Can I afford a million dollar house?

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Topic Author
tomtoms
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Can I afford a million dollar house?

Post by tomtoms »

I would like to get your feedback!

House price (Southern California): $1.2 million

Annual pre-tax income ($320 k):
- Job: $140 k (stable, 40 hours a week)
- Business: $180 k in profit (90% growth per year for last 2
years; 30% growth this year)

Cash reserve: $400 k
Retirement fund: $210 k
Stock: $57 k

35 years old
Single, no debt

Mortgage ($960 k):
- 20% down payment ($240 k)
- $5400 monthly payment based on 3.1% interest rate (principle, interest, property tax, insurance)
- Estimated tax savings: $1000 per month for the first few years (will use part of the house for my business)

I am thinking about holding at least 2 years of expenses in cash, just in case. I am also planning to be aggressive in paying off my mortgage for the first three years.

So what do you guys think?
Last edited by tomtoms on Sun Jul 03, 2016 8:09 pm, edited 1 time in total.
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White Coat Investor
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Re: Can I afford a million dollar house?

Post by White Coat Investor »

No, you cannot afford it. You don't have a million bucks sitting around. You'll have to make payments on it like most people. The good news is you can afford to make payments, especially if you put $400K down.
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travellight
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Re: Can I afford a million dollar house?

Post by travellight »

Is your monthly income reliably over 15k per month? Your mortgage should be roughly a third of your net income. I would tend to go for buying less house.... I would base it just on the stable job and consider the side business a way to pay down your mortgage quickly if you want to. Based on just your job, I don't think I would buy a million dollar house.
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Topic Author
tomtoms
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Re: Can I afford a million dollar house?

Post by tomtoms »

Travellight- yes, $15 k a month is reliable. I don't think my business will keep on expanding at the current rate but I don't believe it will drop more 50%. I also don't have much business expense. Please note $320 k is pretaxed income.

Whitecoatinvestor- I have your book. Do you think I should put 30% down payment instead of 20%?

Thank you for your feedback. Please keep them coming.
ralph124cf
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Re: Can I afford a million dollar house?

Post by ralph124cf »

I would like to point out to some of our board members who have not lived in VHCOL areas that 1.2M may well be a three bedroom ranch on a 1/6 acre lot, 60 years old, and with a detached garage. It is very hard to get your foot in the door.

Ralph
KlangFool
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Re: Can I afford a million dollar house?

Post by KlangFool »

ralph124cf wrote:I would like to point out to some of our board members who have not lived in VHCOL areas that 1.2M may well be a three bedroom ranch on a 1/6 acre lot, 60 years old, and with a detached garage. It is very hard to get your foot in the door.

Ralph
ralph124cf,

Whether the fact that a person live in a VHCOL, HCOL, or LCOL does not change the FACT that a person is "House Poor" if most of the person's net worth is tied to THE HOUSE. Being "House Poor" is a choice that some people made. And, they have to live with the consequences.

<<It is very hard to get your foot in the door.>>

Then, don't get into the door.

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Grt2bOutdoors
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Re: Can I afford a million dollar house?

Post by Grt2bOutdoors »

Rent. OP you will be skating on very thin ice if all of your ducks are not precisely lined up to make this work.

Your wage income is secure, business income is more of a crap shoot - high growth trajectory (30%) - what risks are there? - i see one without even knowing the business space you operate in - disability comes to mind, if you become disabled what type of income protection do you have to assure you of a continuous stable flow that delivers a minimum level of $190K pre-tax in addition to the $140K wage income that I'm assuming has disability income protection? The next risk - you plunk down $400K, now you have $57K in very risky stock as your backup plan - if you liquidate the $57K what is the net after tax value? That is what you have as reserve money - let's say it's $45K after-tax, that amounts to less than 6 months of all-in expenses.

Continue to rent, no matter how hard it is to own, sometimes you have to respect the math. The numbers don't lie - one more reason why I'm not driving a Mercedes S class or a Ferrari - the numbers don't lie. It costs money to own expensive things, homes can be money pits - they always need work.
Last edited by Grt2bOutdoors on Sun Jul 03, 2016 10:24 pm, edited 1 time in total.
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Jack FFR1846
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Re: Can I afford a million dollar house?

