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I am a US citizen living in Europe, so this question might be complicated by tax laws, but let's just ignore them for now.

Basically, I am really emotionally driven to buy a house but am realizing that my decision has nothing to do with what makes sense financially. Before I do anything rash I want to make sense that it is not a terrible decision.

I have ~150K saved and am looking at houses that cost 300K (~340K after taxes & mortgage fees are applied).

If I spend ~100K (and keep 50K to invest in other places) on a 300K house and make up the rest with a 30 year mortgage at ~2% I will end up paying about 900/month.

I make around 2.5K/month so it would represent 36% of my salary. If I put ~150K down then the mortgage will be about 700/month which is ~28%. But then I do not have any savings left.

I do not expect the house to significantly increase in value, but I do expect to live there at least during the next 5 years.

Alternative to buying is to rent, which costs about 1K-1.5K/month.

Obviously nobody can tell me what to do, but what recommendations are out there? Also, what basic articles should I read? I don't feel very well educated about this huge decision.

Updated/fixed question to answer some comments below:

  • 2.5k/month is net.
  • I have permanent residency in Spain
  • Mortgage rates are currently low: I can find a 10-year fixed at 2% which then converts to Euribor + 0,99%).
  • Taxes are 10% of the purchase price. So 300K -> 330K post tax. Also, fees add up to about 7K. So total 300K -> 337K
  • Down the line, capital gains tax is 21% if I sell.

Update:

Reading the answers, with a net income of 2.5K/month I should be looking for a mortgage around 700/month. Looks like with 100K down that means I should not spend more than 280K (max 300K) on a house.

Thanks everyone, I am still not sure what to do, but I feel a lot better informed.

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    As an expat do you think you'll be likely to either return to the US or become a permanent EU resident? – Freiheit Apr 25 '17 at 15:27
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    Also, bear in mind that by locking up your money in EU real estate and/or loans, you are exposing yourself to currency fluctuations if you plan to return to the US eventually. Converting your savings to dollars as you go along may be lower risk strategy - but if I knew how to predict exchange rate movements accurately, I wouldn't be spending my time writing comments on SE! – alephzero Apr 25 '17 at 15:36
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    Re "my decision has nothing to do with what makes sense financially": All emotional decisions are bound to be financially sub-optimal, but they are the important ones. Our ratio has to serve our emotions, not vice versa. (Whether you can actually afford the house I have no idea though.) – Peter A. Schneider Apr 25 '17 at 18:14
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    @njzk2: All over Europe. Strong renter protection comes at a price; landlords will include a risk premium in the rent. This also means there are less potential landlords competing to buy houses, which depresses sales prices. – MSalters Apr 26 '17 at 7:25
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    @njzk2 I don't know where in Spain this house is, but in tourist areas (like where I live, on the Canary Islands) you have an additional factor driving up rental prices: letting to tourists is infinitely more lucrative than long-term lets to residents. It is often illegal without a proper license (perhaps that's what's keeping purchase prices from also exploding completely) but everyone and their dog does it. Plus what MSalters says about renter protection, which tends to be very on the side of renters (and sometimes even squatters) in Europe. – Pekka 웃 Apr 26 '17 at 10:16
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The common "rule of thumb" I have seen is that mortgage payments (including taxes and insurance) should not exceed more than 25-30% of your gross income. That is to leave room for income taxes, living expenses, etc. So 30% is definitely on the high range, and 40% would leave you house poor.

I would also not count on "other investments" to make up the difference. While many investments make more than 2.5% on average, you need to incorporate risk in a comparison of returns, especially if you're relying on those returns to make your mortgage payment. Consider what would happen if your investments lost 2% in one month (which is not uncommon for investments that make more than 10% annually).

30% might be doable depending on whether you can save on other expenses (transportation, etc.) but it still seems like a tight fit.

You are wise to recognize that your emotions may be getting the best of you. Don't let your dream house become a nightmare.

I would be paying 1K-1.5K/month on rent if I don't buy a house.

I just connected this part. I'm not sure how you can afford that on a 2.5K salary (even net, but certainly not gross). As Nathan mentions, there are a lot of additional costs that come with a house that make the comparison tricky, but this rent certainly seems unaffordable.

  • From the post it seems like the OP is already spending 40%+ on rent - why not buy in that situation? – LMGagne Apr 25 '17 at 14:54
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    Well, if you're spending 40% on rent and you hit a rough patch, or your needs change, you can always just rent a cheaper place. If you're tied into a mortgage that eats 40% of your income, you have very few options; especially if the housing market takes a downturn. – Keith Apr 25 '17 at 14:58
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    @Keith: That assumes there ARE cheaper places to rent. – jamesqf Apr 25 '17 at 17:16
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    @jamesqf True, but there aren't too many places where there aren't alternatives to spending "1K-1.5K/month on rent". But either way, my point was simply that if you over-spend on your first home, you can end up in a world of hurt if things don't go as planned. The same may be true of renting, but in my opinion to a MUCH lesser extent. – Keith Apr 25 '17 at 17:38
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    @jamesqf If you become unemployed, you would be in a position of moving to a part of the country where there are no jobs and rents are much, much lower. – gerrit Apr 26 '17 at 11:15
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First, let me get "rent" out of the way.

