Can I Afford this House?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

Can I Afford this House?

Postby mw1739 » Wed Jan 23, 2013 11:33 am

I just put in an offer on an ideal house in an ideal school district. We offered $355,500. I've been pre-approved for an amount far greater, but am having second thoughts about the potential monthly burden. I calculate a monthly PITI payment of approximately $1800 based on 20% down. I hope to appeal the property tax assessment, which would potentially knock off about $100/month, but no guarantees. We have a baby and my wife is currently working part-time, and will potentially be a full-time mommy, so we're trying to base our finances solely off my income.

Here are our stats:
Age: 26/27
My Income: $68,000
Wife's part time income: $30,000

Cash: $65,000
I-bonds: $15,000
Taxable Investments: $160,000
Roth IRAs: $92,000
SEP IRA: $25,000
401k: $80,000
Inherited IRA: $300,000

Only debt is ~ $80,000 owed on our current residence. We're debating on selling our current home or renting it out. Conservative estimate of our equity would be ~ $40,000. If we rent it out, I would expect positive cash flow of ~ 400/mo.

Any thoughts on whether or not we could afford this property?
mw1739
 
Posts: 99
Joined: Mon Mar 21, 2011 6:44 pm

Re: Can I Afford this House?

Postby eclipsis » Wed Jan 23, 2013 11:39 am

Is the 20% down coming out of your available cash or taxable investments? Or have you already removed the down payment from your numbers?
eclipsis
 
Posts: 97
Joined: Thu Sep 01, 2011 8:34 am
Location: Ohio

Re: Can I Afford this House?

Postby Grt2bOutdoors » Wed Jan 23, 2013 11:44 am

mw1739 wrote:I just put in an offer on an ideal house in an ideal school district. We offered $355,500. I've been pre-approved for an amount far greater, but am having second thoughts about the potential monthly burden. I calculate a monthly PITI payment of approximately $1800 based on 20% down. I hope to appeal the property tax assessment, which would potentially knock off about $100/month, but no guarantees. We have a baby and my wife is currently working part-time, and will potentially be a full-time mommy, so we're trying to base our finances solely off my income.

Here are our stats:
Age: 26/27
My Income: $68,000
Wife's part time income: $30,000

Cash: $65,000
I-bonds: $15,000
Taxable Investments: $160,000
Roth IRAs: $92,000
SEP IRA: $25,000
401k: $80,000
Inherited IRA: $300,000

Only debt is ~ $80,000 owed on our current residence. We're debating on selling our current home or renting it out. Conservative estimate of our equity would be ~ $40,000. If we rent it out, I would expect positive cash flow of ~ 400/mo.

Any thoughts on whether or not we could afford this property?


1)If you are having second thoughts - red flag #1.
2) You have not disclosed what your monthly expense spend rate is now with your current income.
3)What is wrong with the current abode?

Conservative underwriting protocol says 28% of gross income ($19,040 based on your income) with total debt coverage equaling no more than 36% of gross income ($24,480). On the first hurdle, your PITI exceeds 28%, on second hurdle you overcome it. Is the cash and I bonds after the downpayment or before? Good job on your retirement savings!

Are the taxes based on 2012 or 2011? Forget about an appeal - you likely will not win unless several homes in the neighborhood have sold for far below assessed value.
I would not go into this carrying two homes - sell the first before buying the second. Trust me - unless you like being landlord, handyman, enforcer of non-rent paying folk. What you expect and what you get - two different things.

You do have term life insurance for both you and your wife, right? A will?
Last edited by Grt2bOutdoors on Wed Jan 23, 2013 11:48 am, edited 1 time in total.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 9850
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 11:47 am

From the total picture it looks like you can afford this house. I'd recommend selling your current residence, you don't want to be stuck paying for two houses if you can't find a renter. You have substantial investments for such a young couple and the 160k in taxable investments says to me that there is no reason why you can't hit that up if you find yourself in a rough patch.

I'd say yes you can afford this house, and with that much in taxable investments you should be maxing out all tax-advantaged space.
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby Grt2bOutdoors » Wed Jan 23, 2013 11:49 am

NYBoglehead wrote:From the total picture it looks like you can afford this house. I'd recommend selling your current residence, you don't want to be stuck paying for two houses if you can't find a renter. You have substantial investments for such a young couple and the 160k in taxable investments says to me that there is no reason why you can't hit that up if you find yourself in a rough patch.

I'd say yes you can afford this house, and with that much in taxable investments you should be maxing out all tax-advantaged space.


:shock: - Suggesting the use of taxable investments to upgrade one's lifestyle! The horror! That's not very Boglehead like of you. :wink: What happened to LBYM lifestyle practiced by the Boglehead monks? :D
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 9850
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 11:57 am

Grt2bOutdoors wrote:
NYBoglehead wrote:From the total picture it looks like you can afford this house. I'd recommend selling your current residence, you don't want to be stuck paying for two houses if you can't find a renter. You have substantial investments for such a young couple and the 160k in taxable investments says to me that there is no reason why you can't hit that up if you find yourself in a rough patch.

I'd say yes you can afford this house, and with that much in taxable investments you should be maxing out all tax-advantaged space.