Post by Jack FFR1846 »

Can you do your side business from anywhere? With that income alone, you could buy a house for cash in central Indiana (or many places in Florida, West Virginia, etc), have no job and live a much higher standard than you would in California. Just a thought.
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stan1
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Re: Can I afford a million dollar house?

Post by stan1 »

I live in a VHCOL area and I'm usually one of the first to tell people who've made the decision to live and stay in such an area to buy a house that will meet their household's needs. In this case I don't think you have the assets, income, and liquidity to do this yet. If your business continues to throw off $180K/year and you have $800K in cash in 2018 then you can afford a $400-500K down payment on a $1.2M house.

What lifestyle reason do you have for buying a house now, other than wanting to be able to deduct part of house as a business expense? Have you thought about how much it costs to maintain a SFH and keep it in good condition?
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Leemiller
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Re: Can I afford a million dollar house?

Post by Leemiller »

KlangFool wrote:
ralph124cf wrote:I would like to point out to some of our board members who have not lived in VHCOL areas that 1.2M may well be a three bedroom ranch on a 1/6 acre lot, 60 years old, and with a detached garage. It is very hard to get your foot in the door.

Ralph
ralph124cf,

Whether the fact that a person live in a VHCOL, HCOL, or LCOL does not change the FACT that a person is "House Poor" if most of the person's net worth is tied to THE HOUSE. Being "House Poor" is a choice that some people made. And, they have to live with the consequences.

<<It is very hard to get your foot in the door.>>

Then, don't get into the door.

KlangFool
I agree.

We live in a HCOL area and bought a home for around that price with 20% down, but with an annual income of about 500k. Also, being a two income house where both incomes are high made it an easier deduction. I will say that I've been surprised by the costs of renovations and even deffered maintaince issues that have cropped up.

I think it may be tighter than you think with your proposed down payment and income. Also, that will be stressful and I've noticed in many small business it's better not to "need" the money....
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obgyn65
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Re: Can I afford a million dollar house?

Post by obgyn65 »

Nope.
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thomasbayarea
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Re: Can I afford a million dollar house?

Post by thomasbayarea »

What kind of business generates $180k in profits on the side?

:)
michaeljc70
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Re: Can I afford a million dollar house?

Post by michaeljc70 »

My concern would be the business profits. You don't give details on that. If a recession were to hit, would this business be recession proof? Is it cyclical? Can it fizzle out? They are also going to scrutinize that business income when applying for a mortgage.
Tal-
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Re: Can I afford a million dollar house?

Post by Tal- »

Tal votes no.

Three big reasons:

First - If your side business income has seen such dramatic increases over the last few years, that's great - but it's also not "stable" in my eyes. As a general statement, I would avoid relying on current numbers for long-term projections. At the very most, I would use something like the average income from the last 5 years.

Second - Even if we do assume that your current side income will be maintained long-term, 1.2M stretches you in several ways. I worry that your net worth isn't quite where it should be (you're close) for you to sink such a large chunk of your liquidity into a $1.2M house. And, the $5K in expenses really puts a dent into your annual cashflow. To say it another way, this makes you a little too house-poor for my tastes.

Third - This is my personal take only, but there is no way I would spend $1.2M on a house in S. Cali. For me, a market that is so high, and so high relative to the replacement costs, and requires such a strong economy to maintain, and is so far above the national median, etc. etc. is super risky. And, I don't think that you have the assets behind you to take this big of a risk.

I'm sure that you feel in great shape, and in many ways, you are. And, if I were a betting man, I'd wager that your peers are buying houses, and living a lifestyle that surpasses yours. Its hard when the Jones' are your good friends. And you're on a great track. If you can convert that savings to investments, and maintain a high savings rate for a few more years, my vote may change. But for now, Tal votes no.
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Topic Author
tomtoms
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Re: Can I afford a million dollar house?

Post by tomtoms »

Thank you for your feedbacks so far. Please keep them coming!

It seems like the consensus is that I can afford to make the payment. I was actually pre-approved for this amount last year. Now that I have more cash reserve, I feel comfortable moving forward.

