25 year old and home purchase

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
FlipFire
Posts: 16
Joined: Fri Jul 05, 2013 5:56 pm

25 year old and home purchase

Post by FlipFire »

Hi everyone. I have been reading this forum for a few months and have found it to be a great resource. I have been mulling over whether to buy a home or not and could use some advice.

Emergency funds: Yes
Debt: None
Tax Filing Status: Single
Tax Rate: 28%% Federal, 6.25% State
Age: 25
Desired Asset allocation: 90% stocks /10% bonds
Desired International allocation: 50% of stocks

Assets:
Roth IRA: 50k
Roth 401k: 30k
Traditional 401k: 20k
HSA: 9k
After Tax Savings: 70k

My Contributions:
17.5k into Traditional 401k
5.5k into Roth IRA
3.25k into HSA
10% salary into after tax 401k which is rolled over into Roth IRA
5% salary into employee stock purchase plan which has some matching
Money left over after paying expenses goes into after tax savings

Company Contributions:
~8% salary between 401k match and defined contribution pension

I have been focusing a lot on saving the past couple years because I understand the value of saving young and how much of an effect compound interest can have. All of my retirement investments are in low cost index funds and my after tax is in cash since I sold those in late May anticipating a large purchase in the next couple of years. I have been able to save a lot because I have very low expenses. However, I am wondering at one point is it acceptable to upgrade one's lifestyle and enjoy a little bit more of the fruit of one's labor?

I currently live in a place in the city which has been fully paid for. I am thinking about using that equity, some of my savings and along with a mortgage, buy a house in the suburbs or a larger place in the city. The issue is this would be expensive and would decrease my savings rate if I were to do it now. I have good reason to expect some salary increases the next couple of years which would be approximately enough to continue to maintain the same savings rate and pay for the mortgage + property taxes I am estimating (assuming mortgage, property tax and state income tax deductions still exist).

I don't know if I should continue doing what I'm doing now and living cheaply and just save any raises and bonuses until I become financially independent, or save a little bit less but upgrade my house soon, or wait until I make more to maintain my current savings level and then upgrade my house? The obvious answer seems to be to wait until I get more financially secure but I arbitrarily picked my savings rate to be maximize every benefit which might be excessive since one could argue if I start to earn more, then I should save even more and it would be a continuous cycle. Thank you.
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: 25 year old and home purchase

Post by Watty »

However, I am wondering at one point is it acceptable to upgrade one's lifestyle and enjoy a little bit more of the fruit of one's labor?

Obviously there is a question of if you can afford it or not but assuming that is not an issue the question is not if it is "acceptable" or not but if it is the best use(for you) of your money, and worth the tradeoff between risk and safety to you.

For some people having a large expense like buying a more expensive house might mean that they would have to work ten more years to be able to retire. Assuming that the numbers work then there is not any one right or wrong answer, just which tradeoff is best for an individual.

Instead of thinking of how buying a house will affect your retirement savings percentages it would be good to write a list of the things you will not be able to do if you do buy the house. It could include things like; retire at 60 instead of ??, take a six month sabbatical and travel when you are 30, go to work for a risky startup company, etc. Once you know what you will be giving up you can then decide if the tradeoff is worth it to you.

It would be good to be cautious about taking on a lot of debt to buy an expensive house when you are 25. This can cause all sorts of problems if your life changes and you get into a serious relationship, go to work for a different company where in a different city, or even across town with a bad commute, etc. I have seen job offers and promotions that were mainly decided on which person could be relocated easiest. Even if things go well your life will likely look much different when you are 30.

If you want to upgrade your lifestyle then I would take a hard look at renting a better place.

In a lot of ways once you get above a certain level a house is just a box your live in and if you upgrade to an expensive new "box" you might get a lot of satisfaction at first but after you have lived there for a while the newness will wear off and there is a huge risk that your satisfaction level might drop off so watch out for that.

It could be that that you could spend a fraction of the amount a new house would cost on things like travel or hobbies and you might enjoy that a lot more.
User avatar
mojave
Posts: 393
Joined: Mon Aug 20, 2012 8:59 am

Re: 25 year old and home purchase

Post by mojave »

I agree with the above poster. It sounds like you are financially set at 25 and I can see why you are wondering what to do next. My husband and I are 28. At the ripe old age of 22 he bought a house mere months before the bubble burst. He was also making about $150k a year. As the years went by we would watch the value tumble and his salary decrease. In the end he sold it for much much less - bought for $215k, sold for $86k. Now we are in an apartment, his salary half of what it was. I'm happy we were able to get here though, and we only have opportunity ahead.

