Author Topic: First Time Home buyer Question  (Read 10103 times)

sis

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First Time Home buyer Question
« on: June 08, 2016, 12:35:51 PM »
Hello Mustachians,

I've been a fan of MMM for quite some time.  DH and I are going to go about making our first home purchase soon.  Our lease is up on our current apartment at the end of September.  DH still works full time at a very high paying job (~330k compensation), I work part time.  My husband is planning on changing to a much lower paying job (compensation about 90k per year) to follow his dreams, so we figure that we should get a mortgage on a home now while the terms would be incredibly favorable.  We live in a very high COL area.  Because of DH's job we are not planning on moving to a lower COL area of the country, though we will move to a town just outside the main city where the COL is lower and we can afford a house.  In the area that we currently rent in, small 1 bedroom apartments are going for 700k, so we definitely will not buy here. 

We have done the rent vs. buy calculator on the NYT and for our area and needs it makes sense at this point to buy.  We have found an area that meets our needs as far as transportation, schools, etc.  This town has many multifamily homes and some single family homes.  Because DH works full time and isn't overly handy we will likely buy something already pretty renovated.  My question is: would it be better to buy a single family home for ~400k or a two family home (one much larger unit, one single bedroom apartment which we would rent out) for ~500k?  On the 500k house the going rate for a similar one bedroom unit is about 1100/month in rent.  We are able to put 20% down in either case.  We have about 260k in non-retirement index funds, and no debt other than credit cards which we pay off in full at the end of each month.

Tl;dr: Should we buy a single family home for 400k or a multifamily home for 500k with potential rental income of 1100 per month?

ShoulderThingThatGoesUp

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Re: First Time Home buyer Question
« Reply #1 on: June 08, 2016, 12:37:44 PM »
What is your income? You should not be buying that much house at all if he's going to be making $90k/year and your income is small.

Beriberi

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Re: First Time Home buyer Question
« Reply #2 on: June 08, 2016, 12:44:53 PM »
The point of qualifying while your husband's income is high may only lead you to getting in well over your head. You should qualify based on what you make after the transition (your income + 90k) - and then you should likely spend even less than that.

Also, 13k per year on a 100k investment might be wise, but if you have to outsource a lot of repairs and maintenance, it may quickly eat that up. If you haven't been a home owner, you are probably not prepared to be a landlord.

sis

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Re: First Time Home buyer Question
« Reply #3 on: June 08, 2016, 12:56:36 PM »
What is your income? You should not be buying that much house at all if he's going to be making $90k/year and your income is small.

My income is irrelevant to these calculations because we are planning on me being a SAHM.  We have no MM's at the moment but will try to to conceive in the fall.  To be clear, he hasn't taken this job yet (he only applied yesterday and the hiring and appointment process is very long) it is a federal job where he would start at 90k and have set raises to 160k within 10 years.

prognastat

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Re: First Time Home buyer Question
« Reply #4 on: June 08, 2016, 01:04:21 PM »
What is your income? You should not be buying that much house at all if he's going to be making $90k/year and your income is small.

My income is irrelevant to these calculations because we are planning on me being a SAHM.  We have no MM's at the moment but will try to to conceive in the fall.  To be clear, he hasn't taken this job yet (he only applied yesterday and the hiring and appointment process is very long) it is a federal job where he would start at 90k and have set raises to 160k within 10 years.

The thing to keep in mind is that the house payments are guaranteed to keep coming until you sell or file bankruptcy. The job prospects aren't guaranteed. I would advise buying a house towards the income you expect to have and more towards what you are able to afford currently and for currently I would either take the income they are offering him if he is planning to take the job.

sis

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Re: First Time Home buyer Question
« Reply #5 on: June 08, 2016, 01:05:15 PM »
The point of qualifying while your husband's income is high may only lead you to getting in well over your head. You should qualify based on what you make after the transition (your income + 90k) - and then you should likely spend even less than that.

Also, 13k per year on a 100k investment might be wise, but if you have to outsource a lot of repairs and maintenance, it may quickly eat that up. If you haven't been a home owner, you are probably not prepared to be a landlord.

This is probably true.  I've only been an apartment dweller as an adult.  As a child I lived in a house and did help with a lot of the maintenance.

The 90k would be his starting salary and it would rise within 10 years to 160k.  It is a job with incredibly high job security and we have the savings to tough it out for a bit while his pay is lower.  Right now we are in a situation where will we definitely move when our lease is up.  We currently live in a 3500 per month 1 bedroom apartment (it is a market rate building, we were at 2700 when we moved in 5 years ago and our rent has kept increasing) - it is certainly stupid to continue paying that if he switches to the lower paying job.  We live here now because he works 80 hour weeks and his commute is super short from here.  My husband has very expensive housing tastes (which is pretty much his only financial vice).

Le Poisson

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Re: First Time Home buyer Question
« Reply #6 on: June 08, 2016, 01:09:28 PM »
I understand you not wanting to give away location for privacy reasons, but it would be helpful to know what country and or state you are in. Taxes and other laws vary from one place to another and RE rules change from place to place as well.

Since he is looking at a federal job, I would guess that you are either in DC or in Ottawa. If you are in Ottawa I may have insights, for DC I have nothing.

sis

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Re: First Time Home buyer Question
« Reply #7 on: June 08, 2016, 01:09:54 PM »
What is your income? You should not be buying that much house at all if he's going to be making $90k/year and your income is small.

My income is irrelevant to these calculations because we are planning on me being a SAHM.  We have no MM's at the moment but will try to to conceive in the fall.  To be clear, he hasn't taken this job yet (he only applied yesterday and the hiring and appointment process is very long) it is a federal job where he would start at 90k and have set raises to 160k within 10 years.

The thing to keep in mind is that the house payments are guaranteed to keep coming until you sell or file bankruptcy. The job prospects aren't guaranteed. I would advise buying a house towards the income you expect to have and more towards what you are able to afford currently and for currently I would either take the income they are offering him if he is planning to take the job.

