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Six Homes, One Payment

It's been a while since I've gone and done some real math for you guys. Let's fix that. It's easy to look at the sale price of a home and have that be the deciding factor on what sort of house you buy. However, your monthly payment is what will dictate if you can stay in that house once its yours. Today we're going to calculate the average affordable monthly payment for a Chicago homeowner, and look at six different types of homes they could afford with wildly different purchase prices.

Step 1: Establish the monthly payment.

We've used the American Housing Survey (AHS) data from 2009 before. It's a little dated at this point but it's the only trustworthy survey that has numbers for the City of Chicago. Within that survey we discover that the median income for a Chicago Homeowner's Household was $56,200 per month. Divide that by twelve months and you get a monthly income of $4683.

Many lenders use 33% as the percentage of your income that should go towards housing costs. For today, we'll consider those housing costs to include your mortgage, your property taxes, your homeowner's insurance, assessments, and utility bills. 33 percent of $4683 is just over $1545, which is the number we'll shoot for.

Step 2: Determine some scenarios.

For this exercise I wanted six different scenarios, all for the same monthly payment. I chose three single family home options and three condo/co-op options.

  • A 5 bedroom single family home in Austin
  • A 3 bedroom single family home in Lakeview
  • A 3 bedroom LEED-certified single family home in North Center
  • A 1 bedroom condo in a high rise building with doorman & pool in the Gold Coast
  • A 2 bedroom condo in a vintage courtyard building in Lincoln Park
  • A 2 bedroom condo in a small co-op in Lakeview

Step 3: Source some utility, insurance and property tax rates.

For utility rates I went back to the same AHS data. I discovered that on the low end a homeowner would pay about $115. The median was about $350 and the high end would be way up around $700 per month for a big drafty house with a deluxe cable package and super fat internet bandwidth.

For the monthly insurance I used a ballpark figure that insurance would be the sale price divided by 3500.

Property tax numbers were sourced from actual listed 2011 taxes for properties similar to the ones I'm describing that have sold within the past four months in Chicago.

For all purchases I'm assuming an interest rate of 3.5% (the current national average on BankRate.com) except for the co-op, as those tend to be tougher to fund. For the co-op I'm using an interest rate of 3.625%. I'm also assuming a down payment of 20% of the purchase price. If you'd like to play with the interest rate, down payment and other financing aspects, you can check out the mortgage scenario calculator I wrote a few months ago.

The monthly homeownership cost consists of many smaller pieces.

Step 4: I do math for you.

The first scenario is the big single family home in Austin. This area has low property taxes but high insurance rates. Since it's a big, old house the utility usage is about as high as it can possibly get.

5 bedroom Single Family Home in Austin
Monthly Property Tax Escrow $125.00
Monthly Homeowner's Insurance Premium $80.87
Monthly Utilities (Heat, Power, Stove, Water, Cable) $700.00
Monthly Mortgage Principal & Interest $636.29
Total Monthly Payment  $1,542.16
Initial Loan Balance  $139,521.58
Maximum Home Price  $174,401.98

The next scenario is for a smaller single family home in Lakeview. Property taxes are much higher here than they are out in Austin, as are list prices. However, the insurance premiums would be a little lower here and for the smaller house it would cost much less in terms of utility bills.

3 bedroom Single Family Home in Lakeview
Monthly Property Tax Escrow $750.00
Monthly Homeowner's Insurance Premium $32.88
Monthly Utilities (Heat, Power, Stove, Water, Cable) $350.00
Monthly Mortgage Principal & Interest $405.00
Total Monthly Payment $1537.88
Initial Loan Balance $90,191.47
Maximum Home Price $112,739.34

So, moving in from Austin to Lakeview means you can afford $61,000 less house if you want to keep your monthly payment consistent. Now, what if we scaled back our neighborhood choice to something nice but not outrageous in terms of property tax, and cut back those utility bills with a LEED-certified Green home?

3 bedroom LEED Certified Single Family Home in North Center
Monthly Property Tax Escrow $350.00
Monthly Homeowner's Insurance Premium $80.57
Monthly Utilities (Heat, Power, Stove, Water, Cable) $115.00
Monthly Mortgage Principal & Interest $992.43
Total Monthly Payment $1538.00
Initial Loan Balance $220,982.46
Maximum Home Price $276,228.08

So moving just a few blocks north from Lakeview to NorthCenter and focusing your search on green homes can more than double how far your monthly budget will stretch for the same size house. Pretty cool.

Now what about condos and co-ops? Our first condo is a little one bedroom in a building full of amenities. Let's figure that the building has a full-time doorman, an exercise room, party room, roof deck, elevators, business center, receiving room and a dry-cleaners on site. These buildings tend to include most of your utilities, and the insurance premiums are really low. The assessments, however can be quite pricey. The number I've chosen for assessments in this case is far from the lowest in the Gold Coast area, but leaves at least a little room for a mortgage payment on top.