:shock: - Suggesting the use of taxable investments to upgrade one's lifestyle! The horror! That's not very Boglehead like of you. :wink: What happened to LBYM lifestyle practiced by the Boglehead monks? :D


Haha, yes indeed the heresy!! I'd rather the OP not need to use the taxable investments on the house, but think there is no reason not to buy what seems to be a home in their desired town/school district when a huge source of funding exists should the OP and his family ever need some supplemental income.
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby TSR » Wed Jan 23, 2013 12:06 pm

As someone who is several years older than you but still salivating at your accumulated wealth, I'd say that yes, you can probably afford it. That said, permit me to offer this bit of patronizing advice: please be careful about the "perfect neighborhood, perfect school zone" stuff. If they are actually perfect then you will never have to move. As it is, so many people find reasons to buy more and more home based on some new "perfect" thing that they covet. Check in every few years and remind yourself that you already bought your perfect home in the perfect neighborhood and you don't need to compete with anyone on the housing front anymore. (This is, of course, a variation on the "once you've won the game, quit playing" theme.) Good luck!
TSR
 
Posts: 259
Joined: Thu Apr 19, 2012 10:08 am

Re: Can I Afford this House?

Postby mw1739 » Wed Jan 23, 2013 12:08 pm

Thanks for the replys. All figures are pre-downpayment. Would like to keep at least $20,000 in cash so some downpayment, closing costs etc. would come from taxable. Term life insurance is covered, wills are on my to do list for the Spring.

Our current house is too small for the wife and I, a baby and 3 dogs and is not located in a great school district. New house would give us room to grow and is located in one of the top school districts in the state.

My concern is mainly centered in the large debt burden ~ 32% of my income. My current mortgage payment is $500/month. We live below our means, maxing 401k and IRA's. Moving up to a payment 3x as big may put a damper on the retirement savings, at least initially. I expect my pay to grow 3-4% annually and my employment is highly stable.

What are your thoughts on putting more than 20% down? We can afford it, but I'm unsure if I want to take so much out of taxable to do it. I certainly know it would help me sleep better at night with a lower monthly obligation.
mw1739
 
Posts: 99
Joined: Mon Mar 21, 2011 6:44 pm

Re: Can I Afford this House?

Postby hand » Wed Jan 23, 2013 12:13 pm

I'd go a step further, why limit the downpayment to 20%? If monthly payment is a concern, it seems to me that using the majority of the taxable investments (excluding emergency fund of course) to fund the downpayment and lower the monthly mortgage payment is a slam dunk. Only potential downside I see is dealing with capital gains when liquidating taxable accounts.
User avatar
hand
 
Posts: 582
Joined: Sun May 17, 2009 9:42 pm

Re: Can I Afford this House?

Postby awval999 » Wed Jan 23, 2013 12:15 pm

mw1739 wrote:Thanks for the replys. All figures are pre-downpayment. Would like to keep at least $20,000 in cash so some downpayment, closing costs etc. would come from taxable. Term life insurance is covered, wills are on my to do list for the Spring.

Our current house is too small for the wife and I, a baby and 3 dogs and is not located in a great school district. New house would give us room to grow and is located in one of the top school districts in the state.

My concern is mainly centered in the large debt burden ~ 32% of my income. My current mortgage payment is $500/month. We live below our means, maxing 401k and IRA's. Moving up to a payment 3x as big may put a damper on the retirement savings, at least initially. I expect my pay to grow 3-4% annually and my employment is highly stable.

What are your thoughts on putting more than 20% down? We can afford it, but I'm unsure if I want to take so much out of taxable to do it. I certainly know it would help me sleep better at night with a lower monthly obligation.


Personally what I would do is use more taxable to get you to a point where you sleep comfortably.

Honestly you are way ahead of the game due to what seems like a large inheritance. Not touching that inherited IRA and Roth IRA for 40 years may put you there in itself. The most important thing in life is to have a happy home. You are in that position. No amount of extra money at retirement is worth having your wife work and not being able to stay-at-home in a house you both love.

All I would say is I would take enough out of taxable for the budget to work in perpetuity. I wouldn't want to use it as a slush fund where you go into it a couple times a year and such. So if that means using $80-100K then so be it. But when you are done with the downpayment, etc you need to be able to support your family/bills with just your salary.

Personally... I'd use enough to get the mortage to be no more than 3x your salary--- or about $200K borrowed. And I realize that may take almost all of your taxable.

I would also sell your current house.
awval999
 
Posts: 635
Joined: Fri Apr 08, 2011 11:17 pm

Re: Can I Afford this House?

Postby awval999 » Wed Jan 23, 2013 12:22 pm

I did some quick calculations:
$300,000 IRA not touched from Age 26 to Age 65 at 5% (real) = $2,011,425
$92,000 Roth IRA adding $5500/year from Age 26 to Age 65 at 5% (real) = $1,275,736
----------------------------------------------------------
Total ~$3.2MM at 3% SWF = $96,000/year or at 4% SWF = $128,000

Game is pretty much over and you've won--- at least with regards to retirement savings.
I personally would max Yours and Spouses Roth IRA every year and it's super game over.

Let the wife stay-at-home, enjoy your family and your soon-to-be new house.
awval999
 
Posts: 635
Joined: Fri Apr 08, 2011 11:17 pm

Re: Can I Afford this House?

Postby bottlecap » Wed Jan 23, 2013 12:28 pm

I don't think you can, unless you're planning on spending down your taxable investments.

Of course, you don't indicate what your expenses are, but they will almost certainly go up with this new house. If your wife quits work, your $68,000 won't go a long way.