This makes sense to me.  The ironic thing is that if he doesn't get or take the lower paying job he has job security at his current place of employment for at least the next 3 years.  His pay is set to increase at his current job to around 400k compensation within the next 3 years.

sis

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Re: First Time Home buyer Question
« Reply #8 on: June 08, 2016, 01:11:09 PM »
I understand you not wanting to give away location for privacy reasons, but it would be helpful to know what country and or state you are in. Taxes and other laws vary from one place to another and RE rules change from place to place as well.

Since he is looking at a federal job, I would guess that you are either in DC or in Ottawa. If you are in Ottawa I may have insights, for DC I have nothing.

NYC but looking to buy in NJ to escape the 3.5% city income tax.

frugaliknowit

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Re: First Time Home buyer Question
« Reply #9 on: June 08, 2016, 01:12:02 PM »
What is your income? You should not be buying that much house at all if he's going to be making $90k/year and your income is small.

My income is irrelevant to these calculations because we are planning on me being a SAHM.  We have no MM's at the moment but will try to to conceive in the fall.  To be clear, he hasn't taken this job yet (he only applied yesterday and the hiring and appointment process is very long) it is a federal job where he would start at 90k and have set raises to 160k within 10 years.

True, but if ultimately, your husband is planning on "downshifting" to a lower stress/lower income job, your purchase should be planned accordingly.  In fact, if your husband is craving a change which will likely result in a lower income, MAYBE you should wait until he gets settled in a new job before you take the plunge...

ShoulderThingThatGoesUp

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Re: First Time Home buyer Question
« Reply #10 on: June 08, 2016, 01:14:33 PM »
What is your income? You should not be buying that much house at all if he's going to be making $90k/year and your income is small.

My income is irrelevant to these calculations because we are planning on me being a SAHM.  We have no MM's at the moment but will try to to conceive in the fall.  To be clear, he hasn't taken this job yet (he only applied yesterday and the hiring and appointment process is very long) it is a federal job where he would start at 90k and have set raises to 160k within 10 years.

You cannot afford this house with your current plans without seriously eating into savings. No raise is guaranteed, and no job is guaranteed, even by the federal government. This is a bad idea and you should not do this.

sis

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Re: First Time Home buyer Question
« Reply #11 on: June 08, 2016, 01:26:53 PM »
What is your income? You should not be buying that much house at all if he's going to be making $90k/year and your income is small.

My income is irrelevant to these calculations because we are planning on me being a SAHM.  We have no MM's at the moment but will try to to conceive in the fall.  To be clear, he hasn't taken this job yet (he only applied yesterday and the hiring and appointment process is very long) it is a federal job where he would start at 90k and have set raises to 160k within 10 years.

You cannot afford this house with your current plans without seriously eating into savings. No raise is guaranteed, and no job is guaranteed, even by the federal government. This is a bad idea and you should not do this.

I'll share this whole thread with my husband - he is the one pushing for the higher priced/nicer houses.  I think we could find something that we can live in for closer to 300k if we really hunt or I convince him that a 10 minute walk to mass transit is doable.

CmFtns

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Re: First Time Home buyer Question
« Reply #12 on: June 08, 2016, 01:29:09 PM »
What is your income? You should not be buying that much house at all if he's going to be making $90k/year and your income is small.

My income is irrelevant to these calculations because we are planning on me being a SAHM.  We have no MM's at the moment but will try to to conceive in the fall.  To be clear, he hasn't taken this job yet (he only applied yesterday and the hiring and appointment process is very long) it is a federal job where he would start at 90k and have set raises to 160k within 10 years.

You cannot afford this house with your current plans without seriously eating into savings. No raise is guaranteed, and no job is guaranteed, even by the federal government. This is a bad idea and you should not do this.

I agree you probably should not buy a 400k house with a 90k income.

prognastat

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Re: First Time Home buyer Question
« Reply #13 on: June 08, 2016, 02:17:27 PM »
It is going to have to be a compromise on one side or the other.

Either the more enjoyable/comfrotable lower paying job in which case you don't get everything you want out of a house or work towards maximizing your income and buy a house more to your wishes. One thing to keep in mind though is the larger/nicer your house is generally the more work in keeping it looking nice both in maintenance and cleaning.

sis

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Re: First Time Home buyer Question
« Reply #14 on: June 08, 2016, 02:24:38 PM »
It is going to have to be a compromise on one side or the other.

Either the more enjoyable/comfrotable lower paying job in which case you don't get everything you want out of a house or work towards maximizing your income and buy a house more to your wishes. One thing to keep in mind though is the larger/nicer your house is generally the more work in keeping it looking nice both in maintenance and cleaning.

Agree 100%

CmFtns

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Re: First Time Home buyer Question
« Reply #15 on: June 08, 2016, 02:26:31 PM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income
« Last Edit: June 08, 2016, 02:28:04 PM by CmFtns »

sis

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Re: First Time Home buyer Question
« Reply #16 on: June 08, 2016, 02:32:29 PM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income

Do you live in a high COL area?  Literally there is nothing that we could buy for 115% of income within a 1 hour mass transit commute of DH's job.  Even trying to find something at 2x income is unrealistic.

Fishindude

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Re: First Time Home buyer Question
« Reply #17 on: June 08, 2016, 02:40:52 PM »
Consider using some of that $260K you have stashed for a very large down payment and get the base mortgage amount way down.

sis

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Re: First Time Home buyer Question
« Reply #18 on: June 08, 2016, 02:43:17 PM »
Consider using some of that $260K you have stashed for a very large down payment and get the base mortgage amount way down.

But doesn't it make sense to just borrow the money at 3.4% APR given that our investments earn more than that?  Math :-)

CmFtns

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Re: First Time Home buyer Question
« Reply #19 on: June 08, 2016, 02:50:04 PM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income

Do you live in a high COL area?  Literally there is nothing that we could buy for 115% of income within a 1 hour mass transit commute of DH's job.  Even trying to find something at 2x income is unrealistic.

I do not but usually in high cost of living areas people rent for this very reason. Rent prices do not rise as fast as purchase prices and therefore renting becomes more and more appealing as areas get more and more high cost of living.