I also understand the risks - my business tanked, I lose my job, become disabled, single income. But I can also make an argument that my business will continue to grow, I get marry within a year, I rent out the extra room to a close relative.

I don't want to get into unnecessary detail but I believe my business income is stable and I hope it will continue to expand.

I have always regret not buying a house in 2012. I had the money but I decided to pay off my student loans first. Of course that worked too but if I had not been so aggressive with my student loan debt, I would have purchased a house back then for much less.

Believe it or not but this is actually one of the least expensive houses in the neighborhood. It seems to be well maintained and I think it has a lot of value. Right now there is a lot of competition for $700-900 k well maintained houses in a good neighborhood. Most likely I would end up paying way over asking price for one of those houses.

I came from a modest family (living in "poverty" according to the government) so this is a big step forward. I get nervous thinking about this. I am planning to hold two years of expenses in cash, just in case. I will crunch the numbers again before moving forward.
Last edited by tomtoms on Mon Jul 04, 2016 11:05 am, edited 2 times in total.
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quantAndHold
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Re: Can I afford a million dollar house?

Post by quantAndHold »

I think I must have read a different set of responses than you did. But when I was reading, I wasn't looking for someone to confirm a decision I'd already made, so I might have been more objective.
KlangFool
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Re: Can I afford a million dollar house?

Post by KlangFool »

tomtoms wrote: But I can also make an argument that my business will continue to grow, I get marry within a year, I rent out the extra room to a close relative.
tomtoms,

<<my business will continue to grow,>>

And, you will choose to buy a better house instead of this one.

<<I get marry within a year>>

Your future spouse HATE the house. You have to move and buy a new one. Or, you have to move due to school / pre-K consideration.

So, besides the FINANCIAL consideration, being single at 35, you are in a UNSTABLE phase of life to own a house. Typically, a person should be married with children before they can know for sure where they will live for a long period of time.

<< I rent out the extra room to a close relative. >>

So, besides a full-time job, side business that earn good money, you want to be a LANDLORD? Who are you kidding? If the business is doing well, you will be buying a better house. If the business is not doing well, renting room to your relative is not going to save you.

WHY at this stage of your life, you want to maintain a HOUSE? You should make hay while sun shines. Put more time and effort into your business. Makes a lot of money. Then, retire to a beach somewhere.

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EnjoyIt
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Re: Can I afford a million dollar house?

Post by EnjoyIt »

There is no reason why a single young person should buy a house unless they want to be tied down to a neighborhood for the next 7-10 years. This is a horrible decision. Rent and save money. Reevaluate when you are married and have a child on the way.

Why is it you want to own a house so badly?
What benefit to you get with this house that is worth the down payment, mortgage interest, property tax, and loss of growth by not investing the extra cash?
Don't forget, when you move, and you will move, you realestate agent fees for selling will be 6% or $72K.
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southbay
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Re: Can I afford a million dollar house?

Post by southbay »

unless you are absolutely positively sure you want to live in the same exact location for the next 10+ years, I would not buy anything. i would rent. and if i was you, and single, i would probably rent a simple 1 bedroom apartment, maybe a 2 bedroom if i could find a deal. there is really nothing wrong with renting. if you own or rent, it costs money to put a roof over your head. but with renting you have tons more flexibility. i don't know where you're shopping in Southern California (it is a huge area), but there are lot of places where it makes a lot more financial sense to rent instead of buy when you crunch the numbers.
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nyknicks4412
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Re: Can I afford a million dollar house?

Post by nyknicks4412 »

The question isn't can you afford it...because just from a numbers perspective sure you could make it work. The question is should you buy a million dollar house given your current situation. And in my mind the answer to that is no.

Single, young, in a great financial position with what sounds like a lot of life changes coming in the next few years. Why jeopardize that success? One or two shifts in your financial position and you could find yourself with way more house than you can afford blowing through a cash reserve that should probably be invested but is held on the sidelines because of the risk in purchasing so much home.

You're holding roughly 60% of your assets in cash. At your age that is a lot of dry powder that you could do a lot with. Why dump it all in a home that really doesn't seem like a life necessity.
Last edited by nyknicks4412 on Mon Jul 04, 2016 11:56 am, edited 1 time in total.
cast128
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Re: Can I afford a million dollar house?

