How much house should I buy? (young person with many assets)

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hockeyjunkie312
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How much house should I buy? (young person with many assets)

Post by hockeyjunkie312 »

Hello Bogleheads,

I am looking to buy a house and would really appreciate advice on how much I could/should spend. Here is some background on my situation:


- 25 years old
- single
- live at home with parents
- been at current job for three years. It is a very stable job and I intend to stay with this employer for a long time. (I know I might get criticism for this statement as I am making this judgement based on only being there for three years, but I am fairly confident about this.)
- The area I am looking to buy is a relatively mid-priced (not expensive like LA, NY, ect, but not very cheap either)

Financials:

- 737k in inherited IRA
- 78k in Roth 401k
- 20k in Roth IRA (of which 15.5k is contributions)
= total: 835k
- investments allocated 75% stock and 25% bonds
- a few thousand in a checking account

- job income: 48.5k
- I have a very generous 401k match. If I contribute at least 3%, employer contributes 14%. I have been maxing out Roth 401k and Roth IRA, but have recently brought this down to just the 3% contribution now that I am looking to buy a house.

- I owe 7k on a car loan at 1.5%, no other debt


I have decided to buy over rent, mostly because most of the rental properties in the area I am looking do not appeal to me, and also because if I bought a house I would hopefully live in it for at least five years and thus buying is likely a better option financially. (NYT rent vs. buy calculator confirms this)

Because I am in a very unique position financially because of my significant assets, I am really struggling with deciding how much I could/should spend. I don't want to spend too little and then get the itch to upgrade shortly thereafter, but I also don't want to spend an unreasonable amount. To give you some idea, the properties I like and could see myself in for at least five years are mostly in the low 200's with property taxes at about 3500-4k.

I'm not sure how I would pay for the down payment. If I did buy around 200k, I'm not sure I could get a large enough mortgage to just put 20% down because, from what I have heard, the bank cares more about your debt to income ratio than your assets. I would ideally like to only put 20% down to keep as much money as possible investing and so I wouldn't have to pay tax on such a large Inherited IRA distribution, but am open to opinions on this. I could potentially do a mix of borrowing from 401k up to 32k, taking out Roth IRA contributions of 15.5k, and withdrawing from Inherited IRA, although I would of course owe ordinary income tax on those distributions. The Penfed 5/5 ARM seems very appealing considering it's initial rate is just under 3%, but I am also open to opinions on this.

Any advice or comments are greatly appreciated. I don't have many financially-wise people I can turn to for advice, but reading the posts on this forum over the last few months has been incredibly helpful in helping me manage my finances. Thank you!

Regards,
Pat


(EDIT: There are a few other factors I should have mentioned: I am looking at two story condos, or townhouses, not sure what they are referred to as. They will have an HOA. I know there are pros and cons to this but it means I will not be responsible for landscaping or exterior maintenance. They are in the 1500 to 2000 sq foot range. Also, I'm currently paying about $500 in rent a month to my parents. Also, my RMD's currently are about 13k.)
Last edited by hockeyjunkie312 on Fri May 23, 2014 5:18 pm, edited 1 time in total.
Gill
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Re: How much house should I buy? (young person with many ass

Post by Gill »

Don't do it. It makes no sense to pull such a large amount from the IRA and you will likely have trouble getting a large mortgage. Rethink your desire to buy. Your plans will change in many ways. Live your life as if you never inherited the IRA and you'll be glad you did.
Gill
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Bacchus01
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Re: How much house should I buy? (young person with many ass

Post by Bacchus01 »

At 25, those assets seem like a lot. They aren't. Not when you are 40 years of inflation away from retirement.

Pulling funds from there will be just about the most disastrous financial decision you could make.

Save until you have a down payment.

I would rent. You also haven't accounted for the fact that buying a house now means furnishing it, taxes, insurance, repairs, etc. Where is that cash going to come from.

$200k is also a lot of house on a 48K salary.
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Ged
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Re: How much house should I buy? (young person with many ass

Post by Ged »

If you should marry I think your wife may have some opinions on what kind of house she prefers. Plus of course since you have not ever owned a house or really even lived independently you may find experience is very informative.

Rent.
Retread
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Re: How much house should I buy? (young person with many ass

Post by Retread »

Your heading referring to "many assets" reveals a great deal. You don't need a house at 25 and you'd be making a terribly foolish mistake to withdraw any more from this IRA than your RMD. A future spouse and a likely job opportunity will soon make you regret buying this house.
Bruce
Last edited by Retread on Thu May 22, 2014 7:38 pm, edited 2 times in total.
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fposte
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Re: How much house should I buy? (young person with many ass

Post by fposte »

You're doing really, really well for your age, even without the inherited IRA; good for you on putting money away in years where it really matters and developing the habit.