You've done a great job saving thus far, so perhaps you have a handle on this and know what you can and can't afford. In doing your calculations, however, I would leave a large buffer of income every month, as things start to get expensive when you buy a $355,000 house.

Good luck,

JT
User avatar
bottlecap
 
Posts: 3221
Joined: Wed Mar 07, 2007 12:21 am
Location: Tennessee

Re: Can I Afford this House?

Postby Grt2bOutdoors » Wed Jan 23, 2013 12:29 pm

awval999 wrote:I did some quick calculations:
$300,000 IRA not touched from Age 26 to Age 65 at 5% (real) = $2,011,425
$92,000 Roth IRA adding $5500/year from Age 26 to Age 65 at 5% (real) = $1,275,736
----------------------------------------------------------
Total ~$3.2MM at 3% SWF = $96,000/year or at 4% SWF = $128,000

Game is pretty much over and you've won--- at least with regards to retirement savings.
I personally would max Yours and Spouses Roth IRA every year and it's super game over.

Let the wife stay-at-home, enjoy your family and your soon-to-be new house.


Sorry, devils advocate in me says - get real! 5%! Real? really? have you made that in the last ten years?
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 9850
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 12:31 pm

Don't overthink this. At 26/27 you are absolutely CRUSHING it in the amount of accumulated retirement savings. I know part of it is inherited, but trust me your bank account does not know the difference. I know 57 years olds that would do anything to have the same portfolio. Even with conservative estimates about growth, you should have several million dollars in retirement assets at age 60 without adding a single penny more to your portfolio.

If you need to take some money out of the taxable account to pay for this house that you really want then by all means do it. I think the monthly payment won't be a problem for you, keep in mind your mortgage payment will stay the same while your income should gradually go up. The payment:income ratio is somewhat misleading as well since your interest will be tax deductible.

You can afford this house. As others have mentioned, you have won the game already. There is no need to deny yourself this purchase if it is what you really want and it will make you and your family happy.
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby Grt2bOutdoors » Wed Jan 23, 2013 12:32 pm

bottlecap wrote:I don't think you can, unless you're planning on spending down your taxable investments.

Of course, you don't indicate what your expenses are, but they will almost certainly go up with this new house. If your wife quits work, your $68,000 won't go a long way.

You've done a great job saving thus far, so perhaps you have a handle on this and know what you can and can't afford. In doing your calculations, however, I would leave a large buffer of income every month, as things start to get expensive when you buy a $355,000 house.

Good luck,

JT


+1 - Exactly. OP you have a baby - how old? The baby unless an Einstein will not be attending school until 4 at the earliest. Why the rush to move into a home, pay higher taxes, higher utilities, higher everything since you will have 30K less coming in and $160K in taxable investments can be $100K overnight, unless you are holding fixed maturity debt and/or cash.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 9850
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 12:37 pm

Grt2bOutdoors wrote:
awval999 wrote:I did some quick calculations:
$300,000 IRA not touched from Age 26 to Age 65 at 5% (real) = $2,011,425
$92,000 Roth IRA adding $5500/year from Age 26 to Age 65 at 5% (real) = $1,275,736
----------------------------------------------------------
Total ~$3.2MM at 3% SWF = $96,000/year or at 4% SWF = $128,000

Game is pretty much over and you've won--- at least with regards to retirement savings.
I personally would max Yours and Spouses Roth IRA every year and it's super game over.

Let the wife stay-at-home, enjoy your family and your soon-to-be new house.


Sorry, devils advocate in me says - get real! 5%! Real? really? have you made that in the last ten years?


5% nominal gets you the $2M+ figure. The 5% annual plus contributions (just for one, not even both) get the IRA balance over $1 million. The 401k balance, without any further contributions, earning 5% annually will be worth 500k when the OP is 65. This leaves out Social Security and assumes there is no other savings of any kind for the next ~4 decades.

I think you are providing a valuable service being the devil's advocate, but I think your concerns are easily addressed on this one.
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby gt4715b » Wed Jan 23, 2013 1:02 pm

On the face of it, I would say you couldn't afford it, but you have some very positive factors in your advantage:

1. As others have said, you're pretty much set in terms of retirement savings. The only thing I would do would contribute enough to your 401k to get any match, hopefully only 3-4%.
2. No non-mortgage debt.
3. Large taxable savings, gives you some cushion


It looks like you can cover the 20% down payment between your cash and the equity of your current home, meaning you wouldn't have to touch the taxable investments.

Questions:1. What is the age/condition of the house? If the house is coming up on a cycle where it will need lots of upgrades (roof, heating/cooling, kitchen, bath upgrades), those things will be quite expensive

2. Have you run the budget numbers with this new house, including taxes, only your salary,increased utilities for the new larger house? If not, do that now. I see it as being very, very tight to carry that mortgage, feeding 3 people, etc. on just your salary. At the very least it will be a very spartan lifestyle (no vacations, inexpensive used cars, etc.). If that OK with both of you, great, but you should go in knowing what to expect.

