How much can I afford to pay in rent?

I just got my first job after graduating university, and I want to know what people with some experience think is a reasonable proportion of your income to spend on accomodations.

I make money playing *****, but am not counting on it in my budget. As such, I figure I have an after tax income of $2500/month. I want to invest about 1k of it, and spend the rest living the jetset lifestyle I so richly deserve.

My current plan is to rent for six months to a year, and then re-evaluate. I might be able to buy right away, but I only have a small potential downpayment. I also am uncertain about liking this job and wanting to own property in my city. Still, I would listen to a compelling argument for entering into indentured servitude.

I've looked at a few apartments, and they seem to be in the range of $700-$900. I know mathematically how to think about the time value of money, but in a practical sense how much of a difference does this variation in rent make? Will extra savings towards a downpayment make a significant difference in the sort of property I'd be able to buy? Will having insuite washer/dryer and a nicer kitchen really make me $100 happier/month? Any other advice?

[Blarg]

I'm tired and lazy so won't say much besides YES having laundry inside will make you very much happier. It's a lifestyle thing you will easily notice and be grateful for. Seriously. Whether it's worth $100 a month is up to you. But in my opinion, it makes a real difference in how you perceive your life and your circumstances. Having to go outside in the cold and fight for washers and pull the occasionally urine stinking diaper from your ruined urine stinking wash will really make you feel like you've failed in life.

[nigelloring]

[ QUOTE ]
I'm tired and lazy so won't say much besides YES having laundry inside will make you very much happier.

[/ QUOTE ]

I use the "wash and fold" service at the cleaners next door. Once a week I bring them all my dirty clothes, and for $1 / pound they wash, fold, and even pair up all my socks. Amazing.

[Schwartzy61]

Well it all depends on how much you spend on everything else.

You need to sit down and figure an honest budget. You need to figure out everything you will spend money on and just total it up.

I do think trying to save/invest 40% of your after tax income is a bit grandiose unless you plan on living like a bum for the most part.

Don't know about the nicer kitchen, but having washer/dryer in house has got to be a necessity...

Check out this link...

How to Determine How Much You Can Pay in Rent (http://www.ehow.com/how_7541_determine-much-you.html)

Should help a little...

[istewart]

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[ QUOTE ]
I'm tired and lazy so won't say much besides YES having laundry inside will make you very much happier.

[/ QUOTE ]

I use the "wash and fold" service at the cleaners next door. Once a week I bring them all my dirty clothes, and for $1 / pound they wash, fold, and even pair up all my socks. Amazing.

[/ QUOTE ]

It will be even more amazing when you make a gimmick account in three months to whine about the three local Mexicans who robbed your house.

[dcasper70]

IMO, if you have the means to own, lean that way first. If you can get a halfway decent condo in your price range, it certainly beats renting. Get into the market and maybe build some equity. With the right place, you stand a decent chance of making money in the long term.

If you're worried about being tied down, don't.
Get an adjustable rate mortgage for a lower rate/payments and sell in 2 years if you want to move.

You're young, you can do this. Hell, even 5 years is nothing. When you're in your mid 30's you'll realize that the time really didn't matter...it just goes on by /images/graemlins/frown.gif

[Blarg]

Agreed on the time not mattering.

I've found it consistently hilarious when people who own properties whine about not making enough money, forgetting about the catastrophe of lost rent they have avoided by owning instead of renting. Even if you break even after many years of home ownership, it's nothing compared to the complete butt-f*cking you would have gotten paying rent. Unbelievably serious money differential there.

You have to lose very big to not come out ahead owning compared to renting.

[Sooga]

The thing is, in certain places, renting is the only option for some people. For instance, in the L.A. area (where I live), if you want to buy a condo, you won't find a decent one in a decent neighborhood for less than $350k, which, unless you can put at least 20% down, will run you about $2k/mo or so (I asked around and did some research on that this summer). Contrast that with paying about $900/mo on rent, and it's not really much of a 'choice'. My plan right now is to keep renting apartments for a few more years until I have a good chunk of money saved up, and then move to somewhere a lot more affordable (i.e. probably out of california).

[Blarg]

California prices really are insane.

You can get by on spending a hell of a lot less than $2k a month, but you have to accept living in neighborhoods you don't want anything to do with, and maybe where the people don't want anything to do with you either.

There are actually a lot of city programs enabling very low cost mortgages, and community colleges offering courses on how to get those low mortgages. Friend of mine did that; smart girl.

But nobody without money is moving into nice neighborhoods anytime soon. It's a long process. Still, compared to paing rent, it rarely loses money. The nightmare stories I've heard my friends tell me usually count as nothing compare dto what they would have spent paying rent.

