Quick scenario for you I'd love to hear opinions on.
Currently 23 years old living in a mid-tier and fast growing city in the Southeast US. I'm wrapping up my 2nd year as a banking Analyst for a regional bank and recently found out I'll be earning an early promotion to Associate in June. All-in comp will be going from ~$115k (85k base) to ~$175k (120k base).
Housing prices have shot up roughly 40% in the past five years and I'm getting sick of paying the $1,650 rent for my 750 sq foot apartment in the city. I found a new construction 2,272 sq. ft end-unit 3/3.5 townhome for ~$455k in a great part of town around 10 minutes from the city/office.
Obviously a steep price but I would like to take the risk given I plan to have a roommate for the first year and I plan on staying in the area for the forseeable future (close to family, great lifestyle, etc.) I'm planning on putting 10% down for the purchase.
Here is my current financial profile and you can let me know if I'm being crazy:
- Cash: $50,000
- 401k: $17,000
- Wealthfront: $11,000
I also have a $450/mo (1/4 paid off) car payment (family is in the car business, got suckered into it). I'm a big believer in betting on myself but don't want to suffocate in too much debt. Thanks in advance for the advice!
Personally, I would feel uncomfortable with that level of debt to my name so early in my career. On an after-tax basis, your base income is likely around $80-90k once you factor in 401(k) contributions and taxes. Plus, you're already carrying a sizable car note.
If you put 10% down and take out a loan for $410,000 at 4.75% over 30-years, your principal and interest alone come to $2,139/mo. Layer in insurance, taxes, HOA fees, and utilities, and you're up close to $2,500-$3,000/mo. Combine that with the $450 car note and you're easily above $3,000/mo.
Using $3,000/mo and $90,000 per year, your debt-to-income ratio is 40%. The added compensation from your bonus and having a roommate (or two/three with a place that size) changes all of this to be more favorable, of course. However, personally, I don't take bonuses into account when it comes to making financial decisions because in my case, they aren't guaranteed.
You might like the job now, but in a few years time, you might not be able to afford switching careers because of your monthly notes. Clearly, just my two cents.
curiouschad, it sounds like you are in a great financial position at 23. I recently bought new construction, and love it. I also received a good deal on the lot/house for committing early and saved nearly $6,000 in closing costs for working with the builders preferred lender. There can be a lot of value in buying new.
I would like to understand more detail related to month over month cash flow before weighing in definitively. Would you be willing to share?
- What is your monthly take home after taxes, 401k contributions, etc... (sounds like some of total income is tied to irregular bonus payouts)
- What do you expect total monthly housing expenses to be with Principal, Interest, PMI, HOA, Taxes, etc...
- How much do you expect from a roommate (or two!)?
- How much are your non-housing related expenses outside of $450 car payment?
It could be tough to have a big house and larger monthly expenses after depleting the majority of your cash savings. I would work hard to assess your comfort level with that much leverage and commitment without much cash on hand. You would also likely spend more money on furniture considering you would be moving from 750 SqFt to 2,272.
My first impression is to think that this only becomes a compelling option if your bonus is right around the corner to build up some cash and you were willing to have 2 roommates to keep your monthly expenses comparable to what they are today. If that bonus and raise isn't guaranteed, I would be hesitant to move forward.
Otherwise, is it a new construction neighborhood? Are they close to selling out, or is it possible to buy a comparable home later in the year when your income and cash on hand is in a different position?
Looking forward to hearing what you decide – keep us posted!
Hey curiouschad I imagine that on this forum, you'll see relatively conservative advice regarding buying a home. Most people won't recommend putting less than 20% down payment.
Only you can decide how much risk you want to take financially. Personally I think you may be ok if you decide to put all your bonuses into paying the mortgage and have roommates for some time.
Do you want to buy only because you want to lower your rent? If so, why not rent a place with roommates now? At 23, most people don't want to be tied down to one place.