3. Following #2, Can the wife continue part-time work after say 2-3 years when the child is older? That will greatly ease the burden

I wouldn't use the taxable investments to pay down the mortgage. At today's rates a 30yr fixed mortgage is going to cost you $4.40 per $1,000 borrowed. So even if you use $100k to pay down the mortgage you've only reduced your debt burden by $440/month. After taxes, your net interest rate is going to be something like 2.5%, which you should be able to easily beat with a conversative 30/70 stock/bond mix in the taxable investments.
gt4715b
 
Posts: 324
Joined: Mon Jun 11, 2007 11:29 am

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 1:20 pm

The OP and his wife are 26 and 27 years old.

Their total assets (without the equity in current home) equal $737,000.

Assuming they sell their current home and gain nothing but lose nothing, they still have a total of $737,000 in assets. If they sold assets to pay for this home outright, they would still have $382,000 in left over and own their home free and clear.***

They would have a paid-for home and $382,000...at 26 and 27 years old. If they never contributed another dime, their portfolio, earning just 5% annually, would be worth $1,911,218 when the Mrs. turns 60...without every contributing another dime.

They can afford this house...

***I am not suggesting this as the method to pay for the house, my point was only to illustrate that this couple has ample assets that should provide protection from job loss or having to fix a roof. They don't need to contribute much, if anything to 401ks or IRAs going forward, but obviously any contributions would be gravy. I'm a very frugal person but think that they can buy this house very comfortably.***
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby Watty » Wed Jan 23, 2013 1:24 pm

It was not clear just what your current tax rate is but it could be pretty low or even zero. If so then the mortgage interest deduction may not be worth very much to you and putting money into a 401K(above any match) is problematic since you will likely be in a higher tax bracket when you retire than you are now. Maxing out Roth accounts would make sense but you may be an odd situation where investing in a taxable account might actually be a better option than using a deductible retirement account that will eventually be taxed.

It sounds like your mortgage will be costing you over $10,000 a year in interest. I would be real tempted to make a huge down payment of $200k+ then have a 15 year mortgage at a lower interest rate. This would save you a huge amount of interest over the years and the mortgage would be paid off at about the time your kid is ready to go to college. Admittedly you could keep the money invested and likely get a higher return but there is always a chance it will not work out well and you really don't need to take additional risks.

We offered $355,500................Only debt is ~ $80,000 owed on our current residence. We're debating on selling our current home or renting it out. Conservative estimate of our equity would be ~ $40,000.


If you buy the new house and keep the old house then your total real estate holding(not home equity) will be about $500,000.

I didn't add up your other assets but that is somewhere around 100% of your net worth. From as asset allocation standpoint I would not keep the other house just from a diversification standpoint.

A rental property can also eat up a lot of your time which is a very valuable thing, especially when you have a new baby. That time would likely be better spent on your family and your main career.
User avatar
Watty
 
Posts: 4487
Joined: Wed Oct 10, 2007 4:55 pm

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 2:26 pm

+1 on selling the current home. You don't want the headache associated with becoming a landlord, and you do not need the additional income.

Best of luck going forward, you already have an awesome nest egg for retirement. I'll reiterate that I think you can definitely afford this house and leave it at that.
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby Grt2bOutdoors » Wed Jan 23, 2013 3:18 pm

NYBoglehead wrote:
Grt2bOutdoors wrote:
awval999 wrote:I did some quick calculations:
$300,000 IRA not touched from Age 26 to Age 65 at 5% (real) = $2,011,425
$92,000 Roth IRA adding $5500/year from Age 26 to Age 65 at 5% (real) = $1,275,736
----------------------------------------------------------
Total ~$3.2MM at 3% SWF = $96,000/year or at 4% SWF = $128,000

Game is pretty much over and you've won--- at least with regards to retirement savings.
I personally would max Yours and Spouses Roth IRA every year and it's super game over.

Let the wife stay-at-home, enjoy your family and your soon-to-be new house.


Sorry, devils advocate in me says - get real! 5%! Real? really? have you made that in the last ten years?


5% nominal gets you the $2M+ figure. The 5% annual plus contributions (just for one, not even both) get the IRA balance over $1 million. The 401k balance, without any further contributions, earning 5% annually will be worth 500k when the OP is 65. This leaves out Social Security and assumes there is no other savings of any kind for the next ~4 decades.

I think you are providing a valuable service being the devil's advocate, but I think your concerns are easily addressed on this one.


Here's a little wrinkle for you: OP becomes disabled. Whoops! there goes the retirement contributions. OP loses employment, whoops! there goes the home and/or the investments. Things are not always so cut and dry, no matter how clear the picture may look on the face of it. One of the posters on the board says they eat risk for breakfast, I eat it 24 hours a day. When the OP gets a disability policy, then we'll talk about a "sure" thing and "it's in the bag". Come on dude, you were in the corp - your supposed to think of the unknown.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 9850
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Can I Afford this House?

Postby HomerJ » Wed Jan 23, 2013 3:47 pm

Grt2bOutdoors wrote:5%! Real? really? have you made that in the last ten years?


Making 40-year plans based on the last 10 years is about as silly as making 40-year plans based on 1990-1999 returns.

5% real is not unreasonable over 40 years.
User avatar
HomerJ
 
Posts: 6561
Joined: Fri Jun 06, 2008 1:50 pm

Re: Can I Afford this House?

Postby HomerJ » Wed Jan 23, 2013 3:48 pm

OP... you can definitely afford this house... You have an amazing amount of assets for your age... I'd put down a larger down-payment to make the payments fit in your budget.
User avatar
HomerJ
 
Posts: 6561
Joined: Fri Jun 06, 2008 1:50 pm

Re: Can I Afford this House?

