View Full Version : Pondering housing costs
How do you guys plan your housing costs? As a percentage of your earnings, such as the old 25% of gross income rule? Or as a portion of your net worth?
If you're FI with your home paid off, did you buy it with a target price in mind based on a portion of your income or liquid assets? Or did you first choose where you wanted to live, pay whatever it cost, either upfront or over time, and then adjust other expenses accordingly?
Since I'm back to working full time, my rent and utilities amount to less than 10% of my gross income (I rent rather than own because I like the freedom).
When I eventually go back to not working full time, or at all, the equation will change. I'll put myself on an allowance and decide how much goes to rent. Based on my current spending, housing would be about a third of it. If I decide to buy again someday, I'll be pondering how much of my liquid assets to put into a fixed asset.
How much of your income or wealth do you feel comfortable spending for housing?
iris lilies
1-25-15, 2:15am
How much of your income or wealth do you feel comfortable spending for housing?
I don't compute a purchase price in relation to my income, I compute it in relation to the market value of my current house. Since my current house is around $235,000-ish, I would never go higher than that.
I assume that if I moved in retirement, we would downsize. The perfect house would be 2 br, 1.5 baths on one floor, around 1,000 sq feet with heated outbuildings for DH's stuff /shop/garage. On 1.5 to 3 acres of flat land, no trees. All for $150,000. That's easily doable in some places, but likely not realistic in Oregon.
lessisbest
1-25-15, 7:23am
Our current home we purchased new and is 9-years old (paid for), and for several years we have been living on 1/3 of hubby's income as a trial run for retirement (saving and investing the remainder). This amount of money is very close to what our projected Social Security would be, so we could easily live here after retirement (I'm 62, hubby is 63), in a perfect world. However, we are now considering downsizing to a smaller townhouse in the next year or two, which would also be paid for, and would be more affordable for one person, and easier to maintain for an elderly person on a fixed income, should one of us die. It's property taxes and other annual and semi-annual fees that add up to be a large percentage of the budget, so reducing or eliminating those as much as possible now would be beneficial before retirement. And then there are the great budget "unknowns" like insurance and health care costs....
I don't compare it to income either. For rent vs buy as well as what property to rent or buy it all comes down to am I getting the most of what I want at the lowest price. I figure out what I want and then determine the most affordable method to get that. For retirement I'll have an estimate of expenses, including housing, and work until I have enough money.
I just rechecked the math. Mortgage and property tax (which is now higher than mortgage) amounts to 26% of our net pay. Not sustainable for wannabe retirees. The market price of our house is beginning to stall since it only has teardown value now, ie land only. Plan is to pay cash for the next living space ( no more than $225K and hopefully less) with proceeds from selling this one. Still lots to figure out...
Are you saying that your monthly property tax is more than your monthly mortgage payment? I've never paid more then 2-3 months mortgage cost for a year of property taxes. But I've only owned homes in rural areas or small towns.
to get my housing cost down to that percentage of my income, wow, i would not be living in Denver that is for sure! i help people with some financial paperwork and lower income pay over 50% of their income on housing generally, for not unusual rents either. i am below 50% for ow but my income will drop next year so who knows.
awakenedsoul
1-25-15, 1:10pm
Hi Oddball,
When I was renting, I used the 25% rule. As rents started to climb, I was ended up paying far more than that. I started having trouble when I was earning $1,500. a month and my rent was $675.00 a month. No wonder...I ended up buying that rental cottage (without a realtor) for $89,500. I still try to live on $20,000. a year, and I paid off the house in my early thirties.
I looked for the smallest house on the block. It's a rule l read in the Beardstown Ladies Book of Investing. (I think that's the name of the book.) It's worked for me. Property taxes started at $100. a month in 1998. Now I pay $1,400. a year. Not bad for a small house in Southern California. This is also an ideal home for retirement.
