How much worth house should one buy?

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avalpert
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Re: How much worth house should one buy?

Post by avalpert » Thu Oct 05, 2017 1:05 pm

learning_head wrote:
Thu Oct 05, 2017 9:12 am
KlangFool wrote:
Wed Oct 04, 2017 9:32 pm
My rules:

1) The PITI of the house you buy should be 20% to 30% lower than the house that you are renting.

2) Your net worth excluding the house should be at least 2.5 to 3 times the price of the house.

KlangFool
IMO, comparing mortgage payment to rent is comparing apples and oranges. Mortgage is just a loan for your equity. Rent is a throw away money to live somewhere for a period of time. Rent should be compared to throw away money expenses when owning a house, including
- insurance
- property taxes
- maintenance (estimates I've seen are ~2% of house cost)
- extra utility payments (e.g. because house is larger or because some utilities might be included in rent)
- mortgage (after-tax) interest and other fees (not mortgage itself), for minimally required mortgage
Don't forget the opportunity cost of capital sitting in home equity - that's a big one.

tampaite
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Re: How much worth house should one buy?

Post by tampaite » Thu Oct 05, 2017 1:06 pm

jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
All depends on job stability. if you have a stable job - go for 50% or more. not so stable - then wait until you have cash saved up.

rgs92
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Re: How much worth house should one buy?

Post by rgs92 » Thu Oct 05, 2017 1:09 pm

That's a good point about job security. These days in the "gig-economy" or contractor/temp world (like for so many in I.T. these days) I don't know how people feel comfortable with a big mortgage (or maybe any mortgage). I certainly would not have been confident if I didn't have a regular full-time-employee job when I was starting out (and little money in the bank or anywhere).

The world has changed.

wolfeman
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Re: How much worth house should one buy?

Post by wolfeman » Thu Oct 05, 2017 1:12 pm

Our house has been a money pit. We bought a foreclosure in the midwest 10 years ago (so we didn't even buy that expensive of a house). Have spent way too much money and time repairing, remodeling. It's an endless activity. We would be much better had we just rented, or bought a duplex and rented out half (which I considered).

I would recommend buying as cheap of a house as you can, or renting if that makes more sense financially. You can always purchase a larger/better house down the road when you have more money, if that's still important to you at the time.

I've been reading "Set for Life". If you are young, and don't yet have a house, it's worth considering the approach discussed.

Jags4186
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Re: How much worth house should one buy?

Post by Jags4186 » Thu Oct 05, 2017 2:25 pm

travellight wrote:
Thu Oct 05, 2017 9:59 am
very sensible approach. Looks like the calculations end up being about 3x annual earnings. 320k mortgage is about $1500/month. I think that translates to about 22.5% of income monthly.
It’s actually about a $256k mortgage with $64k down.

KlangFool
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Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 2:43 pm

tampaite wrote:
Thu Oct 05, 2017 1:06 pm
jrk wrote:
Wed Oct 04, 2017 9:19 pm
I understand that many factors such as income, debt, expenses, market, family size play a role in how much worth house one should buy but is there a general rule or a common sense rule that monthly house payment shouldn't exceed certain % of the gross house hold income? What is the safest margin to be in - 30%, 40%, 50% or more?

THanks!
All depends on job stability. if you have a stable job - go for 50% or more. not so stable - then wait until you have cash saved up.
tampaite,

Many folks assume that their jobs are stable. Then, the world changed on them. Please noted that 20 to 30 years ago, US Telecom industry was one of the most stable industry with very good job security.

KlangFool

tampaite
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Re: How much worth house should one buy?

Post by tampaite » Thu Oct 05, 2017 2:57 pm

KlangFool wrote:
Thu Oct 05, 2017 2:43 pm
Many folks assume that their jobs are stable. Then, the world changed on them. Please noted that 20 to 30 years ago, US Telecom industry was one of the most stable industry with very good job security.

Good point. However, the decision belongs to OP maybe, the industry they are in still has legs to run and during that time period, they might payoff their mortgage aggressively and not waiting to pay it off in 30 years.

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Phineas J. Whoopee
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Re: How much worth house should one buy?