Postby damjam » Wed Jan 23, 2013 3:57 pm

You stated that you don't want to count your wife's income in determining if you can afford the house.
Well as was referred to earlier the conservative ratios are 28/36. So your monthly PITI outlay should not exceed $1,586.67 to be 28% of your 68K income. So 20% down is not going to cut it. You need to be willing to put more down and part with the liquidity. If you feel comfortable with that then OK you can afford the house.
I would not even consider keeping the current house, your cash flow would be too strained.
IMHO, for your age you are somewhat ahead of the retirement saving game. However your current rosy position is in large part because of an inheritance, a stroke of good fortune. (In the financial sense only, I don't mean to discount your family's loss) You could just as easily have a stroke of bad fortune in the future. My point is: just because your a little ahead now does not mean you can coast for the rest of the race.
Keeping your fixed expenses under control is the key to long term financial stability. Job loss, illness, more children, etc. could easily be in your future, prepare for them as best you can.
User avatar
damjam
 
Posts: 834
Joined: Thu Mar 25, 2010 8:46 am

Re: Can I Afford this House?

Postby Clearly_Irrational » Wed Jan 23, 2013 4:00 pm

So according to your post you want two things:

1) Buy an expensive home
2) Allow your wife to stop working

Given your current income of $68k per year at 28% of gross you can afford a monthly payment of around $1587 which translates roughly to a $337k home assuming a 20% downpayment + the 40k from selling your current home. (including principal, interest, taxes, insurance, repairs etc.) So on that basis I would argue that no you can't afford it, however you have enough resources that you could pay down the loan to the point where you could afford it so it's not impossible. Personally I wouldn't want my mortgage payment to be such a large portion of my income. One of the hardest things about having some money is that the question is no longer "can we do this" but "should we do this".
User avatar
Clearly_Irrational
 
Posts: 2400
Joined: Thu Oct 13, 2011 4:43 pm

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 4:13 pm

Outdoors, yes I was in the Corps and I try to think of the unknown and make contingencies to mitigate risk...so let me address your post and if at the end we disagree, well I suppose that is what the forum is all about...

1. OP becomes disabled: you said "there goes retirement contributions." As indicated in my other post, the OP doesn't even need to make any retirement contributions going forward. Assuming a 5% nominal return, the portfolio will be worth several million dollars by the time he reaches 60. Obviously any 401k match would be leaving free money on the table, but he certainly doesn't NEED to keep contributing.

2. OP loses employment: The OP has 160k in taxable investments. That is 1.6 years worth of his income + his wife's current income. He has mentioned his job is stable, but yes things do happen and he could lose his job. Assuming he gets $0 from unemployment, he can still bankroll 1.6 years worth of living expenses from his taxable account. Without earning a single dollar during that period or collecting unemployment.

3. Fine, let him get a disability policy...or would the other posters suggest that he can't afford one?!? (Sarcasm, come on guys lighten up)...

I always enjoy your posts and understand where you are coming from, but the OP has such a high number of assets right now that to me it is borderline absurd to suggest that he cannot afford this house. Will the payments be a slightly higher percentage of his income than most are comfortable with...Yes, but WHO CARES, this guy has ample assets to cover any bumps in the road. He could pay for it outright tomorrow and still have $382k in invested assets...at 26!!!

What is so unreasonable about that...where is the risk? If he bought it in cash he'd have no monthly payment, his retirement account would be 4x the size of the average 401k at 26 years old!
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby Clearly_Irrational » Wed Jan 23, 2013 4:21 pm

HomerJ wrote:
Grt2bOutdoors wrote:5%! Real? really? have you made that in the last ten years?


Making 40-year plans based on the last 10 years is about as silly as making 40-year plans based on 1990-1999 returns.

5% real is not unreasonable over 40 years.


Stock market nominal CAGR 1928-2011 9.23%
10yr Treasuries nominal CAGR 1928-2011 5.14%
Average rate of inflation 1913-2012 3.23%

If he's 26 now and will be 66 at the end then his average portfolio over that time frame is 54/46 so if history repeats then his real return should be very roughly 4.12% so yeah, I'd say 5% is too optimistic. (Obviously this model is extremely simplified)

Is 5% real possible? Sure, but not with a standard Bogleheads portfolio, he'd need to take on more risk either through more beta or through small, value, credit or term risks. (actually the above model already has higher than normal term risk but the numbers were easy to find)
User avatar
Clearly_Irrational
 
Posts: 2400
Joined: Thu Oct 13, 2011 4:43 pm

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 4:25 pm

Clearly_Irrational wrote:
HomerJ wrote:
Grt2bOutdoors wrote:5%! Real? really? have you made that in the last ten years?


Making 40-year plans based on the last 10 years is about as silly as making 40-year plans based on 1990-1999 returns.

5% real is not unreasonable over 40 years.