What I'm missing in your description is a budget overview--as people upthread are noting, house payments and costs can take a huge bite out of 48k of salary. I differ from some here in that I could could see dipping into the IRA for $5-$10k to bump up a down payment a little (heck, RMDs might be getting you that right there), but the actual ongoing costs should be sustainable based solely on your income. I'm with the others in thinking over $200k sounds like a lot of house for a $48k annual income, and a lot of house to be a "starter home" for a single young person on his/her own.

What you might do is identify a plausible house and then use its costs as a test for a year or so--put away the equivalent of its mortgage, taxes, and insurance every month and see if you're okay living within those constraints. Then at the end of that time if you're still set on buying the money you've put away will provide a nice start on a down payment.
linenfort
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Re: How much house should I buy? (young person with many ass

Post by linenfort »

Rent and invest!
cmr86
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Re: How much house should I buy? (young person with many ass

Post by cmr86 »

fposte wrote:
What you might do is identify a plausible house and then use its costs as a test for a year or so--put away the equivalent of its mortgage, taxes, and insurance every month and see if you're okay living within those constraints. Then at the end of that time if you're still set on buying the money you've put away will provide a nice start on a down payment.

+1. I'm 27 and in my own house (though my parents have been overly generous and they put down the principle).

Plus...depending on where you live, you could always do what I'm doing, and rent out any extra space. My roommates pay for my mortgage. It's not convenient (I'm not a big fan of sharing my living space with people I'm not particularly fond of, or coming home to a messy kitchen, but the benefits far outweigh the detractors).


Ah well, that gravy train will eventually dry up when my girlfriend decides to move in.
Last edited by cmr86 on Thu May 22, 2014 8:00 pm, edited 1 time in total.
Retread
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Re: How much house should I buy? (young person with many ass

Post by Retread »

hockeyjunkie312 wrote:I have been maxing out Roth 401k and Roth IRA, but have recently brought this down to just the 3% contribution now that I am looking to buy a house.
This is another huge mistake. You are passing up the opportunity for those contributions to compound for as long as the next 60-75 years or so. Contribute the max and forget the house until you can afford it.
Bruce
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bottlecap
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Re: How much house should I buy? (young person with many ass

Post by bottlecap »

Honestly, you should really rethink renting, unless maybe you can make a good case for houses being really depressed in your area right now because of the economy.

You really don't want to be a homeowner at 25, even if you can afford it. When you rent, you're responsible for basically nothing but rent. When you buy, you are responsible for insurance, upkeep, taxes, assessments, landscaping, premises liability - you name it.

If you must buy, on a salary of $48k, you can probably afford a $100,000 home, maybe $120,000.

I really wouldn't think about the rest of the money, except to wisely invest it. Wait until you're 35 or 40 and see where you're at and what you want to do. If your salary increases and you settle down and want to by a condo at 29 or 30, go crazy. But don't bite off too much, too soon. If you do this right, with those assets, you can write your own ticket later in life.

Good luck,

JT
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Re: How much house should I buy? (young person with many ass

Post by SnapShots »

I read most people who inherit or win the lottery go through the money in 5 years or less.

At 25 and single, don't buy a house. Find yourself a cool apartment. Keep working and saving. Spend some of your inheritance on travel. Learn about other cultures and get out of your comfort zone. Your ideas of what you want will be different at 30 and 40 and 50 and 60 and 70. Marriage and children will change your outlook on life, should you do that. Go slow. You have an opportunity to set yourself up for a wonderful life and retirement .... if you don't blow it all. Which, is very easy to do.

Good Luck...
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carofe
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Re: How much house should I buy? (young person with many ass

Post by carofe »

Max out your employer match
Build an EF (it seems that you don't have enough)
Save for the down payment
And then you'll be ready to buy a house but make sure that the monthly payment + taxes + any community fee are less than the 25% of your income and you'll be fine. A lender can tell you that you can afford much more but remember, the are lenders, not your finance planner, never relay on them to figure out how much house you can afford.
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Retread
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Re: How much house should I buy? (young person with many ass

Post by Retread »

SnapShots as said it all. I spent my career administering decedent's estates, often handing out large checks to beneficiaries who hadn't expected to receive the money. They often told him how they had so many needs for the money, and I then wondered to myself how they would have managed if they hadn't received the inheritance. I can't imagine the OP "needed" this house before he inherited the IRA and he sure doesn't need it now. It would be a mistake he'll regret the rest of his life.
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Grt2bOutdoors
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Re: How much house should I buy? (young person with many ass

Post by Grt2bOutdoors »

Many assets - until the tax man takes his "fair share". Then the many, become the few. End of story.
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Re: How much house should I buy? (young person with many ass

Post by Dale_G »

Jeez, what a bunch of grinches :annoyed

Pat, if you want a modest house, go ahead and buy it. And if you take the down payment from the IRA (take enough to pay the taxes too) that is just fine. Someone probably left the money to you because they thought you would get more joy from it than they would get by spending on themselves. Because the IRA amounts to a big "emergency" fund you can tap at any time, you can well afford a house in the $200,000 range. $500,000 - no, no ,no.