Post by cast128 »

I personally think its too early to buy the house . Here is my reasoning.

Owning a business can be expensive and filled with one time expenses that can break a business. Does the business have cash reserves or is your 400k part of the cash reserves if you need a one time unexpected purchase? If that 400k is reserve for the business then no you definitely can not afford it.

Is your business going to keep growing & why did it go from 90% growth to 30% growth this year? I know you replied that you feel it will keep growing but so does everyone or else they would take their winnings and leave or alter something to prevent the unforeseen problem. What changed to have the slow down in yoy growth and what is the future like growth and profit wise?

I'm very conservative and so is my family when my brothers both started their business. They didn't make any purchases till they had cash money to buy wants such as a million dollar house even though they live in a HCOL area.

From your reply in this thread it seems that you know your market and have done a lot of research so I respect that. In the end only you know your situation best and we are trying to give you advise on what little we know about your life. Let us know what you end up doing.
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goingup
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Re: Can I afford a million dollar house?

Post by goingup »

quantAndHold wrote:I think I must have read a different set of responses than you did.
Me too. OP- almost all responses were no, you cannot afford the 1M house.
expat
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Re: Can I afford a million dollar house?

Post by expat »

EnjoyIt wrote:There is no reason why a single young person should buy a house unless they want to be tied down to a neighborhood for the next 7-10 years. This is a horrible decision. Rent and save money. Reevaluate when you are married and have a child on the way.

Why is it you want to own a house so badly?
What benefit to you get with this house that is worth the down payment, mortgage interest, property tax, and loss of growth by not investing the extra cash?
Don't forget, when you move, and you will move, you realestate agent fees for selling will be 6% or $72K.
+1
Dottie57
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Re: Can I afford a million dollar house?

Post by Dottie57 »

I think this would be a classic bad decision.

Your job is 140k. You don't give any info on the side business. $180k seems really high for part time work.

Keep saving. Bump up investing. Make sure you max out Roth and 401k for 5 years and then look at a house.
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JonnyDVM
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Re: Can I afford a million dollar house?

Post by JonnyDVM »

Yes given your HCOL. I think this is the wrong forum to post this question BTW. If it doesn't fit some ridiculous formula completely inapplicable to a HCOL area people will shoot you down.

You have 400k saved, and a steady income. I don't think buying a million dollar house is a financially disastrous decision. Obviously, less would be ideal but if you want to live certain places you have to stretch a little.

The question wasn't if OP should buy or rent. It was if he could afford a house. Should he buy is a different question. Can he afford it ? IMO yes. I wouldn't be eager to do it. But I'm not eager to live in SoCal either.
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unclescrooge
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Re: Can I afford a million dollar house?

Post by unclescrooge »

tomtoms wrote:I would like to get your feedback!

House price (Southern California): $1.2 million

Annual pre-tax income ($320 k):
- Job: $140 k (stable, 40 hours a week)
- Business: $180 k in profit (90% growth per year for last 2
years; 30% growth this year)

Cash reserve: $400 k
Retirement fund: $210 k
Stock: $57 k

35 years old
Single, no debt

Mortgage ($960 k):
- 20% down payment ($240 k)
- $5400 monthly payment based on 3.1% interest rate (principle, interest, property tax, insurance)
- Estimated tax savings: $1000 per month for the first few years (will use part of the house for my business)

I am thinking about holding at least 2 years of expenses in cash, just in case. I am also planning to be aggressive in paying off my mortgage for the first three years.

So what do you guys think?
You're probably in an extremely high tax bracket. I wouldn't be surprised if your marginal tax rate was close to 45%.

If I was in your position, I would buy a house.

In fact, that's what I did two years ago.

My family income was close to your total income. I bought a house in a similar price range with a 35% down payment.

Rents are insanely high in Socal. Our tax-subsidized housing payment was similar to our rent.

Posters who do live in Socal do not often realize how expensive it is to live here. But that's the sacrifice you make.
Ron Ronnerson
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Re: Can I afford a million dollar house?

