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how much money should i spend on a house? I have lots
throwawayjackhunter
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Registered User regular
Hey, I was hoping for some perspective.
So here's where I am. I live in Los Angeles, make 60k a year and through some inheritance + my savings I have in excess of 400k. I was thinking I'd buy a house.
Currently I live in an apartment paying 700 a month for my room. I like it there, it's nice enough. Frankly, I don't even feel like I need to move, but I have all this money sitting around, and buying a house seems like a smart thing to do. Right?
The houses that I'd want to live in in LA are all well over 550k and probably closer to 800k, so if I was going to get a house, I'd need to rack up some debt. How expensive a house should someone in my position buy? Is this even a smart move? Should I just keep the money invested in the markets? It seems like if I buy a house my monthly expenses will be going up quite a bit. I could rent out extra rooms to friends to deal with that though. I could even buy a house, and just rent out the whole thing to make extra money, although I'm not sure I'd like the responsibility that comes with that on top of my day job.
I would be very grateful to hear the crowd's thoughts on this. Thanks!
So here's where I am. I live in Los Angeles, make 60k a year and through some inheritance + my savings I have in excess of 400k. I was thinking I'd buy a house.
Currently I live in an apartment paying 700 a month for my room. I like it there, it's nice enough. Frankly, I don't even feel like I need to move, but I have all this money sitting around, and buying a house seems like a smart thing to do. Right?
The houses that I'd want to live in in LA are all well over 550k and probably closer to 800k, so if I was going to get a house, I'd need to rack up some debt. How expensive a house should someone in my position buy? Is this even a smart move? Should I just keep the money invested in the markets? It seems like if I buy a house my monthly expenses will be going up quite a bit. I could rent out extra rooms to friends to deal with that though. I could even buy a house, and just rent out the whole thing to make extra money, although I'm not sure I'd like the responsibility that comes with that on top of my day job.
I would be very grateful to hear the crowd's thoughts on this. Thanks!
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Also "just because" is probably not a terribly good reason for buying a house. Just sayin'
do you like the idea of being responsible for all the bills and maintenance for your new place?
do you like the idea of setting your new place up with furniture and yard tools and other assorted things to make it a home?
do you see a situation in the not too distant future where you could make use of all the new space you would have?
Do you enjoy cleaning? more space means more stuff to clean.
Those are just some thoughts to consider before you buy a house "just because".
There are other options though, you could consider a larger apartment or a condo or a townhouse where you pay the mortgage or rent and let other people do the maintenance.
While relocating may not be a desirable option for you, you should at least keep it in mind as moving to an area with a lower cost of living can make your cash go much, much farther than living in an area with some of the highest costs in the US.
if you'd like an income property, that's one thing. but i make more than you do and my house is probably half the price of what yours would be, even after your sizeable up front payment, and it's a big chunk of my income each month. not to mention upkeep etc (my house is a bad example for those kinds of expenses). income properties are less reliant on the market swings, because basically, if rent is coming in, you don't really care how much the house is worth on the market. if you are happy where you are, i'd invest my money elsewhere.
Most people acquire some debt to purchase a house. Ideally, the amount you pay on a mortgage is equal to or less than the amount you pay for rent. To calculate that, load up a mortgage calculator, put in the term of the loan (usually 30 years, but you can experiment with 15 years too since you have a lot of money) and the total for the loan, and see what the result is. You can get today's interest rates from bankrate.com (currently about 4%).
If you get a mortgage for $150k, your mortgage payment would be around 800 or so, so a slight increase from your current rent. Of course, you'd have a house and arguably much more space, but you don't go into those details and they're somewhat unimportant for this thread. Typically, people who are single and young do not buy houses "just because" since it's likely they will move -- both near and far. If you love your area, are extremely stable in your job, and want to spend the next 10+ years there, it's probably not a bad idea.
But it's also not bad to do the math and realize you're better off just waiting until the math makes more sense.