One other thing to pay attention to is the overall trend in the real estate market. We've had a very solid 10 year expansion in home prices, coming off of a truly terrible crisis in 2008/9. Nobody knows for sure when the tippy top will be (or if we've already peaked), but the trend is not your friend at the moment, with home sales slowing and the potential for interest rates and real estate taxes to rise, thus further depressing home values. Some southern cities got crushed during the last downshift. Would definitely talk to a few smart real estate investors in your area (NOT agents!) to understand the dynamics where you live.
All that to say, unless you're really sure that you'll be in that home for 7 to 10 years, I think purchasing new home construction is a real gamble right now. If you were buying something that you could add a lot of value to (i.e. a fixer-upper) AND planned on staying, I might be more inclined to be excited about your situation.
Based on the math from the poster above (which I think is quite rationale), I'd take the extra $700-1000/month that you 'save' by renting and continue to build your home equity in an interest bearing account earning 2-3% interest. This will likely appreciate just as fast as home values (based on averages) and you will be in so much better shape during the next down cycle to snap up a good deal. I just don't see new homes being a good deal at the moment.
For what its worth, I put my money where my mouth is -- I live in a high-cost city and had a lovely home that I sold over the summer due to skyrocketing taxes, lower tax deduct-ability and a belief that home values will fall within 1-2 years. I HATE paying rent... I really do, but I've got my home equity sitting in 12 month CD that will cover half of the rent, just on interest alone. I'll buy again when I see a value. ... and of course I have no crystal ball. I'm equally terrified that values will continue to rise and I'll miss out somehow, but history has a way of repeating itself.... My two bits!
I LOVE real estate as a way to build wealth. My primary residence has appreciated from $750K to $1,700K in 15 years, so yes, it's been good to me. If things go as planned by the end of today, I will be in escrow to buy another apartment building using my equity from my home to help make that deal.
However, I've also experienced and seen friends get absolutely crushed by poor real estate investments (e.g., bad timing, bad location, not knowing the market, etc.). From experience, coastal city real estate performs very different from the Midwest. Suburbs perform very differently from city centers/employment centers.
The most important decision criteria are:
A. The investment is a good deal (market conditions) - this comes in cycles and is uncontrollable but not unpredictable
B. You can weather the ups and downs (your personal situation) - this comes with age (usually) and is both financial and emotional
A is far more important than B. If something is a good deal (part A), I'll beg, borrow and steal to make it happen but that is because I know I have part B covered financially and more importantly emotionally. I can say that now in my 40s but not in my 20s. Study historical prices, job data/forecasts, etc., in your specific neighborhood to evaluate A. What happened to Long Island real estate when Amazon pulled out?
It's always hard to give advice like this without more context so all I can do is offer what I might do and how I'd think of it in your shoes.
That's a $2,120 per month payment on $410,000 @ 4.7% before taxes, insurance, HOA, and PMI.
Atlanta (example SE city) has a 1.22% property tax rate for $5500 in property taxes. 0.5% PMI is another $2,000. Average HOA is $331 / year -- probably low for most condos. Homeowner's insurance would likely be $1100-1500 / year.
The extra total is $8931 or $744 / mo.
You're in for $2,800 in home costs and $450 in a car. If you max the 401k and have health insurance your take home is probably in the $7,000-$9,000 monthly range plus bonuses. You're pushing 40% tapped before you start the month. That's too much for my taste, especially at a young age where your situation and outlook is all but certain to change.
A roommate helps, but we haven't gotten into the drain on time and money that maintaining a property can take. Though, I'll admit that my first home was a new build and we had relatively little maintenance cost for the first few years.
My last considerations for the condo market would be about long term implications. If you were OK with that debt service ratio, you still need to consider how well this type of condo will fair on the market when it's not new. What is the local market like? Are they going to still be building new condos nearby in 5-10 years? How long will you stay? Can you rent it out? How have similar condos done in that area in the last couple decades? Is there a reason that the city's prospects have changed?
If I woke up in your shoes with such a great income and few obligations, I'd pay off the car (or get a bike or a cheaper car) and get a roommate for my current rent or similar. You could save a tidy sum in the next few years and buy a house on your own terms with a nice nest egg building.