Post by Ron Ronnerson »

I'm in a VHCOL area. I think that if your business income can be relied on to stay at least near its current level, you can afford it. I agree with those who have said that maybe you shouldn't buy. However, if your question is whether or not you can afford to, I say yes. After subtracting taxes and housing expenses from your income, you should have plenty to cover other expenses. If your business income is not very stable, then you can't afford it. Also, rather than paying off the mortgage aggressively, you may want to instead direct extra funds toward building up your savings and investments. Mortgage rates are low these days and it may not be best to have most of your wealth in a house.
O2sats
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Re: Can I afford a million dollar house?

Post by O2sats »

quantAndHold wrote:I think I must have read a different set of responses than you did. But when I was reading, I wasn't looking for someone to confirm a decision I'd already made, so I might have been more objective.
+1
letsgobobby
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Re: Can I afford a million dollar house?

Post by letsgobobby »

Personally, I think it's too high. Doable, but doesn't leave a ton of room for error - error in this including kids. Not that kids are errors. Kids - marriage - expensive. Is any of this in your future?

You haven't said anything about the precise location. $1.2M in SoCal could be a Hermosa Beach cottage or a Mediterranean estate in Tujunga. Is this home really appropriate for your needs for the next ten years?

By the way - where are you getting 3.1% on a jumbo loan? Is that 15 or 30 year? I can't find a 15 year jumbo less than 3.375%.
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vitaflo
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Re: Can I afford a million dollar house?

Post by vitaflo »

tomtoms wrote: - Business: $180 k in profit (90% growth per year for last 2
years; 30% growth this year)

I don't want to get into unnecessary detail but I believe my business income is stable and I hope it will continue to expand.
If it were me I'd throw away the idea of buying a house and use the $400k to expand the business. If it's increasing that fast, you expect it to continue, and it's your side gig, why haven't you gone all-in on it yet?

That is unless you actually aren't that sure of it and worried it might fail or recede, in which case the house question is moot. If you're going to tout your business income and growth, then grow the business. Then in 5 years you can come back and ask if you can afford a $10m house. :sharebeer
stoptothink
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Re: Can I afford a million dollar house?

Post by stoptothink »

letsgobobby wrote:Personally, I think it's too high. Doable, but doesn't leave a ton of room for error - error in this including kids. Not that kids are errors. Kids - marriage - expensive. Is any of this in your future?

You haven't said anything about the precise location. $1.2M in SoCal could be a Hermosa Beach cottage or a Mediterranean estate in Tujunga. Is this home really appropriate for your needs for the next ten years?
We just got back early this morning from visiting my brothers in Huntington Beach and Pasadena. One brother is literally a single block from the beach and downtown, the other is closer than that to downtown Pasadena. Both areas are expensive for SoCal, but 1.2M still buys what I think is a lot more house than I'd want if I was living alone - it's a lot more than my brothers with wives and children have.

Besides that, IMO, the simple fact that the OP is single and has the possibility of a lot of upcoming life changes makes the affordability argument moot. Technically, it sounds like it is far more than I'd be comfortable with but doable, but there seems to be a lot of downsides and few upsides to buying at this point in their life.
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Watty
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Re: Can I afford a million dollar house?

Post by Watty »

goingup wrote:
quantAndHold wrote:I think I must have read a different set of responses than you did.
Me too. OP- almost all responses were no, you cannot afford the 1M house.
Add another "no" to the list.

The business income just isn't that dependable, but if things go well and you save a lot you could afford it in a few more years.
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tomtoms
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Re: Can I afford a million dollar house?

Post by tomtoms »

Thank you again everyone! I have gone over the numbers again:

$1,200,000 - $240,000 (20% down) = $960,000

3.3% interest rate

$1150 property tax
$1839 principle
$2365 interest
$100 insurance
$300 utilities

$5754 total

$3915 (not including principle) x 0.25 = $980 (tax saving from using part of the house for my business)

Total cost: $5754 - $980 = $4774 per month (not including maintenance, unexpected expenses but if I were to hold 2 years of expenses in cash, this should cover it).

It is located in a very stable, traditional neighborhood. I don't expect prices to go down much or go up much.

$140 k job income (after taxes, maxing my 401 k, health insurance): $7250 annual earning or about $6000 a month

$6000 - $4774 = about $1250 for living expenses.