Keep doing exactly what you are doing - I get the itch to move to the next level in life too, but you don't want to be stuck because of it. You are very well off for being 25. Wait until you settle more into your career or get married. Your portfolio could double by the time you are 30.

Are you renting or do you own the place you live in now? Sorry, I couldn't figure that one out. Whatever city you are in, home values are going up so if you own yours might be a good investment to hang onto just a little bit longer.
User avatar
momar
Posts: 1359
Joined: Sun Nov 13, 2011 11:51 am

Re: 25 year old and home purchase

Post by momar »

Without knowing more details, taking out a mortgage to get a bigger place when you don't already have a mortgage or rent would be a big mistake. Unless you need it because you are going to be co-habiting with someone, have kids, or are in a seedy neighborhood (probably other justifications I left out).

If it's just you, you'll find yourself with a lot of unused space. Even if you have the best intentions on using it.

And, while you have good (edit: great) savings for your age and a fantastic savings rate, your savings aren't at a super duper awesome level (especially if you plunk down that 70k for a downpayment). If you can do that until you are 30, you will be more or less set.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
travellight
Posts: 2892
Joined: Tue Aug 12, 2008 5:52 pm
Location: San Diego

Re: 25 year old and home purchase

Post by travellight »

I would give it a qualified "yes".

You can calculate how much house you can afford based on a 15 year loan. If that number gets you a place that you would love and enjoy, then I'd say go for it. Do a 30 year loan just in case things go bad with your income/job but pay it down in 15 as long as you can afford it. Rates are still close to their all time low although time to buy was probably better a year ago in many markets.

If you are a "house" person, you won't tire of it in a year when the novelty wears off and the investment will be worth it. I am in my house about 22 years now and still sometimes can't believe it when I walk through it that I live in such a place. For me, it is not worth being able to retire 5 years earlier to live in a crappier place for 20 years. I like my work and having a nice place to live for a longer part of my life is worth it to me.

Also, don't buy banking on appreciation in value. Appreciation in value should just be gravy if it happens.

Unlike the other posters, I don't think being in your 20s is an absolute contraindication to buying a house. I bought my first house at 21. Your planning and savings rate would indicate to me that you are not typical of many in their mid-twenties.
364
Colorado14
Posts: 1792
Joined: Thu Apr 07, 2011 4:58 pm
Location: Colorado

Re: 25 year old and home purchase

Post by Colorado14 »

travellight wrote:
Unlike the other posters, I don't think being in your 20s is an absolute contraindication to buying a house.... Your planning and savings rate would indicate to me that you are not typical of many in their mid-twenties.
Agreed. Not all people in their 20s are job hoppers, immature, spendthrifts, etc. Some may not want to move across country, change jobs every year, get married, etc., and that's just fine. There's nothing inherently wrong with owning a home in your 20s; lots of us have done it. However, I advise against planning your house purchase based on future salary increases. Those increases may or may not materialize so calculate house affordability based on current income. If income increases in the future, that's wonderful of course, but not necessarily guaranteed.
travellight
Posts: 2892
Joined: Tue Aug 12, 2008 5:52 pm
Location: San Diego

Re: 25 year old and home purchase

Post by travellight »

ditto, colorado. That's why I recommend planning on affording a 15 year loan on current salary and paying on such but setting up a 30 year mortgage (hope this isn't confusing). If there is a salary decrease, he/she can scale down to a 30 year payment and hopefully, be safe.
364
Alexandria
Posts: 72
Joined: Tue Jun 19, 2012 5:11 pm
Location: Northern California

Re: 25 year old and home purchase

Post by Alexandria »

I completely agree with the last 3 comments. I don't think age has much to do with it (we bought our first home at 22/23, and it was an exceptionally good financial move for us. We bought our "forever home" at 25). We wouldn't have bought during the peak (a couple of years after we bought second home), because the prices were ridiculous. (We could in no sane way afford those prices). I think a little common sense goes a long way in avoiding real estate traps. You have the wealth to weather smaller real estate fluctuations.