Another thing we haven't discussed... Does your husband really hate his current job or something? With that compensation everything in this thread becomes irrelevant because you can afford anything you are talking about easily. Maybe he should aggressively save & invest for 3-4 years, buy the house you both want, then follow dreams
« Last Edit: June 08, 2016, 02:54:51 PM by CmFtns »

rpr

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Re: First Time Home buyer Question
« Reply #20 on: June 08, 2016, 02:50:34 PM »
Consider using some of that $260K you have stashed for a very large down payment and get the base mortgage amount way down.

But doesn't it make sense to just borrow the money at 3.4% APR given that our investments earn more than that?  Math :-)
The mortgage is a fixed rate. Investment returns can be anything. What happens if your investments drop 50% and your house also drops in value as happened in 2007-09? Your mortgage will still be that high value.

robartsd

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Re: First Time Home buyer Question
« Reply #21 on: June 08, 2016, 02:51:08 PM »
Consider using some of that $260K you have stashed for a very large down payment and get the base mortgage amount way down.

But doesn't it make sense to just borrow the money at 3.4% APR given that our investments earn more than that?  Math :-)
It would make sense if you weren't planning on spending those investments in the fairly near term. Buy and hold over decades - yeah the higher return makes more sense; but the need to use that money to live on over the next few years means that you will be much more subject to volitility of the investment so the risk adjusted return is not as high.

sis

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Re: First Time Home buyer Question
« Reply #22 on: June 08, 2016, 03:00:53 PM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income

Do you live in a high COL area?  Literally there is nothing that we could buy for 115% of income within a 1 hour mass transit commute of DH's job.  Even trying to find something at 2x income is unrealistic.

I do not but usually in high cost of living areas people rent for this very reason. Rent prices do not rise as fast as purchase prices and therefore renting becomes more and more appealing as areas get more and more high cost of living.

Another thing we haven't discussed... Does your husband really hate his current job or something? With that compensation everything in this thread becomes irrelevant because you can afford anything you are talking about easily. Maybe he should aggressively save & invest for 3-4 years, buy the house you both want, then follow dreams

Nope, he doesn't hate his job.  He just really has his heart set on this much lower paying job.  I am just trying to be supportive of his decision to switch to a job that is less than a third of his current salary.  That said, likely the earliest he'd start this new job is in about 6 months, the latest is probably 20 months.  We will move come September regardless (whether buying a place or moving to a place with much more reasonable rent), he just doesn't want to have to move twice within a short time frame especially if there's an infant in the mix on the second move.
« Last Edit: June 08, 2016, 03:03:25 PM by sis »

Daleth

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Re: First Time Home buyer Question
« Reply #23 on: June 08, 2016, 03:19:08 PM »
I think we could find something that we can live in for closer to 300k if we really hunt or I convince him that a 10 minute walk to mass transit is doable.

That sounds like a good plan. A 10-minute walk is not only very doable, it's good for you (a little built-in exercise at the start and end of every day).

Let me guess: is he a big-firm lawyer, or general counsel at a huge company, whose heart is set on being a law professor? That is a sweet, sweet job (a sibling of mine is a tenured prof at a major law school) and I completely understand his heart being set on it. Tell Mr. Future Professor that professors often walk to work or to mass transit. Big-firm lawyers and Fortune 500 GC's usually don't, but then, they also don't get summers off. Which lifestyle does he prefer? ;)
« Last Edit: June 08, 2016, 03:23:58 PM by Daleth »

sis

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Re: First Time Home buyer Question
« Reply #24 on: June 08, 2016, 03:27:41 PM »
I think we could find something that we can live in for closer to 300k if we really hunt or I convince him that a 10 minute walk to mass transit is doable.

That sounds like a good plan. A 10-minute walk is not only very doable, it's good for you (a little built-in exercise at the start and end of every day).

Let me guess: is he a big-firm lawyer whose heart is set on being a law professor? That is a sweet, sweet job (a sibling of mine is a tenured prof at a major law school) and I completely understand his heart being set on it. Tell Mr. Future Professor that professors often walk to work or to mass transit. Big-firm lawyers usually don't, but then, they also don't get summers off. Which lifestyle does he prefer? ;)

You're right one one of the two. :-)  I've shown him this thread and he's agreed that we should aim for a much lower priced house.  Now that we aren't going to get something fully renovated we may want to close a bit earlier so that we can get painting and possible floor refinishing done before move in.  He currently walks to mass transit -- 5 minutes to the subway :-)

GoingConcern

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Re: First Time Home buyer Question
« Reply #25 on: June 08, 2016, 03:59:33 PM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income

The average house in the United States is over $200k.  Granted the market is saturated because of people buying homes they can't afford and low inventory but your rule is almost impossible for most Americans.

CmFtns

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Re: First Time Home buyer Question
« Reply #26 on: June 08, 2016, 04:08:55 PM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income

The average house in the United States is over $200k.  Granted the market is saturated because of people buying homes they can't afford and low inventory but your rule is almost impossible for most Americans.

And the lesson is... rent if your in a HCOL area and/or buy less house than the average american

I think we could find something that we can live in for closer to 300k if we really hunt or I convince him that a 10 minute walk to mass transit is doable.

That sounds like a good plan. A 10-minute walk is not only very doable, it's good for you (a little built-in exercise at the start and end of every day).

Let me guess: is he a big-firm lawyer whose heart is set on being a law professor? That is a sweet, sweet job (a sibling of mine is a tenured prof at a major law school) and I completely understand his heart being set on it. Tell Mr. Future Professor that professors often walk to work or to mass transit. Big-firm lawyers usually don't, but then, they also don't get summers off. Which lifestyle does he prefer? ;)

You're right one one of the two. :-)  I've shown him this thread and he's agreed that we should aim for a much lower priced house.  Now that we aren't going to get something fully renovated we may want to close a bit earlier so that we can get painting and possible floor refinishing done before move in.  He currently walks to mass transit -- 5 minutes to the subway :-)

Seriously think about the amount of renovation you want to do... My house needed a lot of work and it is easy to underestimate how much work/time/money it will take. I almost bit off more than I could chew, but if you can pick the right house, have the time, and do a lot of the work yourself it is very financially beneficial and personally rewarding to see results of your hard work every day.
« Last Edit: June 08, 2016, 04:13:59 PM by CmFtns »

mozar

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Re: First Time Home buyer Question
« Reply #27 on: June 08, 2016, 05:14:23 PM »
Do you want to be a landlord? It seems like it matters more whether 1100 is a profitable amount to get on a rental.

sis

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Re: First Time Home buyer Question
« Reply #28 on: June 09, 2016, 09:24:23 AM »
Do you want to be a landlord? It seems like it matters more whether 1100 is a profitable amount to get on a rental.