I would dumb down the advice, and say wait until you get the promotion (anything can happen before then), and be comfortable in that job for a year or so - save what you can while getting the bigger paycheck. After you build up some savings and are confident in your job and income, think about a house or any other major purchase.
Lots of talk about the economy going south. Probably be safest to get comfortable in the new position and keep expenses low.
Thanks everyone, very helpful. After thinking it over I agree with the sentiment that it's best to probably hold off for another year before purchasing something in that price range. Maybe if I can find something < $415 I'll pull the trigger. I will note however that the expected delivery on this particular property isn't until October so I would have time to store some more cash and possibly make it work (bonus #'s come out Friday, fingers crossed).
Howdy Mate - Are you sure at 23 years old you want to cement yourself to a 2,200sqft home? A lot changes from 23 - 30.
If you see yourself living in the home or owning it for at least 5 years, then you'll probably be financially safe b/c I assume your income will continue to grow up.
Just don't let FOMO get in the way, and run some assumptions of what if the house goes down 20% in value etc.
I would focus most on career opportunity and moving anywhere there is the best opportunity. So if you buy, make sure you are OK renting it out too.
Firstly, congrats on killing it in your career! That is an impressive income for your age.
I'm late to this conversation and I see your follow up and am glad. I'd be leery of taking on that much debt for such a big property at such a young age. So many things can change quickly which could cause you to want to sell. If it's rentable that's another story. However, I do get that tired feeling of throwing away money renting but it's way worse to be stuck in a property that you want out of. Anyway, best of luck and continued success. I'm impressed at those numbers.
I would add that I think real estate is too hot right now. I like buying real estate when there is a clear down turn. Especially are your age when you may not even stay there forever.
In other words, if you were living there for 20 years, you could take a down turn and wait for the upturn. If you buy right now, in a rather up market, and there is a substantial downturn... what are you going to do? All of a sudden the place is worth $350k and you are buried.
Car payment, big mortgage payment, etc. Not a recipe for future success. Considering your income and age, you are in an absurd position to stash away a ton of money and realistically be thinking about whether you want to work or not in your 30's. Or you can screw that up with more debt, car payments, and a big mortgage for a house you may not even stay in.
Bad idea. At your age, I'm leaning towards Sam's advice. And I'd suggest keeping your bills and everything stupid low. Get an apartment closer to work and ride a bicycle, keep an old car for when you need it. And just laugh at all the "ballers" blowing their salaries on cars and nonsense.
Hey everyone, had some down time and remembered I had made this post a couple of years ago. I wanted to provide a follow-up because it was fascinating reading some of the comments back in February 2019.
I ended up buying a home at an even larger purchase price ~$475k closer to the city center. I'm now 26 years old and lateraled to a larger bank in an Associate level role in the same city in the Southeast. I took the plunge and put down 10% on that home which wiped out most of my cash savings at the time, as you can imagine I was pretty nervous taking that large of a risk but felt confident in my career trajectory.
I made this decision because I had an old college buddy who agreed to room with me and pay $1,200/month, however he eventually backed out. After further consideration I got too used to living alone and didn't want the headache of searching for a roommate. Luckily my income has continued to rise and as we all know the housing market has boomed (25%+ since I closed).
I guess my key takeaway is that it may be worth taking a risk to purchase a more expensive home early in your career if you're confident with your career and income growth. I definitely consider myself lucky and don't recommend blindly levering up without strong conviction that you can comfortably meet your monthly payments.
Posting my updated financial stats below to display how things have changed since my home purchase. I still wish I had the risk tolerance to buy crypto back then instead of real estate, ha. Looks like I'll be on the banking grind for the foreseeable future.
Income: $175k base, bumping to $200k in January; 2021 bonus expected to be an additional ~$150k
401k (50/50 roth/traditional): $130k
Real Estate: $150k (net of ~$410k mortgage)
Wealthfront (after-tax): $125k
No other debt outside of mortgage