Obviously I can't afford this house with just my job. But, including my $180 k business income, I can afford it. Fortunately my business does not depend on a booming economy. As bad as it sound, it may even do better in a bad economy. There is some risk like any other business but if I were to shut it down today, there is not much business expense. I don't have any employees. Cost is low. Profit margin is high. It is pretty much a one person business.

What do you guys think of the numbers?
Last edited by tomtoms on Mon Jul 04, 2016 3:18 pm, edited 5 times in total.
Non7WoodUser
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Re: Can I afford a million dollar house?

Post by Non7WoodUser »

Is it 10,000+ sq ft?
stoptothink
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Re: Can I afford a million dollar house?

Post by stoptothink »

tomtoms wrote:Thank you again everyone! I have gone over the numbers again:

$1,200,000 - $240,000 (20% down) = $960,000

3.3% interest rate

$1150 property tax
$1839 principle
$2365 interest
$100 insurance
$300 utilities

$5754 total

$3915 (not including principle) x 0.25 = $980 (tax saving from using part of the house for my business)

Total cost: $5754 - $980 = $4774 per month (not including maintenance, unexpected expenses but if I were to hold 2 years of expenses in cash, this should cover it).

It is located in a very stable, traditional neighborhood. I don't expect prices to go down much or go up much.

Job income (after taxes, maxing my 401 k, health insurance): $7250 annual earning or about $6000 a month

$6000 - $4774 = about $1250 for living cost.

Obviously I can't afford this house with just my job. But, including my business income, I can afford it. Fortunately my business does not depend on a booming economy. As bad as it sound, it may even do better in a bad economy. There is some risk like any other business but if I were to shut it down today, there is not much business expense. I don't have any employees. Cost is low. Profit margin is high. It is pretty much a one person business.

What do you guys think of the numbers?
Whether you can afford it is tertiary, with so many possible upcoming changes in your life, do you really want to be a homeowner? If so, do you really need or even want that much home as a single person?
harrychan
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Re: Can I afford a million dollar house?

Post by harrychan »

$1250 for monthly living expense? I think you just answered your own question.
This is not legal or certified financial advice but you know that already.
stan1
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Re: Can I afford a million dollar house?

Post by stan1 »

Are you going to hire a landscaper or spend 3-4 hours per week yourself? That will be $200/month minimum. Will you be hiring someone to clean the house? That's $200-300/month. For utilities: $300/month in Southern CA is pretty low if you are including electric, gas, water/sewer (!), and high speed internet. I think it would be closer to $450/month minimum and add another $100/month if you want cable TV and at least another $1000 per year if you plan to run the air conditioner.
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tomtoms
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Re: Can I afford a million dollar house?

Post by tomtoms »

harrychan wrote:$1250 for monthly living expense? I think you just answered your own question.
Just to clarify, $1250 for monthly living expenses does not include income from my business. That is income from my job.
KlangFool
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Re: Can I afford a million dollar house?

Post by KlangFool »

tomtoms wrote:
What do you guys think of the numbers?
tomtoms,

Don't buy THE HOUSE! You will be "House Poor". You are hanging a 960K mortgage debt on your neck. You will lose your FINANCIAL FREEDOM.

Without THE HOUSE, you have 660K of asset. You can lose your job and business tomorrow and move somewhere else. And, you can have a very good life. If things go well for a few more years, you can retire at a beach somewhere. There are many nice beaches everywhere.

What do you get with THE HOUSE? Sleepless nights?

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Dottie57
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Re: Can I afford a million dollar house?

Post by Dottie57 »

tomtoms wrote:Thank you again everyone! I have gone over the numbers again:

$1,200,000 - $240,000 (20% down) = $960,000

3.3% interest rate

$1150 property tax
$1839 principle
$2365 interest
$100 insurance
$300 utilities

$5754 total
Your numbers are really high for a guy who makes140k per year. I don't count the side business since you haven't stated what it is. Asuuming the insurance is to cover the house, your number looks low. For a 150k condo, I pay $800 a year. It is hard to believe a 1.2m house would be only $100/mo. Utilities - electricity, phone (?) , cable/dish,garbage, water -are you sure that is only $300 a month?