Hmm good point.  I think that I wouldn't mind being a landlord, but I've never done it so who knows?  I have land lorded in a sense for roommates, but renting out other rooms in apartments I'd already been renting.  So the collecting rent from people aspect doesn't bother me.  I also tend to already fix the tiny things in my apartment that most people would bother maintenance about - bigger issues I'm not sure.

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Re: First Time Home buyer Question
« Reply #29 on: June 09, 2016, 09:45:18 AM »
Cash flow is king. After two kids in 4 years, what does it look like?

Also, can you live in the 1 bedroom for a couple of years and rent the main house, then switch when baby is a year old? That may help tremendously.

Furniture alone will eat at your cash flow if DH likes nice places. Lots of household costs the first two years after you buy a house. Hoses, garbage can, window caulk, plant pots,  etc etc etc
« Last Edit: June 09, 2016, 09:48:01 AM by goldielocks »

sis

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Re: First Time Home buyer Question
« Reply #30 on: June 09, 2016, 10:12:13 AM »
Cash flow is king. After two kids in 4 years, what does it look like?

Also, can you live in the 1 bedroom for a couple of years and rent the main house, then switch when baby is a year old? That may help tremendously.

Furniture alone will eat at your cash flow if DH likes nice places. Lots of household costs the first two years after you buy a house. Hoses, garbage can, window caulk, plant pots,  etc etc etc

Right - I'm not worried about cash flow in the first two years.  He's still at his current high paying job and we have a lot of savings (260k in index funds, 200k in retirement funds).  But I've definitely taken it to heart that we should lower our budget a bunch.  Switching is an interesting idea and would allow us to have a ton of savings, but part of the reason for buying now is to not have to move again it two years.  I'm not sure if my husband would view moving from one unit to another within the same house as moving or not :-)

Is there any good resource for budgets with all of the line items/needs listed out?  I've made one of my own, but I want to make sure that I'm not missing anything that I just don't realize.

undercover

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Re: First Time Home buyer Question
« Reply #31 on: June 09, 2016, 10:20:04 AM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income

The average house in the United States is over $200k.  Granted the market is saturated because of people buying homes they can't afford and low inventory but your rule is almost impossible for most Americans.

And the lesson is... rent if your in a HCOL area and/or buy less house than the average american


That's not necessarily true. That's far too black and white. It mainly comes down to whether buying or renting is cheaper, coupled with your risk tolerance.

No, you shouldn't buy more than you need, and no, you shouldn't get in over your head, but math is math and if you plan on sticking in the area it may well make financial sense to buy even in a HCOL area (it often does).

Taking on more house than you can realistically afford (but can still manage and not go into further debt) is technically taking a huge risk so it all depends on your risk tolerance which has nothing to do with whether buying or renting is advantageous in any given scenario.

Choices

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Re: First Time Home buyer Question
« Reply #32 on: June 09, 2016, 09:37:37 PM »
Agree w/ buying a much less expensive house if your family's income is going down dramatically.

But, income aside, having a duplex means that your tenants are right. next. door. This could be awesome or they could ask you to do every little thing, change filters and light bulbs, etc. If you're not very handy and they always want something done, it could be pretty uncomfortable.

Dicey

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Re: First Time Home buyer Question
« Reply #33 on: June 09, 2016, 10:14:52 PM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income
Nice to know what you would do, sir or madam, but your answer is mostly irrelevant to the OP's question. Were you posting this just to humble brag or seem virtuous? Basically you just said that you are merely keeping up with the Jonses in your part of the world. You aren't doing better or worse than anyone else in your pond. Kinda even sounds like the "lot of people" you referenced are more mustachian than you are.

Surely you did not believe your answer, based on your experience in a totally different setting would help them make the right decision in theirs?

High COLAS also provide, on average, much higher wage scales, as evidenced by OP's and spouse's current and soon to be former salaries.

Comments such as yours tempt me mightily to stand up and shout: Troll! But I'll try to control myself.

Back to OP: I'm used to crazy RE numbers, so I'd consider it. What I would NOT do is put a crap-ton of money down. Put 20-25% down and keep the rest in your control. Make the transition to the new job knowing that you have a shitload of money you can draw on to make payments for a very long time, if needed. I suspect if the Federal job isn't all DH hopes, the poor dear will find something as similarly lucrative as his current position without too much trouble.

JLee

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Re: First Time Home buyer Question
« Reply #34 on: June 09, 2016, 10:26:10 PM »
The point of qualifying while your husband's income is high may only lead you to getting in well over your head. You should qualify based on what you make after the transition (your income + 90k) - and then you should likely spend even less than that.

Also, 13k per year on a 100k investment might be wise, but if you have to outsource a lot of repairs and maintenance, it may quickly eat that up. If you haven't been a home owner, you are probably not prepared to be a landlord.

This is probably true.  I've only been an apartment dweller as an adult.  As a child I lived in a house and did help with a lot of the maintenance.

The 90k would be his starting salary and it would rise within 10 years to 160k. It is a job with incredibly high job security and we have the savings to tough it out for a bit while his pay is lower. Right now we are in a situation where will we definitely move when our lease is up.  We currently live in a 3500 per month 1 bedroom apartment (it is a market rate building, we were at 2700 when we moved in 5 years ago and our rent has kept increasing) - it is certainly stupid to continue paying that if he switches to the lower paying job.  We live here now because he works 80 hour weeks and his commute is super short from here.  My husband has very expensive housing tastes (which is pretty much his only financial vice).

