Financial advisors recommend spending no more than 30% of take-home pay on housing. I have always followed this rule and now have $750,000 in cash savings. But now I have to take a big step. Are there ever exceptions to this that make sense?
My wife and I have just learned that we are pregnant with our second child. We want to get closer to be with the family for childcare because our eldest is still 22 months old and cannot be put in a crèche for medical reasons.
We live in our single family home in a nice area of Los Angeles. We bought the house for $758,000 in 2016. We invested $200,000 and financed the remaining $568,000. Our monthly housing costs, including mortgage, taxes, insurance and utilities, total approximately $3,400 per month. My wife and I both work full time. Our combined monthly net income is $12,200.
We want to move into a house closer to the family. A relative has a house available and it is very comparable to our current house. She has rented in the past for $6,000 but is willing to offer us for $4,600. Including water and electric services, I estimate our new housing costs to be close to $5,000 per month. She said the $4,600 covered all of her overhead and she was willing to give a discount in exchange for not having to deal with tenant issues. Going from $3,400 to $5,000 is a big change, in addition to our growing family and rising childcare costs. I also worry about inflation driving up the cost of everyday goods and services. In short, I don’t think we can or should afford to spend 45% of our net income on housing when we have a baby on the way.
Maybe I can rent out our current house to cover our current mortgage and taxes as well as some cash to help cover new child care costs when the baby is due this summer. However, dealing with a new baby coming and our young toddler not old enough to go to school will be a major undertaking. We won’t have the energy or motivation to deal with property management for the foreseeable future.
““Dealing with a new baby coming and our young toddler not old enough to go to school will be a major undertaking.””
Alternatively I believe I can sell my house for $1.4m – I got a cash offer worth $1.3m so I have the potential to list it further on the market. Selling the house and using the proceeds to help cover new housing costs of $5,000 per month will help me for the next few years and may allow us to become a homeowner if a buying opportunity arises in three to four years.
Could our situation be an exception to the 30% rule? I feel like I’m going to stretch my family financially if we don’t apply additional rental income or income from the sale of the house, as I don’t think I can handle the task of being a landlord.
Difficult to abandon the 30% rule
“The Big Move” is a MarketWatch column examining the ins and outs of real estate, from navigating the hunt for a new home to applying for a mortgage.
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I think it may be helpful to put your situation in context. In 2019, 46% of renters nationwide were cost overburdened, meaning they spent more than 30% of their income on housing, according to a report by Harvard University’s Joint Center for Housing Studies. This equates to some 20.4 million people. And almost one in four tenants were badly affected, spending more than 50% of their take home pay on housing costs.
Understandably, households with an income of $30,000 a year or less were much more likely to feel the strain. But it was the share of middle-income renters — those earning between $30,000 and $74,999 a year — who saw the biggest increase in charges between 2014 and 2019. Before COVID-19, 41% of these renters had to spend more than 30% of their net salary on housing.
In today’s market, it’s safe to say that the situation isn’t getting all that much better. Rent prices are rising at a record pace, at the same time as inflation has worsened significantly. It comes shortly after the country faced a major deportation crisis amid the pandemic. More than 11% of renters said they weren’t confident they would be able to afford next month’s rent starting in early February, according to data from a US Census Bureau survey.
“41% of middle-income renters spent more than 30% of their annual income on housing-related expenses.”
I’m not telling you all this to shame you – on the contrary, I hope you feel grateful when you consider these facts. You are in a position where you can afford to make such a decision, unlike many households who are forced into situations where they spend a large portion of their income on housing.
You are right to approach the situation with caution, but I think you can also afford to (literally) let yourself go. I presented your scenario to financial advisers, and the prevailing sentiment was: the 30% rule is not hard and fast. As a guide, it is a useful goal to keep in mind and an important tool when developing public policy on housing affordability. But this is not necessarily a one-size-fits-all approach.
“What’s important is not the so-called 30% rule,” said George Gagliardi, founder of Massachusetts-based advisory firm Coromandel Wealth Management. Instead, what’s important, Gagliardi said, is free cash flow and retirement savings, among other things.
Your $750,000 nest egg is admirable, and I would suggest first that when mapping your cash flow when you move, you make sure you can afford to continue building that savings pool. Not only that, but don’t forget to consider saving for your children’s education.
Look at your other expenses and find out where there is wiggle room. This will help you determine if you can actually afford this move.
“I’m always concerned for families who are ‘housing poor’ because it limits them in other areas of life, especially with young children,” said Jennifer Weber, vice president of financial planning at Weber Asset Management, based in New York. “Their day-to-day expenses will increase over time, but changing or reducing fixed expenses like rent or mortgage payments is much more difficult.”
Making that move will likely mean cutting back on some luxuries such as dining out or vacations. Decide if you can live with this compromise.
““Daily living expenses will increase over time, but changing or reducing fixed expenses such as rent or mortgage payments is much more difficult.””
Another thing to keep in mind when making this choice is how much you would spend on child care if you weren’t closer to your family. As Brooklyn-based financial planner Landon Tan pointed out, child care can often top $1,600 a month in many parts of the country. What would the alternative look like and cost? If your back-up plan is to hire a nanny or other in-home caregiver, the difference in monthly costs is likely not very large.
At the same time, you’ll want to make sure you can afford to seek professional support with your children if for some reason your family is unable to help.
If you decide to move, several advisors have recommended that you consider selling your old home. As you mentioned yourself, you won’t have the time or energy to deal with property management. Paying an outside company to do this is an option, but comes at a cost. Selling the house, especially 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 does sound like a move that would benefit your family and bring some peace of mind – a necessity for parents.
As Brett Maikowski, investment advisor at Texas-based THM Wealth Management cleverly puts it, “Good financial planning is all about aligning your money with what’s important to you.
If it turns out that your family’s top priority over the next few years is offsetting the stress of childcare, then the move will be worth it. But you may decide that trading the stress of raising two toddlers with fewer resources nearby for the stress of tighter finances isn’t worth it. It’s a decision you and your wife can make. But if you continue to take this measured approach, I’m sure you’ll choose the best option for your household. I wish you all good luck.
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