Reasonable cost for a forever home?

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NRoy
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Reasonable cost for a forever home?

Post by NRoy » Tue Oct 16, 2018 3:35 pm

Hello All!

My fiancee and I are looking to buy a home, based on the advice here, i'd like to only ever buy one house and be happy with that one house. We live in a very high cost of living area, and was curious as to what people here think are reasonable limits for a home based on our finances.

We are both 33 year old physicians with no debt so our next 10 year income may go down a bit as we reduce our working, but shouldnt change dramatically. We both like working and plan on doing it indefinitely.

Income: Mine: 550-600k (probably 700-750 next 4-5 years); Hers 200-250 (prob 300 next 2-3 years)
Investments:
401k: 400k in mine, 100k in hers; Roth: 100k All in index funds.

Investment town homes: Over the past few years I've bought one town home a year that I've fixed up and rented. The houses have 1-2 year leases and each one generates considerable cash flow above the mortgage. These are ballpark numbers but served to give a rough estimate.

House 1: 120k paid down of a 160k mortgage with a tenant: 1000 cash flow/month.
House 2: 100k paid down of a 170k mortgage with a tenant: 900 cash flow/month.
House 3: 90k paid down of a 180k mortgage with a tenant: 950 cash flow/month.
House 4: 80k paid down of a 150k mortgage with a tenant: 800 cash flow/month.
House 5: 70k paid down of a 160k mortgage with a tenant: 900 cash flow/month.

Cash/Checking:
Me 100k Her 140k
Savings:
Me 100k Her 130k

We've paid off our cars, and have no kids. Currently are renting at 3k/month.

The question is - how much is a reasonable amount to spend on a home based on the above numbers/savings/income? We plan to have a kid or two and have a puppy. We wont be expanding our cost of living. Our kid will be going to public school.

1.5 million? 1 million? 2?

Answers like "only as much house as you need" are very reasonable, and a given. I'm trying to get a reasonable upper limit for a house given our circumstances. I'm going to try and find the cheapest house in the area that fits our needs and pay down as much as possible of it.

Thank you all in advance!

ResearchMed
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Re: Reasonable cost for a forever home?

Post by ResearchMed » Tue Oct 16, 2018 3:44 pm

NRoy wrote:
Tue Oct 16, 2018 3:35 pm
Hello All!

My fiancee and I are looking to buy a home, based on the advice here, i'd like to only ever buy one house and be happy with that one house. We live in a very high cost of living area, and was curious as to what people here think are reasonable limits for a home based on our finances.

We are both 33 year old physicians with no debt so our next 10 year income may go down a bit as we reduce our working, but shouldnt change dramatically. We both like working and plan on doing it indefinitely.

Income: Mine: 550-600k (probably 700-750 next 4-5 years); Hers 200-250 (prob 300 next 2-3 years)
Investments:
401k: 400k in mine, 100k in hers; Roth: 100k All in index funds.

Investment town homes: Over the past few years I've bought one town home a year that I've fixed up and rented. The houses have 1-2 year leases and each one generates considerable cash flow above the mortgage. These are ballpark numbers but served to give a rough estimate.

House 1: 120k paid down of a 160k mortgage with a tenant: 1000 cash flow/month.
House 2: 100k paid down of a 170k mortgage with a tenant: 900 cash flow/month.
House 3: 90k paid down of a 180k mortgage with a tenant: 950 cash flow/month.
House 4: 80k paid down of a 150k mortgage with a tenant: 800 cash flow/month.
House 5: 70k paid down of a 160k mortgage with a tenant: 900 cash flow/month.

Cash/Checking:
Me 100k Her 140k
Savings:
Me 100k Her 130k

We've paid off our cars, and have no kids. Currently are renting at 3k/month.

The question is - how much is a reasonable amount to spend on a home based on the above numbers/savings/income? We plan to have a kid or two and have a puppy. We wont be expanding our cost of living. Our kid will be going to public school.

1.5 million? 1 million? 2?

Answers like "only as much house as you need" are very reasonable, and a given. I'm trying to get a reasonable upper limit for a house given our circumstances. I'm going to try and find the cheapest house in the area that fits our needs and pay down as much as possible of it.

Thank you all in advance!
What are some example home prices, maybe a low and a high that you'd "consider"?