For what it's worth, if you need to dip into savings to live on a $90k/yr income you need to drastically cut your costs somewhere.

Alternatively...with $460k in retirement and investments, another couple of years at the current job would mean you're solidly FI in a LCOL area.  You could just retire and then do whatever you want, without worrying about if it pays well.

Don't forget that property taxes on a $400k home in Jersey are probably $10-15k/year.  I make a little more than his anticipated salary (97 + bonus, and a little rental income from my house in AZ) and there's no way in hell you would find me buying a house in this area. I'm in northern NJ, about 6 miles from the city.

Fiveyearclub

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Re: First Time Home buyer Question
« Reply #35 on: June 09, 2016, 11:47:47 PM »
I've studied housing... A lot.  Probably too much.  Several things:

1) Housing should be treated as consumption (maintenance, improvements, etc.) and insurance (against rising rents), not as an investment.  This is because it doesn't produce a cash flow and because you cannot sell it and still have a place to sleep.  In the long run, you want your money in real estate to be less than 25% of your net worth.  Don't underestimate things like maintenance (est. 1% of value per year).  Owning a home has pains in the butt that should not be underestimated.  When you sell you have to spend a bunch of money on that, and the bigger the property, the bigger the pain.

2) Put together a long term, 50 year plan for your life.  It doesn't have to happen, it just has to be something both of you think sounds good.  Price it out.  See where you need to be net-worth wise every decade and see if you're likely to have the income numbers to hit that.  How much will you need to retire?  Do you want a beach house?  Etc.  Back it up to a 10 year plan.  Back that up to a 2 year plan.  That will help you put the purchase in a wiser financial context.  Almost for sure, it will be much easier to hit your 50 year goal if you sacrifice in the beginning, and housing is a big area where people can avoid the lost of tons of time value.

3) People talk about hedging mortgage interest rate vs. market returns, but this calculation usually, naively, ignores risk.  Also, looking at housing volatility, this kind of hedge only works over long periods of time, and only if people have excellent discipline.  Most do not.  People use the hedge to justify buying a larger home on a 30 year... Basically to justify their consumption.  After studying wealthy people and running many calculations myself, I've found that the mortgage hedge is not that great of a deal, even if you do it perfectly.

4) The impact of psychology on wealth building cannot be overstated.  Purchasing a more expensive home will lead to the purchase of more expensive accessories, and those will not be accounted for in the initial calculation.  They will be purchased with money with a big time value.  The nicer area you move to, the more you will be reminded of any deprivation.  If you buy a cheaper property, not only will the numbers come out better, but also the psychology will, and that will in turn influence your savings rate and general satisfaction.

5). Re agents and loan officers will tell you how wonderful the interest deduction is.  They're full of crap.  Getting a discount paying money to the bank is still paying money to the bank.

6). Retirement accounts don't count as savings because they have huge opportunity costs for withdrawing the money.  It would be like a 40% interest credit card to use that money for anything.  The $260k of index funds is cool, but remember you want to maintain diversity and wise investors typically hold for 4+ years.

My overall point is this: be conservative.  Like others have said, if your income is $90k, don't buy anything where the payment is over 25% of take home pay.  You say, "but I live in a high cost of living area!" -- then it's possible the best move to hit your biggest 50 year goals is not to buy right now, even if his income is so high at the moment.  If you do choose to use a bigger chunk of the $260k, just make sure you feel the pain of the lack of diversity in your net worth, and don't get yourself into a property that's going to absorb so much of that $90k that he won't be able to build up the investments again in a timely way.  It may be that once you talk about your dreams and run the numbers, he feels inspired to work a few more years at the higher rate.

None of the real estate people care about you or your net worth.  They will use standards of affordability that relate to the bank's risk tolerance - the bank's net worth, not yours.  They will play on your materialism.  Come up with your long term goals, college costs, etc, and keep critically thinking and seeking out different opinions.  You'll start to see patterns in how people approach it.

Icecreamarsenal

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Re: First Time Home buyer Question
« Reply #36 on: June 10, 2016, 04:28:39 AM »
I've studied housing... A lot.  Probably too much.  Several things:

1) Housing should be treated as consumption (maintenance, improvements, etc.) and insurance (against rising rents), not as an investment.  This is because it doesn't produce a cash flow and because you cannot sell it and still have a place to sleep.  In the long run, you want your money in real estate to be less than 25% of your net worth.  Don't underestimate things like maintenance (est. 1% of value per year).  Owning a home has pains in the butt that should not be underestimated.  When you sell you have to spend a bunch of money on that, and the bigger the property, the bigger the pain.

2) Put together a long term, 50 year plan for your life.  It doesn't have to happen, it just has to be something both of you think sounds good.  Price it out.  See where you need to be net-worth wise every decade and see if you're likely to have the income numbers to hit that.  How much will you need to retire?  Do you want a beach house?  Etc.  Back it up to a 10 year plan.  Back that up to a 2 year plan.  That will help you put the purchase in a wiser financial context.  Almost for sure, it will be much easier to hit your 50 year goal if you sacrifice in the beginning, and housing is a big area where people can avoid the lost of tons of time value.

3) People talk about hedging mortgage interest rate vs. market returns, but this calculation usually, naively, ignores risk.  Also, looking at housing volatility, this kind of hedge only works over long periods of time, and only if people have excellent discipline.  Most do not.  People use the hedge to justify buying a larger home on a 30 year... Basically to justify their consumption.  After studying wealthy people and running many calculations myself, I've found that the mortgage hedge is not that great of a deal, even if you do it perfectly.

4) The impact of psychology on wealth building cannot be overstated.  Purchasing a more expensive home will lead to the purchase of more expensive accessories, and those will not be accounted for in the initial calculation.  They will be purchased with money with a big time value.  The nicer area you move to, the more you will be reminded of any deprivation.  If you buy a cheaper property, not only will the numbers come out better, but also the psychology will, and that will in turn influence your savings rate and general satisfaction.

5). Re agents and loan officers will tell you how wonderful the interest deduction is.  They're full of crap.  Getting a discount paying money to the bank is still paying money to the bank.