Stock market nominal CAGR 1928-2011 9.23%
10yr Treasuries nominal CAGR 1928-2011 5.14%
Average rate of inflation 1913-2012 3.23%

If he's 26 now and will be 66 at the end then his average portfolio over that time frame is 54/46 so if history repeats then his real return should be very roughly 4.12% so yeah, I'd say 5% is too optimistic. (Obviously this model is extremely simplified)

Is 5% real possible? Sure, but not with a standard Bogleheads portfolio, he'd need to take on more risk either through more beta or through small, value, credit or term risks. (actually the above model already has higher than normal term risk but the numbers were easy to find)


Does the fact that he has an absurd amount of money at age 26 not enter into the equation? The 5% figure used showed his portfolio growing to more than $3 million...nominal value...yes, the word "real" was used but the calculation shows a nominal return.
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby damjam » Wed Jan 23, 2013 4:25 pm

Clearly_Irrational wrote:One of the hardest things about having some money is that the question is no longer "can we do this" but "should we do this".

+1
User avatar
damjam
 
Posts: 834
Joined: Thu Mar 25, 2010 8:46 am

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 4:35 pm

The OP is talking about purchasing a home that is suitable for his family in an area that he likes. I know the whole "should I vs. can I" argument but why bother saving our money if we're not going to spend it on things like a home once in a while.

From some of the posts on this thread you'd think the guy was asking if he should buy a $355k Maserati or purchase an ownership stake in a private jet. He is buying a house. The mortgage interest will be deductible. The property taxes will be deductible. And oh yeah, if he puts 20% down he'll have enough money in the inherited IRA to pay the balance of the mortgage off any day he chooses (subject to market flux of course, but it could work the other way too).
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby supersharpie » Wed Jan 23, 2013 4:53 pm

mw1739 wrote:I just put in an offer on an ideal house in an ideal school district. We offered $355,500. I've been pre-approved for an amount far greater, but am having second thoughts about the potential monthly burden. I calculate a monthly PITI payment of approximately $1800 based on 20% down. I hope to appeal the property tax assessment, which would potentially knock off about $100/month, but no guarantees. We have a baby and my wife is currently working part-time, and will potentially be a full-time mommy, so we're trying to base our finances solely off my income.

Here are our stats:
Age: 26/27
My Income: $68,000
Wife's part time income: $30,000

Cash: $65,000
I-bonds: $15,000
Taxable Investments: $160,000
Roth IRAs: $92,000
SEP IRA: $25,000
401k: $80,000
Inherited IRA: $300,000

Only debt is ~ $80,000 owed on our current residence. We're debating on selling our current home or renting it out. Conservative estimate of our equity would be ~ $40,000. If we rent it out, I would expect positive cash flow of ~ 400/mo.

Any thoughts on whether or not we could afford this property?


You are in your 20s have close to $800,000 in savings. Of course you can afford the house!!!
supersharpie
 
Posts: 488
Joined: Wed Dec 22, 2010 2:28 pm

Re: Can I Afford this House?

Postby awval999 » Wed Jan 23, 2013 5:15 pm

If OP cannot afford this house then we are all screwed.

What is the point of money anyway?

Now we are making up scenarios where the OP gets disabled and loses his job and the stock market returns zero for 40 years.

If we're going down that road then he needs at least 5 years of dry food and distilled water in the basement. Because of the risk of a Zombie/Alien attack. Also he needs to buy a bubble.
awval999
 
Posts: 635
Joined: Fri Apr 08, 2011 11:17 pm

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 5:20 pm

awval999 wrote:If OP cannot afford this house then we are all screwed.

What is the point of money anyway?

Now we are making up scenarios where the OP gets disabled and loses his job and the stock market returns zero for 40 years.

If we're going down that road then he needs at least 5 years of dry food and distilled water in the basement. Because of the risk of a Zombie/Alien attack. Also he needs to buy a bubble.


Thank you for more eloquently stating what I have been trying to say on this thread.

Another poster asks "what is the point of money" if the OP can't buy this house. I think that shoot put the nail in the coffin on this one. What are all we saving it for if we endlessly convince ourselves that no expenditure is affordable?
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby Clearly_Irrational » Wed Jan 23, 2013 5:32 pm

NYBoglehead wrote:Does the fact that he has an absurd amount of money at age 26 not enter into the equation?


For rates of investment return? Not for values of under say $20 million or so. Once you reach a certain level there are investments available that aren't necessarily accessible to those with a smaller nest egg.
User avatar
Clearly_Irrational
 
Posts: 2400
Joined: Thu Oct 13, 2011 4:43 pm

Re: Can I Afford this House?

Postby Grt2bOutdoors » Wed Jan 23, 2013 5:34 pm

One more point, then the OP will have all the information he needs:

800K in assets
$50K in current debt (mortgage)
Net $750K

What is known - more than half of the $750K is invested in tax penalized assets - IRA's are subject to special penalties and taxes prior to age 59.5 - OP is 26.

What is unknown - what is the taxable basis of the $160K taxable investments? What is the liability? This is before you even look at the beta.

OP can buy the home, is it the most optimal to be house rich and liquidity poor? Only the OP can answer that. Sounds like he's nervous about it - that says plenty.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 9850
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Can I Afford this House?

Postby Clearly_Irrational » Wed Jan 23, 2013 5:37 pm

supersharpie wrote:You are in your 20s have close to $800,000 in savings. Of course you can afford the house!!!


Most of which is tied up in retirement accounts and can't be touched without severe penalties. Without tapping his savings it's a stretch on a income basis. Personally if I were in his situation I'd probably cash out my taxable investments, sell the old house, use up a bit of that cash hoard and buy a new one free and clear. Considering that his current house is worth $120k moving up to a $220k place would still be a huge improvement even if it's not as nice as the $355k one. With no mortgage it would then be really safe for his wife to stop working for few years till their child starts school.
User avatar
Clearly_Irrational
 
Posts: 2400
Joined: Thu Oct 13, 2011 4:43 pm

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 5:55 pm

Clearly_Irrational wrote:
NYBoglehead wrote:Does the fact that he has an absurd amount of money at age 26 not enter into the equation?