There is 100% nothing wring with renting. A lot of people will tell you you are just throwing your money down a hole and you will never get it back, but the sheer honest truth (IMO) is that you are paying for a service. That service includes repairs, a place to live, and the flexibility to change your circumstances if you need to (have a kid, get married, kid goes off to school, etc etc.). With a house purchase, it takes a LONG TIME to get to a place where the money you are throwing into that "investment" gives you any kind of return, AND that return is highly dependent on things that may not be in your control (housing prices, exchange rates, current neighbors, all kinds of fun things).

That is not to say that buying is flat out bad, but don't discourage renting as a tool. No matter what some people say, renting is a perfectly reasonable thing to do, and actually a good "investment" in many, many, situations (i.e. you lose less money than a purchase).

I went though all that, because there are people that will tell you to "always" buy. These people are wrong. Look at their past history and you will often see, one foreclosure, or many house purchases. Just keep in mind that it takes a long time to get "positive" on a house purchase, and in some cases you may never get positive.

Buying in a city

Purchasing a house in a city is a gamble. That area may improve over time, or it may fall into a "bad neighborhood" over time. Yes that LAND is a good purchase, it will probably go up in value in the big picture, but that could easily take 50 to 100 years, maybe even longer. Also unlike a "house in the country" you are usually going to have stricter code enforcement, AND more codes/laws to follow. For no other reason then their are more people around. Make sure you understand that before going in.

Buying in another country

Buying a house in another country may have some serious legal issues, but we will ignore that for now as requested. What is more likely to impact you are "social" issues. A made up example (sorry don't buy houses in London) would be the kitchen. In the US it is often common for a house to be sold with no appliances in the kitchen. Is that true in London? When you go to sell the house would you be expected to furnish it first? Again a made up example, but you should be aware of this. Also, there may be subtitle ways to tell the "direction" a neighborhood is heading in. I know thous ways in Florida. Do you know them in London?

Now for the money.

So, the rule I like to follow is that up to 1/3 of your gross income should go towards "housing". Now that's important to know that "housing" includes rent or mortgage AND any services (landscaping) your must spend to keep the house including repairs and setting aside the "roof fund"

You make 2,500 a month (I know you said net but it's the number I have to work with). So I would suggest a mortgage no more then 750-800. Then pest control (depends on area, here in Florida you NEED it), and lawn care service (depends on lawn, a real nice to have sometimes) should come in under $100. So you are spending $850 to $900 a month on "housing" and the rest of whatever the gross is can go to the "roof fund". The roof fund is important. Your Heat/AC will break, your roof will need repairs. This is part of the ownership. But that fund should not have to grow very fast. Even if it's just $20 a month, by the time your roof needs repairs you will have a nice "nest egg" to work from.

Of course if you don't need pest control, or can handle that your self, or if you don't need lawn service, or you do need some other service, then those numbers should be figured into (or out of) your "housing costs". Insurance is certainly part of the "houses costs" line item.

A note on renting

The number for renting is the same. 33% of your gross income for rent + renters insurance + any other required services. It's a lot easier to get out of a lease though. If you have to break the 33% rule, then renting is the way to do it.

A note on sentiment

There is no other viable reason to buy a house as a normal individual. If your an investor, that's a different story, but as a normal person, the only real reason to buy a house is because you like it.

One last thing

I am a strong believer in the concept of "Don't buy stuff you can't afford"! 33% is a good number and it leaves lots of left over money for things like investing, savings, retirement, and buying furniture for your new house. That been said, you may notice that with a 2.5k income your housing costs should not exceed $825 (again that should be based on your gross not net). Yep, that's a small number for a big city. But perhaps you should consider the fact that you can't afford to live in that city. What about the outskirts and commuting? How about a new job that pays more, or a job that is in an area where the cost of living is less? In my experience it would be much better to restructure your entire life to hit that 33% than to "force it" by having housing costs at 45%. There are ways to get that housing cost down, or the gross income up (like a room mate, or renting a room in the house if you can), and they each have their own risks and should not be ignored. But that 33% magic number really is a good place to sit. (but don't go changing you life because it's 34%, you have to use common sense).

8

You've done some of the math on rent paid vs. mortgage, some other things to consider:

Repairs

You wouldn't pay for repairs if you were renting, how old is the house? Will you have sufficient cash flow to cover repairs and average them in for the difference between your monthly rent and the mortgage?

Taxes

How much is your tax situation complicated by owning property in another country. Are there property taxes? Capital gains?

Real Estate Commissions and Fees

In addition to standard commissions, you should probably expect to pay a lawyer to review local laws for foreign nationals purchasing real estate.


After considering other hidden costs, your next question should be how long you plan to stay. Could political changes cause you to leave sooner than expected? If so, there is some additional risk to owning real estate.