6). Retirement accounts don't count as savings because they have huge opportunity costs for withdrawing the money.  It would be like a 40% interest credit card to use that money for anything.  The $260k of index funds is cool, but remember you want to maintain diversity and wise investors typically hold for 4+ years.

My overall point is this: be conservative.  Like others have said, if your income is $90k, don't buy anything where the payment is over 25% of take home pay.  You say, "but I live in a high cost of living area!" -- then it's possible the best move to hit your biggest 50 year goals is not to buy right now, even if his income is so high at the moment.  If you do choose to use a bigger chunk of the $260k, just make sure you feel the pain of the lack of diversity in your net worth, and don't get yourself into a property that's going to absorb so much of that $90k that he won't be able to build up the investments again in a timely way.  It may be that once you talk about your dreams and run the numbers, he feels inspired to work a few more years at the higher rate.

None of the real estate people care about you or your net worth.  They will use standards of affordability that relate to the bank's risk tolerance - the bank's net worth, not yours.  They will play on your materialism.  Come up with your long term goals, college costs, etc, and keep critically thinking and seeking out different opinions.  You'll start to see patterns in how people approach it.
Very well put, thank you.

kite

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Re: First Time Home buyer Question
« Reply #37 on: June 10, 2016, 05:56:38 AM »
As someone who does own in NJ and work in the NYC area, I'll remind you that NJ property taxes can be insane. 
Ridiculously insane.  Depending on location, they can completely upend the rent/buy equations. 

sis

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Re: First Time Home buyer Question
« Reply #38 on: June 10, 2016, 07:05:15 AM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income
Nice to know what you would do, sir or madam, but your answer is mostly irrelevant to the OP's question. Were you posting this just to humble brag or seem virtuous? Basically you just said that you are merely keeping up with the Jonses in your part of the world. You aren't doing better or worse than anyone else in your pond. Kinda even sounds like the "lot of people" you referenced are more mustachian than you are.

Surely you did not believe your answer, based on your experience in a totally different setting would help them make the right decision in theirs?

High COLAS also provide, on average, much higher wage scales, as evidenced by OP's and spouse's current and soon to be former salaries.

Comments such as yours tempt me mightily to stand up and shout: Troll! But I'll try to control myself.

Back to OP: I'm used to crazy RE numbers, so I'd consider it. What I would NOT do is put a crap-ton of money down. Put 20-25% down and keep the rest in your control. Make the transition to the new job knowing that you have a shitload of money you can draw on to make payments for a very long time, if needed. I suspect if the Federal job isn't all DH hopes, the poor dear will find something as similarly lucrative as his current position without too much trouble.

Yep that's the plan 20% down :-)  We always have a ton of savings if the times get rough.  In any case, I think I've convinced DH to buy the least house that meets our needs.  You are correct that the ironic thing in our situation is that if DH hates the government job he'll just jump back into a high paying job in the private sector.

horsepoor

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Re: First Time Home buyer Question
« Reply #39 on: June 10, 2016, 07:14:50 AM »
You don't mention how long your husband has been earning $330K, but unless it's been a short time, it's a red flag to me that you've "only" got $460K saved up.  That could mean that you're not used to living on a $90K salary lifestyle, and once he switches jobs and you have a mortgage, you'll be locked into that whether you're able to adjust well to it or not.  I understand marginal taxes will be lower, and your mortgage might even be lower than current rent, but still.  Be honest with yourselves about how much you're spending, and whether you'll be able to manage a decent savings rate on $90K before taking this leap.

As another poster said, a couple more years at the high salary and you guys could be easily FI and live in a lower COL area and do the downshift in job at that point.

sis

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Re: First Time Home buyer Question
« Reply #40 on: June 10, 2016, 02:24:07 PM »
You don't mention how long your husband has been earning $330K, but unless it's been a short time, it's a red flag to me that you've "only" got $460K saved up.  That could mean that you're not used to living on a $90K salary lifestyle, and once he switches jobs and you have a mortgage, you'll be locked into that whether you're able to adjust well to it or not.  I understand marginal taxes will be lower, and your mortgage might even be lower than current rent, but still.  Be honest with yourselves about how much you're spending, and whether you'll be able to manage a decent savings rate on $90K before taking this leap.

As another poster said, a couple more years at the high salary and you guys could be easily FI and live in a lower COL area and do the downshift in job at that point.

My husband has been working less than 5 years.  His starting salary was 160k.  We live in a high COL area and in fact housing is our largest expenditure.  In the past year we've spent 42k on rent (for the short commute time since he's pulling 80 hour weeks - also because my husband likes to live in a moderately nice place - which is hard to do in NYC - this is an 800 sq foot one bedroom apartment that costs us this much just for context of how absurd COL is), all of our other spending combined was 32k.  We did take some very high cost vacations but that's because we don't have kids yet and want to travel while we are young.  We've paid off all school loans, etc in this time.  He's only 27 :-)

CmFtns

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Re: First Time Home buyer Question
« Reply #41 on: June 10, 2016, 08:03:39 PM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income
Nice to know what you would do, sir or madam, but your answer is mostly irrelevant to the OP's question. Were you posting this just to humble brag or seem virtuous? Basically you just said that you are merely keeping up with the Jonses in your part of the world. You aren't doing better or worse than anyone else in your pond. Kinda even sounds like the "lot of people" you referenced are more mustachian than you are.

Surely you did not believe your answer, based on your experience in a totally different setting would help them make the right decision in theirs?

High COLAS also provide, on average, much higher wage scales, as evidenced by OP's and spouse's current and soon to be former salaries.

Comments such as yours tempt me mightily to stand up and shout: Troll! But I'll try to control myself.

