Price Limit Question
Having a debate with my brother about his purchase ceiling. He earns roughly $200,000, but wont likely exceed that in his profession. His wife is stay at home and her profession (arts)will never be a factor in earning, so their income is essentially capped at $200K or so. They are in late 30s and have…
Having a debate with my brother about his purchase ceiling. He earns roughly $200,000, but wont likely exceed that in his profession. His wife is stay at home and her profession (arts)will never be a factor in earning, so their income is essentially capped at $200K or so. They are in late 30s and have one kid not yet in school. They have savings/liquid investments of over $500K (plus a 401K to which I am not privy to – i just know it got hit hard). They have no debt. They obviously do not want to spend most of their savings on a down payment, considering they have a kid (and want a second), prefer private school in the future and are cautious considering the economy.
So, Q – what do you all think is the upper limit of what they can subjectively afford? What would you do in their shoes?
3 X Income = $600K for a single fam/apartment. That amount plus 3 X Rental Income if multi-fam. Tradition don’t lie.
If I were them, I’d do what I’m doing. Wait for NY Case-Shiller YOY to stop falling. Optimize purchase. Candy from a baby. In the mean time, stack up reserves of 6 mos to a year.
***Bid half off peak comps***
Yes, if their horizon is only 5 years, I’d rent and put the child in a private school when he/she is of age. Seriously.
But, if they’re determined to buy and don’t plan on having another child, they will find great value right now in newer condos in west Harlem. They should be able to find spacious 2 brs with tax abatements for under 700k.
Based on their income, (just about what ours is) their ceiling should be about $4,200 a month all in (mort. plus maint/ccs). With the interest deductions etc, they should be around 3,500k/month after tax time.
I think Arches is right on. And $800K is enough for some good size 2 BRs in Manhattan and Brooklyn.
However, when you say that it won’t be for more than five years “if they stay in the city” do you mean Manhattan only or do you mean NYC as a whole? If it’s the latter, I’d suggest they just keep renting a 2BR for under $3000 a month and sock more away in savings for when he moves away.
Isn’t the conventional logic that housing costs shouldn’t exceed 28% of gross income? By that measure, he could spend $4667/mo on housing. Assume a 2 br maint of around $800/mo, leaves $3866/mo for mortgage payments. That supports a mortgage around $680-720k, based on recent rates.
Assuming he’s going to put down 20%, that backs into a potential purchase price of $850-$900k.
Unless my job was rock solid, I’d probably scale back a bit from there – maybe shoot for something around $800k. 20% down still leaves him with $340k in cash/liquid assets to ride out any storms. His ongoing income should be sufficient to pay for private schooling costs (assuming he doesn’t have wild discretionary spending habits).
I’m a huge fan and proponent of buying, but if he is already planning on leaving in 5 years I’d say rent.
To find a place, buy, move in, get comfortable, etc can be a year + process. The in 4 years they are going to think about leaving which in and of itself could be a year long process, in which case they are only really living in a place for 3 years (their minds check out before they do kinda thing).
And yes, the market, who knows where it’ll be. If they were planing on settling in Manhattan/South Brooklyn then buying is the way to go. Bailing in 5 years? They’ll probably be better off banking some cash to drop on the ‘burbs and the move out…
2 bdrm unit + 5 yrs = renting is best option. if prices tank super hard while you rent, you can still buy. if you buy and it tanks, you’re stuck. ~$3k or so will get your brother a pretty good & big 2 bdrm in many prime hoods in BK. Much lower cashflows than buying something now. if your brother is to roll the dice anyway, roll in when he is planning to buy a house cause there’ll be enough space to accommodate the 2nd child vs. a 2nd child in a 2-bdrm will FORCE him to move
Ideally they want to be in Manhattan, but South Brooklyn is okay. Though, if they stay in the city, it wont be for more than 5 years or so as they understand space – which they will well need at that point – comes at a price, well beyond what they can ever do. They aren’t looking to be landlords, so they are looking at mainly 2-bedroom apts. They know the areas and prices, its just a matter of what they feel is reasonable to spend on housing (weherever it is) in their situation. I was just curious what you all thought was reasonable for housing budget.
I think it really depends on what he is looking for and where he is looking.
Brooklyn vs Manhattan, condo vs co-op, brownstone, multi-family, mint vs needs tlc… et, etc etc…?
Has he started looking, does he have any idea what sort of property he wants and where he wants to be?
If it were me I’d be looking at multi-family buildings in the $2 million and under range. 4 family qualifies for up to 1.4 mil in conforming loan. 75% of the rents of 3 units help, and there is room to expand as the years/family grow…
But that is me…
given this econ and how long it might take for things to be well again, I think he needs (after buying & renovating a place) to have 2 yrs worth of projected monthly outflow. Right now, he is sitting comfortable and enjoying life. To deplete the savings and take on massive debt, it would introduce a ton of risk & worries into his life. but if he were to find something cheap enough that he still has that 2 yrs worth of outflow reserves, then he would still be able to live comfortable and become a homeowner. So this is reverse algebra to figure out what he can afford within the parameters of that 2 yrs outflow reserve.
Renting is a great option to wait out the market for better clarity.