Anyway, economically, if I were you, I'd probably take advantage of low interest rates and consider this a good time to make a move. On the flip side, I don't think it's the worst idea to stay put until you are a little older and you have a clearer picture of the long-term. Especially if you think that some day you might marry. I think whether you buy now or wait that you will be fine. It just depends how compelling your reasons are to buy right now and how long-term you think you might be in your next home. It sounds like you are in a bit of a "flip a coin" kind of place, and maybe a little time will make things more clearer. There is certainly no reason to rush.
Topic Author
FlipFire
Posts: 16
Joined: Fri Jul 05, 2013 5:56 pm

Re: 25 year old and home purchase

Post by FlipFire »

Thanks everyone for the responses. I thought hard about this and think it would be wise for me to wait. I was feeling pressure to 'upgrade' my lifestyle and was worried I would lose an opportunity with the rising interest rates.

To give some rough numbers, I current live in a 350k condo with no mortgage but HOA + property taxes are around $500/month. I currently earn around 100k a year and spend between 15k-20k a year. The houses/condos that I was interested in cost between $850k to $1.1M. These places are not that large (900-1800 sq ft depending on city vs suburb and price), it is just extremely expensive where I live. I decided I should take advantage of having relatively low housing costs in a high cost of living area and continue to save. It is better to take a safe approach than risk being over-leveraged and stressing over cash flow. I did the math for rising interest rates and if I plan on paying off mortgages within 5-10 years, the rise in rates would have a minimal impact - especially if I wait and have a larger down payment. I'm still young and have plenty of time to 'live well' in the future, there is no need to rush.
JJP
Posts: 60
Joined: Fri Jan 11, 2013 10:06 pm

Re: 25 year old and home purchase

Post by JJP »

FlipFire wrote:Thanks everyone for the responses. I thought hard about this and think it would be wise for me to wait. I was feeling pressure to 'upgrade' my lifestyle and was worried I would lose an opportunity with the rising interest rates.

To give some rough numbers, I current live in a 350k condo with no mortgage but HOA + property taxes are around $500/month. I currently earn around 100k a year and spend between 15k-20k a year. The houses/condos that I was interested in cost between $850k to $1.1M. These places are not that large (900-1800 sq ft depending on city vs suburb and price), it is just extremely expensive where I live. I decided I should take advantage of having relatively low housing costs in a high cost of living area and continue to save. It is better to take a safe approach than risk being over-leveraged and stressing over cash flow. I did the math for rising interest rates and if I plan on paying off mortgages within 5-10 years, the rise in rates would have a minimal impact - especially if I wait and have a larger down payment. I'm still young and have plenty of time to 'live well' in the future, there is no need to rush.
Good choice. I'm a year younger and about half the pay. I rent for cheap and sometimes wish I lived in a nice condo and had a place of my own with no roommates. Then I look at what financial burden that would be and the idea slowly trickles away.

Just a quick question on your HSA: Is it worth putting your own money into rather than investing it? My employer puts a few bucks every paycheck into an HSA. I have the high deductible plan but covers regular checkups and whatnot. I only use a few hundred dollars a year from the account and do not put in any of my own money. It seems it's better off in a mutual fund. There may be some things I don't know about though.
Topic Author
FlipFire
Posts: 16
Joined: Fri Jul 05, 2013 5:56 pm

Re: 25 year old and home purchase

Post by FlipFire »

JJP wrote:
FlipFire wrote:Thanks everyone for the responses. I thought hard about this and think it would be wise for me to wait. I was feeling pressure to 'upgrade' my lifestyle and was worried I would lose an opportunity with the rising interest rates.

To give some rough numbers, I current live in a 350k condo with no mortgage but HOA + property taxes are around $500/month. I currently earn around 100k a year and spend between 15k-20k a year. The houses/condos that I was interested in cost between $850k to $1.1M. These places are not that large (900-1800 sq ft depending on city vs suburb and price), it is just extremely expensive where I live. I decided I should take advantage of having relatively low housing costs in a high cost of living area and continue to save. It is better to take a safe approach than risk being over-leveraged and stressing over cash flow. I did the math for rising interest rates and if I plan on paying off mortgages within 5-10 years, the rise in rates would have a minimal impact - especially if I wait and have a larger down payment. I'm still young and have plenty of time to 'live well' in the future, there is no need to rush.
Good choice. I'm a year younger and about half the pay. I rent for cheap and sometimes wish I lived in a nice condo and had a place of my own with no roommates. Then I look at what financial burden that would be and the idea slowly trickles away.