Post by Phineas J. Whoopee » Thu Oct 05, 2017 3:16 pm

avalpert wrote:
Thu Oct 05, 2017 1:05 pm
...
Don't forget the opportunity cost of capital sitting in home equity - that's a big one.
In return for which you don't have to pay a landlord any profit. You get your housing at cost. Essentially, you serve as your own landlord.

Each individual or family makes their own choice. One can rent a house. One can buy an apartment.

PJW

avalpert
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Re: How much worth house should one buy?

Post by avalpert » Thu Oct 05, 2017 3:24 pm

Phineas J. Whoopee wrote:
Thu Oct 05, 2017 3:16 pm
avalpert wrote:
Thu Oct 05, 2017 1:05 pm
...
Don't forget the opportunity cost of capital sitting in home equity - that's a big one.
In return for which you don't have to pay a landlord any profit. You get your housing at cost. Essentially, you serve as your own landlord.

Each individual or family makes their own choice. One can rent a house. One can buy an apartment.

PJW
Well yeah, that is why you include it as a cost in a comparison to rent - it is often overlooked though and people only compare the mortgage payment to rental payment and concluding the house must be cheaper despite putting 50% down on it...

Jags4186
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Re: How much worth house should one buy?

Post by Jags4186 » Thu Oct 05, 2017 3:25 pm

Phineas J. Whoopee wrote:
Thu Oct 05, 2017 3:16 pm
avalpert wrote:
Thu Oct 05, 2017 1:05 pm
...
Don't forget the opportunity cost of capital sitting in home equity - that's a big one.
In return for which you don't have to pay a landlord any profit. You get your housing at cost. Essentially, you serve as your own landlord.

Each individual or family makes their own choice. One can rent a house. One can buy an apartment.

PJW
Rent is not based on is it profitable or not, rent is based on what the market will bear. There are plenty of people who have homes they rent out and are not even able to cover the mortgage payment, let alone other expenses. It’s hard to go 1 segment on the Dave Ramsey show without hearing someone calling in on an underwater rental that they have to feed monthly beyond the rent. Don’t always assume you’re paying someone a premium.

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Phineas J. Whoopee
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Re: How much worth house should one buy?

Post by Phineas J. Whoopee » Thu Oct 05, 2017 3:32 pm

Jags4186 wrote:
Thu Oct 05, 2017 3:25 pm
...
Rent is not based on is it profitable or not, rent is based on what the market will bear. There are plenty of people who have homes they rent out and are not even able to cover the mortgage payment, let alone other expenses. It’s hard to go 1 segment on the Dave Ramsey show without hearing someone calling in on an underwater rental that they have to feed monthly beyond the rent. Don’t always assume you’re paying someone a premium.
Fortunately for me, I made no such assumption. One must look at total long-term value, not just this month's or year's cash flow.

I agree people are focused on cash flow, and it is important, but it is not the only important thing with respect to personal finance.

PJW

KlangFool
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Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 3:46 pm

tampaite wrote:
Thu Oct 05, 2017 2:57 pm
KlangFool wrote:
Thu Oct 05, 2017 2:43 pm
Many folks assume that their jobs are stable. Then, the world changed on them. Please noted that 20 to 30 years ago, US Telecom industry was one of the most stable industry with very good job security.

Good point. However, the decision belongs to OP maybe, the industry they are in still has legs to run and during that time period, they might payoff their mortgage aggressively and not waiting to pay it off in 30 years.
tampaite,

The more common case is the "House Poor" folks will upsize to a bigger house before paying off the current house. This continues until they lost their jobs and their houses.

KlangFool

Suman
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Re: How much worth house should one buy?

Post by Suman » Thu Oct 05, 2017 4:18 pm

I make 400K and I am buying a 600K house max in a good school district. In my area, that will buy a good size house to serve our needs. Mortgage or any other kind of loans are a burden on one's shoulder and one will have to carry it everywhere.

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JupiterJones
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Re: How much worth house should one buy?