I think the mortgage will be an albatross.
EXH
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Re: Can I afford a million dollar house?

Post by EXH »

If the business profit is expected to remain stable certainly you can afford it - more than I would want to do, but certainly doable. As for the costs listed - Keep in mind that insurance is based on rebuild costs - I don't insure for the full price I paid for the house as much of the cost is land. $100/mo is reasonable for many of the million dollar houses in my area of NCAL certainly - they are small! Utilities sound about right as well (no cable though) - I pay less than that total even in the winter months. It really depends on why you want a house - I certainly wouldn't do it as an investment, but there may be other motivating factors. I wanted a house so that I could have outdoor space for gardening and a kitchen that wasn't crappy (renting this would cost similar to our mortgage although man maintenance costs are high!!!). That was worth a lot to me. You also mentioned marriage?? Not sure if that was a concrete plan or not but if not I would be worried about buying a house now then wanting to get married to someone in a few years that needed to live somewhere else for work, kid's schools, etc.
harrychan
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Re: Can I afford a million dollar house?

Post by harrychan »

tomtoms wrote:
harrychan wrote:$1250 for monthly living expense? I think you just answered your own question.
Just to clarify, $1250 for monthly living expenses does not include income from my business. That is income from my job.
Yes..I know that. I thought that was what your point was in the 2nd numbers. I'm also in socal and totally understand the HCOL. Sounds like you are looking at a neighborhood / house that is your "dream home". I bought in 2010 and made sure it is a home I can stay for at least 10 years in a good neighborhood for just under $599k. My home is valued at just under $800k now. I think you should target homes that are a bit lower costs. I read your commend and certainly understand the competition on 'entry' level homes.
This is not legal or certified financial advice but you know that already.
Ninnie
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Re: Can I afford a million dollar house?

Post by Ninnie »

Put down more of a downpayment. Buy a cheaper home - can you max out at $1 million? Wait until you're married.
Blender
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Re: Can I afford a million dollar house?

Post by Blender »

Can you afford it? Yes, today you can but you would have very little margin. Without your side business, no you absolutely can not.

But the real question is should you buy it? IMHO that answer is no. I have yet to hear one reason why you need a house, let alone a 1.2 mil one (I get the HCOL but what are you getting that you need over say a 1 mil one?). But even with a reason, financially you are taking a risk. The house needs to appreciate $72K just to cover realtors fees, not to mention enough to keep up with inflation. Add in maintenance, taxes, added insurance, closing costs and financial it's actually very hard to come out ahead as an investment. Not to mention the risk of your side business not doing as well as you expect it to. Investing in index funds gives much better financial results unless you're in a small handful of areas in the US. It also anchors you, reduces your mobility, ties you down and ties you up. If you had a family and were looking to settle that'd be one thing, but you're single and mobility is a great asset that you're throwing away prematurely.

Your heart seems set on it though, best of luck!
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vitaflo
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Re: Can I afford a million dollar house?

Post by vitaflo »

tomtoms wrote: $3915 (not including principle) x 0.25 = $980 (tax saving from using part of the house for my business)
This does not seem correct. What is the 25% from? Your tax rate? Keep in mind you can only deduct the % of the home you actually use for your biz. If the area you use for your biz is 10% of the house size, then it's something closer to $3915 x 0.1 x 0.25 = $98. Of course this is also wrong because the deduction also reduces your self-employment tax, and there's depreciation (so the savings would be higher than $98) but I digress. You may want to rethink that deduction. It's probably not what you think it is. In any case I wouldn't use it to decide whether I could afford a house or not.
Last edited by vitaflo on Mon Jul 04, 2016 5:28 pm, edited 3 times in total.
Trader/Investor
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Re: Can I afford a million dollar house?

Post by Trader/Investor »

ralph124cf wrote:I would like to point out to some of our board members who have not lived in VHCOL areas that 1.2M may well be a three bedroom ranch on a 1/6 acre lot, 60 years old, and with a detached garage. It is very hard to get your foot in the door.