[Cubswin]

[ QUOTE ]
it's nothing compared to the complete butt-f*cking you would have gotten paying rent.

[/ QUOTE ]

This logic is no longer true in a good number of markets at this moment. Renting actually makes better sense given the all time high housing cost to rent ratios. Historically, this ratio has tended to be in the neighbourhood of 100/1 but in many markets it is now over 300/1.

The building I live in (Northern VA) is going from apartments to condos. Monthy rent is $1425 while we have first right to buy the new condo at $495000. The cost to rent ratio on my unit is a 347/1!!! On top of that, there would be a $500 a month association fee. Ok, lets do some math.

Assuming I wanted to buy my condo, and i had $50k to plunk down, lets just say i borrowed $450k at 5.5 for 30 years. My monthly mortgage + HOA fees would be $3055. Of course, this does not take into account property taxes, income tax breaks and insurnace costs that come with home ownership. $1805 of my monthy payments would be thrown out the window, lost to HOA fees and interest payments. $1250 of my monthly payments actually goes toward equity in my house.

Now, if i continue to rent at $1425 but save and invest the difference of my would-be mortgage if i bought, I would be in a better situation ($3055-1425= $1625 invested as opposed to $1250).

To make a long story short, the old adage that renting is throwing money away no longer holds true in many markets. In many cases, renting is actually a sounder financial option. To the OP... the housing market is cooling off quickly at the moment. Save some money while renting and try to shoot toward saving 20% toward a down payment and avoid mortgage insurance. When things finally cool down, and the real estate flippers see their profits margins shrink, then get ready to pull the trigger.

cubs

[Cubswin]

Get an adjustable rate mortgage for a lower rate/payments

Thats just bad advice.

[turnipmonster]

so you have an effective budget of 1500 for all your expenses, and you're looking at places that are 900/month?

[StevieG]

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it's nothing compared to the complete butt-f*cking you would have gotten paying rent.

[/ QUOTE ]

This logic is no longer true in a good number of markets at this moment.

[/ QUOTE ]

High quality post, cubs.

<font color="white">I originally sent this as a PM, but cubs is over the limit</font>

[Cubswin]

yeah.. i missed that the first time around. if you are a typical american male figure $500 a month for food alone and you are quickly outside your $1500 budget.

[dcasper70]

[ QUOTE ]
Get an adjustable rate mortgage for a lower rate/payments

Thats just bad advice.

[/ QUOTE ]
Feel free to elaborate.

Based on your other post (very good BTW), your argument for rent vs. own is quite good for many markets. And I'm sure you'd agree that this is not the case in every market across the country.
I was not attempting to compare rent to own, rather ARM's vs fixed.

My argument:
1) ARM's have lower rates compared to fixed. In CT the avg difference is over 1/2 %, hence lower payments.
2) OP insinuated a desire to be able to move within a few years. A 3/1 or 5/1 ARM would be fine in this situation.
3) If I bold it, my criticism must be right, is actually just plain annoying...
4) OP has yet to inform us where he is looking to live.

[Cubswin]

Ive been meaning to clean out my PM box... its been full for quite some time. /images/graemlins/crazy.gif Anyone know what is the max number of PMs you can have saved?

[jaydub]

dcasper,

Your arguments are naive except for #3.

Here are my arguments for why an ARM is not good right now.

1. Interest rates at a relative low and are likely to increase in the coming years. I will caveat that I have not looked at actual interest rates recently and if this has already occured, my argument sucks.

2. The housing market in many areas is due for a downward turn and this could devastate someone who took an ARM expecting to be out in a couple years. The choice of leave and take a big loss of equity vs pay a much higher, possibly too high, payment is an ugly one.

And no bold either.

J

[Cubswin]

ARMs do have a lower interest rate but rates are arising and will continue to do so for the foreseeable future. The .5% difference with a ARM as compared to a fixed rate mortage will quickly disappear and your monthly mortgage payment could balloon to an ugly number.

The promblem that I have with ARMs is that people are using them because they barely have the means to afford a house. Through ARMs, people are over extending themselves and buying more then they can afford. If you are already over extended when you first buy a property, it can get really ugly when interest rates start moving in an unfavorable direction. Before you know it, your mortagage payment nearly doubles and your left unable to make payments.

[jaydub]

cubsalwayslose,

The house beyond means with ARMs is one reason why the housing market will likely crash but that is not a reason against using one.