Post by JupiterJones » Thu Oct 05, 2017 4:31 pm

cusetownusa wrote:
Thu Oct 05, 2017 1:01 pm
3CT_Paddler wrote:
Thu Oct 05, 2017 11:13 am
The number should definitely be less than the bank will loan you.

Dave Ramsey has a good rule of thumb... PITI less than 25% of your net pay (post-tax).
I believe he also says on a 15 year loan.
And he also says with, ideally, at least a 20% down payment to avoid PMI.
Stay on target...

KlangFool
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Re: How much worth house should one buy?

Post by KlangFool » Thu Oct 05, 2017 4:42 pm

learning_head wrote:
Thu Oct 05, 2017 10:47 am
KlangFool wrote:
Thu Oct 05, 2017 10:20 am
learning_head wrote:
Thu Oct 05, 2017 10:13 am
KlangFool wrote:
Thu Oct 05, 2017 9:43 am
learning_head wrote:
Thu Oct 05, 2017 9:12 am


IMO, comparing mortgage payment to rent is comparing apples and oranges. Mortgage is just a loan for your equity.
learning_head,

I disagreed. My peers are paying 25% income tax plus state income tax on every extra dollar that they spent on the mortgage versus rent. Those are throwaway money. That is one of the reason that they cannot save money. Meanwhile, my effective tax rate is less than 5%. My effective tax rate at early retirement is probably at that rate too.

What equity? Folks upsize to a bigger house whenever they have a bit more money. They pay more tax and more mortgage interest. Then, everything goes to hell in a recession like 2008/2009. House under water. They have no job. And, they lose everything.

KlangFool
Mortgage is clearly a loan to get house equity. Once you pay it off or buy house for cash, you own the house. Whether that house loses value is irrelevant. Just like if you bought any other asset that is risky.

Regarding paying extra income tax instead of potentially shielding it in tax-advantaged accounts, it's a fair point and can be added to throw-away money list I mentioned (just like I mentioned the after-tax mortgage interest there). That does not change overall point.
learning_head,

Really? That is 20% to 30% on top of the mortgage payment. It is a significant number. Hence, the PITI need to be 20% to 30% lower than rent.

Keep it simple. Look at the big significant number. All other extra stuff that you mentioned does not come anywhere close this factor.

KlangFool
Highlighted statement in your response is very much FALSE.

It all depends on particular situation.

For one thing, it could also be $0, if all tax-advantaged accounts are already filled / taken care of.
learning_head,

In my neighborhood, the annual median household income is 150K and median house price is around 500K to 600K. Basically, there is no money left to save after the house.

In general, people buy the house at about 3X to 4X their gross income. So, how can they save any money?

KlangFool

jrk
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Re: How much worth house should one buy?

Post by jrk » Thu Oct 05, 2017 5:33 pm

Wow! So many perspectives.

I have a primary house and a rental. We are thinking of buying and moving to another area of the town. If I rent my current primary, I will have about 500 monthly cash flow and I get the same from my other rental. This excludes the principle I pay in Mortgage payments.

I have 2.5x (in savings and cash, excluding house equities) of the 20% down I need for next house. Now I am thinking if I should cut my budget for the next house or if I will be ok.

I am in my mid 30s.
Last edited by jrk on Thu Oct 05, 2017 5:34 pm, edited 1 time in total.

mervinj7
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Re: How much worth house should one buy?

Post by mervinj7 » Thu Oct 05, 2017 5:33 pm

KlangFool wrote:
Thu Oct 05, 2017 4:42 pm
learning_head,

In my neighborhood, the annual median household income is 150K and median house price is around 500K to 600K. Basically, there is no money left to save after the house.

In general, people buy the house at about 3X to 4X their gross income. So, how can they save any money?

KlangFool
Quick number check. Let's assume the house is in Milpitas, CA and selling for $550k. $110k (20%) was saved for down payment, and they max out their 401k every year.

Monthly Gross Income: $150k/12= $12.5k
Monthly CA Tax: $7.2k/12 = $600
Monthly Fed + FICA: $26k/12 = $2.16k
Monthly 401k: $36k/12 = $3k
Monthly Mortgage (30 year fixed, 3.75% APR) = $2k
Monthly Property Tax (1.26%) = $7k/12= $580
Monthly Home Insurance = $1k/12 = $83

Net Income after taxes, max 401k, PITI on $550k house = $4k/month
I didn't itemize the mortgage interest, property tax, or state tax since that may be changing soon.

furikake
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Re: How much worth house should one buy?