Otherwise, it's hard for us to give suggestions. The "affordability" can be stretched or not, depending...

And with that income, it sounds like you'd have quite a range IF you chose to use it.

What are your goals/dreams for a "family house for children and pet(s)" in terms of size, especially smallest you could imagine being *happy* in (not just "barely satisfied")?

RM
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grkmec
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Re: Reasonable cost for a forever home?

Post by grkmec » Tue Oct 16, 2018 3:47 pm

I would say 1.5-2.0 million which is around 2x your gross income. I would also suggest putting 30% down.

bloom2708
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Re: Reasonable cost for a forever home?

Post by bloom2708 » Tue Oct 16, 2018 3:50 pm

Things change. People change. Jobs change. Kids change. School change. Kids move away. People retire. Neighborhoods change. Styles change. Needs change. Everything changes.

A "forever home" is not the goal. Buy as much house as you need and can afford. Buy no more.

20% down. Avoid PMI. Still allowing you to meet your savings/retirement goals.

Many buy their forever home and 3 years later their next forever home is being searched for. I guess set reasonable expectations and don't reach for a nebulous "forever home".
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

2015
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Re: Reasonable cost for a forever home?

Post by 2015 » Tue Oct 16, 2018 3:55 pm

bloom2708 wrote:
Tue Oct 16, 2018 3:50 pm
Things change. People change. Jobs change. Kids change. School change. Kids move away. People retire. Neighborhoods change. Styles change. Needs change. Everything changes.

A "forever home" is not the goal. Buy as much house as you need and can afford. Buy no more.

20% down. Avoid PMI. Still allowing you to meet your savings/retirement goals.

Many buy their forever home and 3 years later their next forever home is being searched for. I guess set reasonable expectations and don't reach for a nebulous "forever home".
Excellent post and outstanding example of second order thinking as applied to this situation.

gold99xx
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Re: Reasonable cost for a forever home?

Post by gold99xx » Tue Oct 16, 2018 3:57 pm

Would help to know where you are located?

In my neck of the woods, $2 Mil gets you 750 Sq feet, sometimes less. NOT an ideal forever home...
Last edited by gold99xx on Tue Oct 16, 2018 3:58 pm, edited 1 time in total.

Thegame14
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Re: Reasonable cost for a forever home?

Post by Thegame14 » Tue Oct 16, 2018 3:58 pm

I would take a year and pay off all of those other mortgages, and then that is additional free cashflow from the rentals, Would you consider selling any of them to purchase your home? That would be a lot of equity also to consider.

I would think with a salary of close to $900K, plus additional cash flow from properties of another $60K, you are close to $1M in income. I would think a house of $2-3M is reasonable, if you sell the properties and use that equity which looks to be guessing another $1M, you could do $3-4M. I do worry that the west coast housing is in a big bubble, but the salaries in the area seem to justify it. ID also think waiting that one more year while you don't have kids and paying off the other mortgages, gives you time to see how the interest rates may affect the prices, yes as interest rates go up, prices go down so usually you end up close to even, but the rate you can possibly refi later to get lower in the future, but the price you pay never changes.

veindoc
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Re: Reasonable cost for a forever home?

Post by veindoc » Tue Oct 16, 2018 8:39 pm

I started with a set of criteria:
At least four bedrooms, preferably five.
One for us, two for kids and two for multiple guests. Don’t want to trip over anyone sleeping on an air mattress in my living room.
Had to have a home office.
At least 3 full bathrooms and a half
Large mud room laundry (on main floor) and kitchen
At least 1/2 acre lot
3 car garage
Brick exterior

Then I chose the neighborhoods and ranked them. In one neighborhood I could get what I wanted for 300k. The other would be more like 500k. The more expensive area had the better schools.

Finally I decided how much I wanted to save a month, how much groceries cost, how much I wanted to spend on cars and so on and then worked backwards from there and that told me what my mortgage should be under.

I plugged it all into Zillow and that gave me a price range of homes with my criteria. It also told me that homes with my criteria were more expensive and by how much in the suburb with the better schools. But both under the amount I wanted to pay to maintain a certain savings rate.

