Author Topic: Home Purchase/City Living  (Read 4412 times)

GoPackGo

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Home Purchase/City Living
« on: August 26, 2015, 04:25:10 PM »
I am a big fan of the book Millionaire Next Door and one of his metrics resonated me which is "never mortgage a house that is more than double your annual income." (ie annual income 75k, the note on the house should not exceed 150k) How does one reconcile this with MMM living (walking distance/short commute/quality of life) in the city where that is difficult to meet (for me, at least early in my career). Any advice is great!

Jakejake

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Re: Home Purchase/City Living
« Reply #1 on: August 26, 2015, 04:33:45 PM »
My daughter has a similar situation, living in a large city with moderate income. She's been renting part of an apartment, with lots of roommates. Now that she's married, they first looked at buying a large building with two rentable apartments that would pay the mortgage, and when that fell through they bought into a coop, again not a single family home.

Thinkum

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Re: Home Purchase/City Living
« Reply #2 on: August 26, 2015, 05:16:39 PM »
Honestly I believe that metric is outdated. Incomes have not tracked with real estate prices. So even a family making $250K in SoCA, can only buy a house worth $500K. Well that would mean living in a condo or a house in a bad part of town. The only places that metric might make more sense, is in LCOL areas. Even then, you run into the same problem since traditionally the incomes are lower in those areas.

I believe the rent vs buy calculator is a better way to think about buying RE.

irishbear99

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Re: Home Purchase/City Living
« Reply #3 on: August 26, 2015, 05:24:49 PM »
I am a big fan of the book Millionaire Next Door and one of his metrics resonated me which is "never mortgage a house that is more than double your annual income." (ie annual income 75k, the note on the house should not exceed 150k) How does one reconcile this with MMM living (walking distance/short commute/quality of life) in the city where that is difficult to meet (for me, at least early in my career). Any advice is great!

I'd suggest that the best way to reconcile the two is by renting. In fact, I just read a MMM blog post about how silly it is more people choose not to rent in Toronto and instead buy houses with gawdawful commutes because they can't afford to live in the city.

http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/

mozar

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Re: Home Purchase/City Living
« Reply #4 on: August 26, 2015, 06:37:13 PM »
I bought a small coop in a small town ten miles from a major city. I can walk to everything in my town. Then get on the highway or public transportation to get into the big city for work.

Thegoblinchief

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Re: Home Purchase/City Living
« Reply #5 on: August 26, 2015, 06:49:48 PM »
Rent.

Live further out but along a good bike corridor (trail or arterial with bike lanes).

Find a cheaper local burb/town that still has good walkable core.

I've got a mish-mash of walking errands, errands easy to do by bike (even with kids), errands I can do by bike without the kids, and errands even I can only do (but rarely) with the car. This is in a neighborhood with a walk score of 63.

GoPackGo

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Re: Home Purchase/City Living
« Reply #6 on: August 26, 2015, 06:57:15 PM »
Thanks for the replies. Really good thoughts here. I have always rented but may be in a place where I want to stay for 5-10 years. So wanted to get the MMM community advice. It does seem that the market is insane from a buyers perspective right now.

GoPackGo

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Re: Home Purchase/City Living
« Reply #7 on: August 26, 2015, 06:58:25 PM »
Also, when renting what is a good threshold for rent to income %?

Thinkum

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Re: Home Purchase/City Living
« Reply #8 on: August 26, 2015, 08:11:52 PM »
Also, when renting what is a good threshold for rent to income %?

Traditionally, I believe it was no more than 30% of your take home pay? Then the media was talking about how so many places are now at the 50% mark since rents have been on a tear for the last few years.

ShoulderThingThatGoesUp

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Re: Home Purchase/City Living
« Reply #9 on: August 26, 2015, 08:29:39 PM »
House prices being high doesn't mean it you can afford a more expensive house on the same income. Interest rates being lower might, though.

fitfrugalfab

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Re: Home Purchase/City Living
« Reply #10 on: August 27, 2015, 08:40:55 AM »
My DH and I are about to close on our first purchase in the city. Our solution since we live in a crazy expensive city was to go small. So we're getting a studio:)

frugaliknowit

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Re: Home Purchase/City Living
« Reply #11 on: August 27, 2015, 09:09:24 AM »
Go small and/or buy in as convenient of an outlying area as possible.

honeybbq

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Re: Home Purchase/City Living
« Reply #12 on: August 27, 2015, 09:53:06 AM »
Honestly I believe that metric is outdated. Incomes have not tracked with real estate prices. So even a family making $250K in SoCA, can only buy a house worth $500K. Well that would mean living in a condo or a house in a bad part of town. The only places that metric might make more sense, is in LCOL areas. Even then, you run into the same problem since traditionally the incomes are lower in those areas.

I believe the rent vs buy calculator is a better way to think about buying RE.

Yep, I live downtown in large city and small houses start at 500-600k with a 1200 sq foot house with a nice yard might be 700-800k. Our mortgage was less than 2x our annual income, but we put down a substantial down payment. Luckily the city real estate is booming and our home price has theoretically gone up approx $200k since we bought it a few years ago. I hate commuting and I work downtown, so for me it was a no brainer. I have the "luxury" of spending my money on more house so that I can have more time (less commute), but not everyone can do that.

irishbear99

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Re: Home Purchase/City Living
« Reply #13 on: August 27, 2015, 10:03:44 AM »
We just moved and decided to rent for now. We're spending 50% of my take-home pay so we can live less than 10 minutes from my job. There's definitely stuff we're giving up to do so, but we're fully funding my TSP and our Roth IRAs, and we have no debt. 86-ing the commute was totally worth it.