Well by "people here" I was referring to people here on the forums not the Jones next door. Maybe I am actually trying to be helpful by showing that it is not considered normal everywhere to buy a house at 5x your salary. I feel like people that live in big cities have become accustomed to these kinds of inflated prices and use that to justify buying even though renting is probably the right decision. Wages don't scale with housing prices closely at all. I could make maybe twice as much in California but houses are 700% as expensive. Monthly rent here is around 1% of the property cost.... That's why I decided to buy

Why you gotta take my innocent post and be all aggressive and say I'm trying troll?
« Last Edit: June 10, 2016, 08:09:38 PM by CmFtns »

Cyaphas

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Re: First Time Home buyer Question
« Reply #42 on: June 10, 2016, 08:31:04 PM »
This Real estate market is like 2008 Dejavu. If I were in your situation, I'd continue with the high paying job for 2 years, save every dime you can and then GTFO of NYC. I didn't know until I read your post that NYC had an income tax... I didn't even think cities could DO THAT! If your SO likes nice places to live and likes living anywhere near a big city, $90k per year in today's economy isn't much. Especially if you're going to be a SAHM.

Stable or not... He's taking a job that he'll literally have to work 3 years to make up for 1 year at his current one. I understand his sanity may be at risk, but buying a home you can barely afford in a bull market this long in the tooth with interest rates as low as they can go, the fed is out of bullets to stimulate the economy... We've all heard this story before, only it was almost 10 years ago and the FED had interest rate points they could drop back then, that story didn't end well.

Can you do these things? Absolutely, but... why? You're currently in a great position. The baby won't need it's own room until a year after birth.

As Steve Miller once so eloquently put it... Go on take the money and run.

sis

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Re: First Time Home buyer Question
« Reply #43 on: June 10, 2016, 09:46:36 PM »
This Real estate market is like 2008 Dejavu. If I were in your situation, I'd continue with the high paying job for 2 years, save every dime you can and then GTFO of NYC. I didn't know until I read your post that NYC had an income tax... I didn't even think cities could DO THAT! If your SO likes nice places to live and likes living anywhere near a big city, $90k per year in today's economy isn't much. Especially if you're going to be a SAHM.

Stable or not... He's taking a job that he'll literally have to work 3 years to make up for 1 year at his current one. I understand his sanity may be at risk, but buying a home you can barely afford in a bull market this long in the tooth with interest rates as low as they can go, the fed is out of bullets to stimulate the economy... We've all heard this story before, only it was almost 10 years ago and the FED had interest rate points they could drop back then, that story didn't end well.

Can you do these things? Absolutely, but... why? You're currently in a great position. The baby won't need it's own room until a year after birth.

As Steve Miller once so eloquently put it... Go on take the money and run.

Okay so I've convinced DH just to buy a very cheap house.  300k or less ideally :-)  We are moving come September no matter what -- our apartment is a market rate building. We're currently at 3500 rent on a one bed -- it will likely increase to 3700 on our lease renewal (market rate buildings suck for tenants).  By moving to NJ we will save 10k+ just by avoiding the city tax (during the first year when he's still at his high paying job).  By buying our effective "rent" (PITI + maintenance budget) will go down by nearly 2000 per month.  My husband isn't trying to FIRE - he likes working and really wants to pursue this NYC based federal position.  The good news is he's only just submitted his application and given the election season, the earliest he'd start is feb 2017 (yay for at least one more big corporate bonus) and probably the latest is feb 2018.  We want to live/raise kids in the NYC metro area.  It is where our families are located, it is where his dream job is located, and it is where many of our friends are located.  I'd prefer the move to the suburbs in NJ because I really like outdoor activities and to be honest since we don't have a car in NYC I'm often too cheap to get a zipcar for the day and pay $90 bucks to go hiking.

We both fully realize that living in the NYC area has a huge COL, but this specific job opportunity is unique to NYC.  The rational thing to do from the MMM perspective is to leave the high COL area - but sometimes real life is more than just the most rational decision.

Fiveyearclub

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Re: First Time Home buyer Question
« Reply #44 on: June 11, 2016, 01:13:28 AM »
I don't think FIRE is appealing because a person hates work.  On the contrary, it's because someone likes the work so much that they want the freedom to do it.  Even if it was about money, businesses that get a net worth to $10M or more often making very little income for the first 2-5 years.  FIRE lets a person ignore the short term income and focus on building the empire.

I think... as for the MMM perspective... It's not about decreasing costs and increasing net worth No matter what.  In fact his last post was about maximizing happiness being the only rational thing to do.  It's just about thinking critically about every piece of life.  Money is just one tool to achieve whatever the big goals are, which need to be non-money goals.  A goal that ends with money is just a stupid pile of paper.

High cost areas have a lot of money floating around.  You can offset the cost of living by thinking more creatively about how to tap into more of that money.  I love the power of AND.  Like, I'm going to figure out how to live in this expensive place AND find the money to fund my dreams.  The world has many appealing options if we bother to do the work to discover them.

Lmoot

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Re: First Time Home buyer Question
« Reply #45 on: June 11, 2016, 05:02:47 AM »
I think we could find something that we can live in for closer to 300k if we really hunt or I convince him that a 10 minute walk to mass transit is doable.

That sounds like a good plan. A 10-minute walk is not only very doable, it's good for you (a little built-in exercise at the start and end of every day).

Let me guess: is he a big-firm lawyer whose heart is set on being a law professor? That is a sweet, sweet job (a sibling of mine is a tenured prof at a major law school) and I completely understand his heart being set on it. Tell Mr. Future Professor that professors often walk to work or to mass transit. Big-firm lawyers usually don't, but then, they also don't get summers off. Which lifestyle does he prefer? ;)

You're right one one of the two. :-)  I've shown him this thread and he's agreed that we should aim for a much lower priced house.  Now that we aren't going to get something fully renovated we may want to close a bit earlier so that we can get painting and possible floor refinishing done before move in.  He currently walks to mass transit -- 5 minutes to the subway :-)

Just a bit of advice from someone who bought a partial fixer-upper....it's never ever just paint and new floors. 7 years later and after a new kitchen, bathroom, water heater, roof and framing, plumbing and AC unit, I'm about to drop $8k on electrical and soon 14 windows will need to be replaced. Maybe don't use the words "partially renovated" with your realtor, because you will get some eye-openers! Unless you want a lot of headache from property insurance companies, or are willing to go beyond paint and refinishing, make sure whatever you get passes a 4-point inspection because inspectors don't care about cosmetics.

sis

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Re: First Time Home buyer Question
« Reply #46 on: June 11, 2016, 05:07:50 AM »
I don't think FIRE is appealing because a person hates work.  On the contrary, it's because someone likes the work so much that they want the freedom to do it.  Even if it was about money, businesses that get a net worth to $10M or more often making very little income for the first 2-5 years.  FIRE lets a person ignore the short term income and focus on building the empire.

