The Money Mustache Community

Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: morninglightmountain on July 29, 2017, 06:22:38 PM

Title: Home expenses % of takehome
Post by: morninglightmountain on July 29, 2017, 06:22:38 PM
Hello all,

I live in a HCOL and plan to FIRE into a LCOL in 5-10 years (depends on if we have kids and a few other factors).  Anyways, both my partner and I are stable with our careers and plan to be in the area for the next few years so we are looking at homes.  Obviously the prices are very high but the home payments (PITI + any HOA) are about the same as rent.  Owning the place we intend to live in a few years makes it seem worth it to us.

My question on take-home pay, considering the common wisdom of keeping housing expenses lower than 30% of pay:
I'll be paying the down payment and most of the payments, but my partner will be contributing around $900/mo after she pays off her debt.  If I calculate home payment to takehome pay based on my payment net of her contribution, the ratio is 23% but if I don't include hers, it's at 38%.  What's the mustachian right answer here?  I"m concerned that if I have to ask, the right answer is that I should base it off of the 38%, which is certainly high.  However, the DC area is quite expensive.

Any thoughts?

Title: Re: Home expenses % of takehome
Post by: morninglightmountain on July 30, 2017, 06:29:25 PM
Thanks, Bender. I should have added that we would rent the townhome out if we move out without any real appreciation. Rents in the DC area are also high, and unless the bottom drops out I should end able to easily get enough to cover PITI.  Not exactly a cash flowing property, but should suffice as a contingency.

Unless this is clearly a facepunch scenario, we think that owning a home would bring more value than we'd get from some savings by renting (cap ex items, like you said).

In terms of other expenses, DC area isn't that much more expensive f food and basic items.  Our combined income is $200k before taxes. My take-home pay this year is roughly 90k, so if I keep my non-housing expenses to less than 1k, then my savings rate would be over 50% even if my partner doesn't pay housing expense. She has some credit card debt that I'd want her to pay off before paying "rent" but this should be only take 6-12 months. She has a lot of student debt but will be able to pay 900/mo towards the house (after the CC debt is paid)

I feel like the math isn't too bad, and is probably good enough since we don't really want to rent for the next 5 years.  Sounds like this is more of a "lean towards rent" recommendation instead of a facepunch, please please be honest if you think I'm off base.
Title: Re: Home expenses % of takehome
Post by: SwordGuy on July 30, 2017, 08:14:10 PM
Let me be completely blunt.

A property that you plan to rent "because it's rent will cover PITI" is a property YOU PLAN TO LOSE MONEY ON.

That's right.  LOSE MONEY.

Properties have all kinds of expenses that are not included in PITI.   You have to account for vacancy costs, repair costs, property management costs, advertising costs, legal and tax accounting costs, and, God forbid, HOA costs.  Oh, wait, you said "townhome".   So be sure to add in blood-sucking HOA costs and special assessments at inconvenient times.

As far as repair costs, if a water heater lasts for 10 years, then 1/10 of it is broken every year - unless it breaks early, in which case it costs more.  Every other item on, in or under that townhome is breaking a little bit each and every day - unless it breaks a lot today...

And nowhere in that have we discussed profit yet.

Do not buy a property to live in and hope to make money on it as a rental later.

Buy a property that WILL make money when you rent it and just happen to live in it for a few years first.

When it comes to real estate investments, you are choosing to make or lose money the day you buy it.
Title: Re: Home expenses % of takehome
Post by: morninglightmountain on July 30, 2017, 08:35:55 PM
Thanks, Swordguy. Unfortunately, nothing close to our workplaces would cash flow as a rental property.  I know this is probably evidence that renting is smarter than buying. However, it's not nearly as bad here as it is in Denver, SF, Seattle, etc.

I'm planning on buying an investment property further out at some point and have been learning a lot from biggerpockets.  My point about the rent covering PITI (and a tad more) is that it's only a contingency plan. The goal wouldn't be profits (unrealistic) but rather minimizing losses.

 Factoring in repairs, capex, property management, and vacancy, it would be cash flow negative, but only by a small amount.  In addition to the home equity, I'll have socked away a few hundred thousand in ETFs so this wouldn't be ruinous.

Title: Re: Home expenses % of takehome
Post by: waltworks on July 30, 2017, 09:46:09 PM
Yeah, 5 years there, plenty of income and savings - you're good.

Make sure the arrangement is VERY clear with your partner about what their "rent" will cover and both of your expectations, so that you don't create relationship stress because of the house. Other than that, do it.