Much of the focus on this forum is saving for retirement. And to a man with a hammer, everything looks like a nail. You are young and have plenty of time to take care of retirement needs. Among other things the RMDs from the inherited IRA can help fund your own 401k or other investments in the future. That is probably a good idea.

And tapping the inherited IRA in the future for new desires - a nice boat, motorcycle, sports car, multiple trips to Vegas - not such a good idea. I say, "not such a good idea" because I am a man with a hammer too!

But good luck, and enjoy your new home.

Dale
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IMD801
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Re: How much house should I buy? (young person with many ass

Post by IMD801 »

I wouldn't buy a house at all, as others have said. A house when you're single and 25 is a big boat anchor. Keep your load light. Save/invest for another five years and re-assess at age 30.
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Re: How much house should I buy? (young person with many ass

Post by cmr79 »

I agree with Dale in that I think, in theory, you can afford to buy a house in the 200k range you're considering. If you pretend you didn't inherit the IRA (and continue to reinvest the RMDs as you are) and at the same time max out your retirement space as some are suggesting, you'll run a high risk of needing to substantially raise your standard of living in retirement. The IRA money alone, assuming modest earnings of 3% over inflation, would be worth nearly $3M in 40 years. If your desire is to maintain a constant standard of living throughout your life, a premise with which few here would likely disagree, pretending you didn't inherit it just doesn't seem like the smart move.

That being said, how confident are you that these "houses you can see yourself living in for at least 5 years" are actually places you'd want to live for any length of time? Assuming you've spent a few years living in college-style housing and apartments and then moved back in with your parents, buying a house is going to be a big jump.

Why not test the waters for a year by renting a house? Even if you feel like you're throwing away money that could be going towards principle on a purchase, treat it like you're paying to find out what's really important in a house for you. Or what's important in an area/neighborhood. If you nail it, great--you know what to look for and the purchasing process will be that much easier. If not, you've saved a ton of money and angst.

I agree that you need to have a workable budget, but you haven't provided enough details for us to critique your decision based on that. Your mortgage payment is likely to be <25% of your income if you need to put >20% down, so I can't imagine it's a deal breaker.
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Re: How much house should I buy? (young person with many ass

Post by Dale_G »

IMD801 wrote:I wouldn't buy a house at all, as others have said. A house when you're single and 25 is a big boat anchor. Keep your load light. Save/invest for another five years and re-assess at age 30.
I disagree. Pat wants to buy a house and has done some cost benefit analysis. There are a lot of anchors in life; an ill-chosen spouse, unplanned children, student loans, or go nowhere jobs. But if a home is an anchor, Pat has a big power winch. It is called money, He can pull the anchor and be away at any time - and it won't be a big deal.

And if it turns out to be a mistake, so be it. He (maybe) will never know unless he tries.

Dale
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Re: How much house should I buy? (young person with many ass

Post by fanmail »

I agree with Dale that if OP wants to buy a home, he should consider it assuming he can afford the taxes and upkeep on his current salary. I understand the tone of caution of a 25 year old pulling $ out of an inherited IRA and potentially "blowing it", but OP seems pretty sensible to me.
EnjoyIt
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Re: How much house should I buy? (young person with many ass

Post by EnjoyIt »

Owning a house when single is silly. You currently have freedom and a house decreases that freedom. I see very little reason to tie yourself down.

Since you live with your parents I doubt you have a good idea of what you will find important in a home. You have to experience life out there and for that you will need to rent.

Lastly, houses are a maintenance burden and you are the only one responsible. Not to mention you would spend less renting because you will end up buying a larger home than you would rent. You will think that since you will be there for the next 7 years, maybe it is better to spend the money and have a nicer home. Not to mention your nicer home will need nicer furniture. Before you know it, your "many assets" will be cut by 20-30%.
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Re: How much house should I buy? (young person with many ass

Post by Devil's Advocate »

hockeyjunkie312,

At first glance I believe you can buy a house without too much financial damage.

That being said, what would I do at 25 with what I know now?

Probably max out retirement and save up for downpayment using your income cash flow. IMO using the inherited IRA is inflating your lifestyle when your income would not support it. In other words you may be setting yourself up to spending down your nest egg.