Post by furikake » Thu Oct 05, 2017 6:22 pm

To me, it depends on a few things. When we were younger, we spent 17+% of one income on the mortgage monthly payment, and I had a job lined up, and very quickly, that became like 3.5%. Paid off mortgage in 7 years. Lived there for almost 20 years and after figuring in all expenses and mortgage, etc. after we sold the house, our monthly house expense was only about $200, way cheaper than rent. As we were looking for a new house, I was uncomfortable with the new house price at 70% of our income. But then dh convinced me, life was short, why not?! We bought a house at more than 1x our income, with cash. We were able to make everything back in income within a year. Buying this house does not affect our retirement, we can still retire with 1.7% WR if we were to retire today, we enjoy this house more, and it's a lot less stressful living here compared to our old house which was tiny.

Life is short, but if it stresses you out if you can't make your mortgage payment, don't buy it. If it makes you happier, buy it. :D

ncbill
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Re: How much worth house should one buy?

Post by ncbill » Thu Oct 05, 2017 6:31 pm

new2bogle wrote:
Thu Oct 05, 2017 12:01 pm
KlangFool wrote:
Thu Oct 05, 2017 10:43 am

1) Why do you need to buy in order to live in a particular location? You could rent. This is a common lie that people tell to themselves in order to overspend on a house.
One very good reason is school districts. Recently, a group of "concerned" citizens in our school district managed to change school boundaries so that the better elementary school did not have "apartment complex" students (i.e., lower income families). There are very few homes to rent in the school district, certainly not enough if every apartment complex renter wanted to make the change from apt to rental house.
Schools are regularly redistricted.

My high school was redistricted between my junior & senior year, doubling the number of students, most of whom were now drawn from one of the poorest areas of town.

"Beat up for your lunch money" sounds quaint until it happens to your 18 year old friends...

It was the premier high school in my city until then, but plunged to the bottom and has been there since.

You might have to move just to get your kids back into a decent school...

finite_difference
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Re: How much worth house should one buy?

Post by finite_difference » Thu Oct 05, 2017 6:53 pm

Here is my rule of thumb:

1. Assumes you are planning to live in the house for at least 5 years.

2. Assumes you buy a house in a good public school zone, or else you need to factor in private school costs (if applicable).

3. Assumes you are a proficient worker in a reasonably high-demand profession that is likely to be able to stay employed somewhere in your salary range.

4. Assumes you (both, if married) want to buy a house, and will enjoy home ownership.

5. Assumes you have no other major debt or high-interest rate debt.

6. PITI <= 35% net income after taxes and at least 15% of gross income in 401k/IRA savings.

For example if your monthly net pay is $4000 after taxes and 401k/IRA, then you could afford a PITI of $1400.

So the 35% is not exact, and lower is obviously better, but I wouldn’t go much higher than that personally.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

emoore
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Re: How much worth house should one buy?

Post by emoore » Thu Oct 05, 2017 8:16 pm

KlangFool wrote:
Thu Oct 05, 2017 4:42 pm
learning_head wrote:
Thu Oct 05, 2017 10:47 am
KlangFool wrote:
Thu Oct 05, 2017 10:20 am
learning_head wrote:
Thu Oct 05, 2017 10:13 am
KlangFool wrote:
Thu Oct 05, 2017 9:43 am


learning_head,

I disagreed. My peers are paying 25% income tax plus state income tax on every extra dollar that they spent on the mortgage versus rent. Those are throwaway money. That is one of the reason that they cannot save money. Meanwhile, my effective tax rate is less than 5%. My effective tax rate at early retirement is probably at that rate too.

What equity? Folks upsize to a bigger house whenever they have a bit more money. They pay more tax and more mortgage interest. Then, everything goes to hell in a recession like 2008/2009. House under water. They have no job. And, they lose everything.