It adds up really quickly.
Also, I just read an article yesterday predicting the California housing market bubble will burst sometime soon. It might not, but it's something you need to consider.
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Like a 900 sq ft, 2 bed, 1 bath, on a 3000 sq ft plot, just enough for a small backyard and 2 car off street parking. A quick look at zillow, and I see a ton of places that fit that description in LA, for about $300k.
As for real estate vs stocks, you have to live somewhere. Might as well buy your own home outright, if you can.
i think property is a great way to invest. my suggestion is a tiny apartment in a cosmopolitan, central location - old (vintage!) buildings are good meter of this. that way you'll be able to live comfortably with a small (or no) mortgage, and either sell it to upsize down the line or keep it in the family by renting it out for a bit, if you need a bigger place. home ownership isn't scary or dangerous - it's exciting and can give you a real sense of place and achievement
that said, if you're not excited, hold off. give yourself the luxury of time - find a place that makes perfect sense, or save your cash until you do.
2) You CAN become a landlord without having it become "another job". There is something called "property managers" that do this for a living. You can hire one. Most people do.
3) Don't become a landlord in LA, because it would cost you your entire savings just to get started
4) You would go into a debt for a half million dollar house+, be prepared to have the money to repair it
5) Housing prices are just now starting to go up, but I am under the impression that in Cali, prices are still pretty inflated, therefore a house wouldn't necessarily be a great investment
60k/yr in LA aint that much. It's nice but to take out a 200k mortgage on a 600k house on that salary screams "house poor" to me
My advice
1) Lower your tastes or move farther from the city
2) Experiment with landlording in a suburb where property is cheaper and easier to maintain
3) Don't spend all your fucking money. Start a 401k or something. You have a lot of money, but you don't have a lot of money for a Californian investment realtor.
we also talk about other random shit and clown upon each other
1. Don't buy in suburbia. It's hell traveling an hour by car all the time. Long commutes screw over everything, but mainly screws over your social life.
2. Make sure you want to stay in LA before you buy a place in LA.
3. Pay for it outright, with cash left over in the bank. Preferably lots of cash left over in the bank. Having extremely low fixed expenses is awesome. It means you can do stuff most people can only dream of.
4. A small place in the middle of a fun urban area rocks. Especially as a 20 something. Even as a 30 something.
Where I live (Idaho), you could take that 400k, and buy two move in ready middle-class (maybe middle-class+) houses... With ~100k left over. Outright. No mortgage or anything. You could then turn one into an income property and (possibly) retire.
Sure, that sounds like a fantasy, but as others have said... That kind of money will go far, far, further in many other parts of the country. Investing in the CA area right now seems like a fools errand. With a windfall like that, if you want to stay in CA, bank it and/or get a money guy.
To answer some questions.
1. Yes my career is stable.
2. I don't plan to leave LA anytime soon. For my field, it has a wide variety of work options + I love california.
3. I'm 28 years old, so yes fairly young.
I'm obviously still mulling things over in my mind, and have been for a little while now, but waiting on buying a house until I make more money definitely seems smart... At least the kind of overpriced houses I want. And it's not that I'm looking for a mansion. I just know what neighborhoods I like in LA, and finding ones without a homeless population can be difficult.
And yea, "just because" isn't a great reason to buy a house, but I dunno, I have a lot of options and maybe home ownership is a good choice. I'd certainly enjoy the extra space.
Edit: It's especially nice to hear lots of opinions because this is the sort of thing I can't bring up with friends because I hate letting people know that I have "money"
If you take that 400k to pretty much anywhere off the coasts in america, you can buy a serious McMansion (3k+ sqft, 4+ b/ba) with straight cash homie, and have change left over
we also talk about other random shit and clown upon each other
Perhaps you might want to re-evaluate your needs as well. A bigger house isn't always better, do you plan on getting Married? Children? do you really need an Office? Library? Workshop?
