4 Couples, 4 Home Purchases: How Much Can They Afford?

Christine Ryan Jyoti

Dan&SamanthaThe Investment-Property Seekers

Who: Dan Sharma*, 29, a finance manager, and his wife, Samantha, 31, a middle school teacher. They have a 4-month-old son.

Location: Columbus, Ohio

What They Want to Buy: An investment property—preferably a condo—in Columbus/Central Ohio in the next one to two years.

We plan on renting the property to my in-laws in the short term and using it as a rental property in the long term. As we’ll initially be renting to family members, we’ll have them pay enough rent to cover the mortgage payment, so our only gain in the short-term would be appreciation, not positive cash flow.

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Our priorities for the property are location, property taxes, number of bedrooms and age of the property.

Where They Stand: We currently have $10,000 saved for a down payment and are aiming to have $30,000 to $35,000 by the time we make the purchase. We’ll be considering properties in the $150,000 price range.

Combined, we make $140,000 a year. We pay our credit cards off monthly and owe $7,000 this month. We don’t have any student loans, but we do have an installment loan for our SUV on which we pay $600 a month.

We currently live in a single family new-build that we bought in 2012, the year we got married. Our current mortgage is $336,020, and our monthly payment is $1,733.

Samantha and I have $80,665 total in retirement savings. Samantha has $28,539 in her pension (even though her final pension will be calculated off her salary). My public retirement account, which functions as a 401(k), has $35,474 held in index funds, and 85% are in stocks. The same is true of my 403(b), which has $16,652 in it.

We currently have five to seven months saved in emergency savings.

What the CFP Says®: I’m so glad to see that Dan and Samantha have retirement assets and sufficient emergency savings. It also seems like they want to make sure they have an adequate down payment for this investment property.

“Adding an extra real estate expense could put a strain on cash flow. Dan and Samantha should consider what sacrifices they’ll have to make to pay the monthly mortgage on an additional property.”

Given their monthly household expenses, it seems like adding an extra real estate expense could put a strain on cash flow. Dan and Samantha should consider what sacrifices they’ll have to make to pay the monthly mortgage on an additional property. My concern is that they’re making an investment that they may not be able to afford in the event they’re unable to rent the property at full market value.

RELATED: Your Guide to Rental Property Investing

Since it could be some time before the property begins to make a profit, this might not be the best use of their capital and could expose them to risk should the housing market take a dive or if they need to sell at an unexpected time.

It’s important that they consider the full carrying cost of the property (mortgage, insurance, taxes, maintenance, repairs) versus the rent received to determine whether the property will be cash flow positive, neutral, or negative. If it’s negative, they might want to consider a less expensive home or putting more cash down to get the expected cash flow to at least neutral.

  • a

    Why would they suggest that the first couple buy a three bedroom house when they are not even sure that they want children and are currently living on a single income? A mini mansion is not the solution for everyone– especially for a couple that seem accomplished at frugal living and thinking outside the box in terms of lifestyle and saving. I think the old advice that everyone should buy more house than they need or want is outdated and only benefits realtors.

    • Monica

      I agree. Home prices in San Jose are very high. It would have been a much more helpful article, if they actually gave some estimates of what homes cost in the different areas…

  • Hillary

    I’m more than a little disappointed with this article. I started reading it expecting to be able to apply something to my own life, and after reading I feel like the only couple I might possibly relate to is the 4th one. How many people buying a home seriously wait until they have over 20% cash as a down payment? As a prospective first time home buyer, I would have appreciated them talking about other options rather than waiting until I’m in my 30′s to purchase because I should have at least a 20% down payment. This article completely ignores the fact that by owning a home, you are investing into the home’s equity by paying the mortgage, whereas in paying rent each month you are basically throwing that money away.

    • Reality

      I’d almost agree with you here, but after hanging out with another forum group in personal finance (reddit.com/r/personalfinance), I’ve changed my view on buying/renting.
      Renting is NOT throwing your money away. Buying a home is not the best type of investment you want to make either. Buying a home is investing into a huge illiquid asset. As quoted by another article about renting vs buying, “Housing returned 0.4% per year from from 1890 to 2004.” You make a downpayment, pay off that house, well you better hope that your house has appreciated in value over that time, which the past few years kinda makes that shaky. And on top of that, all that money you “invested” into the house, are you getting all that cash back? No, you’re probably going to sell that house (hopefully at some gain) and drop that as another down payment into another home. You’re not really getting that money back. Also consider you’re still “throwing money away” when you buy a home. Consider the fees you have to pay, PMI if you don’t have full down payment, HOA fees, taxes, hidden costs at purchase, etc. Is that money invested?

      As for renting, I also felt that it was throwing money away. But other than not owning a home, the value of payment is no different than buying a home. You’ve got advantages with renting. If something breaks, I usually call maintenance and they fix it. No costs for me to spend on. Major home maintenances aren’t something I have to worry about. Location? I can move wherever I want to, I’m not stuck with a house that can’t move with me. This is especially advantageous if you’re in a constantly moving industry where your job could change in three to five years. Houses pay off at least around 10 years, that doesn’t work if you had to suddenly move after working at a job for five years. And that’s another advantage, I don’t have to worry about whether I can or can’t sell the house, and whether I’ll make profit or lose on the value of the house. Housing preferences change, as a friend of mine discovered recently when trying to sell her house. She’s got a great home for a growing family, but guess what, not enough of a yard which is a big thing now. House is still on the market for a year now.