Just a quick question on your HSA: Is it worth putting your own money into rather than investing it? My employer puts a few bucks every paycheck into an HSA. I have the high deductible plan but covers regular checkups and whatnot. I only use a few hundred dollars a year from the account and do not put in any of my own money. It seems it's better off in a mutual fund. There may be some things I don't know about though.
I think of the HSA as one of the best tax deferred investment options there is. If you are allowed to contribute through payroll deductions then the contribution is excluded from federal, state, and payroll taxes. Not only that, but a lot HSA administrators allow you to invest in mutual funds which grow tax free. Then if you use the withdrawal to reimburse a medical expense, you can withdraw it tax free as well. I don't think there is any other tax deferred option that offers all of these benefits. Also, you don't have to withdraw the money the year that you spend it, you can withdraw it whenever you want. This allows the investments to compound over time. I highly recommend maxing out the account or putting in as much as you can. Like you, I have limited annual health expenses but you can't predict what the future will bring. 'Worst' case scenario and you never have high medical expenses, you can withdraw the HSA money at 65 penalty free and only pay taxes. This is similar to a traditional IRA.
dyangu
Posts: 204
Joined: Wed Nov 03, 2010 4:25 pm

Re: 25 year old and home purchase

Post by dyangu »

Why would you want a house in the suburbs at this stage of your life? Also, $1 million is 10x your salary! Most people would recommend buying <5x salary.
By the way, what's your secret to $50k in Roth IRA at 25?
Topic Author
FlipFire
Posts: 16
Joined: Fri Jul 05, 2013 5:56 pm

Re: 25 year old and home purchase

Post by FlipFire »

dyangu wrote:Why would you want a house in the suburbs at this stage of your life? Also, $1 million is 10x your salary! Most people would recommend buying <5x salary.
By the way, what's your secret to $50k in Roth IRA at 25?
I wanted to have more space and some land which would be impossibly expensive in the city. I agree, 10x salary would be crazy but I was hoping to put down a decent downpayment. However, it would still be a stretch financially. I would be more comfortable waiting until I have a higher income before I take the dive.

I started my Roth IRA at a young age when I had my first internship. That job also allowed interns to contribute to a 401k, which I took advantage of and rolled over into an IRA and converted that into a Roth. Other than maxing out my Roth IRA every year, my current job allows one to contribute a % of your salary into an after tax 401k and do an in-service rollover to a Roth IRA. All of these opportunities plus the recent bull market has allowed me reach what I have in my Roth IRA.
User avatar
DiscoBunny1979
Posts: 2054
Joined: Sun Oct 21, 2007 10:59 am

Re: 25 year old and home purchase

Post by DiscoBunny1979 »

FlipFire wrote:Thanks everyone for the responses. I thought hard about this and think it would be wise for me to wait. I was feeling pressure to 'upgrade' my lifestyle and was worried I would lose an opportunity with the rising interest rates.

To give some rough numbers, I current live in a 350k condo with no mortgage but HOA + property taxes are around $500/month. I currently earn around 100k a year and spend between 15k-20k a year. The houses/condos that I was interested in cost between $850k to $1.1M. These places are not that large (900-1800 sq ft depending on city vs suburb and price), it is just extremely expensive where I live. I decided I should take advantage of having relatively low housing costs in a high cost of living area and continue to save. It is better to take a safe approach than risk being over-leveraged and stressing over cash flow. I did the math for rising interest rates and if I plan on paying off mortgages within 5-10 years, the rise in rates would have a minimal impact - especially if I wait and have a larger down payment. I'm still young and have plenty of time to 'live well' in the future, there is no need to rush.
--------------

Now that there are more facts in terms of $$$, I would suggest it's not a good idea to buy a more expensive house. For instance, if you live in CA whereas property taxes are kept to 1% of purchase price plus bond issues for the first year of owning the house/condo . . . you could potentially be in the $10,000 a year range for property taxes alone, not to mention insurance costs. In my opinion that's way too much for any working stiff.

But while it would be great to buy something bigger and better, the typical no more than 3x gross income for a mortgage seems to suggest a down payment of at least 50%. I don't know how the OP could pay off a $1M dollar house in 5-10 years when savings for retirement would be equally, if not more important. The reason prices are extremely expensive is because there are other people dumb, yes dumb, enough to be able and wiling to pay that amount. You don't have to be one of them. But it's all your call.
Andyrunner
Posts: 856
Joined: Thu May 03, 2012 9:14 am

Re: 25 year old and home purchase

Post by Andyrunner »

Not commenting on the financial stuff, but at the young age of 25, are you sure you are going to be at your current location for the next 5+ years? If you're still young and single what are the chances of you moving to a different city? What are the chances of your company asking you to move?

Need to factor this stuff into a home purchase as well.
Post Reply