collecting a salary - 75% chance. This would bring our personal expenses to $4k/month ($2k rent + $2k other) (~$3k/month going into the business).

(b) raise outside equity financing (so I could then collect a salary, but the company would still be unprofitable) - 15% chance.

(c) $0 - 10% chance.

[LivingAlmostLarge]

Does your wife work? Do you get medical through her?

[tripods68]

It seems startup has been your career for sometime. It's probably easier for us here who probably never worked in the small startup (at least I do) to sway you to just get a "real job". But that's just too simple and easy solution.

I for one would definitely buy the house out right and start paying myself a salary. You are still at the young age where you can "fail and get back up" on your feet. Another way of looking at it, is this house can be a great source income source as rental property $12K a year less property and insurance.

[momof1in150]

No doc mortgages do not exist anymore. You need documentable income and you don't have any. I would not buy until you have a decent downpayment and are able to document your income (tax return, W2s or bank statements)

[disneysteve]

Neither of you work. Your business is currently costing you $3,000/month and you are estimating that there is at least a 25% chance that it won't even break even. You have total savings of about $480,000 and you're looking to spend at least 68% of that to buy a house.

I realize you are a risk-taker but I'd have to vote against that plan.

[boosami]

Don't count on being able to rent out your property. Being a landlord out of necessity is not a good thing. Managing even one rental property is a lot more trouble than you might think. If there's a real chance you might move, hold off on buying the home. You'll be much better off if you have to move without it. If the startup works or you're able to stay in the area, that's the time to re-evaluate your options and possibly buy. Don't be in such a hurry!

[Zunow]

> Does your wife work? Do you get medical through her?

No, and we pay for our own medical insurance (part of that other $2000/mo expenses).

Thanks for the feedback!

[ukey]

buying the property with cash seems a good idea to me. Putting 30k inside means you would still having 145k cash, which hopefully you can make better use of to sustain part of your living expenses(you do need some money for your business from this, if I'm not mistaken?)

Maybe putting into some CD or whatever that will cash flow?

I'm just comparing this with the $2k rental you are paying right now. IMHO, thats a flat out 8% cash flow for your $305k. sounds like a good investment to me.

Regarding the business expense, you are the one with the clearest idea on how it works, and how much you need to make it work. I've to admit that your first business success gives you good credibility, so you should trust your own judgement at least.

If there is any amount you have left form your business necessities, put it into some form of investment to cater for your expenses, and would that leave you with a positive cash flow? if not, maybe you need to find out other ways of making things work.

Tell the truth I'm in a similar situation, and am currently forced to rent at $1,500. Luckily my wife is currently working and have a stable income, while I continue to work on the business with no income yet.

Still, we're overall nett positive, so there's no need to eat into the principle thus far.

Good luck to your endeavour.

[Russell]

The biggest and most basic/necessary expense is housing and food. If I could pay cash for the house I'd do it in a heart beat and be done with it. No more mortgages/rent etc and not to mention this is the time to buy a house. Sure the prices could go down a little more but if you stay in the house for at least 10 years they're only going up. You can't lose. Do take property tax into account when considering cash flow.

At the end of the day you need a roof over your head and food on the table, if you can do that you can survive. Of course, no one wants to live the most minimal lifestyle but that's the worst case scenario in my mine and if you can take care of housing and food you'll live.

Having said that I would try to find a cheaper house to make sure you still have enough funds left to see through your business, the kid's expenses, an emergency fund and any other expenses you plan to have in the next 2-4 years.

[whitestripe]

i'm not much of a risk taker - but i would buy the house.

is it possible for you to do this 'startup' part time? you could find a part time job so that you have other income as well.

[wnlbutterfly]

From the viewpoint of a new mother with a baby and a husband with no job and money going out the window on a business venture that might not go anywhere....I would be scared. Just my gut reaction.

Savings is great, but how long will it last, new babies cost money too.

I was going to suggest the same as the above poster...why not do the "startup" part time, and get a job with a regular paycheck, even part-time will help.

And I would buy the house outright, but who knows, maybe you can get a loan even without a job. Let us know what happens.

[Goldy1]

If it were me, I would consider if possible a cheaper home.

[Zunow]

Thanks again for the feedback - I thought I'd share an update:

My wife and I decided to go ahead with the purchase of the home - we should close on Tuesday. We negotiated down to $271k - which I'm ok with, since we would have paid $275k, and I think it's worth more.

It's strange how banks treat these foreclosures - they are REALLY bad at getting the best price. It doesn't make any sense to me. They had 5 offers (including ours) after 3 days and then *stopped taking any more offers*. Good for us, but why? I'm sure they could have found a buyer that was more anxious than us. A similar home sold for $340k 2 months ago, and that wasn't that bad of price. Anyways...

Plus, I've made two big changes to my cash flow situation: (a) I did get a part time job (2 days a week) "consulting" (eeek!) but it pays well. This was a good suggestion that a friend recommended as well. Plus, I made a deal with our offshore engineering team (the largest business expense I have) to basically eliminate that cost for about 12 months. Yay. So, it worked out quite well. We bought the home, still have some savings, can still pursue the startup, and are now "burning" less than $1k a month (all in; personal and business) instead of $7k.

So, we're not saving any money right now, which we probably should be, but it definitely feels better than "losing" $7k a month.

We'll see where this all ends up in 6 to 12 months. More revenue from the business, perhaps outside financing, perhaps get a real job... We'll see!

[Zunow]

> If it were me, I would consider if possible a cheaper home.

Yeah, I'd like to, but now we live in San Diego and would really like to stay in the area.

I'm actually just so happy that we can buy a house at what I consider a decent price (< $300k) and stay in San Diego. My biggest (and only) complaint of San Diego for so long has been the cost of housing.

This house had sold for $530k before the peak. Homes in the area have sold for up to $900k (nicer than ours, but not much). That's crazy! And they aren't worth $900k now, but I don't think they are worth $500k. I think people lose sight of how much money $500k is. And what it can buy you other places.

I have a brother in the midwest that paid $200k for his home several years ago and I was so jealous to be able to buy a home for a "smallish" amount of money. At the same time I had bought a 1 bedroom condo for $690k and since sold for $530k (ugg).

Now we have a 4 bedroom house, 1740 sq ft, small but nice yard, 6 miles from the beach, quiet street, good schools - I'm happy.

(at least I am right now - now we have about 2 months of renovations ahead of us. )

[zetta]

$271k for a 1740 sq ft house in San Diego only 6 miles from the beach? You got a DEAL!!!! Congrats!

[tripods68]

Hey Zunow,

We have the same exact home square footage (3br, 2br) and we live in NorCal. I'm curious what type of renovation you are doing? at what cost?

[wnlbutterfly]

May I ask if you are paying the whole thing from your savings, or getting a loan? Just curious if the bank would do a loan without more employment history.

CONGRATS on the new house!!