I looked for deals on the outskirts of town. They've done a lot of developing since I bought here. We now have several new homes nearby that sell for $500,000, $600,000, and $700,000. They've also put in a college around the corner. So much of it is market timing. I tracked home prices in this area before buying mine. The land value has continued to rise. Even during the years where people were losing their homes, mine still held its value. (because of the land.) I'm in a 567 square foot cottage on a 7,400 square foot lot.
I'm impressed with your figures. You're really saving a lot of money!
Yes, the monthly amount we squirrel away to pay annual property taxes is now higher than our mortgage payment. We thought about just paying off the house but we don't get a break on taxes until we are 65 and by then they will be $10K a year if not more. In expensive cities like this (which it didn't used to be by the way), it is reported that many are having trouble paying taxes. I would think if possible, one should aim for no more than 35% of net income if possible.
Pinky can I ask what state/city you live in? That's an astounding amount of property tax in my world,
Austin TX. Lion's share are school taxes.
For rent vs buy as well as what property to rent or buy it all comes down to am I getting the most of what I want at the lowest price. I figure out what I want and then determine the most affordable method to get that.
Kestra, I like your formula. That's what I've been doing for years but never thought out and articulated so clearly.
Awakenedsoul, I owned a cottage about the same size and price as yours. Paid cash 10 years ago, lived there for 7. It was in the boonies, so the taxes were only $300 a year! And it was brand new, so the maintenance was low. Flip side was I had a car and an SUV to feed. Anyway, I figured I'd be there forever, but then my plans changed.
I've thought about buying a condo. Problem is the taxes, insurance, and HOA fees would rival the rent on my downtown studio. Plus the condos here are less conveniently located. I realize I'm missing out on property value appreciation in exchange for more freedom and less hassle. To me this equals simpler living, and it's why Kestra's approach is working well for me now.
With owning, there's the psychological aspect of having your housing expenses over and done with. But of course not necessarily when the taxes and fees get so high.
awakenedsoul
1-26-15, 9:31pm
Oddball, Yeah, that's true. In California, property taxes can only go up 2% a year. For me, owning a home has been sort of like a forced savings account. Even though my repairs are costly, I still spend far less this way. Rents here have really shot up since so many people have lost their homes. I couldn't afford to rent now. (Well, in this area, anyway.)
I guess as long as you are able to stay in budget whatever works for you is best. How much did you pay for the cottage? (if you don't mind me asking.) It sounds like it was ideal at the time.
Grand total was about $92K. I bought the land first and added the house a year later (2004). I don't think I'll do that again. Much easier to buy an existing place!
I don't compute a purchase price in relation to my income, I compute it in relation to the market value of my current house. Since my current house is around $235,000-ish, I would never go higher than that.
I assume that if I moved in retirement, we would downsize. The perfect house would be 2 br, 1.5 baths on one floor, around 1,000 sq feet with heated outbuildings for DH's stuff /shop/garage. On 1.5 to 3 acres of flat land, no trees. All for $150,000.. OMG, would you like to buy my house? I'm about an acre short but otherwise pretty close. :~)
iris lilies
1-27-15, 1:35am
OMG, would you like to buy my house? I'm about an acre short but otherwise pretty close. :~)
Oh, I forgot to say, I don't do desert.:D
My boyfriend and I share a rented flat of 430 square feet (40 square meters). It is small, but it's all we can afford right now, and it is okay.
It costs 25% of our income.
Buying a home is not feasible at the moment, and wouldn't make sense anyway, because our jobs aren't permanent and we have to move eventually when we have to get new jobs.
Teacher Terry
1-27-15, 1:51pm
Here your property taxes on based on the age of the home. So our home built in 1950 is only $600.00/year. This was done to prevent old people from losing their homes but what has happened is people are buying huge beautiful homes in old neighborhoods & not paying their fair share of taxes. One idea is floating around is that when a house sells it should go up to it's taxable value so the old owners would not suffer.
