Can I afford this place?
Can I afford this place?
I found a great place in a premier neighborhood of my city. It is a split-level stone from 1928 with immaculately maintained details. Of the past 4 owners, 3 were generations of the same family. It is $439K.
I have been approved for a PenFed 5/5 ARM @ 2.75% w/ 20% down. Taxes and insurance run about $820/month.
Take home after fully funding 401k and taxes and deductions (medical & ltd) is about $61K
I currently own a fully paid off condo which I will rent out if I buy this place. It may net me $3K to $5K per year.
Also my partner may want to join me in this home (not a given) if my partner's home is sold at a reasonable price. But the contribution split would be 2/3 and 1/3 with me paying the 2/3 of the Mortgage+insurance+taxes & rest of expenses split 50:50.
I expect to stay in this place for a max of 10 yrs and a min of 5 yrs.
It feels like stretching a bit but would like your opinion.
I have been approved for a PenFed 5/5 ARM @ 2.75% w/ 20% down. Taxes and insurance run about $820/month.
Take home after fully funding 401k and taxes and deductions (medical & ltd) is about $61K
I currently own a fully paid off condo which I will rent out if I buy this place. It may net me $3K to $5K per year.
Also my partner may want to join me in this home (not a given) if my partner's home is sold at a reasonable price. But the contribution split would be 2/3 and 1/3 with me paying the 2/3 of the Mortgage+insurance+taxes & rest of expenses split 50:50.
I expect to stay in this place for a max of 10 yrs and a min of 5 yrs.
It feels like stretching a bit but would like your opinion.
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Re: Can I afford this place?
Go with your gut. It IS a stretch.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Can I afford this place?
I would be uncomfortable with stretching my money that much, personally. If you said this was your dream home for forever, I would be more inclined to say go for it. Because you would be staying there 10 years max, I would say that this is likely not a good financial move from the information provided. If you are there the minimum time of 5 years, I would say absolutely not to buy it. (This from a guy who has been writing about the positives of buying... but buying intelligently.)
While there may be more details than what I have to work with, from what I see, this does not sound like a good option for your situation.
While there may be more details than what I have to work with, from what I see, this does not sound like a good option for your situation.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Re: Can I afford this place?
How come you're getting $3-5k rent (assuming year) from your fully paid off condo? Seems a bit low.
If $600/month rent is the norm in your city, than a $440k house is very expensive.
If $600/month rent is the norm in your city, than a $440k house is very expensive.
Re: Can I afford this place?
No way. Not on $61k take home. If you need an ARM, that's a pretty good indication right there.
JT
JT
Re: Can I afford this place?
Could you expand on that statement a bit? I don't understand the implications that going for an ARM would represent.bottlecap wrote:If you need an ARM, that's a pretty good indication right there.
Re: Can I afford this place?
A fixed-rate mortgage has a higher initial payment than an ARM, but eliminates the risk that payments will rise. If your salary is not high enough for you to qualify for the fixed-rate mortgage, what will you do if rates are much higher five years from now?morbster wrote:Could you expand on that statement a bit? I don't understand the implications that going for an ARM would represent.bottlecap wrote:If you need an ARM, that's a pretty good indication right there.
If you don't have that problem, then an ARM can be a good deal, particularly if you are likely to sell before or soon after the ARM resets. (But if you are likely to move in five years, buying any home is not normally a good deal, because of the costs of buying and selling.)
Re: Can I afford this place?
$3-$5K is the net amount after taxes, insurance, condo fees and rainy day fundErhan wrote:How come you're getting $3-5k rent (assuming year) from your fully paid off condo? Seems a bit low.
If $600/month rent is the norm in your city, than a $440k house is very expensive.
Rent collected would be around $9K.
Re: Can I afford this place?
Grabiner explained it very well above.morbster wrote:Could you expand on that statement a bit? I don't understand the implications that going for an ARM would represent.bottlecap wrote:If you need an ARM, that's a pretty good indication right there.