For rates of investment return? Not for values of under say $20 million or so. Once you reach a certain level there are investments available that aren't necessarily accessible to those with a smaller nest egg.


What???

So you are saying that you must achieve the same return on $737k at 26 as you would need on $100k in order to have a secure retirement, is that what you are saying?

I gotta tell you, on this one I really am failing to see how this is a risky purchase. Yes, a lot of the assets are in tax-advantaged accounts. He still has a lot in taxable space. There are ample assets to cover him in the event of a job loss or emergency.

Let me ask the doubters this question: what would it take for you to say that the OP can afford this house? At what level of savings would you give this the thumbs up? You are telling a 26 year old with $737k in total assets (excluding current house) and income of ~98k that he cannot afford a 355k house because the monthly payment would be too high. SO WHAT? He has more than enough to pay for the house.
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby supersharpie » Wed Jan 23, 2013 6:12 pm

Not to mention the fact that his current IRA holdings without any future contributions will likely offer him a comfortable retirement in 40 years! Obviously I am not advocating he stop contributing to his retirement funds in favor of buying a house beyond his means, however compounding investment returns should serve him very well in the coming decades. :happy
supersharpie
 
Posts: 488
Joined: Wed Dec 22, 2010 2:28 pm

Re: Can I Afford this House?

Postby stingray5688 » Wed Jan 23, 2013 6:27 pm

maybe OP was a troll just looking to rile up some bogleheads?? LOL
"Don't be emotional about investing. So even a first investment should not be exciting." - livesoft
stingray5688
 
Posts: 108
Joined: Fri Nov 09, 2012 1:58 pm

Re: Can I Afford this House?

Postby damjam » Wed Jan 23, 2013 6:34 pm

mw1739 wrote:I just put in an offer on an ideal house in an ideal school district. We offered $355,500. I've been pre-approved for an amount far greater, but am having second thoughts about the potential monthly burden. I calculate a monthly PITI payment of approximately $1800 based on 20% down. I hope to appeal the property tax assessment, which would potentially knock off about $100/month, but no guarantees. We have a baby and my wife is currently working part-time, and will potentially be a full-time mommy, so we're trying to base our finances solely off my income.

Here are our stats:
Age: 26/27
My Income: $68,000
Wife's part time income: $30,000

Cash: $65,000
I-bonds: $15,000
Taxable Investments: $160,000
Roth IRAs: $92,000
SEP IRA: $25,000
401k: $80,000
Inherited IRA: $300,000


I can't speak for others. If we reread what the OP had to say, we see that he only wants to count his 68K in income. The standard ratios for housing affordability is 28/36. If we consider 28% for PITI as a reasonable expense load for housing then the OP needs to put more down than 20%.
Obviously the OP has the funds in taxable accounts to put more than 20% down, if he is comfortable with a little less liquidity. I would feel comfortable with the amount of liquidity left. Only the OP knows how much liquidity he needs or wants.

But I am baffled that anyone would consider this purchase a no brainer. I would only consider it to be a slam dunk if the OP could pay cash for the house and still have a comfortable cushion of liquid assets left. That is not the case here. I would think most Bogleheads would work very hard to not put themselves in a position where they need to withdraw funds from retirement accounts for emergencies.
User avatar
damjam
 
Posts: 834
Joined: Thu Mar 25, 2010 8:46 am

Re: Can I Afford this House?

Postby bottlecap » Wed Jan 23, 2013 6:53 pm

NYBoglehead wrote:Let me ask the doubters this question: what would it take for you to say that the OP can afford this house?


More income. It's not the level of savings that concerns anyone. It's the $1,800 per month plus the increased expenses of the house. It's not good if you have to dip into savings to make house payments - that's what your income is for. It's especially not good if you don't plan on dipping into savings, which doesn't seem to be the plan for this poster.

If this poster put all of his cash and taxable investments into the house - which does not appear to be the plan - he'd have a $137k mortgage after closing costs. On $68,000, that would be doable. Still maybe tight, but doable. But, he'd have no emergency fund and will have to figure on at least $5,000 in work on the house. This puts them in a hole. Add in all the expenses that will hit with kids and middle age and it's not hard to see that the hole will be hard to get out of and that too much house could be a strain.

That's not to say it can't be done, but it's not a forgone conclusion. You really need a stream of greater income to make this work. Once you spend the savings, it's gone, but the increased expenses aren't.

JT
User avatar
bottlecap
 
Posts: 3221
Joined: Wed Mar 07, 2007 12:21 am
Location: Tennessee

Re: Can I Afford this House?

Postby Grt2bOutdoors » Wed Jan 23, 2013 7:08 pm

+1 - JT aka Bottlecap!
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 9850
Joined: Thu Apr 05, 2007 9:20 pm
Location: New York

Re: Can I Afford this House?

Postby mw1739 » Wed Jan 23, 2013 7:38 pm

Interesting replies. Thanks to all for your input. Everybody seems unanimous that I should sell my existing house (assuming my bid is accepted). I have always been in this camp as well, but the wife is eager to rent it out. Hopefully I can convince her.