We had that same type of system, Teacher Terry. The state ended up revamping the whole system and some people's taxes went up 300% or more without any significant period of adjustment. It was a bad time for all the counties trying to sort out a wholesale change. One county took almost 3 years to sort out the tax situation. $2,000 or less to $10,000 per year is a crisis to most and even though the houses were worth a lot, they had to refinance or sell to get the money in many cases.
In addition, I think they changed the mill rate at the same time and snuck it thru thinking that no one would notice in the confusion.
Teacher Terry
1-27-15, 2:12pm
I think that if they wait for people to sell it should be ok because you would buy the house knowing what the new tax would be. However, if you just raise it that would certainly tax fixed income people right out of their homes which would be terrible.
lessisbest
1-27-15, 6:50pm
I just ran across this jotted in my "Book of Odd Knowledge II". Not sure of the original source, but it's not original to me. Don't know if it will help any or not, but at least it's a formula you could work with and tweak as needed. My first tweak would be to add at least 10% off the top for giving.
BUDGET FORMULA
30% housing and debt
26% living expenses (food, clothing, utilities, transportation, medical, entertainment)
25% taxes (federal, state, local, property; FICA & Medicare)
15% savings & retirement (401(K), stocks, mutual fund, college savings, etc.)
4% insurance (life, health, disability, auto, homeowners or renters)
awakenedsoul
1-27-15, 6:59pm
Here your property taxes on based on the age of the home. So our home built in 1950 is only $600.00/year. This was done to prevent old people from losing their homes but what has happened is people are buying huge beautiful homes in old neighborhoods & not paying their fair share of taxes. One idea is floating around is that when a house sells it should go up to it's taxable value so the old owners would not suffer.
Wow! $600. a year is fantastic! That's great. Makes me want to look at older cottages in NV. In California, it's based on the purchase price of the home. Since I bought mine in a down market, and property taxes can only go up 2% a year, it's worked out well.
awakenedsoul
1-27-15, 7:01pm
Grand total was about $92K. I bought the land first and added the house a year later (2004). I don't think I'll do that again. Much easier to buy an existing place!
That's good to know. You learn from each experience. I know a lot of people here are buying up acreage in Oregon and Nevada. I think they plan to build their own homes for retirement. (Most of them are in construction.)
Pinky can I ask what state/city you live in? That's an astounding amount of property tax in my world,
It's average in mine--and I don't think pinkytoe lives in the same part of the country I do (TX / NJ).
Oh, I forgot to say, I don't do desert.:DI don't either. Lol.
Our 2 bedroom condo in rural small town Ohio (we're renting it out) has property tax of 900 a year. Value about 90,000.
Maybe I'm just not comparing taxes to cost. Most expensive house we've ever bought was 94,000 for a 3 bedroom 2 bath ranch house on a lake. Cities are so different.
Teacher Terry
1-27-15, 8:38pm
The value of our home is $225,000 so pretty darn amazing the amount we pay. This is the lowest taxed state I have ever lived in & if any mention comes up about raising taxes people have a big fit.
How do you guys plan your housing costs? As a percentage of your earnings, such as the old 25% of gross income rule? Or as a portion of your net worth?
How much of your income or wealth do you feel comfortable spending for housing?
I don't know if there is a hard and fast formula, but my decision was based on how long I wanted to work to pay for housing and my anticipated income in FI or retirement, rather than any current income stream. I like the "live below your means" formula. At least when it comes to home ownership the expenses don't end when the house is paid off. It's not just taxes, but utilities and repairs and upkeep that all depend on the size of home and it's age. My 50's home is always in need of something, just to keep it on a level keel. Since I've left the work force my expenses have generally been less than I anticipated, but home upkeep is one item that I grossly under estimated.
That's good to know. You learn from each experience. I know a lot of people here are buying up acreage in Oregon and Nevada. I think they plan to build their own homes for retirement. (Most of them are in construction.)The Oregon and Nevada State Legislature should pass laws prohibiting that sort of thing. (They are Callyfornicating Or & Nv.)
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