  • Thanks for the answer. I am staying in Europe for the foreseeable future (at least 5 years, maybe forever). Tax wise I am not sure how it changes things, but I am sure it will have some impact. Regarding repairs: is 1% of the total value per year realistic? So 3K/year = 250/month. Real Estate fees are around 7K and are included above. – lambda Apr 25 '17 at 16:39
  • @lambda, included for the purchase only, or for ongoing tax issues and sale as well? That's the total cost of ownership but that is less likely to be a big factor if you are staying much longer than 5 years. – Nathan L Apr 25 '17 at 17:17
  • I saw ~1% of total purchase value referenced as the cost of maintaining the house after purchase. – lambda Apr 25 '17 at 17:36
  • Sorry, I mean in the real estate commissions and legal fees. If you pay a 6% commission to buy, then pay another 6% commission to sell again only a couple of years later (not to mention a 6% commission to buy a replacement) you can see that the economics of renting look better if you move frequently. – Nathan L Apr 25 '17 at 17:41
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    Agreed. If I buy I will stay. If I have to move I will very likely just opt to rent it out instead of selling. – lambda Apr 25 '17 at 18:25
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If 2.5k/month is your net income, then conventional wisdom would have you looking to keep your monthly house payment around 1000, if that's 2.5k gross, then around 750. Even though you might pay more in rent, you have to account for more than just the mortgage when considering a home purchase, like repairing/replacing major appliances, taxes/insurance, for example.

It's prudent to keep an emergency fund (3-6 months worth of expenses is a common goal), so plunking down all of your savings to reduce the monthly payment is not a good idea.

Personally, I think it's a sound decision to buy, but only if you can find an agreeable property for a price that doesn't stretch your budget too thin. I'd rather live low-stress in a smaller/less-fancy home than to be house poor.

  • OK, so looks like I should be aiming for a house around ~250K since a 30-year mortgage with a 100K downpayment would be around 650/month = 26% of monthly income. Right? – lambda Apr 25 '17 at 16:47
  • If that's do-able, some markets don't have agreeable cheaper options and you'd need to be in that 30-40% range if you were going to buy. It's all about what you're comfortable with. If you are fiscally conservative in other areas, maybe it doesn't feel as risky to spend 40% of gross on housing to you. – Hart CO Apr 25 '17 at 23:15
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Obviously you want to make sure that you are going to stay there for long enough for it to be worthwhile - at least 5 years is the normal recommendation. Otherwise you've wasted the 50k (!) in "fees and taxes". So therefore you need to be sure of your employment situation, preferably that you could find other work nearby if your current job ends. In your case you also need to consider residence - as a "US citizen living in Europe" you're dependent on visas. Do you have permanent residence yet?

You should also consider the volatility of local prices. It's difficult to estimate whether a local housing market is at its "top" or "bottom", but again if you get stuck buying in at the wrong point you could lose badly.

  • Thanks for the answer. Luckily the visa is not an issue and I am very confident that I will not be out of a job in the next 5 years. – lambda Apr 25 '17 at 16:43
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I tried your buy vs. rent scenarios in a free forecasting calculator since I wanted to include the artifacts so you could see real numbers for yourself.

Shared Whatll.Be models (referral code: money.stackexchange.com):

You’ll see that your RAW numbers show the home ownership scenario is much better financially, mostly because you're talking 18K/yr rent vs less than 4K/yr mortgage interest with your principal payments coming back to you at home sale. If I understood and figure correctly, your home spend in the first 10 years would be ~75K (40K plus ~3.5K/yr). Your rent for 10 years would be ~120K (1000/mo). And that’s without adding any appreciation (assuming 1.5%/yr, that would be an extra ~4.5K/yr on your 300K house).

Across a mere 5 years there's still a ~24K benefit to home ownership or ~7K with no appreciation. Of course your liquid spendable cash would be lower in the meantime, that is until you finally sold the home to realize the big benefit of your returned principal. Here in the US there's also the tax benefit for mortgage interest, but I won't speak to your European situation.

The group is right, and you need to add in "cost of home ownership," and consider risk. Keep thinking about what else you need to add to the cost above and beyond renting (yearly taxes, utilities, repairs, pest control, etc...) and you might still find that home ownership is better for your forecast. If you think you won't lose your income, and you think you can sell the house near or above what you paid, home ownership would be worth the risk.

The group is also right about NOT spending all of your income on your home. I did not try to factor everything you should consider into those Whatll.Be models. You’re going to have to add other expenses into your forecast such as travel, groceries, eating out, medical, amazon prime, gambling night, etc…

Tweak the models and ensure they reflect your wider scenario and the excercise should gain you the tangible insights you want.

(Full disclosure: I'm passionate about making "the right decisions" for my future and I'm a developer, so I made Whatll.Be to freely help with these types of scenario questions. Even though it is currently in early beta, I hope this early reference will be useful to you.)

  • @ChrisW.Rea, Oops, I made it so these links would not require the "beta test" code, but SE doesn't let referrers pass along. Thanks for letting me know! I edited the post. – AAron Jun 4 '17 at 13:35

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