JT
Re: Can I afford this place?
That makes sense. Thanks for the info.grabiner wrote:A fixed-rate mortgage has a higher initial payment than an ARM, but eliminates the risk that payments will rise. If your salary is not high enough for you to qualify for the fixed-rate mortgage, what will you do if rates are much higher five years from now?morbster wrote:Could you expand on that statement a bit? I don't understand the implications that going for an ARM would represent.bottlecap wrote:If you need an ARM, that's a pretty good indication right there.
If you don't have that problem, then an ARM can be a good deal, particularly if you are likely to sell before or soon after the ARM resets. (But if you are likely to move in five years, buying any home is not normally a good deal, because of the costs of buying and selling.)
Re: Can I afford this place?
I can understand that if I were looking that in isolation. But I do have a paid off condo which could generate rent, and I may have my partner paying etc. Plus I am in my early thirties so plenty of room to grow my career.bottlecap wrote:No way. Not on $61k take home. If you need an ARM, that's a pretty good indication right there.
JT
I do not have negative view of ARMs. I understand what they offer in return of variable payments in the future - a future which nobody can predict. Being born outside of the US, ARMs were the only standard mortgage I knew about. In the US, sometimes people pay higher interest for a certainty that they may not use at all.
I want to look at this objectively.
Re: Can I afford this place?
Would it make sense to sell the condo and use the proceeding as additional down payment?
Re: Can I afford this place?
Yup I can do that. It is just that I may feel a bit overwhelmed handling the condo on the market and purchasing a home at the same time. Plus the rent collected would be a much better payoff if I could get $9K in rent annually - standard in my area.Erhan wrote:Would it make sense to sell the condo and use the proceeding as additional down payment?
Re: Can I afford this place?
Your statements suggest otherwise. I have no dog in this - I don't know you and I don't care whether you win or lose on this. Looking at it objectively, you are taking on a mortgage that is six times you take home, not even counting taxes, insurance and upkeep (this place is nearly 100 years old, right?). You are counting on rent that you may or may not get and, if you do, it might cover 2 to 2.5 months of mortgage payments a year. You are further counting on your partner making some serious life changes and helping you make the payments. These are a lot of "if's" and even if they all come through things would still be in question.kd2008 wrote:I can understand that if I were looking that in isolation. But I do have a paid off condo which could generate rent, and I may have my partner paying etc. Plus I am in my early thirties so plenty of room to grow my career.bottlecap wrote:No way. Not on $61k take home. If you need an ARM, that's a pretty good indication right there.
JT
I do not have negative view of ARMs. I understand what they offer in return of variable payments in the future - a future which nobody can predict. Being born outside of the US, ARMs were the only standard mortgage I knew about. In the US, sometimes people pay higher interest for a certainty that they may not use at all.
I want to look at this objectively.
You may not have a negative view of ARMs, but the fact is they are mostly used as a crutch by people who are stretching to buy more than they comfortably can. What happens in five years if your property value goes down and your interst rate doubles? You'll be stuck with a payment you can't afford and a house you can't sell without taking a loss.
Those seem to be the objective facts to me. Granted, I'm conservative by nature, but your case doesn't even seem close to me.
JT
Re: Can I afford this place?
To the OP : I would say no.
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell
Re: Can I afford this place?
When you say "net" rental for your condo, you're factoring in a vacancy rate and value of repairs/maintenance, I take it?
If I only wanted to live somewhere for a maximum of ten years I would probably just rent in that neighborhood instead. But yes, I think you can afford it--it looks like you'd be spending roughly half of your after-tax, after-investment income on this property, right? If you're happy with that and can pay all your other expenses, I guess you can afford it. If your question is really "is this the best use of my money," I'd probably say no, and that you should rent in that neighborhood if you really want to live there and invest what you save elsewhere.
