Started working two years ago — how much savings/income should I strive for to afford an expensive house within the next five years without being "house poor"?

Submitted by makes-more-sense t3_z7ubwp in personalfinance

I am dead set on buying a decent house with a nice backyard in the same city I grew up in for me and my aging dad. Housing costs are insane here (like $900/sqft), but I still think it's an attainable goal and I'm prepared to make the sacrifices for it — the figure I'm aiming for is $1.5 million. I was wondering whether or not my current lifestyle can keep me on that trajectory or if I should look for another job or stop traveling etc.

My base salary is slightly higher than $200k, and with bonuses, cash stipends, etc that goes up to about $250k. Take home that's about $12k a month pre-bonus. My total monthly expenses usually vary from $1000-2500 when I'm stationery, but I was extremely, extremely happy digital nomading this summer and was spending about $3000 - 6000 a month, and would like to do that. If I worked hard and play my cards right, I think I could be in a position to attain a ~$325k base salary within the next few months, but the work would be linearly commensurate (and thus I'm hesitant to).

I have total savings of about $300k, with $80k of it being in securities.

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MikeWPhilly t1_iy85dih wrote

Not enough info to really say the “right” number. And its not clear if you are living in the house and/or some of the other items. But a $600k loan is going to be about $2900 a month. You don’t say where you are tax wise but tackle on another 1200-1500 a month for that. you obviously can afford a $4500 a month payment.

Means you need $900k or so down payment to get into the ballpark.

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sephiroth3650 t1_iy85qhf wrote

Generally, a $1.5 million dollar home will not be affordable to somebody making $250k/yr.

The mortgage on a $1.5 million home with $300k down will be roughly $9238/month, depending on taxes and insurance. So it could be in the upwards of $10k/month, if taxes are higher and if interest rates continue to climb. If your net income is $12k/month, then you already can't balance the budget.

If you saved $6k of your money every single month for the next 5 years, that would add up to $360k. Add that to the $300k you have now, and if you put all of the $660k down on that house, the payment comes out to $7000/month. So it would still eat up more than half your net income monthly. And it would require you to save all of your extra money for the next 5 years, and would take all of your savings to purchase. Or it would require you to make more sacrifices (like stop travelling so you can save $7500-10k/month) to increase the down payment (or not spend every penny of your savings).

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pancak3d t1_iy865ru wrote

1.5m for a secondary home is so, so far out of your budget.

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mrbrsman t1_iy86pog wrote

It’s a honorable goal to strive to give your Dad such an amazing gift. Don’t eliminate other alternative gifts which would still be a blessing. Why not a $600k townhome with a small backyard (you mention he is aging so maybe burdening him with maintenance of a large home/yard isn’t a great long-term goal).

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fromKCtoAZ t1_iy87f3p wrote

It’s difficult to project what five years will look like. A property that is $1.5M now could be $1.75M-$2M in five years.

If the house values and mortgage rates stay somewhat consistent, you will need to save somewhere between $750K-$1M to put as a down payment.

A five year timeline seems doable given your income and current position, but you are going to have to tailor your budget. You will need to save $100K at a minimum each year and probably want to save more for some cushion.

If you put away $10K per month that leaves you with $2K for expenses and $600K in cash to add to your $300K in savings ($900K total). This does not include your bonuses or earnings from your savings/investments.

I don’t think you have to stop living a nomadic lifestyle, but you do need to create a monthly/annual plan to achieve your goal. I personally would tie my travel budget to the bonuses rather than the base salary.

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Badroadrash101 t1_iy87snw wrote

Just curious. Does your dad have any assets or income that can be used to help with the purchase or with the mortgage?

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sephiroth3650 t1_iy885kg wrote

Replying to makes-more-sense (#763,352)

It really comes down to your budget. What are your bills for the short (and long) term? What are your savings goals? If you buy this house for your dad, will you also be focused on buying a home for yourself? If so, you need to account for that.

Without knowing more details about all of that, a general rule is to not exceed 3x your gross annual salary on a house purchase. So roughly speaking, in order to afford the mortgage and maintenance/upkeep on a $1.5 million home, you probably need to make in the upwards of $500k. But again....if you can afford to put a very large amount as a down payment, that will change things.

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makes-more-sense OP t1_iy89bs6 wrote

Replying to sephiroth3650 (#763,786)

My baseline monthly expense is $1000 — Rent and utilities is approx $450 a month. Food varies within $120 - $400. Domestic travel (For work, seeing family, etc) varies a lot but is about $200 a month. The rest is incidentals. I don't really have concrete savings goals other than for a down payment, though my work does have a 401k that I contribute to. The house would also be for me — I guess the for-my-father point is materially irrelevant (Though I personally would've been fine being in another city)

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Rave-Unicorn-Votive t1_iy8aqi0 wrote

Replying to makes-more-sense (#763,402)

Then you're not buying your dad a house, you're buying yourself a house and letting dad live there for free.

If you truly enjoy the digital nomad lifestyle you need to reconsider locking yourself into a house you don't want that will consume a significant portion of your salary.

If you want to give him a house, free and clear in a VHCOL area, and continue to live your life, you're probably going to need $500k salary to support two HCOL households simultaneously. If you're good "settling down" then a 5x income house isn't really outlandish for a VHCOL area. And saving $10k a month for the next 5 years will be a solid downpayment.

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sephiroth3650 t1_iy8b7du wrote

Replying to makes-more-sense (#764,096)

Well, if your intent is that you would live in this home as well, it changes things....but not by a ton. Unless you are able to save up $750k or more to put down on the house, it's probably not going to be affordable. B/c you're not only looking at your finances at this moment, but for the next 30 years. You don't have a car payment now. But you won't need one ever? Gotta have wiggle room to afford to buy a car. And pay for car insurance. And gas. Food and household bills will go up if you're covering the entire home. You will have to pay for maintenance and upkeep on the house. Assume 1% of the purchase price annually for repairs/upkeep. So you may have to cover up to $15k annually for home issues. You will have utilities to pay. On the home you could easily be over $500/month for gas/electric/Internet/water/sewer. More, if you live in an area that can get very hot or cold.

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Liquidretro t1_iy8d666 wrote

Replying to makes-more-sense (#764,096)

I would also add, don't forget about funding retirement too. It's fine to slow or stop retirement contributions for a short period of time to build up a downpayment, but doing that for more than a few years is going to really start to hurt long term. Being house poor is one thing, but being house poor and not have much saved for retirement is financial suicide for OP's income bracket.

I think OP needs to sit down and have a long hard thing about their priorities, and what's achievable with their realistic income and decide on what needs changing.

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Leading-Hat7789 t1_iy97m0b wrote

A good general rule is to payoff all debt and max out retirement (back door and mega back door included) and HSA first. Then save 25% of your “take home” (non-retirement) pay. After 5 years, you should be able to comfortably spend 5x your non retirement savings. The total should include home price + improvement.

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