Tag Archives: PITI

Figuring Out How Much House We Can Afford with RSUs

We are going to buy a house. It is not the most financially wise decision, but life isn’t about always being financially wise–sometimes you have to splurge (within reason) and take risks. I accept that buying a house will reduce our total networth in the future, and I’m ok with that. After all, what is the point of making money if you can’t enjoy it, and what would I enjoy more than having a home of my own to raise my kids in? Sure I’d love to take lots of international trips and such, but with a toddler and one on the way (and maybe one more in 2-3 years), that’s not happening for a while. My house will be my Paris and Prague and Tokyo.

But one thing has been very difficult to figure out — how much we can afford. All home buying calculators assume you have a fairly consistent income that goes up by a consistent percentage every year. That isn’t reality for us. There are many ways to figure out how much you can afford, but one model that I’ve decided I like is 28% of pre-tax income (I’d prefer to do post-tax but if I do that I’ll never afford a home here.)

I worked out the chart below, which shows potential annual income (pre tax) with the amount of mortgage (PITI total) we can afford per month (on the right) and then on the let, I have the house price and the total amount of PITI with a 3.5% 30 year fixed loan. Our goal would be to afford a $1.7M home with an in-law, where my father-in-law would pay some rent. This means based on the chart below we need to make $320,000 per year, consistently, to afford a home at this price point. (*my insurance estimates are probably way off but I tried to figure out what home insurance would cost in California with earthquake insurance tacked on — if these numbers look wrong please let me know in a comment.)

Total Year Total Month Mortgage Max (28%) Total Monthly House Price Mortgage (3.5) Taxes Insurance Earthquake
$210,000 $17,500 $4,900 $4,872 $1,000,000 $3,412 $933 $167 $360
$255,000 $21,250 $5,950 $5,957 $1,200,000 $4,310 $1,120 $167 $360
$300,000 $25,000 $7,000 $6,862 $1,400,000 $5,029 $1,307 $167 $360
$320,000 $26,667 $7,467 $7,767 $1,600,000 $5,747 $1,493 $167 $360
$400,000 $33,333 $9,333 $9,936 $2,000,000 $7,543 $1,867 $167 $360
$500,000 $41,667 $11,667 $11,381 $2,200,000 $8,801 $2,053 $167 $360

 

Right now, I’m earning $170,000 in base income, and my husband makes $85,000. Based on our minimum income, that gets us to $1.2M of house… which isn’t enough here. To get to that $1.6M target (which is still a small house and a fixer upper), we need $320k in annual income. So either I need to consistently make $235k, or my husband needs to increase his income, or some combination of both.

What the above does not account for is that my annual bonus is $34,000. I have no idea if I will get a bonus this year or how much of it I will get. I have received my full bonus every year for the past 3 years BUT there is no guarantee I will receive a bonus in the future, or that future jobs will pay such a sizable amount in bonus. I’m not sure if I should include my bonus in my calculations or not. I’d rather not, because a bonus is nice to have for an extra vacation or gift for the kids vs worked into our planned home expenses. It would be nice if my base was $200k, so I could actually include that in the calculations. If I could get my base to $200k and my husband could figure out how to make $120k, we’d be in pretty good shape.

In addition to the base and bonus, I also receive a large amount of my income in RSUs. My refreshes have not been great, though. And if I lose my job, then I will not be able to obtain the same amount in RSU.

When I joined my company, my total compensation was as follows:

  • $165k (base)
  • $33 (bonus)
  • $56k (RSU/yr for 4 years) (*currently worth ~$350k+/yr)
  • TOTAL = ~$254k

My current compensation once I fully vest my first grant is:

  • $170k (base)
  • $34k (bonus)
  • $12k (RSU/yr)
  • TOTAL = $216k

So, that’s good, with bonus and RSU I’m still getting close to the $235k I need to make to afford a $1.6M home, but not quite, and that’s including bonus and RSU which are all variable.

What’s scarier is that if I lose this job, I have no idea if I will be able to do better than $150k salary with no bonus or RSU (I feel fairly confident I can find a job with $150k salary since before I started this job I had a few offers for that amount at startups that I turned down as they were way too low.) So do I base my home purchase off of $150k (me) + $85k (husband) = $235k/yr of income? Then we a afford a $1M house… so we can’t afford any house here and we’ll just continue renting. However, with my RSU growth, my income this year and next year are very high, and it “feels” like I should be able to afford more house. But can I?

Should We Buy a Home or Rent a Home in the Bay Area?

East Bay. North Bay. South Bay. Peninsula (Bay). So many–unaffordable–options where to live!

Sane people would take this pandemic situation and pack their bags and head to any reasonably blue part of the country that doesn’t cost $1000 per square foot.

But we’re crazy and want to stay. And there is no reasonable way to calculate how much house we can afford because our income is SO variable. This year we might make $700k (yes that’s crazy and like double our best year ever)! Two years from now, we might be lucky if we make $200k. How on earth do we figure out what we can afford?