1 bedroom Condo in Amenity High Rise, Gold Coast
Monthly Property Tax Escrow $183.33
Monthly Homeowner's Insurance Premium $25.78
Monthly Utilities (Power, Cable) $115.00
Monthly Condo Assessment $900.00
Monthly Mortgage Principal & Interest $320.89
Total Monthly Payment $1,541.61
Initial Loan Balance $70,705.66
Maximum Home Price $88,382.08

Wow. What a difference those assessments made. But not all condo buildings have ridiculously expensive monthly dues. In fact, the median condo assessment in Chicago according to the AHS was $325. A big condo in a smaller development will have higher property taxes, but much lower condo fees.

2 bedroom condo in small development in Lincoln Park
Monthly Property Tax Escrow $487.38
Monthly Homeowner's Insurance Premium $41.33
Monthly Utilities (Heat, Power, Stove, Cable) $350.00
Monthly Condo Assessment $150.00
Monthly Mortgage Principal & Interest $517.03
Total Monthly Payment $1545.75
Initial Loan Balance $113,371.02
Maximum Home Price $141,713.78

So. Suddenly another $50k to spend. Kinda neat, don't you think?

Now, I've been neglecting co-ops and one of my clients yelled at me for doing so lately, so I'm going to make a point to include them more. So, our last option is a co-op. Because the co-op pays taxes as a single entity, your property taxes in this case would be rolled into your monthly payment. However, since many major lenders won't finance purchases in co-ops you'd have to settle for a higher interest rate than normal on your loan. Your insurance premiums would also be higher, as many insurers avoid writing policies on co-ops. In this case I've chosen a real co-op that includes heat, water and cable in the monthly membership fee. I should note though that the listed amount of $548.80 is on the lower end for a co-op monthly payment.

2 bedroom in Modestly Priced Lakeview Co-Op
Monthly Property Tax Escrow $0.00
Monthly Homeowner's Insurance Premium $80.57
Monthly Utilities (Power, Stove Gas) $115.00
Monthly Co-op Membership, Incl. Taxes & Remaining Utilities $548.80
Monthly Mortgage Principal & Interest $781.00
Total Monthly Payment $1527.47
Initial Loan Balance $171,252.66
Maximum Home Price $214,065.83

So Why Do We Focus on Price?

So with six wildly different prices all leading to the same monthly payment, why do we talk about price at all? Well, while there's a massive gap between the low end and the high end of buying power outlined above, we do need to consider what's realistic in the areas I specified. While the last two condo prices are within range of a short sale, the other four are pretty much non-existent in the neighborhoods I chose unless you're a cash buyer working the foreclosure market. You can muck about with the assorted components of the monthly payment all you like, but if you can't afford to purchase the property in the first place it's all academic.

The point of all of this isn't to say that the price should be totally neglected. Rather, it hopefully will serve to give you an understanding of how lifestyle choices can affect your buying power. After all, if you knew that your choice to live in a high rise was going to knock $125.6k off of your price point, would you still want all of those amenities? If going for a new, green home could more than double the amount of house you can afford, would you still want that lovely old Victorian?

On the other hand, if you're comparing the monthly cost of owning a home with the cost of renting, it is worthwhile to consider the whole scenario. The monthly rent for most of these properties would be between $1800 and $2400 per month and you'd still have to pay utilities on top.

This Friday we'll have a guest post for the landlords. I'll see you guys Monday.

10 Warnings every Landlord should give to their First Time Renter

So you're renting your Chicago apartment to someone who's never lived on their own before. This means that the person living in your space won't have necessarily had the time to build up an inventory of common sense and practical wisdom that come with living alone. It doesn't mean that they're stupid or poorly educated. Rather than risk you having too many episodes of complaining to your friends about "kids these days," here are some things that you'll want to warn them about, or plan for.

1. Hair in drains. Renters may have previously had housekeepers who stood between them and the need to clear out a drain. If your renter has hair (most do), suggest that they get a hair catcher for the bathroom. Similarly if your property has particularly fragile plumbing please let your tenant know this. Often. Post laminated signs in the bathrooms. I'm not kidding. You'll probably still need to snake the drains at least once a year, but at least you can say you made an effort.

2. Pilot lights. Old fashioned gas stoves & furnaces have live-flame pilot lights. This will be a new experience to renters coming from homes with high end electric stoves or electric spark pilots. A tenant who discovers a lit pilot may consider it to be a malfunction & fire hazard, and extinguish it. In the category of easily avoided bad ideas, this is the ultimate example.

Your average 25 year old will have no idea what these are.

3. Furnace filters, fuses & other comestibles. An apartment has needs. Your average newbie renter may not know that they're responsible for replacing certain items as they wear out. The major repairs are generally going to be your responsibility. However, here in Chicago tenants are normally responsible for replacing light bulbs, blown fuses, smoke detector batteries, and in some cases they're responsible for changing the furnace filter. Make sure they know this up front.