If you are adamant about buying then go for it, but just know this is most likley not the best way to maximize your net worth.

DA
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Re: How much house should I buy? (young person with many ass

Post by RunningRad »

I think that technically the OP could afford the house. At age 25, I did not have the maturity, lifestyle, or professional stability, not to mention cash flow, to own one. Leaking roofs, water in the basement, A/C going out on a hot day, etc. would have put me over the edge. (They still do.)

Owning a home is more than dropping some money for a down payment and writing a mortgage check each month.
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Re: How much house should I buy? (young person with many ass

Post by awval999 »

You obviously can afford a house.

I would rent a house for a year. I'm currently in a rented house. It has made me realize several things that I want my purchase home to have. And several things I DO NOT want in my purchased home.

So while I am spending money on rent, it has allowed me to the ability to apply for other jobs, including an international one (didn't take), not worry about maintenance, realize that a big yard is a deal breaker, realize that a noisy road is a deal breaker, etc.

I would say it's been an interesting experience.
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Re: How much house should I buy? (young person with many ass

Post by mw1739 »

I think you need to sit down and make a budget and figure out what you can afford. You make $48k a year, plus I'm guessing your RMD is $10-12k, so lets say you're making $60k a year. You say you live rent free with your parents and have been maxing your retirement acccounts ($22k a year). Where is the rest of your money going? As others have said, houses are expensive, especially if you've never owned before. You'll drop $10k easily buying furniture, TV, pots and pans etc. just when you move in. I would move out of your parents house and rent a place for a year at minimum. You'll get a taste of what it costs to live in the real world.
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Re: How much house should I buy? (young person with many ass

Post by RunningRad »

mw1739 wrote: I would move out of your parents house and rent a place for a year at minimum. You'll get a taste of what it costs to live in the real world.
That is a great point. It's a jump to move from one's parents house to an apartment, on their own, and an even bigger jump right to a house that you own.
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Re: How much house should I buy? (young person with many ass

Post by HardKnocker »

It makes no sense to buy a house with a 5 year time horizon.

You are single. Rent.
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Re: How much house should I buy? (young person with many ass

Post by Andyrunner »

Being as young as you are, even if you stay with your employer, your employer might say get on a plane and move to the other side of the country. You might meet a mate that you want to spend the rest of your life with and they say "I got a great job opportunity halfway across the country" or even "two hours away and I hate commuting"

Honestly I would say rent or buy a home you can easily turn around into a rental. I have seen multiple friends buy a home then get the ticket to move in 1-2 years for personal or business reasons.
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Re: How much house should I buy? (young person with many ass

Post by Retread »

OP, where are you????
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ajcp
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Re: How much house should I buy? (young person with many ass

Post by ajcp »

Dale_G wrote:Jeez, what a bunch of grinches :annoyed

Pat, if you want a modest house, go ahead and buy it. And if you take the down payment from the IRA (take enough to pay the taxes too) that is just fine. Someone probably left the money to you because they thought you would get more joy from it than they would get by spending on themselves. Because the IRA amounts to a big "emergency" fund you can tap at any time, you can well afford a house in the $200,000 range. $500,000 - no, no ,no.

Much of the focus on this forum is saving for retirement. And to a man with a hammer, everything looks like a nail. You are young and have plenty of time to take care of retirement needs. Among other things the RMDs from the inherited IRA can help fund your own 401k or other investments in the future. That is probably a good idea.

And tapping the inherited IRA in the future for new desires - a nice boat, motorcycle, sports car, multiple trips to Vegas - not such a good idea. I say, "not such a good idea" because I am a man with a hammer too!

But good luck, and enjoy your new home.

Dale
+1 I'm a similar age and income and it would probably take me 20 years to catch up to op even if he spent 100% of his income and just let the current assets appreciate. So if op can't afford to take the foot of the pedal a little I guess I'm really in trouble. :(

The points about looking closer at the rent vs buy decision and getting a idea of how much living on your own will cost are great, but the slower person can still win the race of they get a big enough head start. You just have to make sure you don't get too complacent and think you're at for life.