If I only wanted to live somewhere for a maximum of ten years I would probably just rent in that neighborhood instead. But yes, I think you can afford it--it looks like you'd be spending roughly half of your after-tax, after-investment income on this property, right? If you're happy with that and can pay all your other expenses, I guess you can afford it. If your question is really "is this the best use of my money," I'd probably say no, and that you should rent in that neighborhood if you really want to live there and invest what you save elsewhere.
Re: Can I afford this place?
I don't know one can say that given it is a PenFed product. The first reset occurs after 5 years and it has a +2% max cap interest increase, which would put the borrower at 4.75% worst case max rate for years 6-10, or average rate of 3.75% worst case the first 10-years. I used one of these on a cash out on my primary residence recently and paid off a rental property with the proceeds as the terms fit my outlook well for the rental property and it had no closing costs. I could have done whatever I wanted as I had ample liquidity to pay it off in full or other. It would not surprise me that many PenFed customers are using rational economic decisions when utilizing the 5/5/ 30-year ARM. The taxes and insurance on that house would make me bite my lip, but probably inline with that area. I would not want to be a house rich/cash flow constrained home owner, but not knowing the specific market, whether the purchase price is a good value, upside potential, etc I have no opinion.bottlecap wrote:You may not have a negative view of ARMs, but the fact is they are mostly used as a crutch by people who are stretching to buy more than they comfortably can. What happens in five years if your property value goes down and your interst rate doubles? You'll be stuck with a payment you can't afford and a house you can't sell without taking a loss.
Re: Can I afford this place?
OP, you say you make 60K a year and you are going to buy with a mortgage a house over 400? Are you looking to go bankrupt?
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Re: Can I afford this place?
Not him, it will be the bank - whichever one that even thinks about such a loan deserves what they get.Calm Man wrote:OP, you say you make 60K a year and you are going to buy with a mortgage a house over 400? Are you looking to go bankrupt?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Can I afford this place?
That $60K is take-home pay, not salary; he maxes out his 401(k) and has taxes, health, and disability insurance withheld. That suggests a salary of about $100K, plus net income from the condo (although I would prefer to sell the condo and turn that net income into a larger down payment so that he could qualify for a fixed-rate loan).Grt2bOutdoors wrote:Not him, it will be the bank - whichever one that even thinks about such a loan deserves what they get.Calm Man wrote:OP, you say you make 60K a year and you are going to buy with a mortgage a house over 400? Are you looking to go bankrupt?
Re: Can I afford this place?
My calculations indicate you have $5k month left AFTER taxes, insurance & fully maxing your 401k. I figure you are earning at least $90k/year, maybe a bit more
House payment would be $1433 + $820 = $2253/month, or about $27k/year. Your housing costs would be under 30% of your gross income, which was the traditional rule of thumb, and might be as lower.
Years 6-10, your max P&I could reset to would be $1,831 + $820 (plus probably some increase) = $2,651/month.
If you will still have 6 month emergency fund after you make the down payment, I think you could easily manage this depending upon the balance of your lifestyle. If your budget includes monthly out of town trips that cost $1500 each, etc. then no, you cannot afford this. However, posting on Bogleheads, a paid off condo and fully funding your 401k indicate you probably are fiscally restrained. If you plan to fully fund a Roth along with this, it is probably fine. Also, I understand and agree with your reasoning on the ARM, because I am familiar with the PenFed product. I'm also wondering if you will be attempting to pay off the loan early, so your max mortgage might just be 10 years?
The one issue that concerns me is your statement that buying a new place and selling your condo concurrently might be overwhelming. I would suggest that selling the condo is FAR less overwhelming than learning to become a landlord, familiarizing yourself with federal, state & local LL laws, drafting a lease, advertising for tenants, showing the condo, screening tenants, doing a tenant move in, creating the tenant move in paperwork, etc. I am NOT trying to discourage real estate as an investment, but just want to point out it is WORK.
I think you need to run the numbers assuming:
- You own the condo, but don't have a tenant, so have to carry taxes, insurance and HOA fees.
