[ineedasername]

Precisely, which is why the "don't buy a home more than 2x annual salary" doesn't seem like a good rule: there are too many variables. Where I am, total cost of ownership for a small two bedroom house is generally slightly less than the cost of 2 bedroom apartment that is also smaller, and comes with the benefit of building equity. A clear advantage (in my mind) if you're going to stay there for a few years because you'll build at least a little equity and average property values will increase at least a little bit. In my case I have a moderate sized home and pay about than 70% of the rent rates for anything nearby with the same # of bedrooms & about 500sqft smaller, even after property taxes, utilities, and average monthly maintenance costs.

On the other hand I have family that live in an area where apartment rents are much cheaper than the monthly TCO for buying, and even if you can afford to buy renting makes more sense (unless you need 3-4 bedrooms for a family) because rents are so much cheaper & it is better to put the difference between monthly costs into an index fund and build equity that way.

[busterarm]

It's not even my rule. The 2x rule is older than shit...Just as time has gone up people are stretching it to 2.5x and 3x.

Another rule you can go with is the Rule of 28 if you prefer. These guidelines exist for a reason. Ignore at your own peril.

Lenders look at these things when considering giving you money. Using more leverage usually gives the bank a better deal than you.

[dragonwriter]

> These guidelines exist for a reason.

They exist because of the economic context at the time and place that they were generated, which may not have been valid for much more than that immediate context.

If you can find and examine the mathematical assumptions about cost and risk that justify the rule of thumb against current conditions, then you can make an informed evaluation of whether or not it applies to the current situation. If you can’t, like folk remedies, the advice is as likely to harmful as helpful in your actual concrete circumstances.

[busterarm]

Hey, what do I know?

I'm just debt-free millennial with a fully paid off house and car looking to purchase investment property #2 on another 15-year mortgage while renting an apartment in Manhattan.

[forrestthewoods]

This is just math. You don’t have to earn $200,000/year to afford a $400,000 property. Borrowing $400k costs about $2000/mo. Call it $2500 with taxes and maybe an HOA. That’s about $30,000/year, or 15% of $200,000. Take home on 200 will be north of $150.

Mortgage rates are sub 3% today. That rule of thumb that’s “been around forever” existed when rates were 10%. Such a rule can not possibly be the same when the rate changes so dramatically.

The consistent rule is what percent of your take home you’re comfortable spending. Not many people - owners or renters - spend under 15% on housing.

[busterarm]

There's also a risk management calculation here. Sure the easy money and high leverage works if your life circumstances only change for the positive.

I've also seen lots of people in the last two years who had made similar sound decisions who were then furloughed, or lost their jobs, or got sick, or got REALLY sick and ended up losing everything.

If you want to make higher risk bets, there are better avenues for it and certainly ones that you don't live in and risk losing.

[dragonwriter]

> I've also seen lots of people in the last two years who had made similar sound decisions who were then furloughed, or lost their jobs, or got sick, or got REALLY sick and ended up losing everything.

In a non-recourse state, you don’t really “lose everything”. You lose the house, when the bank gets around to foreclosing. If you recognize the problem before you have adverse marks on your credit history, it's pretty trivial to secure an apartment before you do, otherwise the challenge is finding a landlord willing to consider details of your circumstances in renting rather than just saying no because of the adverse credit.

> If you want to make higher risk bets, there are better avenues for it and certainly ones that you don't live in and risk losing.

What specifically is a better avenue, allowing both the use of leverage and the downside risk protection of buying a house in a non-recourse state?

Because, having been through pretty much exactly the negative scenario you describe—losing the house and, the cleanliness of my credit history—I don't regret it at all.

[ineedasername]

If you're losing everything, it really doesn't matter if your home was 2x or 20x. It's all gone. But for those situations short of losing everything, (lost job, furloughed, sick) then the scenario I outlined that allowed for saving 20% of income would be just of useful if housing was 60% of living expenses or 20% of living expenses.

But you also haven't commented on the aspect of the scenario I presented where a 4x home was still under Rule 28.

No single rule can encompass complex multivariate systems. That is all I am saying here. Otherwise, how about we end it here: It's clear we both agree that financial stability is good and should be a part of any long-term plan, we may simply disagree on the specific parameters that allow for it, which is fine. I appreciate the thoughtful conversation-- HN is one of the few places on the internet where I find that possible.

[ineedasername]

Okay, that's fantastic. I am honestly glad that you are doing well, there's no reason that many more people couldn't also have that financial security. But your personal anecdotal experience does not demonstrate that 2x should be the universal rule.

I am also a millennial, but I spent 4x for my house but now have a fully paid-off investment home and a 10% equity mortgage on my primary residence only because of recent home improvements and the fact that the low interest rates mean my excess money is much better used investing in an index fund instead of paying that 10% out of pocket by cashing out the investments. I have zero other debt, not a dime, not on credit cards, not on anything.

There are multiple paths to financial stability that do not have to involve a single rule. I'm glad it worked for you, but circumstances differ greatly between people.

[ineedasername]

There is no one size fits all, there is no inherent peril in ignoring these general rules. The age of the rules are irrelevant, whether you use expletives to describe them or not.

There is peril in ignoring the specifics of your own individual economic circumstances. If you make $300,000/year and aren't carrying significant other debt then you can afford 4x salary for a $1.2 million house because the ratio of your non-housing expenses do not have to scale upwards with your salary. At 4% interest that's $72k/year, leaving ample room for spending on a comfortable life style while still saving 20% of your salary. In fact that is actually less than your Rule of 28. Alternatively, if you make $300k/year but have $80k in credit card debt and additional business debt made on a personal guarantee then even a 2x house may be too expensive.

Situations vary based on much more complex factors than the salary:$home ratio. Simplistic rules are a greater peril than individual analysis.