Author Topic: Buying a house in the Boston Area  (Read 1018 times)

zeruel

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Buying a house in the Boston Area
« on: June 13, 2018, 01:57:53 PM »
I am thinking of buying a house and would like some mustchian advice.

I can buy it for $740k. Its in Somerville, MA, and that price would be typical for three bedroom homes in the area.

My income + My wifes is $ 236k, plus typicall 10k on bonuses each, (so $20k total). We have $180k available in cash, including everything. Our savings rate is about 55 %. We have one child, who is a month old; I am not sure how much this might effect savings in the future.

The house is great. The location is in a nice neighborhood with good schools, and will let us both bicycle to work. But is it just too much for my income? I am worried that the downpayment + closing costs will leave us with too little cash on hand. I am also worried about cash flow with that mortgage, although it seems like it should be manageable on that income?

Currently I am renting for the below market rate of $1,800/month. I could probably renew at this rate for another year, but its hard to know for how many years in the long term I could get that rate. Market rate for a similar apartment would be at least $2,500, maybe more like $2,800, and rents having been going up about 5-6% a year (as have home prices).

Enough

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Re: Buying a house in the Boston Area
« Reply #1 on: June 13, 2018, 05:00:02 PM »
How many years are you planning on staying in the Boston Area?

zeruel

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Re: Buying a house in the Boston Area
« Reply #2 on: June 14, 2018, 04:09:47 PM »
I plan to stay in the Boston area for the foreseeable  future. Probably at least ten years or more.

calimom

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Re: Buying a house in the Boston Area
« Reply #3 on: June 14, 2018, 09:18:25 PM »
Isn't the rule of thumb X3 your annual income? If so, and since this house checks so many of your boxes, this seems like a wise purchase. You clearly have some pricey years of daycare ahead (and congrats on your sweet new babe!), but I would say proceed. Hopefully the house doesn't need much in the way of upgrades or repair. With your income and savings rate, you guys are doing great.

GrayGhost

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Re: Buying a house in the Boston Area
« Reply #4 on: June 15, 2018, 03:26:18 AM »
If you can buy a house for about three quarters of a million bucks, or rent for a bit under 2 grand a month, the math is extremely clear in this case... there's a very very strong case for renting.

See this article by the boss-man himself.

By renting, you have flexibility and a rather stark lack of responsibility and risk... if something major happens to your unit, all you have to do is call the landlord, then sit back, and relax (probably even more true in MA since, I presume, it's a more tenant-friendly state). If you have a house, however, and something breaks... surprise, tag, you're it, for a potentially major money/time commitment. This is not the ideal situation for a very young family with a new baby.

And, as you point out, you'd basically be depleting your cash reserves to buy an asset that is currently probably at a historical peak of its value. This is definitely a seller's market, from what I've been able to Google.

If I were you, I'd up your savings rate by a LOT (you're blowing through a hundred gs a year... that's about eight a month!!) and stay the course for another handful of years. Then, when you have enough liquid assets, or when the market cools down, maybe revisit the issue!

zeruel

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Re: Buying a house in the Boston Area
« Reply #5 on: June 15, 2018, 12:24:53 PM »
If you can buy a house for about three quarters of a million bucks, or rent for a bit under 2 grand a month, the math is extremely clear in this case... there's a very very strong case for renting.

See this article by the boss-man himself.

By renting, you have flexibility and a rather stark lack of responsibility and risk... if something major happens to your unit, all you have to do is call the landlord, then sit back, and relax (probably even more true in MA since, I presume, it's a more tenant-friendly state). If you have a house, however, and something breaks... surprise, tag, you're it, for a potentially major money/time commitment. This is not the ideal situation for a very young family with a new baby.

And, as you point out, you'd basically be depleting your cash reserves to buy an asset that is currently probably at a historical peak of its value. This is definitely a seller's market, from what I've been able to Google.

If I were you, I'd up your savings rate by a LOT (you're blowing through a hundred gs a year... that's about eight a month!!) and stay the course for another handful of years. Then, when you have enough liquid assets, or when the market cools down, maybe revisit the issue!

He makes a good argument, but much of what he talks about does not apply. I am not buying a house out in the suburbs and giving myself a long commute. The condo I am considering actually moves me closer to work, the grocery store, schools, playgrounds, and basically everything else I might need.

robartsd

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Re: Buying a house in the Boston Area
« Reply #6 on: June 15, 2018, 02:34:59 PM »
Even at a market rate of $2800, renting is pretty favorable over purchasing at $740k (break even would be 5-10 years out). I don't think I would advise buying.