By all calculations we should be able to afford a million dollar home. But in reality what we want in the neighborhood we want doesn’t cost that. Lucky us. With your income I would focus search on home criteria vs mortgage criteria. Not everybody is so lucky.

That’s how I would approach it. Don’t start with how much you can afford. Just set your home criteria and buy the cheapest house that fits that criteria. Criteria could be size, neighborhood or specific home features.

helloeveryone
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Re: Reasonable cost for a forever home?

Post by helloeveryone » Tue Oct 16, 2018 8:56 pm

veindoc wrote:
Tue Oct 16, 2018 8:39 pm
I started with a set of criteria:
At least four bedrooms, preferably five.
One for us, two for kids and two for multiple guests. Don’t want to trip over anyone sleeping on an air mattress in my living room.
Had to have a home office.
At least 3 full bathrooms and a half
Large mud room laundry (on main floor) and kitchen
At least 1/2 acre lot
3 car garage
Brick exterior

Then I chose the neighborhoods and ranked them. In one neighborhood I could get what I wanted for 300k. The other would be more like 500k. The more expensive area had the better schools.

Finally I decided how much I wanted to save a month, how much groceries cost, how much I wanted to spend on cars and so on and then worked backwards from there and that told me what my mortgage should be under.

I plugged it all into Zillow and that gave me a price range of homes with my criteria. It also told me that homes with my criteria were more expensive and by how much in the suburb with the better schools. But both under the amount I wanted to pay to maintain a certain savings rate.

By all calculations we should be able to afford a million dollar home. But in reality what we want in the neighborhood we want doesn’t cost that. Lucky us. With your income I would focus search on home criteria vs mortgage criteria. Not everybody is so lucky.

That’s how I would approach it. Don’t start with how much you can afford. Just set your home criteria and buy the cheapest house that fits that criteria. Criteria could be size, neighborhood or specific home features.
+1

For us we had set "must haves" that included
- single story
- 4 bedrooms
- 3 full baths
- no more than 45 minute drive to work with traffic

since our salaries were nowhere near what yours were we plugged in a maximum price.
that gave us only 3-4 choices where all four criteria were met and thankfully one was the clear winner

so something similar except plug in your max that makes you comfortable

NRoy
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Joined: Sat Jun 30, 2018 5:30 am

Re: Reasonable cost for a forever home?

Post by NRoy » Tue Oct 16, 2018 10:22 pm

Wow! Thank you all for so many thoughtful responses.

I think a lot of the information points to the top limit being 1.5-2, which I think is doable and reasonable, with an upper limit we can start looking at our options/needs/locations and narrow something down in the next 1-2 years that fits the bill.

I dont think that I'd be up for selling any of my current properties, simply because they generate fairly good cashflow whilst paying down the mortgage in a nice area that's appreciating in value, and I'd rather just save more over the next couple years and put it towards a 25% down payment.

If things change they change, then we roll with the punches and deal with it.

Anything more to add is always valuable!

AlohaJoe
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Re: Reasonable cost for a forever home?

Post by AlohaJoe » Tue Oct 16, 2018 10:34 pm

If you're making $1 million a year then your forever home could be $7-8 million.

NRoy
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Re: Reasonable cost for a forever home?

Post by NRoy » Wed Oct 17, 2018 8:15 am

AlohaJoe wrote:
Tue Oct 16, 2018 10:34 pm
If you're making $1 million a year then your forever home could be $7-8 million.
Kidding right? That seems a little extreme. The consensus seems to be 2?

Thanks again!

YellowBrickRoad
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Re: Reasonable cost for a forever home?

Post by YellowBrickRoad » Wed Oct 17, 2018 8:27 am

Also consider using your home as a liability shield if you live in a state like Florida.

While its nice to review your Vanguard statements with the millions ticking higher every few years, its perhaps nicer to live in and use those millions that will likely just be left to family.

If you are even considering having children, suggest sooner rather than later.

pennylane
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Re: Reasonable cost for a forever home?

Post by pennylane » Wed Oct 17, 2018 8:57 am

2-4Mill is reasonable

AlohaJoe
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Re: Reasonable cost for a forever home?