ETA: Did some math to put it in perspective. Person A has 750k, gets 5%/year and contributes absolutely nothing. B starts at nothing, but contributes $30,000 (i.e. 60% of op's income) and gets 7%/year. It takes B 33 years to catch up to A.
Last edited by ajcp on Fri May 23, 2014 8:58 am, edited 1 time in total.
crake
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Re: How much house should I buy? (young person with many ass

Post by crake »

I have decided to buy over rent, mostly because most of the rental properties in the area I am looking do not appeal to me, and also because if I bought a house I would hopefully live in it for at least five years and thus buying is likely a better option financially. (NYT rent vs. buy calculator confirms this)
Nothing much else to add except to suggest you play around with this calculator a bit more. All the math in the calculators is accurate but the problem is there are a few assumptions that will drastically change the outcome. Two of those are house appreciation and rate of return on investments. In my opinion the default values in the NYT calculator overestimates house appreciation (3%) and underestimates return on investments (4%). Tweak those numbers a bit and your results will change drastically. I also believe that the default estimates for maintenance and renovations to be low. I DIY most of these items and don't see myself coming in at or below the NYT estimates. If every 20 years you replace kitchen appliances(3k), roof (10k), and HVAC (7k) you've already met the estimate the NYT calculator gives you for maintenance and renovation on a 200k house. You better hope nothing else brakes in those 20 years and hopefully you don't mind 20 year old paint and carpets.

I recently purchased a home and certainly do not see it as being a long term wealth building purchase. If I break even versus renting I'll be happy, if it makes me money I'll be ecstatic, if it costs me money my expectations will have been met. I believe buying a house should be a life style choice. If you are doing it solely because you think it will leave you better off financially I would recommend against it.
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cowboyinasia
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Re: How much house should I buy? (young person with many ass

Post by cowboyinasia »

If you buy....

Don't buy something too big or needing lots of care (trees, garden, yard) and maintenance and everyday cleaning. At 25, you've got funner things to do.

I'd say 3 bedroom. Big enough for you, maybe a sig other, maybe an eventual kid . . . . and attractive if you want to sell it someday.

At 25, you might move on in a few years but keep that one as a rental. That's how lots of people fall into the landlord game. If that might appeal to you, buy something with no additional work needed, and a renter could cover the mortgage, insurance, etc.

Don't rely on the big IRA to keep paying for it. Maybe a 20% to 25% down payment plus closing costs ..... and here I'm thinking 30k to 50k including tax penalty . . ......, but then makes sure you can cover all your monthly housing costs AND continue to max out the 401k and yearly IRA from your salary.
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Re: How much house should I buy? (young person with many ass

Post by bottlecap »

Dale_G wrote:Jeez, what a bunch of grinches :annoyed
There are always people that think sound advice is too limiting, but I don't think anyone is being a "grinch." I'm speaking from experience. Being a homeowner at 25 is rarely a good idea, for all of the reasons mentioned by various posters above. The OP will have to give up his time and money - both of which could be used to have experiences (travel and such) at this age - to maintain a home he doesn't need. Does he really "want" a home? I don't know and neither does anyone else. The use of the New York Times rent vs. buy calculator suggests he's on the fence or is doing this for financial reasons, not because he is dying to own a home.

And add to this:

1. No emergency fund;
2. Tapping retirement assets and possibly paying penalties to get down payment;
3. $3,500 to $4,000 in taxes per year (not to mention insurance);
4. A five year time horizon; and
5. Use of a 5 year arm so he can afford payments.

These are a lot of red flags if a 40 year old were proposing to buy a home. And those telling a 25 year old with a "few thousand" in a checking account to be cautious are grinches!?! At this point he's tapping retirement accounts to pay for home furnishings!

I've seen so many people buy homes they shouldn't have because of friends, real estate agents and parents who thought it would be a "good investment." OP doesn't need a good investment; he has plenty of them. He probably ought to hear the other side from people who have been there.

If the OP had $100,000 in his checking account, was handy, loved working on houses and didn't care about his freedom or going out at night and doing things most 25 year olds like to do at night and on weekends, I'd say go crazy and buy a home. Otherwise, he should think long and hard before doing this. At the very least, it will likely put a crimp in his lifestyle. It might also put a good dent in what is otherwise a good start, especially if the housing market takes a dive within the next 5 to 7 years.

JT
Luke Duke
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Re: How much house should I buy? (young person with many ass

Post by Luke Duke »

Buy a house if you are sure that you want a house. I bought my first house when I was 22, single and making ~$50K and I never regretted it. Of course it was a $100K house, not a $250K house. I owned it for about 5 years and sold it for about 15% more than I bought it for.

You earn a $48.5K salary. How much is your IRA RMD?
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Re: How much house should I buy? (young person with many ass

Post by surfstar »

Houses require maintenance and "busy-things" on the weekends - like tooling around the garage or front yard.

You're in your 20's, live cheap and enjoy your weekends with friends. Go OUT! Don't stay in/at home. Save that for when you're older and married or whatever.