      I currently rent, and I’ve been raised in that mindset that a house is better and renting is throwing money away. Really looking at the numbers though, you’ll see it’s not like that. I’m looking to buy a house this year simply because with my lifestyle I prefer a larger home as well as having the freedom to customize and do things I want to the home.

      If you really want to look into your finances and figure what’s the best option for buying a house, check out reddit.com/r/personalfinances. LearnVest is great, but their articles tend to be positive, and that’s what this one is about. If you want an article where you can relate to, this article would end up pretty depressing. Who wants to read an article about a family who makes 60k-100k (if dual income), realize they don’t have that six month savings for emergencies, have about 30k-100k debt in student loans, have several credit cards with balances still being paid off, and have maybe 3k for a down payment? It’s just gonna be a standard buckle down, get frugal, save for emergencies first, prioritize and create a budget, and have a plan of attack a couple years down the line to be able to afford a home. This is an article about and for people that have the money and the freedom to advance their life at the moment they’re able to buy a home because they’ve been aware and budgeted their finances, without worrying about crippling student debt, that large medical bill that might be hanging over your head, the credit cards that you might have missed a payment on, or those other large loans you might still be paying off, like that 20k+ car you bought in the past few years.

    • Steve

      Hi Hillary,

      This is Steve from the first article. I understand your concern and in many parts of the country it is better to buy than to rent. In Silicon Valley I don’t believe this is the case. For example there is nothing “nice” on the market for under $500k currently. Even if I could put 20% down my mortgage payments would be $2500-3000/month for 30 years. That is significantly more than my rent and too big of a commitment to make right now. In other parts of the country I would dive in much earlier. Thanks for your comment!

      • Nonya Bizness

        I live in Solano County,which is no where near as expensive as San Jose, but you can’t get anything here under $200k, but up the freeway in Sacramento you can get a lot for that price. Good luck on wherever you decide to go.

        • Steve

          Thanks for the support! I really like Sacramento and think it is seriously underrated. However, finding a “good job” appears to be a difficult task.

    • clout82

      As a real estate professional, the advice for the 4th couple is frustrating because lenders require 20-25% down for investment properties. A better strategy for someone looking to buy an investment property (IMO) is to buy and live in it as a primary residence first. This way you take advantage of lower down payment options. Then when you are ready to move to the next property, you rent out your current home.
      A couple notes about doing this: make sure there is no penalty in your loan product for turning it into a rental (most of the time you have to use it as a primary residence for at least one year to qualify as a non-investment property or there is a big fine if you get busted). The lender will also want to see that you have enough savings to cover all mortgages for at least 6 months, so make sure to consider this in your planning–they will usually count retirement savings.

    • clout82

      Hillary, while I think it’s prudent advice to have 20% down, when interest rates are under 4 and 5% it made no sense to me to put down a large down payment when I could earn more money in the stock market with those funds. I did low down payment options on my first two homes–just make sure your credit is in good shape to qualify for the low down programs and that you can afford the monthly payments.

  • Not Convinced

    This is depressing. I’m 33 and my wife is 29. We have 5,000 in the bank, collectively make 70,000 a year and have no foreseeable way to save the type of money these “examples” have. 100,000 in liquid assets? 1,800$ lease/rent? I guess it’s apartment life for us!

  • Julie

    I also would have appreciated seeing more examples of folks who have less in liquid assets. I live in DC, and if I only bought where I have 20% down, I’d live in a studio for the rest of my life.

    • clout82

      Julie, I didn’t put 20% down on my homes. Interest rates are so low it didn’t make sense to use it as a down payment when I could invest it and make more. I did the minimum 3-5% down, just make sure you have good credit to qualify for these programs and can comfortably afford the monthly payment. If you can, go conventional as you only have to pay mortgage insurance until you build enough equity into the property. FHA will require mortgage insurance for the life of the loan now. Yuck!

  • Michelle

    Would love to see this same article for single home buyers!

    • Anon101

      Me too!

    • clout82

      Michelle–I am a single woman in my early 30s and own a primary residence and 2 rental properties. I’d be happy to answer your questions or share how I got here.

  • Spinner

    Maybe the title of the article “How much can they afford?” should be reflected somewhere in the content. There is absolutely zero answers to that question here. I suppose legal made you take any actual information out because that would constitute useful advice.
    What a waste of an article.

    • clout82

      Agreed. There is nothing in this article about how much these couples can afford based on their incomes, savings, and debt.

  • Jess

    I was hoping to see a move up buyer with an expanding young family. Particularly illustrating the housing crash and the impact of little to no equity if purchased in the last 7-10 years….

  • b

    All of these people are rich. Screw this article.