Dear MarketWatch,
Financial advisers recommend spending no more than 30% of take-home pay on housing. I have always lived by this rule and now have $750,000 in cash savings. But now I need to make a big move. Is there ever exceptions to this that make good sense?
My wife and I just found out that we are pregnant with our second child. We want to move closer to be with family for childcare support because our oldest is still 22 months old and can’t be put in daycare for medical reasons.
We are living in our single family house in a nice neighborhood in Los Angeles. We purchased the house for $758,000 in 2016. We put down $200,000 and financed the remaining $568,000. Our monthly housing costs, including mortgage, tax, insurance and utilities, total roughly $3,400 per month. My wife and I both work full time. Our combined monthly take home income is $12,200.
We want to move into a house that is closer to family. A relative has a house available and it’s very comparable to our current house. She rented in the past for $6,000 but is willing to offer us for $4,600. Factoring water and power utilities, I estimate our new housing costs to be close to $5,000 per month. She said the $4,600 covers all her overhead, and she is willing to give discount in exchange for not having to deal with tenant issues. Going from paying $3,400 to $5,000 is a big change, in addition to our growing family and the increasing cost of childcare. I also worry about the inflation which is driving up the cost of everyday goods and services. In short, I don’t feel that we can or should afford to pay 45% of our take home income towards housing when we have a baby on the way.
Perhaps I can rent out our current house to cover our current mortgage and tax as well as some cash flow to help with new childcare cost when the baby is due this summer. However, dealing with a new baby coming and our young toddler who is not old enough for school will be a major undertaking. We will not have the energy or the motivation to deal with property management for the foreseeable future.
“‘Dealing with a new baby coming and our young toddler who is not old enough for school will be a major undertaking.’”
Alternatively, I believe I can sell my house for $1.4 million — I received a cash offer value of $1.3 million so I have the potential for more listing it on the market. Selling the house and using the proceeds to help cover the new $5,000 per month housing cost will help me for the next several years, and perhaps allow us to own again if a purchase opportunity comes up in three to four years.
Would our situation be an exception to the 30% rule? I feel that I am going to stretch my family financially if we don’t apply additional rental income or income from selling the house, as I don’t think I can stomach the task of being a landlord.
Best,
Finding it hard to give it up the 30% rule
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at [email protected].
Dear Finding,
I think it might be helpful to put your situation in context. As of 2019, 46% of renters were cost-burdened nationally, meaning they spent more than 30% of their income on housing, according to a report from the Joint Center for Housing Studies at Harvard University. That equated to some 20.4 million people. And nearly one in four renters was severely burdened, spending over 50% of their take-home pay on housing-related costs.
Naturally, households with incomes at or below $30,000 annually were far more likely to feel the strain. But it’s the share of middle-income renters — those earning between $30,000 and $74,999 a year — who saw the biggest increase in cost burdens between 2014 and 2019. Before COVID-19, 41% of these renters had to spend over 30% of their take-home pay on housing.
In today’s market, it’s safe to say the situation likely isn’t improving all that much. Rental prices are rising at a record pace, at the same time as inflation has worsened broadly. That’s occurring not so long after the nation was facing a major eviction crisis amid the pandemic. Over 11% of renters said they were not confident they would be able to pay the next month’s rent as of early February, according to survey data from the U.S. Census Bureau.
“41% of middle-income renters spent over 30% of their annual income on housing-related costs.”
I’m not telling you all of this to make you feel ashamed — on the contrary, I hope you feel grateful when you consider those facts. You’re in a position where you can afford to make such a decision, unlike many households that are forced into situations where they’re spending a major chunk of their income on housing.
You’re right to approach the situation with caution, but I think you can also afford (literally) to cut yourself some slack. I presented your scenario to financial advisers, and the overwhelming sentiment was this: The 30% rule is not hard and fast. As a guideline, it’s a useful goal to have in mind, and an important tool when shaping public policy around housing affordability. But it’s not a one-size-fits-all approach necessarily.
“What is important isn’t the so-called 30% rule,” said George Gagliardi, founder of Massachusetts-based advisory firm Coromandel Wealth Management. Instead, what’s important, Gagliardi said, is available cash flow and retirement savings among other things.
Your $750,000 nest egg is admirable, and I would first suggest that when mapping out your cash flow when you move that you ensure you could afford to keep building this pool of savings. Not only that, but remember to account for saving for your kids’ education.
Look at your other expenses, and find out where there is wiggle room. This will help you determine whether you can actually afford this move.
“I am always worried about families who are ‘house poor’ because it restricts them in other areas of life, especially with young children,” said Jennifer Weber, vice president of financial planning at New York-based Weber Asset Management. “Their daily living expenses will increase with time, but it’s much harder to change or lower fixed expenses such as rent or mortgage payments.”
Making this move likely will mean cutting back on some luxuries such as eating out or vacations. Decide whether you can live with that trade-off.
“‘Daily living expenses will increase with time, but it’s much harder to change or lower fixed expenses such as rent or mortgage payments.’”
Another thing to keep in mind while making this choice is what you’d spend on childcare if you didn’t move closer to family. As Brooklyn-based financial planner Landon Tan pointed out, childcare can often exceed $1,600 a month in many parts of the country. What would the alternative look like and cost? If you’re back-up plan would be to hire a nanny or some other at-home caregiver, then chances are the difference in monthly costs may not amount to much.
At the same time, you’ll want to ensure that you could afford to bring on professional support with your kids if, for any reason, your family isn’t able to help out.
If you do decide to make the move, multiple advisers recommended considering selling your former home. As you mentioned yourself, you won’t have the time or energy to handle the property’s management. Paying an outside firm to do that is an option, but comes at a cost. Selling the home, particularly in today’s competitive market, would provide you with another source of funds to offset the monthly hit.
My ultimate advice to you: Keep talking to your wife about this opportunity. It really seems like a move that would benefit your family and provide some peace of mind — a necessity for parents.
As Brett Maikowski, an investment adviser representative with Texas-based THM Wealth Management, smartly puts it: “Good financial planning is about aligning your money with what’s important to you.”
If it turns out the top priority for your family in the next few years is offsetting the stresses of childcare, then the move will be worth it. But you may decide that trading the stress of raising two toddlers with fewer nearby resources for the stress of tighter finances isn’t worth it. That’s a decision only you and your wife can make. But if you continue to take this measured approach, then I’m sure you’ll settle on the best option for your household. I wish all of you the best of luck.
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