It could be, that you're looking at real estate people are telling you that you need, as opposed to what you really need. When my wife and I first started looking at houses, we were looking at these multi-room manors. And really stressing about how we were going to pay for it. After some serious soul searching, we realized that all these amenities we were so "dead set" on getting were just things movies and television had told us we needed. We ended up getting a steal on a small foreclosure, paying only ~40k in cash on a ~125k home (previous value before the crash).
Bigger sounds better, but perhaps all you need is a cozy studio in a great location to be happy.
Also remember that you can buy small now, and if you need a larger place later, rent it out to mitigate the costs of a future mortgage.
If you're sufficiently diciplined, max out your 401K for a year or two and keep the after tax equivalent in a "high interest" internet savings account with monthly drawdowns transferred to your checking.
Put the rest in a regular investment account.
if you're content where you are at stay there and cultivate good saving behavior and educate yourself about investing (equities/funds) and real estate (general cost considerations, and the market in which you are interested). No one can predict the future, but my gut tells me it's not the best time to sink your entire nut into ether the stock market (which doesn't mean you shouldn't maybe put a little into a broad market fund, cause if you have no exposure you may get stuck trying to time the market) or in CA real estate.
Here's my recommendation:
1. Put that 400k into relatively safe investments
2. Make sure you're maxing your 401k (or similar) match from your company and play risky with that
3. When you get to the "I really want to live HERE for 20 years" feeling, start looking
Background: I bought a house when I was 24 and didn't make the best choices on it, which cost me a lot of money and complicated some pieces of my life. The money isn't going to go away overnight, and as long as you live pretending you don't have it, it will grow at a crazy rate.
Sit down, take a breather and see if you have an answer to "Why should I buy a house?" other than "I have a bunch of cash"
Here's another option I'm considering:
I buy a condo for something between 300-350k. I don't take out any loans to pay for it and remain debt free. I get one roommate that pays me rent. I figure with saved expenses from no longer paying rent and also recieving rent that'll put me in a safe spot even if the housing market does drop. Sound smart?
If I did that my quality of life would remain about the same, but I'd be saving a lot more money. Really all I have to worry about is a housing market crash that might never come.
(As a note, 80% of my money IS invested right now. And I am investing in a ROTH IRA and a 401k fairly heavily.)
With the amount of capital you have, there are a LOT of options available to you and you might want to consider speaking to an investment specialist concerning what you can do to ensure that your money is making you more money/retaining upkeep, rather than sinking it all in an impulse home/condo purchase.
I know If I had 400 grand liquid I would maximize my ability to have that sort of cash grow long term, or at the very least last quite a long time to maintain a higher quality of life. Median US income is about 40k, you have essentially ten years worth of the median income liquid. That's a lot of opportunity to waste on an overpriced condo.
That's what I did in Boston. I'm in a blue collar neighborhood, about half a mile from the white collar neighborhoods. While the average 2 bed house price drops $50-75k during that half mile (because it crosses an invisible school boundary), the quality of life barely changes.
I had a bigger suburban condo (townhouse really), traded for a smaller urban house (1050 sq ft), and I'll say, it's very nice to have that backyard. Friends basically invite themselves over for cookouts (bringing food!) from late spring through mid fall.
Maybe, maybe not. The market is pretty inflated right now in LA. There aren't really bargains to be had, from what I hear (though I don't live there so take with some salt)
i think buying an apartment in an area that works for your life is a fine idea. if you get a roommate - in tandem with your own rent savings - chances are you'll have negated even a worse-case scenario loss within a couple of years.
1) Max out matched 401k and your IRA contributions (if you haven't already)
2) Put like 50-75k into accounts to pay for your (one day) kid's college. I.e. Child A, university account. You can talk with your bank/an accountant to figure out the best way to do this.