We're in our mid-late 20's. I have 35 more years for my income to grow. While I agree things may be a little tight for awhile, it is incredibly hard to pass up the opportunity to buy a house for $350,000 that was built for more than $450,000 and last sold for over $500,000 AND be able to finance it at some of the lowest interest rates ever.

I'll let you all know the outcome when I find out.
mw1739
 
Posts: 99
Joined: Mon Mar 21, 2011 6:44 pm

Re: Can I Afford this House?

Postby Clearly_Irrational » Wed Jan 23, 2013 7:45 pm

NYBoglehead wrote:So you are saying that you must achieve the same return on $737k at 26 as you would need on $100k in order to have a secure retirement, is that what you are saying?


No, that's not what I'm saying. My point was that how much have doesn't have much bearing on the rate of return you can achieve in stocks & bonds.
User avatar
Clearly_Irrational
 
Posts: 2400
Joined: Thu Oct 13, 2011 4:43 pm

Re: Can I Afford this House?

Postby NYBoglehead » Wed Jan 23, 2013 7:52 pm

Clearly_Irrational wrote:
NYBoglehead wrote:So you are saying that you must achieve the same return on $737k at 26 as you would need on $100k in order to have a secure retirement, is that what you are saying?


No, that's not what I'm saying. My point was that how much have doesn't have much bearing on the rate of return you can achieve in stocks & bonds.


I think everyone knows that. MY POINT was that since he already has so much even the most conservative estimates make the OP a multi-millionaire by 60. So why not buy the house that he wants even if it'll take up more of his income that is normally recommended? If he wants to buy this house he has the means to buy the house. I know the thread started out mostly talking about buying it on current income alone which I submit would be difficult, but I think it's fairly obvious that taking some of the taxable investments and applying it towards the house make this very affordable.
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 10:38 am

Re: Can I Afford this House?

Postby BL » Wed Jan 23, 2013 8:15 pm

It is probably true that you can buy anything you want, though not everything you want! Can you both decide that you are willing to forgo totally furnishing your new house (or fill it with Craig's List finds, for instance), passing on a new car, saving on eating out, excessive spending on new child, etc.? If you feel you have to increase your lifestyle and living expenses along with the new house and neighborhood, then all of your cushion could evaporate rapidly.
User avatar
BL
 
Posts: 2076
Joined: Sun Mar 01, 2009 3:28 pm

Re: Can I Afford this House?

Postby steadyeddy » Wed Jan 23, 2013 9:02 pm

BL wrote:If you feel you have to increase your lifestyle and living expenses along with the new house and neighborhood, then all of your cushion could evaporate rapidly.


This is exactly what I was going to mention. You can reach to afford the house right now, and odds are good your income will rise and make your mortgage payment more affordable over time. Good luck on your offer! But what will sink you if you aren't careful is lifestyle creep. You just might be the wealthiest person in your entire current neighborhood, but that is about to change big time, so beware.
User avatar
steadyeddy
 
Posts: 441
Joined: Tue Mar 31, 2009 6:01 pm
Location: The Alps of the Midwest

Re: Can I Afford this House?

Postby epilnk » Wed Jan 23, 2013 11:20 pm

I would use most but not all of the taxable savings to increase the size of the downpayment, and sell the current house to bulk the liquidity cushion back up. But I agree with the posters who say there is no affordability problem here. Keep in mind that they are planning for a single income - often recommended on this board - but at the moment the wife is still working. She may continue, she may stop altogether, or she may take a few years off after the second is born. But if she leaves work and then they decide finances are too tight at some point in the future it doesn't sound like returning back to part time work would be a problem - that's an additional financial cushion right there.

Perhaps it would make sense to compare two financially equivalent "plan B"s: which would be better, an at home wife in a small house in a 'not great' school system, or a part time working wife in a larger house in the very good school system? Make sure to ask the wife - she may well prefer the latter. As an at home mom, the latter option would certainly be my preference. I suspect many of the men here would prefer the former, but they're not the ones stuck in the house with the kids on a rainy day.

True, it's always possible that their entire lives could just financially blow up. In that case they have to sell the nice house and downsize to an apartment or something. Which would not be the financially optimum outcome. But you shouldn't live your life downsized simply because if you don't, it increases your chance that you might have to downsize in the future.
epilnk
 
Posts: 2540
Joined: Wed Apr 18, 2007 8:05 pm

Re: Can I Afford this House?

Postby letsgobobby » Thu Jan 24, 2013 2:25 am

You are better off than 90% of retired Americans and you are only 27. Go for it... Just don't make a habit of such things.
letsgobobby
 
Posts: 6830
Joined: Fri Sep 18, 2009 2:10 am

Re: Can I Afford this House?

Postby HomerJ » Thu Jan 24, 2013 9:26 am

NYBoglehead wrote:If he bought it in cash he'd have no monthly payment, his retirement account would be 4x the size of the average 401k at 26 years old!


10x-20x the size... I just hope it was an inheritance from grandma, and not his parents... 26 is fairly young to lose both your parents. :(
User avatar
HomerJ
 
Posts: 6561
Joined: Fri Jun 06, 2008 1:50 pm

Next

Return to Personal Finance (Not Investing)

Who is online

Users browsing this forum: jlguertin, john94549, runner9, tadamsmar and 42 guests