Oh, and now that we all use expensive eco-friendly bulbs, don't be surprised if your tenant takes them to their new apartment upon moving out and leaves you with empty light sockets.

4. You keep whatever is nailed down. Basic landlord-tenant law. In an apartment situation, at the end of the lease, the landlord keeps as a fixture anything that's attached to the walls or floor, plus any appliances provided at the start of the lease. This means that if the tenant puts in their own ceiling fan, full-length mirror, medicine cabinet, shower curtain rod or chandelier and they don't remove it, it's yours to keep.

5. Maximum capacity. It's been almost a decade since the 2003 porch collapse disaster. Your average new college graduate was just wrapping up grammar school when it happened. While the event was sufficiently epic to merit its own Wikipedia entry, the after-effects have been less than thorough. Two-flats escaped the scrutiny of the inspectors and many private homes that have now entered the rental market were never inspected regardless of size. Chicago porches that are up to code have to bear 100 pounds per square foot but many are not up to code. Your first time renter may not be aware of the history. Don't let them overload your porch.

From user sedatephobia on Tumblr.

6. Water is heavy. Humans have a weird tendency to deny that transparent items are heavy. Glass is molten sand and very heavy. Air is extremely heavy. Water appears benign, but it's one of the worst offenders in causing floor damage in apartments. If you stuck Chicago's Bean into a snow globe, the water around it would weigh over 26 times more than the bean itself. A tenant may think that their pet fish are harmless compared with a cat or dog, but a heavy fishtank on an old floor can be just as dangerous.

7. You are not alone. Unless your rental is a single family home, they will be sharing the building with other people. Noise carries from apartment to apartment, through floors, walls, and out of windows. Tenants fresh out of college dorms may need a reminder that they are no longer in a homogeneous environment where noise is forgiven as part of the scene.

8. You are not alone part 2. Pest problems are rarely confined to just one unit in a development. If one tenant gets rid of a pest problem independently of a whole-building treatment, the pests will simply move on to another apartment nearby. Infestations can be embarrassing but they can happen to anyone regardless of their housekeeping skills. Make sure your renters know that there is no shame in reporting a problem, if it means the issue is solved before it spreads.

9. Keep the doors locked. New renters may be coming from dorms or homes where the exterior doors automatically locked closed behind them as they left. It will take them several months of practice to get into the habit of checking behind themselves to lock your door on their way out. Encourage them by posting small signs above the door handle to remind them that safety is everyone's business.

Miniblinds. Saving the world from needing eye bleach since the 1970s.

10. Out of sight, out of mind. Window treatments are not just a matter of style. They're vital to the safety of your tenants' belongings. Remind your tenant that valuables that are visible through a window are easy marks for nearby criminals, and that other people can see into their apartment through open windows at all hours.

This could very well have been a top 20 list but I figured I'd save some for another installment later on. Help me out. What seemingly obvious facts of apartment living have your first-time tenants somehow missed? Share them with us in the comments and I'll try to cover them in the next installment!

The 2-week “Do I Really Need an iPad” Test

Warning sign: "Caution: contains math. Mature Readers only."

Relax, just use the calculator on your phone.

I frequently have a conversation with buyers and renters about looking for a place that works with their life right now, as opposed to the life they want to live. Many people think that buying a new home (or car, or frying pan, or self-help book) will be the magic turning point that changes their life for the better. Sometimes the change they want is very specific, although regular readers will know my thoughts on why using a major purchase to solve a short-term problem can be a bad idea. Unfortunately, psychological studies show us that it takes us several months at the least to form or break new habits, unless those habits involve addictive substances. So, it's generally far more practical to expect change to occur slowly and only through deliberate focus on the element of your life that needs to change.

Meanwhile, iPads are really shiny and very expensive, and people will come up with all kinds of excuses to justify buying them, most of them involving something along the lines of "it will make me more productive." Some type-A people will definitely hold true to those self-made promises. Most of us will wind up with a very expensive toy that we use for playing "Words with Friends" and mucking about with Instagram. If you're trying to save for a down payment or just barely making your monthly mortgage, you cannot afford to be wasting money on toys, especially if you're already pretty close to your peak of productivity as things are now.

Studies show that new technologies must penetrate at least half of the population before they make us noticeably more efficient. (Source: [1])

In my other life as a tech support consultant, I explain gadgets like tablets and smartphones to my clients as pseudo-computers. They cannot run all software. They often cannot run more than one piece of software simultaneously. In most cases, you cannot expand the storage capacity, install your own programs that you made yourself, or even take them to a new wireless provider without a major amount of hassle. That being said, for a small subset of the population they can be very useful. If you think you're in that subset who should purchase an iPad, here's a 2-week test to see if you might be right.

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