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

Christine Ryan Jyoti

Mark&Magdalena family


Who: Mark Daley, 44, is an IT analyst/PM and his wife, Magdalena, 42, is a preschool educator. They have a 5-year-old daughter.
Location: Charlotte, N.C.

What They Want to Buy: We’re looking to buy a two-plus bedroom duplex in a popular area of Charlotte as an investment property in the next month or two. Our goal is to build retirement wealth long-term.

Our main priority with this investment is to have the rent we charge be at least 1% of the total purchase price. We plan on managing the property ourselves.

In addition to an investment property, we’re also looking to buy a house in Charlotte as a primary residence sometime this year. We plan on buying versus renting because of the investment aspect. Our priorities are location (we’d like to be close to work and our daughter’s school) and number of bedrooms (three-plus).

Where They Stand Now: We have $3,000 saved for a down payment, but are aiming to have $5,000 by the time we make the purchase. We’re looking to spend approximately $100,000 on the income property.

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We currently don’t have anything saved for a down payment on a primary residence, but are aiming to have $10,000 by the time we make the purchase. We’re looking for a house in the $200,000 price range.

Our combined income is $90,000 a year. We have $8,000 left on our student loans, $7,000 on our car loan, and $200 worth of credit card debt.

We’ve been renting a three-bedroom house for the past three years and currently pay $900 a month in rent.

Magdalena and I don’t have retirement savings yet, but we’re getting ready to open two Roth IRAs.

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Our emergency fund would cover our current lifestyle for three months.

What the CFP® Says: I’m proud of Mark and Magdalena for having goals and dreams. This is the first step in making financial progress. There are, however, a few things I think they should do prior to purchasing a home or investment property.

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First, they should strive to get at least six months’ worth of emergency savings built up. This may help them manage the unexpected costs associated with home-ownership. They also should work toward having a sufficient down payment of 20% of the purchase price, if possible. This can help them avoid costly mortgage insurance premiums.

The monthly mortgage on a $200,000 home will probably be more than what Mark and Magdalena are currently paying in rent, so they should also make sure that payment fits inside their current monthly budget. To figure out how much house they can afford, they can multiply their gross income by 2.5 (which is a loose calculation) or have a close look at their expenses and run them against their take-home income to see what might fit comfortably in the family budget.

I’d also recommend they hold off on the purchase of investment property until they’re sure they’re able to manage the mortgage on a primary residence. They could instead focus on using their investment dollars to help fund their retirement accounts.

*Names have been changed.

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.

  • 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.