I'm sure plenty of people have extended themselves beyond what you are proposing to purchase a home. $145k down payment + $10k in closing costs would leave you with about $25k. As long as both incomes remain strong that won't be a problem; but if the higher earner's income is lost you might face a negative cash flow emergency (losing both incomes would almost certainly result in a disaster within a few months).

tralfamadorian

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Re: Buying a house in the Boston Area
« Reply #7 on: June 15, 2018, 05:23:16 PM »
Even at a market rate of $2800, renting is pretty favorable over purchasing at $740k (break even would be 5-10 years out). I don't think I would advise buying.

+1

When housing get to the price level you are considering, the math falls pretty soundly onto renting.

sokoloff

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Re: Buying a house in the Boston Area
« Reply #8 on: June 15, 2018, 05:29:38 PM »
Somerville is appreciating at 3.5-6% per year for several years in the past and likely to continue at least in the next year.

It's that expectation that makes the housing prices high. As soon as that cycle breaks, it might get ugly, but I'm comfortable owning in the next town over and even considering purchasing another property nearby to rent out.

GrayGhost

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Re: Buying a house in the Boston Area
« Reply #9 on: June 16, 2018, 08:29:20 AM »
He makes a good argument, but much of what he talks about does not apply. I am not buying a house out in the suburbs and giving myself a long commute. The condo I am considering actually moves me closer to work, the grocery store, schools, playgrounds, and basically everything else I might need.

Those are definite pluses! But is there any way to decrease your commute time at a better price point?

Somerville is appreciating at 3.5-6% per year for several years in the past and likely to continue at least in the next year.

It's that expectation that makes the housing prices high. As soon as that cycle breaks, it might get ugly, but I'm comfortable owning in the next town over and even considering purchasing another property nearby to rent out.

I highly doubt that the kind of place you're talking about will meet the 1% rule, let alone the 2% rule. I know the place you're renting and the place you're looking at buying aren't comps per se, but 1% of $740k is $7.4k a month... but you're only paying $1.8k. As others have said, the math is very clearly on the side of renting in this case. If you buy a property to rent out and the numbers are anything like that, you're lose cash every month.

It's great that Somerville has appreciated recently, but past performance is not an indicator of future performance. I'd also like to know what the basis of the belief is that it will continue to appreciate for at least another year... not that another year of appreciation will do you any good if the local RE market crashes afterwards.

It's also noteworthy that a crash is coming. True, a crash is always coming, but we've had going on ten years of a bull market. This is nearly unheard of in modern history and it's so absurdly anomalous, I have never found an argument that convinces me that it will simply continue unfettered...

zeruel

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Re: Buying a house in the Boston Area
« Reply #10 on: June 16, 2018, 10:28:55 AM »
He makes a good argument, but much of what he talks about does not apply. I am not buying a house out in the suburbs and giving myself a long commute. The condo I am considering actually moves me closer to work, the grocery store, schools, playgrounds, and basically everything else I might need.

Those are definite pluses! But is there any way to decrease your commute time at a better price point?

Somerville is appreciating at 3.5-6% per year for several years in the past and likely to continue at least in the next year.

It's that expectation that makes the housing prices high. As soon as that cycle breaks, it might get ugly, but I'm comfortable owning in the next town over and even considering purchasing another property nearby to rent out.

I highly doubt that the kind of place you're talking about will meet the 1% rule, let alone the 2% rule. I know the place you're renting and the place you're looking at buying aren't comps per se, but 1% of $740k is $7.4k a month... but you're only paying $1.8k. As others have said, the math is very clearly on the side of renting in this case. If you buy a property to rent out and the numbers are anything like that, you're lose cash every month.

It's great that Somerville has appreciated recently, but past performance is not an indicator of future performance. I'd also like to know what the basis of the belief is that it will continue to appreciate for at least another year... not that another year of appreciation will do you any good if the local RE market crashes afterwards.

It's also noteworthy that a crash is coming. True, a crash is always coming, but we've had going on ten years of a bull market. This is nearly unheard of in modern history and it's so absurdly anomalous, I have never found an argument that convinces me that it will simply continue unfettered...

Being fairly familiar with the area, I can't think of a cheaper way to decrease the commute. That said, the commute on the new place is only a little bit better. Its about .8 miles shorter, or five minutes. It does remove the most bicycle unfriendly part of my commute though, which is a little hard to price.