Live with cheap housing, do more memorable things. Thank me later :D
rjm_cali
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Re: How much house should I buy? (young person with many ass

Post by rjm_cali »

It is interesting reading this from a UK perspective. I live in the US now and have recently sold my house in the UK which I owned for 18 years. In that time the property market went through various ups and downs. I sold it at the start of yet another uptick (hey market timing :-) ) but still saw it triple in value. That was nice - but there again I've never worked out what it actually cost - I had my first mortgage at 29 and it was certainly tough to begin when interest rates were peaking at 15%

At 56 I really wish I knew then what I know now. I'd have done the maths for a start and certainly not bought endowments <spit> but ultimately I'm sold on the idea that rent is me paying someone else's mortgage. All things being equal I'd rather pay my own. If it can be a level playing field then why not get into property that is matched to the OP's income rather than assets. That's what I did (had to). First flat I bought I bought with a friend. When he got married I bought him out. When I sold that I bought a house.

And yes the UK property market is not the same as the US but I can see that the SE England is very similar to *certain* parts of the US
killjoy2012
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Re: How much house should I buy? (young person with many ass

Post by killjoy2012 »

As a single guy who has owned a home since he was 28, I would echo everyone here who says "don't buy - rent". Why?
- A house isn't the same type of "no-brainer investment" that most considered it to be just a decade ago.
- It's way too much much work finding the right home, buying it, and then trying to sell it just 5 years later -- not to mention the associated taxes, fees, hassle, etc.
- A house is an anchor. You are 25. Why do you want to be tied down to one area? Even if all of your family is located in that city, as well as your current job, you just never know - especially on the job side.
- If you ever do get married, odds are < 1% she'll want/agree to move into YOUR house.
-- And while renting it out is an option, I personally find "good rental properties" and "my old house" to normally be in different realms.
- Does spending a good portion of your weekends and vacation on home maintenance sound like fun? Why not rent something decently nice and not have to worry about cutting the lawn, shoveling snow, fixing the sink, renovating the kitchen, etc.?

Bottom line: In today's world, especially for a single person, I don't see the positive financial aspects being there to offset enough of the headaches and anchoring.
LFKB
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Re: How much house should I buy? (young person with many ass

Post by LFKB »

Dale_G wrote:Jeez, what a bunch of grinches :annoyed

Pat, if you want a modest house, go ahead and buy it. And if you take the down payment from the IRA (take enough to pay the taxes too) that is just fine. Someone probably left the money to you because they thought you would get more joy from it than they would get by spending on themselves. Because the IRA amounts to a big "emergency" fund you can tap at any time, you can well afford a house in the $200,000 range. $500,000 - no, no ,no.

Much of the focus on this forum is saving for retirement. And to a man with a hammer, everything looks like a nail. You are young and have plenty of time to take care of retirement needs. Among other things the RMDs from the inherited IRA can help fund your own 401k or other investments in the future. That is probably a good idea.

And tapping the inherited IRA in the future for new desires - a nice boat, motorcycle, sports car, multiple trips to Vegas - not such a good idea. I say, "not such a good idea" because I am a man with a hammer too!

But good luck, and enjoy your new home.

Dale
Agree with Dale. Since when is buying a house such a terrible investment on this board? It's not like he's tapping his IRA to buy a sports car.

Pulling out $40k or a bit more for the downpayment and some furniture is not necessarily a bad investment and he'll have an asset that should appreciate and monthly payments that build equity plus the tax shield. He just needs to make sure he has thought out his budget and can afford the monthly mortgage payments. If he can do that buying sounds like a good idea to me.
killjoy2012
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Re: How much house should I buy? (young person with many ass

Post by killjoy2012 »

rjm_cali wrote:It is interesting reading this from a UK perspective. I live in the US now and have recently sold my house in the UK which I owned for 18 years. In that time the property market went through various ups and downs. I sold it at the start of yet another uptick (hey market timing :-) ) but still saw it triple in value. That was nice - but there again I've never worked out what it actually cost - I had my first mortgage at 29 and it was certainly tough to begin when interest rates were peaking at 15%

At 56 I really wish I knew then what I know now. I'd have done the maths for a start and certainly not bought endowments <spit> but ultimately I'm sold on the idea that rent is me paying someone else's mortgage. All things being equal I'd rather pay my own. If it can be a level playing field then why not get into property that is matched to the OP's income rather than assets. That's what I did (had to). First flat I bought I bought with a friend. When he got married I bought him out. When I sold that I bought a house.
I get what you're saying, but I think your view would be different if that house hadn't appreciated 3x in that 18 years. I've owned my current house since 1999, ~15 years, and my house is currently worth about 15% more than what I paid for it. And while I could look at it as avoiding the ~$1k/month rent (paying someone else's mortgage) vs. my $1k/month mortgage/insurance.... I think you need to also look at the additional expenses as being the owner. Off the top of my head - $7k roof, $7.5k HVAC - not to mention all of the smaller incidentals - annual furnace cleanings, rooms needing painted, garage/house exterior painting, landscaping, outdoor power tools, etc. etc. Am I slightly ahead by owning - yes, but I think when you look at TCO, it's pretty much a wash.
fanmail
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Re: How much house should I buy? (young person with many ass

Post by fanmail »

mw1739 wrote:I think you need to sit down and make a budget and figure out what you can afford. You make $48k a year, plus I'm guessing your RMD is $10-12k, so lets say you're making $60k a year. You say you live rent free with your parents and have been maxing your retirement acccounts ($22k a year). Where is the rest of your money going? As others have said, houses are expensive, especially if you've never owned before. You'll drop $10k easily buying furniture, TV, pots and pans etc. just when you move in. I would move out of your parents house and rent a place for a year at minimum. You'll get a taste of what it costs to live in the real world.
Do you not need furniture, tv, or pots and pans in a rented apartment? Those costs aren't going away unless he rents a fully furnished place. Not sure how common that is in his area.
NH_Dave
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Re: How much house should I buy? (young person with many ass

Post by NH_Dave »

I would recommend buying now. I agree with Dale that this board focuses very heavily on saving for retirement, but you have a pretty good head start on that! The majority of your life will be spent pre-retirement, so enjoy it a little. Mortgage rates are still at historic lows and will not remain here forever.

As everyone cautioned, be aware of the carrying costs of the house. I've often heard 1% of purchase price annually for maintenance, but I think that is low. I've owned three homes over the last 15 years and they've cost me more than 1% annually to maintain - especially if you ever plan to sell it. Buyers will want updates, not just mandatory maintenance like when the furnace goes.

You also can't really lose with real estate if it's your primary residence - once you're in the market, you're in! Whether prices go up or down. I bought my first house for $200,000 and sold it for $325K. That sounds great, but I bought my second house for $360,000 and sold it for $260K. That sounds terrible... I bought my third house for $350,000 and it's twice as big as my last one and 25 years newer and was listed at $490K at the same time I bought my second house.

My first house was never really worth $325K and the second was never worth $360K but it didn't matter because as long as you stay in the market you ride with it either way - so get in while the mortgage rates are favorable.

BTW, while your home shouldn't be a primary means of saving for retirement, owning a home outright by the time you retire will surely be a lot cheaper than renting :)

-Dave
rasputin
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Re: How much house should I buy? (young person with many ass

Post by rasputin »

don't buy a house until you're certain that its exactly what you'll want for seven years. a lot of people buy and move in less time than that and have no idea how much its costing them.
island
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Re: How much house should I buy? (young person with many ass

Post by island »

Have you ever lived on your own?
retiredjg
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Re: How much house should I buy? (young person with many ass

Post by retiredjg »

I'm surprised at how many people believe it is a bad idea. That never even occurred to me.

I bought a house at 27 (downpayment from an inheritance) and it was a terrible idea. Not because owning as a single 27 year old was a bad idea. I just bought a very bad house. Inspections were not very common back then and I got a very bad deal and needed to do a lot of repair and renovation I didn't expect. But I mostly did enjoy having the house in spite of that.

I think you can afford a house, but I'm not sure because you didn't mention paying rent right now. Do you have an "extra" $1,000 a month (or whatever) sitting around?

I agree that renting for a year or more is a good idea. You might find you don't like doing yard work or routine maintenance or don't have the money to buy each and every tool that homeownership seems to require. What might work for you is a lease with option to purchase. You lease and if you decide to buy, much of your rent does to the purchase deal. People don't mention this much any more, though. I wonder if these agreements still exist?

If you do buy, be sure you buy something that will sell. If you buy 2 BR and 1 bath, that may suit you fine. But the market for that kind of house is very limited in most markets - you may have trouble selling it.
Flashes1
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Re: How much house should I buy? (young person with many ass

Post by Flashes1 »

You're almost a millionaire at age 25, and you've suffered the indignity of living with your parents post-college.....if you want to buy a house, buy a house. You've heard from a LOT of boring cheapskates so far. Live a little and spend some of your money....so long as it's for something like a house (and not a car, etc.). I caution you to know exactly what you want in a house, and know exactly what part of town you're going to be happy in.

You only live once.
Twins Fan
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Re: How much house should I buy? (young person with many ass

Post by Twins Fan »

I'm on Team Dale also. :D

I say go for it.

BUT,... I also see some red flags others mentioned. Like, hopefully be there 5 years, hopefully not want to upgrade too soon, and I would look lower than $200k on a $48.5k salary. Don't rush into this and find something that you like.

We don't know what area you're in either. A $200k home could be run of the mill, or it could be near mansion to some of us. Being single you don't need a ton of square feet, many rooms, multiple bathrooms, a huge yard, etc. It's just more to clean... for you. Look at lower price ranges and see if you can find a nice but smaller house.

I also don't see it as dipping into retirement for the down payment. Meaning I wouldn't touch your Roth accounts. I see it as dipping into an inheritance for the down payment. I would think someone left you that money to help you get a head start, or have some fun, or whatever. No, I don't mean blow it all ASAP. But, I don't think someone left you that money just to sit on it for 40 plus years. As with anything, find a balance there. Shoot, you could take out enough to pay cash for a house and still be at $500k plus at 25 years old. So you end up not as much a millionaire as you could have been. You're still a millionaire someday. There's worse problems to have. :D ... That would bump you up quite a bit in tax brackets and give quite a tax hit. I'm not recommending that, just saying.

There's plenty of experience to be had as a homeowner. If you're the homebody type, like staying home, and don't venture out of your comfort zone much, it's great to have a place of your own. I'm pretty sure you can still travel if you're a homeowner too. People do it all the time. It's not like you get to the airport, they check the master list, and don't let you on the plane telling you to get back to your house. :D Not sure where that one came from earlier? :confused
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bottlecap
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Re: How much house should I buy? (young person with many ass

Post by bottlecap »

Don't be a boring cheapskate - "live a little", don't buy a sports car, buy a house! Lol. There's probably nothing more mundane than homeownership, but I guess for some folks it's fun to spend the weekend doing yard work. That just wasn't me at 25. Or 35 for that matter.

JT
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Watty
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Re: How much house should I buy? (young person with many ass

Post by Watty »

LFKB wrote:
Dale_G wrote:Jeez, what a bunch of grinches :annoyed

Pat, if you want a modest house, go ahead and buy it. And if you take the down payment from the IRA (take enough to pay the taxes too) that is just fine. Someone probably left the money to you because they thought you would get more joy from it than they would get by spending on themselves. Because the IRA amounts to a big "emergency" fund you can tap at any time, you can well afford a house in the $200,000 range. $500,000 - no, no ,no.

Much of the focus on this forum is saving for retirement. And to a man with a hammer, everything looks like a nail. You are young and have plenty of time to take care of retirement needs. Among other things the RMDs from the inherited IRA can help fund your own 401k or other investments in the future. That is probably a good idea.

And tapping the inherited IRA in the future for new desires - a nice boat, motorcycle, sports car, multiple trips to Vegas - not such a good idea. I say, "not such a good idea" because I am a man with a hammer too!

But good luck, and enjoy your new home.

Dale
Agree with Dale. Since when is buying a house such a terrible investment on this board? It's not like he's tapping his IRA to buy a sports car.

Pulling out $40k or a bit more for the downpayment and some furniture is not necessarily a bad investment and he'll have an asset that should appreciate and monthly payments that build equity plus the tax shield. He just needs to make sure he has thought out his budget and can afford the monthly mortgage payments. If he can do that buying sounds like a good idea to me.
+1

If being a homeowner does not work out for some reason then plan "B" could be to keep it as a rental(which has it's own pros and cons) but witha 30 year mortage at 4.xx% that could be a nice inflation hedge.
chameleon
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Re: How much house should I buy? (young person with many ass

Post by chameleon »

I sold my house last year and I was around the same age as the OP when I purchased my home. Remember the fundamentals..location location location and make sure you are in an area with steady job growth and good schools. Make sure you plan on working long term in that area too. You don't want to have to resort to renting out your home as an absentee landlord down the road or having to sell after a few years.

I bought my house before the housing boom in my state and it was the right decision for me but I got lucky in a lot of ways too. I purchased one of the smaller houses in a growing neighborhood with a robust job market and young highly educated population. The neighborhood really took off later on when lots of upper middle class people started buying plots of land and building million dollar+ homes. The 2008 crisis also didn't crush my old neighborhood like a lot of others. My house tripled in value over 14 years and I got to live in a nice neighborhood so it worked out for me.

If you live in a city with low SFR appreciation I think renting may still be better though. My brother in law has a house in texas that he purchased around the same time I did for close to the same amount but its appreciation has been stagnant.
Ldevelopment
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Re: How much house should I buy? (young person with many ass

Post by Ldevelopment »

Buy the house. You have a huge amount of assets for your age! You seem to have everything else in order.
Gill
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Re: How much house should I buy? (young person with many ass

Post by Gill »

OP posted this nine minutes after joining the board yesterday and hasn't appeared since. Anyone else beginning to wonder if we're being scammed?
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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