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Home ownership is more than just the cost of your mortgage. And in many markets, especially in big expensive cities like NY & SF, it costs more money to buy th

Home ownership is more than just the cost of your mortgage. And in many markets, especially in big expensive cities like NY & SF, it costs more money to buy than to rent.

ineedasername 6y ago
Precisely, which is why the "don't buy a home more than 2x annual salary" doesn't seem like a good rule: there are too many variables. Where I am, total cost of ownership for a small two bedroom house is generally slightly less than the cost of 2 bedroom apartment that is also smaller, and comes with the benefit of building equity. A clear advantage (in my mind) if you're going to stay there for a few years because you'll build at least a little equity and average property values will increase at least a little bit. In my case I have a moderate sized home and pay about than 70% of the rent rates for anything nearby with the same # of bedrooms & about 500sqft smaller, even after property taxes, utilities, and average monthly maintenance costs. On the other hand I have family that live in an area where apartment rents are much cheaper than the monthly TCO for buying, and even if you can afford to buy renting makes more sense (unless you need 3-4 bedrooms for a family) because rents are so much cheaper & it is better to put the difference between monthly costs into an index fund and build equity that way.
- busterarm 6y ago
  It's not even my rule. The 2x rule is older than shit...Just as time has gone up people are stretching it to 2.5x and 3x. Another rule you can go with is the Rule of 28 if you prefer. These guidelines exist for a reason. Ignore at your own peril. Lenders look at these things when considering giving you money. Using more leverage usually gives the bank a better deal than you.
  - dragonwriter 6y ago
    > These guidelines exist for a reason. They exist because of the economic context at the time and place that they were generated, which may not have been valid for much more than that immediate context. If you can find and examine the mathematical assumptions about cost and risk that justify the rule of thumb against current conditions, then you can make an informed evaluation of whether or not it applies to the current situation. If you can’t, like folk remedies, the advice is as likely to harmful as helpful in your actual concrete circumstances.
    - deleted 6y ago
      [deleted]
    - busterarm 6y ago
      Hey, what do I know? I'm just debt-free millennial with a fully paid off house and car looking to purchase investment property #2 on another 15-year mortgage while renting an apartment in Manhattan.
      - forrestthewoods 6y ago
        This is just math. You don’t have to earn $200,000/year to afford a $400,000 property. Borrowing $400k costs about $2000/mo. Call it $2500 with taxes and maybe an HOA. That’s about $30,000/year, or 15% of $200,000. Take home on 200 will be north of $150. Mortgage rates are sub 3% today. That rule of thumb that’s “been around forever” existed when rates were 10%. Such a rule can not possibly be the same when the rate changes so dramatically. The consistent rule is what percent of your take home you’re comfortable spending. Not many people - owners or renters - spend under 15% on housing.
        busterarm 6y ago
        There's also a risk management calculation here. Sure the easy money and high leverage works if your life circumstances only change for the positive. I've also seen lots of people in the last two years who had made similar sound decisions who were then furloughed, or lost their jobs, or got sick, or got REALLY sick and ended up losing everything. If you want to make higher risk bets, there are better avenues for it and certainly ones that you don't live in and risk losing.
        ineedasername 6y ago
        If you're losing everything, it really doesn't matter if your home was 2x or 20x. It's all gone. But for those situations short of losing everything, (lost job, furloughed, sick) then the scenario I outlined that allowed for saving 20% of income would be just of useful if housing was 60% of living expenses or 20% of living expenses. But you also haven't commented on the aspect of the scenario I presented where a 4x home was still under Rule 28. No single rule can encompass complex multivariate systems. That is all I am saying here. Otherwise, how about we end it here: It's clear we both agree that financial stability is good and should be a part of any long-term plan, we may simply disagree on the specific parameters that allow for it, which is fine. I appreciate the thoughtful conversation-- HN is one of the few places on the internet where I find that possible.
  - ineedasername 6y ago
    There is no one size fits all, there is no inherent peril in ignoring these general rules. The age of the rules are irrelevant, whether you use expletives to describe them or not. There is peril in ignoring the specifics of your own individual economic circumstances. If you make $300,000/year and aren't carrying significant other debt then you can afford 4x salary for a $1.2 million house because the ratio of your non-housing expenses do not have to scale upwards with your salary. At 4% interest that's $72k/year, leaving ample room for spending on a comfortable life style while still saving 20% of your salary. In fact that is actually less than your Rule of 28. Alternatively, if you make $300k/year but have $80k in credit card debt and additional business debt made on a personal guarantee then even a 2x house may be too expensive. Situations vary based on much more complex factors than the salary:$home ratio. Simplistic rules are a greater peril than individual analysis.