Post by AlohaJoe » Wed Oct 17, 2018 8:59 am

NRoy wrote:
Wed Oct 17, 2018 8:15 am
AlohaJoe wrote:
Tue Oct 16, 2018 10:34 pm
If you're making $1 million a year then your forever home could be $7-8 million.
Kidding right? That seems a little extreme. The consensus seems to be 2?
People are just overreacting because they aren't used to big numbers.

2x salary is not a standard. Otherwise people making $40,000 would be told to buy $80,000 houses.... which is too conservative even for Bogleheads.

4-5x salary is much more common rule of thumb. But that applies for "normal" salaries only. Rules of thumb like don't have more than 30% PITI are assuming that 70% is barely enough to get by own. That's clearly not true when 70% of your salary is $700,000. So your debt can be much higher in relative terms.

That's how I got to 7x.

I know many people who bought homes at 10x (and more) and don't suffer any mortgage stress because it still leaves them substantial discretionary income to spend.

daheld
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Re: Reasonable cost for a forever home?

Post by daheld » Wed Oct 17, 2018 9:09 am

If it were me, I would deal with the investment properties, one way or the other. By that, I mean I would either sell them and use that money for a down payment on your forever home OR I would aggressively pay them off, OR some combination thereof.

By your numbers, you owe about $460k on all the properties combined. If you pay them off you will save a significant amount of money in interest, and you have the income to pay them off very quickly and still save a significant amount of money each year. You have nearly a half million dollars in cash/savings right now. If you sold one or two properties and paid the rest off over the next year or two, you'd have a million in cash ready to use as a down payment, plus another half million in investment properties, and be earning a million dollars a year combined. You could be absolutely debt free in a handful of years.

grkmec
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Re: Reasonable cost for a forever home?

Post by grkmec » Wed Oct 17, 2018 10:04 am

AlohaJoe wrote:
Wed Oct 17, 2018 8:59 am
NRoy wrote:
Wed Oct 17, 2018 8:15 am
AlohaJoe wrote:
Tue Oct 16, 2018 10:34 pm
If you're making $1 million a year then your forever home could be $7-8 million.
Kidding right? That seems a little extreme. The consensus seems to be 2?
People are just overreacting because they aren't used to big numbers.

2x salary is not a standard. Otherwise people making $40,000 would be told to buy $80,000 houses.... which is too conservative even for Bogleheads.

4-5x salary is much more common rule of thumb. But that applies for "normal" salaries only. Rules of thumb like don't have more than 30% PITI are assuming that 70% is barely enough to get by own. That's clearly not true when 70% of your salary is $700,000. So your debt can be much higher in relative terms.

That's how I got to 7x.

I know many people who bought homes at 10x (and more) and don't suffer any mortgage stress because it still leaves them substantial discretionary income to spend.
2x for ultra high income person making 1mm / yr is more comparable than you think to the 4-5x rule of thumb more moderate income people. The difference is taxes. If you are making that kind of money, chances are you in a high tax state at as well, so your effective tax rate is probably close to 40%. So your take home is probably closer to 600k. On the other hand, if you are making 60-120k, and are a married household maxing 401ks, you are paying di mininis in taxes.

I bought my "forever" home in 2007 when I was recently married with no kids. A new construction 6,000 sq ft house, 6 bedroom, 8 bath on 1.5 acres. At the time I was a 2yr newlywed with no kids. My wife thought I was nuts. 11 years later, we have 3 kids and my wife loves our house. My only regret is I bought a house in town with crappy schools, so I am on the hook for private school tuition. A comparable house in the next town over would have run 3-4 million vs. the $2.1mm that I paid. In retrospect, I should have paid up 3.5mm for a house in the neighboring town but mortgage rates back in 2007 were 6%. So the math between cost of capital, property taxes, and private school tuition didn't pencil. That being said, a house in Fairfield county, CT has been a horrible investment. My house is probably worth 1.5-1.6mm today. And with my taxes approaching $30k / yr, I plan to leave the state as soon as my youngest leaves for college.

timboo
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Re: Reasonable cost for a forever home?

Post by timboo » Wed Oct 17, 2018 10:31 am

It's depends on your priorities. I have probably the smallest home in my neighborhood. It's was purchased as my forever home. At the time it was about 3X my humble salary about 15 years ago. It would be less than 2X currently. But it's 100% paid for. For me a paid off three bedroom ranch style home with money in the bank was more important than a big two story and payments for 30 years. I don't knock folks that want big homes, but it just where I wanted to put all my money.

