Got a Raise at Work--Max out 401k or House Down Payment? WWYD?

[beeth_oven]

I'm 31 years old, single, live in NYC, no debt. I recently got a raise at work and want to be smart about where I put it. Raise adds about 6k to my salary, pre-tax.

I have a little over 70k in investments (I started late at age 26) and 4k in my down payment fund (goal is 40k).

Pro for 401k: With the new raise I'm finally in a position where I could max out my 401k without totally struggling. I don't plan on staying at my job forever so I foresee gaps in my future where I wouldn't have a 401k to contribute to at all. I'm single, no kids...why not save often and early while I can?

Pro for down payment: The plan would be to get a modest 2-bedroom condo where I could live in one room, then rent out the other. I would make sure that the mortgage would not be much more than what I'm currently spending in rent. Eventually I'd be able to rent out both bedrooms if I needed to.

My current monthly paycheck and spending:

5401 gross pay
112   subway pass
208   flexible spending account*
810.16   401k (15%) - not including 6% employer match
2793.46   take-home pay
420   roth ira
150   travel
50   education
870   rent
50   utilities
38   phone
300   food
266   health & fitness*
250   shopping
130   entertainment
68   doctor
50   personal care
50   auto and transport
35   gifts

*atypical spending due to planned medical procedures.

I think I'm already doing alright for myself, but regardless of which option I pick, once the medical stuff is over, I'm going to start paying myself an additional $500/month for the house down payment. But what would you do with the raise money--put it into the 401k or into the house down payment?

[smalllife]

You said you live in NYC - have you worked the numbers about whether it is better to own or rent?  (especially with that rent, definitely the lowest NYC housing cost I've seen on here!)

From what I know of the area, you're probably better off maxing the 401k.  You can always save for a down payment, but the ability to contribute to a 401k is not always there.

Also, $250 shopping?  Or is that your catch all category?

[fiveoclockshadow]

I'd also recommend careful consideration of the rent vs. buy decision.  And that is more than a financial calculation based on rents and prices.  Remember real estate transactions are expensive - plan to take at least a 10% hit on each transaction.  Will you be staying single?  If not perhaps keep renting because you will likely move when you marry.  Will you stay in NYC for five to ten years?  If not perhaps keep renting.  Do you have some great desire to own your own place?  If so perhaps plan on buying even if it is cheaper to rent.

Personally I own a too big house.  Financially it is a pretty stupid position.  Real estate return over the long term barely matches inflation and there is a huge opportunity cost in having money tied up in the house.  Because of transaction costs it isn't sensible for me to downsize right now as there is a fair chance we will relocate in the next five to seven years anyway.  In a sense buying can "trap" you in a decision for the long term.  On the other hand, we do very much like our house and there is a psychological plus to owning.  But it does cost us - no doubt about it.  Having owned and rented and bounced between both over the years I see pros and cons to each.  I think that is the real question you need to answer - am I going to buy or rent.  Once that is answered the 401k question answers itself.

[trammatic]

I think you need to do some market research for condos in NYC.  Based on your info, with a annual gross pay of 65k, how much are you planning to put out for a property?  Even if you charge a tenant 1,000/month, you're looking at a mortgage of 1,870, which yields a bit under 300k.  Can you buy a 2br condo for under 300k?  Also, remember to add in maintenance and condo fees, etc.  Try to come up with a longer-term plan of how this would work out.  Get actual numbers and run them.  Obviously, I wouldn't add tons of time to my commute to live in Long Island or down in Jersey...

[beeth_oven]

You said you live in NYC - have you worked the numbers about whether it is better to own or rent?  (especially with that rent, definitely the lowest NYC housing cost I've seen on here!)

From what I know of the area, you're probably better off maxing the 401k.  You can always save for a down payment, but the ability to contribute to a 401k is not always there.

Also, $250 shopping?  Or is that your catch all category?

I live in one of the best neighborhoods in NYC...with two roommates. I adore them, but obviously roommates are not ideal as you get older. If I wanted to live alone, I'd have to shell out at least $1600, which I can afford, but the idea of giving a landlord that much each month literally makes me sick.

I've been looking at listings and crunched numbers for over a year now. The place would have to be under 200k, so most likely in Queens or New Jersey. If I bought a place for about 189k, monthly fee would be about $1300 (including taxes, insurance, renovations, etc.) The second bedroom would most likely rent for about $700 a month. Although is contingent on renting out that second bedroom. I would never buy a one-bedroom place.

Re: shopping. I expected that to raise a couple eyebrows. Clothing is my hobby. Although I am planning on cutting that amount down...gradually.

[beeth_oven]

I'd also recommend careful consideration of the rent vs. buy decision.  And that is more than a financial calculation based on rents and prices.  Remember real estate transactions are expensive - plan to take at least a 10% hit on each transaction.  Will you be staying single?  If not perhaps keep renting because you will likely move when you marry.  Will you stay in NYC for five to ten years?  If not perhaps keep renting.  Do you have some great desire to own your own place?  If so perhaps plan on buying even if it is cheaper to rent.

Personally I own a too big house.  Financially it is a pretty stupid position.  Real estate return over the long term barely matches inflation and there is a huge opportunity cost in having money tied up in the house.  Because of transaction costs it isn't sensible for me to downsize right now as there is a fair chance we will relocate in the next five to seven years anyway.  In a sense buying can "trap" you in a decision for the long term.  On the other hand, we do very much like our house and there is a psychological plus to owning.  But it does cost us - no doubt about it.  Having owned and rented and bounced between both over the years I see pros and cons to each.  I think that is the real question you need to answer - am I going to buy or rent.  Once that is answered the 401k question answers itself.

Thanks! It's helpful to get the point of view of someone who has actually bought a house. You bring up a great point--being "trapped" in the decision, which is definitely something to seriously think about. To answer your questions:
-I know the costs involved with closing and I would save up additional amounts to cover it. Would also save up extra for renovations.
-Will I be staying single? Not sure, but if I were in engagement phase, I would definitely make the guy move into my place :)
-Staying in NYC for 5-10 years? Most likely, yes. It's the best city for what I do for a living.
-My desire to own comes from the desire to minimize my expenses by having a roommate pay me monies :)

[beeth_oven]

I think you need to do some market research for condos in NYC.  Based on your info, with a annual gross pay of 65k, how much are you planning to put out for a property?  Even if you charge a tenant 1,000/month, you're looking at a mortgage of 1,870, which yields a bit under 300k.  Can you buy a 2br condo for under 300k?  Also, remember to add in maintenance and condo fees, etc.  Try to come up with a longer-term plan of how this would work out.  Get actual numbers and run them.  Obviously, I wouldn't add tons of time to my commute to live in Long Island or down in Jersey...

I wouldn't get a place that's under 200k, because I couldn't afford anything more than that. I've been looking at places for over a year, and found places that meet my specs in New Jersey and Queens. It has to be a two-bedroom, so I could rent out the other room. Otherwise my plan is kaput. Distance-wise--the commute to work from Queens would be the same as where I rent from now; NJ, add another 15 minutes. And I have been running numbers, and have accounted for everything you mentioned, except for the condo fee. Ugh. The sneaky real estate agents of course don't mention that in the listings.

[mpbaker22]

And I have been running numbers, and have accounted for everything you mentioned, except for the condo fee. Ugh. The sneaky real estate agents of course don't mention that in the listings.

And how important those are.  My sister was telling me how she broke even on her condo sale recently.  The thing is she paid $400-$500/month in condo fees while I paid $325/month in rent.
Unfortunately, it's still decisions like those that keep people in the poor class.