I think... as for the MMM perspective... It's not about decreasing costs and increasing net worth No matter what.  In fact his last post was about maximizing happiness being the only rational thing to do.  It's just about thinking critically about every piece of life.  Money is just one tool to achieve whatever the big goals are, which need to be non-money goals.  A goal that ends with money is just a stupid pile of paper.

High cost areas have a lot of money floating around.  You can offset the cost of living by thinking more creatively about how to tap into more of that money.  I love the power of AND.  Like, I'm going to figure out how to live in this expensive place AND find the money to fund my dreams.  The world has many appealing options if we bother to do the work to discover them.

Okay so in that version of the reasons to FIRE - DH switching to the lower paying job is sort of his version living the dream and maximizing happiness.  No one has asked him to leave his current job - in fact his employers would love it for him to stay for the next 3+ years - it is for his personal edification that he wants to switch to this lower paying job.  :-) 

sis

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Re: First Time Home buyer Question
« Reply #47 on: June 11, 2016, 05:13:51 AM »
I think we could find something that we can live in for closer to 300k if we really hunt or I convince him that a 10 minute walk to mass transit is doable.

That sounds like a good plan. A 10-minute walk is not only very doable, it's good for you (a little built-in exercise at the start and end of every day).

Let me guess: is he a big-firm lawyer whose heart is set on being a law professor? That is a sweet, sweet job (a sibling of mine is a tenured prof at a major law school) and I completely understand his heart being set on it. Tell Mr. Future Professor that professors often walk to work or to mass transit. Big-firm lawyers usually don't, but then, they also don't get summers off. Which lifestyle does he prefer? ;)

You're right one one of the two. :-)  I've shown him this thread and he's agreed that we should aim for a much lower priced house.  Now that we aren't going to get something fully renovated we may want to close a bit earlier so that we can get painting and possible floor refinishing done before move in.  He currently walks to mass transit -- 5 minutes to the subway :-)

Just a bit of advice from someone who bought a partial fixer-upper....it's never ever just paint and new floors. 7 years later and after a new kitchen, bathroom, water heater, roof and framing, plumbing and AC unit, I'm about to drop $8k on electrical and soon 14 windows will need to be replaced. Maybe don't use the words "partially renovated" with your realtor, because you will get some eye-openers! Unless you want a lot of headache from property insurance companies, or are willing to go beyond paint and refinishing, make sure whatever you get passes a 4-point inspection because inspectors don't care about cosmetics.

Oh yeah no super fixer upper for us.  I don't want to deal with a money pit.  I'm willing to do as much as pull up carpet to refinish floors, paint, and possibly new cabinets/counter tops (because I love cooking).  I wouldn't want to do major plumbing, electrical, or tile work.

BlueHouse

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Re: First Time Home buyer Question
« Reply #48 on: June 11, 2016, 05:51:30 AM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income

Do you live in a high COL area?  Literally there is nothing that we could buy for 115% of income within a 1 hour mass transit commute of DH's job.  Even trying to find something at 2x income is unrealistic.
I bought a house that is between 3 and 6 times my income, depending on how you count my income. Yes, I have enough to pay for it, but the payments stress me out because IF my income drops when I lose my cushy contract, I can't easily afford these payments on a regular salary.   I've been paying the mortgage down in anticipation of reamortization just to get back to a point where you are now -- in front of the decision rather than behind it and scrambling to get back to comfortable.

The great benefit of this forum is all of the people who can help steer you away from bad decisions BEFOREHAND.  bigger and better houses really do come with more costs all around. If you can avoid that trap, do it.

Dicey

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Re: First Time Home buyer Question
« Reply #49 on: June 11, 2016, 10:13:42 AM »
The house I bought costs 115% of our yearly income and I know a lot of people here have bought houses that cost less than their yearly income.

I would never buy a house that costs more than twice your yearly income
Nice to know what you would do, sir or madam, but your answer is mostly irrelevant to the OP's question. Were you posting this just to humble brag or seem virtuous? Basically you just said that you are merely keeping up with the Jonses in your part of the world. You aren't doing better or worse than anyone else in your pond. Kinda even sounds like the "lot of people" you referenced are more mustachian than you are.

Surely you did not believe your answer, based on your experience in a totally different setting would help them make the right decision in theirs?

High COLAS also provide, on average, much higher wage scales, as evidenced by OP's and spouse's current and soon to be former salaries.

Comments such as yours tempt me mightily to stand up and shout: Troll! But I'll try to control myself.

Well by "people here" I was referring to people here on the forums not the Jones next door. Maybe I am actually trying to be helpful by showing that it is not considered normal everywhere to buy a house at 5x your salary. I feel like people that live in big cities have become accustomed to these kinds of inflated prices and use that to justify buying even though renting is probably the right decision. Wages don't scale with housing prices closely at all. I could make maybe twice as much in California but houses are 700% as expensive. Monthly rent here is around 1% of the property cost.... That's why I decided to buy

Why you gotta take my innocent post and be all aggressive and say I'm trying troll?
Perhaps it's because your comments sounded braggy ("I bought"), condescending  ("I would never") and totally irrelevant to the OP's situation. It certainly did not come off as innocent, nor did it seem that you were trying to be helpful. If you're not responding to the OP's request with relevance, why bother? Unless it's to brag about how great your decisions are. Borderline trollishness. There are plenty of places on this forum to crow about your achievements, but this isn't necessarily one of them.

Finally, if you are buying a house in an area where there are lots of choices in the range you're suggesting,  then it seems you haven't done much more than go with the flow. Achieving mustachianism amidst significantly higher living costs can be much more challenging.

People live where their jobs, families and support networks are. Sometimes shouting "move" is too simplistic an answer.