- Your partner does not move in, so you have no cost sharing
Are you still comfortable with the cost of the house? If so, add this:
- Your partner does not move in, so no cost sharing
- You are in year 6-10, with minimal increase in salary, and the rate rises a full 2%
Are you still comfortable with the numbers?
Go for it.
House payment would be $1433 + $820 = $2253/month, or about $27k/year. Your housing costs would be under 30% of your gross income, which was the traditional rule of thumb, and might be as lower.
Years 6-10, your max P&I could reset to would be $1,831 + $820 (plus probably some increase) = $2,651/month.
If you will still have 6 month emergency fund after you make the down payment, I think you could easily manage this depending upon the balance of your lifestyle. If your budget includes monthly out of town trips that cost $1500 each, etc. then no, you cannot afford this. However, posting on Bogleheads, a paid off condo and fully funding your 401k indicate you probably are fiscally restrained. If you plan to fully fund a Roth along with this, it is probably fine. Also, I understand and agree with your reasoning on the ARM, because I am familiar with the PenFed product. I'm also wondering if you will be attempting to pay off the loan early, so your max mortgage might just be 10 years?
The one issue that concerns me is your statement that buying a new place and selling your condo concurrently might be overwhelming. I would suggest that selling the condo is FAR less overwhelming than learning to become a landlord, familiarizing yourself with federal, state & local LL laws, drafting a lease, advertising for tenants, showing the condo, screening tenants, doing a tenant move in, creating the tenant move in paperwork, etc. I am NOT trying to discourage real estate as an investment, but just want to point out it is WORK.
I think you need to run the numbers assuming:
- You own the condo, but don't have a tenant, so have to carry taxes, insurance and HOA fees.
- Your partner does not move in, so you have no cost sharing
Are you still comfortable with the cost of the house? If so, add this:
- Your partner does not move in, so no cost sharing
- You are in year 6-10, with minimal increase in salary, and the rate rises a full 2%
Are you still comfortable with the numbers?
Go for it.
Re: Can I afford this place?
I'm not as conservative as some on here about housing so I'll say I think it could be doable -- if that's what you want to spend your money on. You could save more and retire early, or travel more frequently. I would sell the condo rather than being a landlord as the condo equity should help you get closer to a 3:1 ratio of housing cost to salary (I'm guessing -- you haven't given the full info on that). I would get a fixed rate loan not an ARM. I would not buy a place like you describe in a premium neighborhood unless you planned to live there a long time as in 20+ years (or plan to do a lot of work yourself to fix up the house).
I would also only do it if you (and your partner, when visiting or living in the house) would really enjoy the lifestyle of living in the house/neighborhood and everything that comes with it. Anyone living in an 85 year old house had better like fixing up old houses as a hobby/lifestyle choice (especially if you plan to sell in 5-10 years as you'll need to keep it in good shape to resell). If the house is immaculate that means the owners have been spending a lot of money on upkeep which you would also need to do to keep it in that state of repair. If you are going to drive into the garage, close the door, go into the kitchen to eat, sit down in the family room to watch TV, then go to the office to use the computer, then go to bed you can do that anywhere -- so you don't need to pay a premium for the house you seem to be describing. If you plan to walk to restaurants, bike to a nearby park, renovate the house, and socialize with like-minded neighbors then its a great lifestyle choice that people are willing to pay for.
I would also only do it if you (and your partner, when visiting or living in the house) would really enjoy the lifestyle of living in the house/neighborhood and everything that comes with it. Anyone living in an 85 year old house had better like fixing up old houses as a hobby/lifestyle choice (especially if you plan to sell in 5-10 years as you'll need to keep it in good shape to resell). If the house is immaculate that means the owners have been spending a lot of money on upkeep which you would also need to do to keep it in that state of repair. If you are going to drive into the garage, close the door, go into the kitchen to eat, sit down in the family room to watch TV, then go to the office to use the computer, then go to bed you can do that anywhere -- so you don't need to pay a premium for the house you seem to be describing. If you plan to walk to restaurants, bike to a nearby park, renovate the house, and socialize with like-minded neighbors then its a great lifestyle choice that people are willing to pay for.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
Re: Can I afford this place?