I don't know about Somerville as a whole, but I do think the value of this home will rise as the long planned Green Line Extension (GLX, transit line) is expected to open in 2021. The property is well within the walk shed of one of the planned stations. Of course, this has already been factored into the price, but there is some risk premium in the event the GLX is delayed, not completed, or does not turn out to be as useful as predicted. So I would be taking on that risk.

Other features that factor into its value include being near the already-established Red Line, and walking distance to a major university.

Of course, I don't want to buy it to speculate on the value.

So, checking rental prices again (new listings tend to come up around now, since the Universities put the entire area on a Sept 1 lease cycle), it seems like market rate for rentals in my neighborhood is about 3k, and in the neighborhood of the new house more like 3.5-4k.

So, my conclusion is that my landlord is giving me a ridiculously good deal, and it makes sense to continue to rent if I can do so at that rate. If he wants to increase it, maybe not.

Also, what is the 1 % rule, and the 2 % rule? I have mostly been comparing the NYTimes rent vs. buy calculator; but it can go either way based on what appear to be entirely reasonable guesses about the future.
« Last Edit: June 16, 2018, 10:37:48 AM by zeruel »

GrayGhost

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Re: Buying a house in the Boston Area
« Reply #11 on: June 16, 2018, 04:34:43 PM »
Yeah man, it's always exciting to want to make a big move and investment in your life, but we must be ruled by the numbers and not our emotions if we're to FIRE super early! I'm sure other opportunities will pop up in the future, and let me again plug the flexibility of renting... once you buy a house, you're tied, in some degree, to the area. Now, if you or your wife get an awesome job across the country, it's about a dozen times easier to go after it if you want. So don't be sad :) I rent myself for these reasons and others!

As far as your landlord increasing rent, you could avoid that by being an awesome and hassle-free tenant, and also by trying to get him to agree to a multi-year lease... maybe 1-2% increases per year to keep up with inflation, and you retain the ability to leave, but no other rent increases and no booting you out in order to increase rent for a new tenant. You can sell this by saying that you love your place and want to stay but your wife is worried about increasing costs... make his enemy someone else so that you can sell the deal better. It can work very effectively in negotiation!

As for the 1 and 2% rules, they're basically rules of thumb that are highly, highly regarded by real estate investors from here to BiggerPockets.com and beyond.

Long story short, rent on a prospective rental property should be at minimum 2% of value, per month. So a property that's worth $100k must rent out for at least $2,000 a month. If you think that kind of property is hard to find, you'd be very right in this market, as everyone's trying to snatch up real estate and it's a huge seller's market. It can still be done with distressed properties or multi-unit properties, but with single family houses, the 1% rule is pretty much the floor... If you buy a $200k house, it should be rentable for $2k a month. This can still be done and if it cannot, it makes sense to sell or not buy.

Dangers of failing to abide by the 1% rule result in underperforming assets (if you take the risk of running a business, which a rental property is, you MUST demand more returns than the stock market for your time and trouble and risk) or potentially cashflow negative property, in which case you're just speculating on value. Some can do that well, but many who attempt fail at their own peril.

Real MMM's run-in with it here: https://www.mrmoneymustache.com/2011/10/10/lets-buy-a-foreclosure-episode-2-what-is-the-50-2-rule/

I'm curious, in your current neighborhood, what is the purchase price of a house that can be rented for about $3.5k-4k range? And what do you think this prospective property could be rented for?

zeruel

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Re: Buying a house in the Boston Area
« Reply #12 on: June 16, 2018, 09:42:43 PM »
It's hard to say exactly, since inventory is so low and prices have appreciated so rapidly, but a house rented for the 3.5k-4k range in my current neighborhood would probably cost similar to house I was considering: around 750 k.

GrayGhost

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Re: Buying a house in the Boston Area
« Reply #13 on: June 17, 2018, 09:07:37 PM »
So that's like half the gross income of a rule that was already halved to account for the comparative convenience of renting out SFHs vs multifamilies. Sounds like the math is very, very heavily on the side of staying the course in this case.

zeruel

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Re: Buying a house in the Boston Area
« Reply #14 on: June 18, 2018, 04:47:33 PM »
Well, I don't plan on renting the place out regardless. Single family homes are somewhat rare in all the areas I would like to live. There are a few, but the reasonable options for purchasing are: condo, or buy a multi-family and rent out one unit.