KlangFool
Mortgage is clearly a loan to get house equity. Once you pay it off or buy house for cash, you own the house. Whether that house loses value is irrelevant. Just like if you bought any other asset that is risky.

Regarding paying extra income tax instead of potentially shielding it in tax-advantaged accounts, it's a fair point and can be added to throw-away money list I mentioned (just like I mentioned the after-tax mortgage interest there). That does not change overall point.
learning_head,

Really? That is 20% to 30% on top of the mortgage payment. It is a significant number. Hence, the PITI need to be 20% to 30% lower than rent.

Keep it simple. Look at the big significant number. All other extra stuff that you mentioned does not come anywhere close this factor.

KlangFool
Highlighted statement in your response is very much FALSE.

It all depends on particular situation.

For one thing, it could also be $0, if all tax-advantaged accounts are already filled / taken care of.
learning_head,

In my neighborhood, the annual median household income is 150K and median house price is around 500K to 600K. Basically, there is no money left to save after the house.

In general, people buy the house at about 3X to 4X their gross income. So, how can they save any money?

KlangFool
I bought a house for 3X my income. I max my 401k and Roth IRA. So yes people can save money with those housing costs.

delamer
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Re: How much worth house should one buy?

Post by delamer » Thu Oct 05, 2017 9:00 pm

emoore wrote:
Thu Oct 05, 2017 8:16 pm
KlangFool wrote:
Thu Oct 05, 2017 4:42 pm
learning_head wrote:
Thu Oct 05, 2017 10:47 am
KlangFool wrote:
Thu Oct 05, 2017 10:20 am
learning_head wrote:
Thu Oct 05, 2017 10:13 am


Mortgage is clearly a loan to get house equity. Once you pay it off or buy house for cash, you own the house. Whether that house loses value is irrelevant. Just like if you bought any other asset that is risky.

Regarding paying extra income tax instead of potentially shielding it in tax-advantaged accounts, it's a fair point and can be added to throw-away money list I mentioned (just like I mentioned the after-tax mortgage interest there). That does not change overall point.
learning_head,

Really? That is 20% to 30% on top of the mortgage payment. It is a significant number. Hence, the PITI need to be 20% to 30% lower than rent.

Keep it simple. Look at the big significant number. All other extra stuff that you mentioned does not come anywhere close this factor.

KlangFool
Highlighted statement in your response is very much FALSE.

It all depends on particular situation.

For one thing, it could also be $0, if all tax-advantaged accounts are already filled / taken care of.
learning_head,

In my neighborhood, the annual median household income is 150K and median house price is around 500K to 600K. Basically, there is no money left to save after the house.

In general, people buy the house at about 3X to 4X their gross income. So, how can they save any money?

KlangFool
I bought a house for 3X my income. I max my 401k and Roth IRA. So yes people can save money with those housing costs.
Our house was 3X income with 10% down. We saved for retirement and college, although not at the 30% rate that KlangFool advocates.

There is a big difference between a family with a $50,000 income buying a $150,000 house versus a family with a $200,000 income buying a $600,000 house. Even if they save the same percentage of their incomes, the higher income family has a lot more income after savings, PITI, and income/payroll taxes to cover other expenses.

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StevieG72
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Re: How much worth house should one buy?

Post by StevieG72 » Thu Oct 05, 2017 9:49 pm

I bought a house I could easily afford on one income 17 years ago.

Still live in the same house even though my income is 5X what it was 17 years ago.

On track for FI sooner vs. later...
Fools think their own way is right, but the wise listen to others.

SEAworld9
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Re: How much worth house should one buy?

Post by SEAworld9 » Sat Oct 07, 2017 4:38 pm

rgs92 wrote:
Thu Oct 05, 2017 10:53 am

I think it's a reasonably smart thing to do with the money as opposed to things like travel which become worthless as soon as you come home. And the house just keeps on giving in terms of enjoyment for many people, while travel is gone in an instant beyond some photos.
not to derail the thread, but i would strongly debate these comments. experiences that give you perspective and help shape you as a person are not definitely not worthless. i would not give up any of mine for a few extra sq ft.

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