While I understand this statement, consider the alternative - keeping the condo an buying the house which would require you handling your current job, renting out your condo for the first time, closing on the house, moving from the condo to the house, furnishing the house and untold small and large maintenance items on the house.kd2008 wrote:Yup I can do that. It is just that I may feel a bit overwhelmed handling the condo on the market and purchasing a home at the same time. Plus the rent collected would be a much better payoff if I could get $9K in rent annually - standard in my area.Erhan wrote:Would it make sense to sell the condo and use the proceeding as additional down payment?
As someone with a job, a house and a rented out townhouse, I would strongly suggest selling your condo.
If you do keep the condo as a rental, get documentation of its value (ideally as high as possible, your buying realtor may be able to help with this) at the time you switch from home to rental to help with future tax calculations
Re: Can I afford this place?
I would like to thank you all for your feedback. JT, you comments did make me take a hard look at my cash flow - including running the taxcaster. Thank you for your critique. Like I said, the house is in a premier neighborhood - walking distance from shopping, restaurants, parks, trails, museums. Added bonus downtown skyline and hospitals closer than my current condo.
I am comfortable renting out the condo as of now as I will be enlisting the help of a friend who is a real estate "mogul" and does this for a living. I may even decide to let him manage it for a small fee. Currently the rental market is tight and the condo is near a university campus plus the condo value is small (<$50K). I am open to selling it.
I am still trigger shy. I am going think this long and hard.
I would like to hear experiences of people who have transitioned like me and also additional critique on my situation.
Thanks once again.
I am comfortable renting out the condo as of now as I will be enlisting the help of a friend who is a real estate "mogul" and does this for a living. I may even decide to let him manage it for a small fee. Currently the rental market is tight and the condo is near a university campus plus the condo value is small (<$50K). I am open to selling it.
I am still trigger shy. I am going think this long and hard.
I would like to hear experiences of people who have transitioned like me and also additional critique on my situation.
Thanks once again.
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- Location: New York
Re: Can I afford this place?
I am a quasi involuntary/voluntary condo and single family homeowner. Here is the thing with you relying on someone else to pay you rent so you can pay your own bills/mortgage - you just don't have a Rely-o-meter to determine how good there bond or word is. They say they'll pay you on the 1st of the month, but then the checks late or the dog ate the checkbook or the payroll was late, or the car broke down, etc. etc. - how much wiggle room do you have to carry both condo and prospective home? If you don't have enough to do it for 6-9 months you have ZERO business trying to pull this off and with an ARM no less. That is called "living on the edge" - I like and enjoy sleeping at night, not worrying about "wheres the rent check?", "the toilet doesn't flush", "the pipe in the sink is leaking", "the refrigerator stopped working", "the oven doesn't heat up at the right temperature". As a landlord you are responsible for all of the above - condo maintainance doesn't cover it.kd2008 wrote:I would like to thank you all for your feedback. JT, you comments did make me take a hard look at my cash flow - including running the taxcaster. Thank you for your critique. Like I said, the house is in a premier neighborhood - walking distance from shopping, restaurants, parks, trails, museums. Added bonus downtown skyline and hospitals closer than my current condo.
I am comfortable renting out the condo as of now as I will be enlisting the help of a friend who is a real estate "mogul" and does this for a living. I may even decide to let him manage it for a small fee. Currently the rental market is tight and the condo is near a university campus plus the condo value is small (<$50K). I am open to selling it.
I am still trigger shy. I am going think this long and hard.
I would like to hear experiences of people who have transitioned like me and also additional critique on my situation.
Thanks once again.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions