How much house can you afford?

For people with volatile incomes and a lot of savings, is there a more sophisticated way to think about what is or is not an acceptable amount to spend on homes?

Theory is generally that there are very few goods worth buying now for high net worth besides additional homes.

Asking because obviously a lot of wealth has been created in the past year and thinking where that goes.

Comments (11)

 
Most Helpful
Jan 9, 2021 - 1:49pm

PM in HF - Other

For people with volatile incomes and a lot of savings

I have to admit, this is something I think about a lot personally, and can't say I have come to any perfect conclusions. So here is my 2 cents (full disclosure, I'm not in any way a personal financial type advisor, nor would even pretend to play on TV, but I nerd out on my on stuff frequently)......

A few assumptions...

1. The person at question is often the "high income" category by profession, but large swath of income can be from bonuses/commissions/profit splits/etc.

2. The person has really good credit, doesn't have credit card debt (like pays all to zero each month), and probably has eliminated any student debt or other debts (if they have car debt or other BS payments, not big part of income)

3. The person is maximizing savings plans like 401K, supplemental savings (deferred comp), stock purchase, carry participation, and what ever else is offered and STILL has some legit liquidity outside of restricted accounts

4. The person is stable and progressing in career (even if income volatile), has a stabilized household (meaning married if that's the plan, with some idea on children, etc.), and is reasonably confident they won't need or want to move markets in at least 3-5 years (if answer is no to any of these, DONT buy a house)

So with those baselines, you can probably get qualified for some ridiculous high balance mortgages and thus have a lot of leveraged home buying power. Thus, how much should one buy???

My own personal guidelines for max safety and optionality (i.e. conservative basis of decision making) says this...

1. Base your pricing decision based on the ability to put 20% down easily (meaning still have 3-6 months excess cash liquidity for expenses post purchase incld cost of moving, renovations, furniture, etc.), and having total housing expenses (mortgage, tax, insurance, HOA) not exceed 30% of minimum gross income (meaning the "base salary" plus any legit minimum likely bonus or other comp).

2. Adjust the above for other auxiliary costs that may shift based on the home purchase (need or lack of need to pay for private school, commuting cost, and excessive maintenance or utilities costs)

3. Other debts or obligations (i.e. if you still have student loans or big car payments or whatever)

4. Sensitivity to capital expenditures (i.e. got enough cash to cover a new roof and/or HVAC units?)

Bottom line, if you want to stay conservative, you will buy less than you can afford (by classic measurement). I really don't like the idea of "my home as investment", that is just added bonus, but since you have to sell (and move) to harvest those profits, it's not really that great of an investment (in fairness, probably one of the best returns I ever got was on a home purchased as primary residence sold about 2 years later to move for a job). If you can rent the home for a rate greater than mortgage/tax/insurance than it is pretty safe, if you can't it can be an albatross if you need to sell. 

Do a lot of people go far more "aggressive" in buying houses, you bet, and frankly I can't blame them. Still, I personally sleep well at night not having gone crazy this department. The bigger and more expensive the home the more EVERYTHING costs.... utilities, maintenance, furnishings, etc. (I've literally been told by some service people they raise the rates the minute a house is in one of the most "prestige" towns in my area). It's easy to overlook the true cost of ownership, and that will fuck with your ability to save and invest, and/or make you sweat the volatile part of your income a whole lot more! 

 
Funniest
  • Associate 2 in IB - Ind
Jan 9, 2021 - 4:07pm

redever

PM in HF - Other

For people with volatile incomes and a lot of savings

I have to admit, this is something I think about a lot personally, and can't say I have come to any perfect conclusions. So here is my 2 cents (full disclosure, I'm not in any way a personal financial type advisor, nor would even pretend to play on TV, but I nerd out on my on stuff frequently)......

A few assumptions...

1. The person at question is often the "high income" category by profession, but large swath of income can be from bonuses/commissions/profit splits/etc.

2. The person has really good credit, doesn't have credit card debt (like pays all to zero each month), and probably has eliminated any student debt or other debts (if they have car debt or other BS payments, not big part of income)

3. The person is maximizing savings plans like 401K, supplemental savings (deferred comp), stock purchase, carry participation, and what ever else is offered and STILL has some legit liquidity outside of restricted accounts

4. The person is stable and progressing in career (even if income volatile), has a stabilized household (meaning married if that's the plan, with some idea on children, etc.), and is reasonably confident they won't need or want to move markets in at least 3-5 years (if answer is no to any of these, DONT buy a house)

So with those baselines, you can probably get qualified for some ridiculous high balance mortgages and thus have a lot of leveraged home buying power. Thus, how much should one buy???

My own personal guidelines for max safety and optionality (i.e. conservative basis of decision making) says this...

1. Base your pricing decision based on the ability to put 20% down easily (meaning still have 3-6 months excess cash liquidity for expenses post purchase incld cost of moving, renovations, furniture, etc.), and having total housing expenses (mortgage, tax, insurance, HOA) not exceed 30% of minimum gross income (meaning the "base salary" plus any legit minimum likely bonus or other comp).

2. Adjust the above for other auxiliary costs that may shift based on the home purchase (need or lack of need to pay for private school, commuting cost, and excessive maintenance or utilities costs)

3. Other debts or obligations (i.e. if you still have student loans or big car payments or whatever)

4. Sensitivity to capital expenditures (i.e. got enough cash to cover a new roof and/or HVAC units?)

Bottom line, if you want to stay conservative, you will buy less than you can afford (by classic measurement). I really don't like the idea of "my home as investment", that is just added bonus, but since you have to sell (and move) to harvest those profits, it's not really that great of an investment (in fairness, probably one of the best returns I ever got was on a home purchased as primary residence sold about 2 years later to move for a job). If you can rent the home for a rate greater than mortgage/tax/insurance than it is pretty safe, if you can't it can be an albatross if you need to sell. 

Do a lot of people go far more "aggressive" in buying houses, you bet, and frankly I can't blame them. Still, I personally sleep well at night not having gone crazy this department. The bigger and more expensive the home the more EVERYTHING costs.... utilities, maintenance, furnishings, etc. (I've literally been told by some service people they raise the rates the minute a house is in one of the most "prestige" towns in my area). It's easy to overlook the true cost of ownership, and that will fuck with your ability to save and invest, and/or make you sweat the volatile part of your income a whole lot more! 

You literally told your entire life story but excluded the two only important details that were asked for...like some kind of douche.

 
  • Investment Manager in HF - Other
Jan 9, 2021 - 2:07pm

I have highly volatile income. What I did:

1) had significant savings when I bought the home

2) made sure I could handle mortgage payments on my relatively fixed pay (or pessimistic outcomes of bonus)

3) kept enough liquid to cover 9-12m of expenses 

4) bought conservatively - depends how much house you "need" but I was perfectly fine buying less than I could afford on a "full" income (really this is just my point #2)

Anyway, it will also depend on risk appetite, I tend to keep debt obligations low due to income volatility. 

 
Jan 12, 2021 - 10:39am

4) bought conservatively - depends how much house you "need" but I was perfectly fine buying less than I could afford on a "full" income (really this is just my point #2)

Yeah, it's worth mentioning that there is a huge diminishing return on expensive homes, even outside of the additional costs of carrying and maintaining the property.

I mean, lets be honest, few people on here are at a point in their lives where they need a 6 bedroom home (or ever will, since I doubt many people here will have 5+ kids).  And if you're in a good school district, have a bit of a yard, maybe a pool... what else do you need?  You can go into some of the nicest neighborhoods in the country and find a 4 bedroom house with a pool for well under $2mm.  Once you have that... why stretch for another half a million dollars of home?  Is an acre of land or a water view really worth it?

Not saying anyone shouldn't go all out to buy their dream home, but this goes to another thread where some person was trying to back into the most expensive vacation home they can afford, and while it's a little different with a primary residence, it's the same concept.  At some point you are throwing money away

 
Jan 9, 2021 - 6:14pm

Its all personal opinion on what and how much you can afford, add in the big difference your housing will make up of your total spending between high COL and low COL areas and there's no way you're going to get any definitive answer.

 

On the mortgage side of the equation, when I bought my place in NYC the bank used the lowest earning year in the last 3 years to underwrite from. Some use an average of a certain number of years. In NYC the particular coop will have much higher standards, financially, than the bank will though.

 
  • Analyst 1 in IB - Ind
Jan 10, 2021 - 5:55pm

Depends on the market, the property, and how much you spend/save.

 

Currently make 75k base but am not American so I'm not a "consoomer". I am taxed at the 30% and bonus is taxed higher.

 

6 months in and have saved a significant portion of my after tax income.

 

Monthly Expenses:

$1,200 apartment

$300 groceries

$15 subscriptions

$200 per month Roth IRA (should probably increase this tho)

 

Purchased a 3/3 in Georgia in a college town a couple of months ago with my savings. Value was 150k with monthly costs including mortgage, insurance, taxes, etc ~800 dollars.

 

Will do some remodelling of kitchen and then rent out to college kids for 750 per room.

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