Home ownership is more than just the cost of your mortgage. And in many markets, especially in big expensive cities like NY & SF, it costs more money to buy than to rent.

ineedasername 6y ago

Precisely, which is why the "don't buy a home more than 2x annual salary" doesn't seem like a good rule: there are too many variables. Where I am, total cost of ownership for a small two bedroom house is generally slightly less than the cost of 2 bedroom apartment that is also smaller, and comes with the benefit of building equity. A clear advantage (in my mind) if you're going to stay there for a few years because you'll build at least a little equity and average property values will increase at least a little bit. In my case I have a moderate sized home and pay about than 70% of the rent rates for anything nearby with the same # of bedrooms & about 500sqft smaller, even after property taxes, utilities, and average monthly maintenance costs. On the other hand I have family that live in an area where apartment rents are much cheaper than the monthly TCO for buying, and even if you can afford to buy renting makes more sense (unless you need 3-4 bedrooms for a family) because rents are so much cheaper & it is better to put the difference between monthly costs into an index fund and build equity that way.

busterarm 6y ago
It's not even my rule. The 2x rule is older than shit...Just as time has gone up people are stretching it to 2.5x and 3x. Another rule you can go with is the Rule of 28 if you prefer. These guidelines exist for a reason. Ignore at your own peril. Lenders look at these things when considering giving you money. Using more leverage usually gives the bank a better deal than you.
- dragonwriter 6y ago
  > These guidelines exist for a reason. They exist because of the economic context at the time and place that they were generated, which may not have been valid for much more than that immediate context. If you can find and examine the mathematical assumptions about cost and risk that justify the rule of thumb against current conditions, then you can make an informed evaluation of whether or not it applies to the current situation. If you can’t, like folk remedies, the advice is as likely to harmful as helpful in your actual concrete circumstances.
  - deleted 6y ago
    [deleted]
  - busterarm 6y ago
    Hey, what do I know? I'm just debt-free millennial with a fully paid off house and car looking to purchase investment property #2 on another 15-year mortgage while renting an apartment in Manhattan.
    - forrestthewoods 6y ago
      This is just math. You don’t have to earn $200,000/year to afford a $400,000 property. Borrowing $400k costs about $2000/mo. Call it $2500 with taxes and maybe an HOA. That’s about $30,000/year, or 15% of $200,000. Take home on 200 will be north of $150. Mortgage rates are sub 3% today. That rule of thumb that’s “been around forever” existed when rates were 10%. Such a rule can not possibly be the same when the rate changes so dramatically. The consistent rule is what percent of your take home you’re comfortable spending. Not many people - owners or renters - spend under 15% on housing.
      - busterarm 6y ago
        There's also a risk management calculation here. Sure the easy money and high leverage works if your life circumstances only change for the positive. I've also seen lots of people in the last two years who had made similar sound decisions who were then furloughed, or lost their jobs, or got sick, or got REALLY sick and ended up losing everything. If you want to make higher risk bets, there are better avenues for it and certainly ones that you don't live in and risk losing.
        ineedasername 6y ago
        If you're losing everything, it really doesn't matter if your home was 2x or 20x. It's all gone. But for those situations short of losing everything, (lost job, furloughed, sick) then the scenario I outlined that allowed for saving 20% of income would be just of useful if housing was 60% of living expenses or 20% of living expenses. But you also haven't commented on the aspect of the scenario I presented where a 4x home was still under Rule 28. No single rule can encompass complex multivariate systems. That is all I am saying here. Otherwise, how about we end it here: It's clear we both agree that financial stability is good and should be a part of any long-term plan, we may simply disagree on the specific parameters that allow for it, which is fine. I appreciate the thoughtful conversation-- HN is one of the few places on the internet where I find that possible.
- ineedasername 6y ago
  There is no one size fits all, there is no inherent peril in ignoring these general rules. The age of the rules are irrelevant, whether you use expletives to describe them or not. There is peril in ignoring the specifics of your own individual economic circumstances. If you make $300,000/year and aren't carrying significant other debt then you can afford 4x salary for a $1.2 million house because the ratio of your non-housing expenses do not have to scale upwards with your salary. At 4% interest that's $72k/year, leaving ample room for spending on a comfortable life style while still saving 20% of your salary. In fact that is actually less than your Rule of 28. Alternatively, if you make $300k/year but have $80k in credit card debt and additional business debt made on a personal guarantee then even a 2x house may be too expensive. Situations vary based on much more complex factors than the salary:$home ratio. Simplistic rules are a greater peril than individual analysis.