3) Spend some on the trip of a lifetime. Not saying blow 10k, but if you've never been to Asia, or Australia, etc etc. There are a lot of amazing things to do and see in the world, many of which won't exist in 10 or 15 years. It will become much more difficult to do these things once you decide to settle down, especially if you decide to have kids.
I would not buy a house unless it's someplace you want to live for a long period of time. This might be a different decision point if you're looking for an income property.
Unlike many people, I would not recommend buying a large purchase totally with cash. If you have good credit (and since you have $$$ in the bank) you can probably get a very reasonable mortgage rate. I would much rather pay some mortgage payment (which can be deducted when you do your taxes) than get rid of my ability to be liquid and agile. Agile in both the ability to make a large purchase when needed, and agile as in not tied to living in a particular area.
Just because the money is there doesn't mean you need to rush out to spend it. If you manage this money correctly now it can save you SO MUCH in the future. When I went to NYU the cost was 40k a year (in 2000-2004) and I got scholarship to pay for roughly half of it. Right now I understand that tuition is something on the order of 62k a year.
Future you will thank past you for not burdening him with college payments.
1. Do you have a career plan? I am not saying job security since that doesn't exist anymore and how flexible are you able to jump form one job to another. I work in advertisement, so its easy to be let go but fast to get another job.
2. Researching neighborhoods and what you want in a house will take minimum 2 years to understand
3. if your under 25, wait it out as your still formulating your plans for your future. Basically younger you are the more your impulsive to do things than say older when you have a better idea what you want in life
4. It takes time to find reliable real estate agent and mortgage broker, hell I went through 4 cause they just wanted to rip me off. Also they will know you have money and take advantage of you. Educate yourself how real estate and mortgage brokers work so you can show them you know your stuff, always question them at everything
5. If you do get a house, don't go crazy furnishing it your first year, learn to budget and live frugal as your not use to the responsibility. Reach out to your utilities providers for discounts or ways to cut your bills.
6. Take care of your retirement and investments before buying a house. Its never wise to put so much money in a house when your not sure how long your staying. If you decide to buy duplex or rental property then those types of purchases while expensive pay themselves off since they are rented, just have to deal with tenants. There are services for that and no matter what that is income coming back to you.
I have way more info since I bought my own house and I was in your shoes also so hit me up if you want any more details
Thank you
Rene
― Dr. Seuss, Oh, the Places You'll Go!
Evanston IL is a nicer, older community near the lake and downtown Chicago. $250k will get you about 1,200 sq ft living on a 4,000 sq ft lot. Move out to close to the WI border, and $250k will get you 3,000 sq ft and more on a 8,000sf lot, and a much newer house.
If you like where you live, there's nothing wrong with renting and holding off moving until you're sure. If there's a neighborhood you like and have done research into growth potential, buying at 28 isn't that strange either.
In any event, what neighborhood were you looking to buy in LA? My opinions on where bubbles are vary zip code by zip code. Ditto in terms of what condos make sense. But generally i think LA is only going to get more expensive. If you could get a 2br for 600k(all-in), get a 300-350k mortgage, save the balance, and rent out the second bedroom, it could make sense but you'd have no margin of error.
It could also make sense to use the $ to buy income properties in cheaper places, but that require a level of investment sophistication we can't offer via message board and you'd want to rope in a professional if you went that route.
Yes, his career is in LA. Leaving his job to get a bargain on a house would make zero sense.
I don't think anyone here is suggesting moving to the middle of nowhere for buying a bargain home insomuch as being able to retire at age 28 with the amount he has almost everywhere but those top 3 American cities. A 60k a year job in LA is not a particularly luxurious income with a family, and certainly not enough to cover the taxes, payments, and upkeep for some of the places he is looking at (his salary would likely prequalify him for payments for a $250k home (at most) without his windfall in LA, even after dropping all $400k on an $800k house he would be paying almost his entirely salary to the mortgage).
If your heart is set on LA, I wouldn't use more than a fraction of the money on a house and use the rest to make you money via investments. Using 100k to pay down half of what you would normally qualify for will ensure you can live quite well with a tiny mortgage payment relative to your job while having the rest of the money to use throughout your lifetime.