Ralph
And I would like to point out that those of us who live in VLCOL areas can get 25 year old 2000 sq ft houses on 1/2 acre lots in nice subdivisions with lawyers and judges and the like for around $115,000 to $130,000. Two different worlds isn't it?
TareNeko
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Re: Can I afford a million dollar house?

Post by TareNeko »

As everyone else said, don't buy the house. You have a good side business. Wait few years, save the money for a big (huge) down payment for a similar house down the road. Added benefit is to get your future wife's opinion.

Other than that, couple notes:

Where do you get 3.3% loan for 30 year jumbo mortgage? The AIM loan website, which usually has very low rates, show 3.875%.

When you calculate tax savings, don't forget that you will loose standard deduction.
furikake
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Re: Can I afford a million dollar house?

Post by furikake »

I think you're underestimating your utilities and insurance costs. Our monthly mowing is already at least $300/month (more when there are more weeks in a month), plus $2000 for lawn treatment, and our insurance is quite a bit more than your estimate and we live in a LCOL area.

Why do you so desperately want to buy that house? Are you okay with the house price plunging to lower than the price you pay? You don't believe that it will happen, what if it does? Because the market will correct itself at some point, even if you don't believe that it will.

Looking at your numbers, it looks like you can afford it, but you will be majorly house poor, and one accident, you will lose your house and the money you put into your house and you will not have money left for anything else. I would not buy it at all if it were me, especially since you said you might get married and what if your wife wants to live in a different area?! It's a bad idea to buy right now with your situation.
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White Coat Investor
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Re: Can I afford a million dollar house?

Post by White Coat Investor »

A lot of Debbie Downers here.

I get that this isn't all that much house in many areas of Cali. I have a friend living in a $6M house out there. It's a little nicer than my $600K house, but not dramatically nicer. I certainly have a better view, a nicer neighborhood to raise kids in, and my driveway is even paved.

I agree with the Debbie Downers that you should only buy a house when you are in a stable job and social situation. It sounds like you are not. So you shouldn't.

But whether or not you can afford it seems very clear to me. My usual metric is that you shouldn't have a mortgage (not mortgage payment) larger than 2X your gross income. Your income is $320K and expected to rise. 2X that is $640K. The house is $1.2M and you have $400K. That gets you to $800K. That's stretching a bit, but not terribly. If you're one of those "I'll never leave California types" then you might as well get in because it isn't going to get any better. But realize just how much you are sacrificing financially by staying in California. Between the cost of living and the taxes, it isn't an environment terribly conducive to building wealth, even on a physician like income.

Good luck with your business. Realize that many Bogleheads are somewhat anti-entrepreneurship because it is so risky. These are also folks who think a 70/30 portfolio performs significantly differently from a 60/40 portfolio and who debate whether a 3.8% or a 3.9% SWR is correct. But in many ways, your entrepreneurial pursuit is opening all kinds of doors for you. That income could easily be $500K in 5 years, at which point you may even start thinking about upgrading from that $1.2M house. Or it could go to zero. But the fact that you can form a one-man business that makes a six figure income tells me that you could probably do it again.

Would I put 30% down? Heck yes. I'd put almost all of that $400K down and maybe even wait a year to save up a little more and see what happens with the business and social situation. You said yourself that the house is unlikely to appreciate rapidly, so might as well take advantage of that.
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vitaflo
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Re: Can I afford a million dollar house?

Post by vitaflo »

White Coat Investor wrote: Good luck with your business. Realize that many Bogleheads are somewhat anti-entrepreneurship because it is so risky But in many ways, your entrepreneurial pursuit is opening all kinds of doors for you. That income could easily be $500K in 5 years, at which point you may even start thinking about upgrading from that $1.2M house. Or it could go to zero. But the fact that you can form a one-man business that makes a six figure income tells me that you could probably do it again.
Agree with this and is what I was getting at above. I think OP is missing the real opportunity here and it's not a house. Sinking all that extra cash into a house when he could be using it grow an already successful business is crazy to me. He has the opportunity to not only become his own employer but also make enough in the future to render this entire thread moot and he wants to blow it all on a house right now instead.

I mean it's entirely possible to do both (have the house and grow the biz) but it'd be so much easier without the house weighing around your neck. But I'd personally rather invest in a business than real estate.
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