GAAP
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Re: Reasonable cost for a forever home?

Post by GAAP » Wed Oct 17, 2018 10:40 am

"Forever home" at age 33 is a concept that basically says "Life doesn't happen".

Buy only as much house as you need, buy no more house than you can afford. Save the rest and later enjoy the benefits that financial flexibility provides.

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DanMahowny
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Re: Reasonable cost for a forever home?

Post by DanMahowny » Wed Oct 17, 2018 10:51 am

If I had to come up with a number, I'd say around $2 million +/-. Congrats on your excellent income, both of you.

"Forever home" is a term I hear often. It usually means around 7 years.
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Watty
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Re: Reasonable cost for a forever home?

Post by Watty » Wed Oct 17, 2018 11:30 am

NRoy wrote:
Tue Oct 16, 2018 3:35 pm
The question is - how much is a reasonable amount to spend on a home based on the above numbers/savings/income? We plan to have a kid or two and have a puppy. We wont be expanding our cost of living. Our kid will be going to public school.
You are asking the wrong question. For you the cost is not the constraint in looking for a house so the answer is "as much as it takes to get the house that fits your needs"

For now the obvious constraints would be;

1) Reasonable commute
2) Good schools
3) Yard for the kids and puppy
4) Safe neighborhood
5) Enough square footage for a family

If you want to stay in that house for the rest of your life then you would also have these constraints for when you are older and might be in a wheelchair or have limited mobility.

6) One level or at least a master on the main
7) Handicap accessible access from the car to the house- no steps.
8) At least one accessible bathroom
9) Good public transportation for when you have to give up driving

These will greatly limit your selection of houses.

You can probably think of more.

You could give a real estate agent that list to find prospective houses the have all those features to see what is available in your area. If there is not a good house available then you can have one built.

One thing I would caution you on though is that the typical suburban home can be very isolating when you are older. My mom survived my dad and she insisted on staying in the large suburban home I was raised in. I can understand that choice but we tried to talk her into moving into some sort of senior community where she could have more social contact. As she and her friends aged they became less mobile and she outlived many of her friends, or they moved away so she had very little social contact with people by her mid 70's. My siblings and I all lived in different cites so there were often periods of time when the the only person she saw was her housekeeper. It was her choice to live that way since she could have afforded to have moved to a senior community but once my dad was gone that was too big of a change for her.

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Watty
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Re: Reasonable cost for a forever home?

Post by Watty » Wed Oct 17, 2018 11:58 am

One more thing to consider. Since you are 33 you could be in your forever home 60+ years.

If you buy a 50 year home then by the time you are in your 90's the house could be over 100 years old.

Even if you keep your house well maintained other houses in that neighborhood could be well past their prime by then.

Try to picture how the house and neighborhood might age.

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Re: Reasonable cost for a forever home?

Post by LadyGeek » Wed Oct 17, 2018 3:27 pm

This thread is now in the Personal Finance (Not Investing) forum (buying a home).
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Cycle
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Re: Reasonable cost for a forever home?

Post by Cycle » Wed Oct 17, 2018 4:08 pm

The wise thing to do is buy or rent for your current needs. If you get a forever home for when you have kids, you will be unsatisfied when they are out of the house and you are wasting space with empty rooms.

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Re: Reasonable cost for a forever home?

Post by stoptothink » Wed Oct 17, 2018 4:17 pm

DanMahowny wrote:
Wed Oct 17, 2018 10:51 am
"Forever home" is a term I hear often. It usually means around 7 years.
This. I dislike that term almost as much as I do "starter home". The chances of OP remaining in that home for the rest of their life is statistically extremely slim and whatever seems ideal now, most definitely won't be ideal in 40 years. Evaluate your needs for about the next 7yrs (the average length of home ownership in the U.S.) and buy accordingly. With that level of income, regardless of where in the nation OP lives, cost shouldn't really be a concern...unless they really value wealth signaling to their friends and family.

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ram
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Re: Reasonable cost for a forever home?

Post by ram » Wed Oct 17, 2018 7:14 pm

2.7 M= Very reasonable ( 3x annual combined salary).
4.5 M = acceptable (5x)
Ram

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