Also, I realize that when I gave you what I'd spend the most on a house, that number doesn't really apply in all places as I'm sure where you work it is quite expensive. What I'm saying is to not spend all of it on a house and make sure you just pay for the house in full with cash.
And yes, my family and I are Dave Ramsey weirdos, haha.
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If you lose your job, are you confident you could quickly and easily find another that pays in the same region? Seriously think on that exact question for awhile and evaluate your monthly expenses to determine what mortgage you can afford.
Ha! Probably not even that (in the cities, anyhow).
Yes, I know things change but at 28 he should have a pretty good idea if he's looking to settle down and get married / have kids, or if that's something that he's not interested in (or doesn't fit with his lifestyle choices). I'd say overall, that would be the #1 determining factor of what choices are the most sensible.
So, assuming that OP is looking to get married / settle down / have kids, and maybe even has a special SO or tentative timeline in his head...this is what I'd do / recommend:
1. Max out your 401k / IRA deductions and savings. Every year without fail.
2. Start shopping schools and commutes, find neighborhoods you would be interested in living in. Going from 'single' to 'married with kids approaching kindergarten' is a surprisingly fast transition once the wheels get rolling.
3. Keep an eye on the Real Estate market in general, maybe even have a realtor keeping an eye on those neighborhoods / areas for really good deals for you.
4. Possibly move into a somewhat bigger but not too expensive apartment that scratches your itch for space.
5. Live your life (off your income - leave the bulk of your money in investments and try to keep saving) until you either find a steal of a house, the bottom falls out of the market, or you are married / have kids on the way and your apartment isn't cutting it. You'll appreciate this later when 'life happens'.
Assuming OP isn't looking to get married / settle down / have kids.
1. Max out your 401k / IRA deductions and savings. Every year without fail.
2. Evaluate where you want to be in 5, 10, 20 years. Do you want to retire early? Do you want to have a family / kids (if so, see above)? Travel / work overseas? Go into politics? Go back to school? Don't think you are deciding exactly what you want to do, but know what it is you want and don't want.
3. Continue renting (again, bigger apartment if you have an itch for space) but keep an eye on the Real Estate market in general, and if you find a steal / the bottom falls out of the market, take a closer look.
4. Live off your income while saving the bulk of your money in standard investments.
If you do find a good deal on a home - a nice one that you want to live in, with decent schools and a decent commut - and according to your income I would recommend ~$400k as a cap, purchase it with a smaller (20-30%) down payment. You don't need a mansion, something like 1200-1500 square feet will be very nice. Definitely keep at least half of your $400k savings, don't put all your liquidity into your home.
Either way, make sure you know what you want to do before you go and buy a house. A house is a big freaking purchase, and it shouldn't be something you do just because you don't know what else to do with your money or think it's the natural 'next step'. Having a home is a lot of work, it's a lot of money; when you look at the money, don't forget to consider property taxes, homeowners insurance, home-owners fees, lawn / maid service, repair fees, seasonal maintenance, even utilities that your apartment might pay for now in your costs. If you want to spend less money, you have to spend more time - mowing, repairing stuff, painting, etc...if you are in LA, consider also the amount of time it may add to your commute. If you're commuting an hour each way every day, you not only lose that time from your day, but you also have to pay for your car, a lot of extra wear and tear and gas, etc.
Also, since you have the windfall, set aside at least a year's worth of money in a stable emergency fund. It's a good recommendation most people don't get to do, so if you have the option do it. If it ever gets to the point you are tapping into it, look very hard at your choices and where you are, and what you can do to stop tapping into it - don't wait until it starts running out.
If that is the case, and the OP is only bringing in $60k a year, then he probably can't support home ownership in that region with his current income unless he payed off the entire property cash in one blow (which would likely eat up his entire savings).