J

[Cubswin]

So you dont think the possiblity of someone's mortgage doubling is not a good reason for cautioning someone against an ARM? The fact is, home buyers tend to overextend themselves. Just look at how much lenders are willing to give borrowers and you can see why this is the case. If someone is overextended on day 1 of a mortgage, what happens 1 year down the road when Mr McMansion owner doesnt get that correspnding raise in income to cover the cost of that nice, new, increased mortgage payment?

[dcasper70]

[ QUOTE ]
2. The housing market in many areas is due for a downward turn and this could devastate someone who took an ARM expecting to be out in a couple years. The choice of leave and take a big loss of equity vs pay a much higher, possibly too high, payment is an ugly one.


[/ QUOTE ]
I guess my view of ARM's are quite different. I happen to be 18 months into a 5/1, so there may be a little bit of me defending my decision wading into this...

If a person KNOWS they will only be in a home for say 2-4 years, how can an ARM be bad?
Are you saying that the market could take such a dive that the owner may not be able to sell at the end of that period?

Aside from that possibility, which IMO is remote, why so negative?

4 yr comparison (based on bankrate.com overnight averages):
200k mtg
30yr fixed, 5.7%, $1160.80/month, 48 months=$55718.40
5/1 ARM, 5.24%, $1103.17/month, 48 months=$52952.16

So $2766 difference in favor of the ARM

And 200k should get you a great condo in about 75% of the country.

Fill me in if I'm missing something major here... /images/graemlins/confused.gif

Edit: Of course I stupidly forget the possibility of being forced to sell for less. Go ahead, kick me...
Another Edit: but since that could happen with a 30 yr fixed also, it's irrelevant. No kicking! Now I'm just confused and rambling....

[SomethingClever]

[ QUOTE ]
So you dont think the possiblity of someone's mortgage doubling is not a good reason for cautioning someone against an ARM? The fact is, home buyers tend to overextend themselves. Just look at how much lenders are willing to give borrowers and you can see why this is the case. If someone is overextended on day 1 of a mortgage, what happens 1 year down the road when Mr McMansion owner doesnt get that correspnding raise in income to cover the cost of that nice, new, increased mortgage payment?

[/ QUOTE ]

Well, if the rates keep going up, and the market keeps going down, you can always refinance to a fixed rate loan before it gets too bad.

[Cubswin]

You calculations assume interest rates dont move... correct?

[Cubswin]

At an additional cost, of course. One day i want to be the bank /images/graemlins/smile.gif

[jaydub]

cubsalwayslose,

Perhaps I was not clear. My statement was basically that just because a person can get themselves into trouble by buying too much house with an ARM does not necessarily mean that ARMs themselves are a bad choice. Don't get me wrong, they are here but the reason is not concerns about buying too much house.

J

[Cubswin]

Correct, ARMs are not a bad choice in all instances, especially people planning to own for a short period of time or those planning to buy when rates are dropping. Rates are currently on the rise so i think right now is not the right time to jump into one.

[dcasper70]

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You calculations assume interest rates dont move... correct?

[/ QUOTE ]
Absolutely no assumption at all.
In a 4 year comparison, I GARANTEE interest rates don't move.

By definition, the rate in a 5/1 ARM doesn't move for 5 years.
Should I also define 30yr FIXED.....???

[dcasper70]

[ QUOTE ]
Correct, ARMs are not a bad choice in all instances, especially people planning to own for a short period of time

[/ QUOTE ]
Wow, sounds like something from number 2 (http://forumserver.twoplustwo.com/showflat.php?Cat=0&amp;Board=exchange&amp;Number=4310449&amp;S earchpage=1&amp;Main=4309743&amp;Words=+dcasper70&amp;topic=&amp;S earch=true#Post4310449)

Thanks for all the advice - I've found it really helpful. I may reconsider the amount that I'm saving, but I really don't mind living like a bum for a while to save and buy. I have a terrible fear of turning 50 and having no savings like my dad. Or worse, turning 40 and having my dad want to rely on my savings.

And I promise no gimmick accounts later; I live much too far north to get robbed by mexicans. We have our own stereotypes up here, but they aren't about cleaning ladies. Or any kind of work at all.

[SomethingClever]

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At an additional cost, of course. One day i want to be the bank /images/graemlins/smile.gif

[/ QUOTE ]

Yeah, but it could easily be worth it.

How bout them ING flat $555 refi rates?

[Ray Zee]

generally about a third of your gross income as the top figure.

but about owning a home. it can make sense to rent and put the difference between the payments into another type of investment. but most people will not be dilligent and spend the money. so when you are 50 you will likely still be a renter.
or buy a house and work hard to pay it off. when you are 50 it will have increased in value many times over and you will own it free and clear and will not have to worry about your expenses as the major one is now gone. and you may find yourself quite rich.