28% of Lowest Income Earner After Tax
The safest way to figure out how much you can afford is to plan on spending 28% of the lowest income earner’s income after tax. My husband makes $90,000 but since that doesn’t include benefits I’m going to say that’s $75,000. If we as a family made $90,000, our taxes would be lower. That would be $7500 a month pre tax or maybe $6000 after tax. We could afford $1680 on rent or mortgage per month.

Well, that’s not going to work… we’re already spending too much at $2600 per month on renting our one bedroom. I guess we can’t plan based on this conservative model.

28% of dual income assuming minimum earning potential
If I assume my husband can keep his $90k a year job even and I can manage to make $150k on average, that gets us to $240k a year. I think I can probably make more than $150k but I don’t feel comfortable committing to more than that (my base is now $170k.) So At $240k a year that’s $20k a month pre-tax, or $10k after tax. So we should spend $2800 on housing a month.

That’s about what we spend now. :/

36% pre-tax dual income minimum earning potential
Same numbers as above, but I’ve read some more risky plans suggest 36% of pre-tax income. That gets us to $3600–still not going to buy us a house in the Bay Area!

Ok, so none of these models work. So how do we figure out what we can really afford?

  • Downpayment & Emergency Fund: $380k
  • Pre-Tax Taxable: $197k ($98k after tax)
  • Taxable Accounts: $294k ($205k after tax)
  • Retirement Accounts Pre Tax: $346.5k ($242k after tax)
  • Retirement Accounts Post Tax: $70k
  • 529 College Fund: $52k
  • TOTAL NETWORTH AFTER TAX = $1M
  • Potential earnings next 1.5 years = $710k pre-tax ($355 post tax) + ~$100k savings from bonus and income (if we stay in our current apartment)
  • TOTAL NETWORTH AFTER TAX IN 1.5 years = ~$1.45M

So if I can maintain employment until January 2022, and my husband keeps his job, and the stock market doesn’t totally tank (which it could) we will have about $1.45M after tax, with $1M of that being in non-retirement and non-529 accounts (or maybe little less if we put more into 529 which we probably will.)

So let’s say in 1.5 years we have $1M in cash and after-tax taxable funds. But our income ratios say we cannot afford a home that costs more than $2800 a month.

Do we put down a large downpayment?

One way to reduce the monthly cost of a home is to put down a giant downpayment. Do we wait until we put down 50% or more on a $1.7M home? Does that work…

$1.7M home
55% downpayment = $935k!
$3875 monthly payment

Ok, so we put down almost $1M and we still have a $3875 monthly payment, which according to above calculations is still more than we should be spending on a mortgage based on our income!!!

And I don’t think we should $1M into a house probably, but it seems to be the only way to get our monthly costs down to something within a reasonable range.

How does anyone afford a house here?

Even though my income is good now, I cannot assume this will go on forever. I already know I need to change jobs in two years to get another stock grant, and it’s highly unlikely my next job will see growth at the same rate my current company has over my tenure here. I’ve been very fortunate to be part of this growth, but that’s not the reality of my future jobs. I already want to take on less stressful roles so I can actually see my children grow up. This shelter in place situation has made me realize just how important that is.

Before you say WHY DON’T YOU LEAVE THE BAY AREA just know that my husband refuses to. I don’t WANT to but every time I run these numbers I think what we need to do is rent here for another 1.5 years so I can vest my stock and then we need to GTFO of this HCOL area and live a slower, better life somewhere else. We’ve talked about moving to maybe Seattle, but I’m not a fan of the Pacific Northwest. I’m not sure where we’d move. He likes rain and grey skies, I like sun and heat. I like oceans. He likes being close to the Bay Area because his family is here. My family is in PA and FL. I feel comfortable with the job situation here–I don’t know if I could get a job or have job stability elsewhere. Maybe New York. I’d move to New York, not sure he would.

So we’re kind of stuck in this dilemma. I want to buy a house because to me that feels like I’ve made it. I want to settle down and meet the neighbors and really feel like we have a place for our kids to grow up. It also feels so not worth being in a career I don’t love and being so stressed (though less so not having to go into the office) and making $600k a year right now to not be able to afford a house because that $600k is meaningless in the grand scheme of things. And I know I sound like I should be thrown in the looney bin because $600k is a fucking lot of money–especially when a huge chunk of the country isn’t even getting a paycheck right now. I know it. It doesn’t change the math. We can’t afford a house. Not here. Not if we’re being remotely risk averse about it.

It is more challenging in that my husband is requiring us to live with his father-in-law. His father-in-law does provide part-time childcare, so I am supportive of this–and he can contribute to the monthly mortgage–but it makes it even harder to find a house that  is within the ballpark of reasonable for our projected income levels. I can’t expect my husband to get raises as he never asks for them. I got a shitty 1.7% raise last year so I’m just estimating I’ll stay flat for the foreseeable future, esp given the state the world is in today. We really need to find a $1.5M house with an ADU and put 50% down ($750,000) and then his father can contribute $2k a month and we’d be ok.

I don’t know what to do. I feel like until I have $5M in networth, I won’t feel like we’re in a good place to buy a house. But with one toddler and a kid on the way, I feel like it’s the right time to buy. What do we do?