posted: May. 8, 2014 @ 11:02p
Here is my entire backstory since I feel it is at least partially necessary to understand the situation:
29 years 5 months, currently working at Allstate making 39k a year in CA. UCLA degree in stats. Didn't finish until I was 26, long story. Current financial situation is:
Renting for $600 a month
12k student loans to one company, 17k to another. Total 29k, anywhere from 2.1% to 5.8%. $130 min payment for first, $210 for second
8.5k lien to Toyota for my 11 Yaris with 55k miles, should last a good while. 1.9% interest. $190 min payment
3.3k balance on a 4.8k limit with something absurd like 15% interest. $72 minimum payment
Car insurance + phone = $180 a month
Gas = roughly $75 a month
Food = varies
Other than that, I don't have many expenses. I go out with my girlfriend of 11 months, sometimes we eat out, or go into San Francisco (I'm currently in Pleasanton), go shopping, buy jigsaw puzzles, etc
Doing the math on the salary, after taxes and health insurance I pocket around $1200 every 2 weeks = $31.2k net a year
My plan, up through last week, was to pay off that 40k debt ASAP and then save for a house, with the aim of only ever purchasing one house in an area I really wanted. At that point I would be married, still single, whatever
At work we had a financial planner come, and he looked over everything and told me I was wrong.
Being good at math and logical thinking, he explained it to me this way:
Instead of paying off your 40k debt asap, you can make minimum payments and open up a savings account with the sole purpose of putting away money each paycheck for real estate. This money is not a 'savings account', it's just named that. This is not my money. I can't go take out 6k in a year when my car dies and I need it. This is another debt, and we can think of it as 'Jeff's future home purchase'.
This is where a part local to me comes in: Livermore, CA supposedly has a buyer program where you only need 3% down. 300k average condo prices, that's 9k. 200 a paycheck for 2 years is about 10k. I would then purchase a condo, mortgage the rest, and continue to do that while paying my minimum debt payments for a few years while the value hopefully goes up. Being that Livermore is a good, growing town in the Bay Area, the odds of this are strong. I would then sell, take the extra money and use it as a down payment on a bigger property, and continue this until I eventually have an actual 2k square foot, 3-4 bedroom house.
He said 'this is how you get wealthy and provide for your family. You can't not take any risks or else you won't own anything until you're 40'
My questions are this:
Supposedly, you can't get a mortgage for more than 34-40% of your total income after debts. The mortgage on that property would be something like $1800, which means I would need a salary of $60k. I can see a few raises within a few years which would put me between $45 and $50, but not $60.
Also, if this program is cancelled or changes, I can't afford it and interest on my other debts are accruing
I always thought you wanted 20% down to avoid PMI, but he says you don't. You need to get in a property you own immediately and start building equity.
My credit is fairly good, I don't know the actual # but I'm pretty sure I will be at least 730, which I understand is the cutoff for the best loans.
If I were to open a savings account for this reason, where should I go and why?
Is this guy right? I just don't see how I'm supposed to be able to afford an $1800 + mortgage, $500 + in other debts, and other expenses when my current monthly take home is ~ $2,500. And even if I got to a point where that was say $3,000, and my debts + mortage would be $2,300, I COULD live off $700, easily. But a bank wouldn't give me a loan because my debt to income isn't high enough
He's worked at this company for 20 years, he's well-trusted, Allstate is a big company and wouldn't have somebody giving this kind of advice if it weren't true or beneficial
I just don't see how it can work