Should we purchase a $1 Million dollar home with all cash?

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sfmarz
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Should we purchase a $1 Million dollar home with all cash?

Post by sfmarz » Sun Feb 19, 2017 1:48 pm

First of all, I am very fortunate to be in this situation.

I'm 43, live in the Bay Area (renting) and just received a $1.5 million dollar payout (Startup company was acquired). After taxes I should have around $750k.

My wife and I have been looking to purchase a home for the last year in Marin with a budget of $800k - 1.1M. We have saved $300k for the downpayment and another $100k as an emergency fund with additional 401k,stocks, IRA and savings for retirement. We do not have any debt and I plan to continue working.

With all of this good fortune, would it make financial sense to pay all cash for our primary home (First time buyer) or should we use traditional financing (20% down) and invest the rest?

Any feedback or suggestions would greatly be appreciated.

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Sandi_k
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Sandi_k » Sun Feb 19, 2017 3:56 pm

Impossible to answer without knowing your other financial progress.

- Do you have retirement savings?
- Do you have appropriate liquidity in non-retirement accounts?
- Are you maxing out your 401(k), IRAs, etc.?
- What percentage of your current salary are you able to save?
- Do you have kids?
- Do you have good insurance? Any health issues that might mean you could not work until FRA?

Personally, I have always found cash flow to be a huge issue in weathering life. I would be hesitant to tie up all of that capital in one asset, and would be more likely to put down 50%, and stash the rest in retirement and savings accounts...

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by KlangFool » Sun Feb 19, 2017 4:01 pm

OP,

1) How many eggs do you put into this one basket (house) after you purchase this $1 million house with cash?

2) How much money do you have besides the house after paying 1 million cash?

3) Are you comfortable with your answer to (2)?

A) If yes, why?

B) If no, why?

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PFInterest
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by PFInterest » Sun Feb 19, 2017 4:24 pm

I vote no. Don't forget you can do 50% down or other combos. Congrats and good luck!

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Watty
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Watty » Sun Feb 19, 2017 4:34 pm

There is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

If you invest the money then you will have a large sequence of returns risk.

I hate to sound like a broken record but this is what I have posted about this before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
This is likely a once in a lifetime windfall that so I would be reluctant to put it in the stock market. The higher your pay is the less of a concern this is. If you invested the money and lost a quarter of a million dollars then could you crank up your saving, along with making the mortgage payments, and save up another quarter of a million dollars pretty easily? If not you need to be cautious.

If the home drops in value by 30% you will have lost that money if you have a mortgage or not.

I would pay cash but then save your "mortgage payment" each month. Ten or twenty years from now that may prove to not been the optimal choice but if you have been saving your "mortgage payment" for a couple of decades you will be doing fine.

Not to beat a dead horse but when buying a house like that in the Bay Area you also need to consider;

1) The earthquake risk. Don't ignore it. Few people would argue that there is a very good chance that there will be a major earthquake in the next 200 years(or less) and if you own a house there for 40 years then there is a 20% chance that it will hit while you own the house.

2) You likely don't get much house for a million dollars in Marin. There are lots of nice places that you could move to and buy a McMansion for $300K and semi retire. With your company being bought out you may soon find yourself leaving that job soon anyway.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by stlutz » Sun Feb 19, 2017 4:52 pm

Your real question isn't whether you should put $1M into the house--if that is what is cost then that is what you'll pay. The real question is whether you have a need to take a leverage position in the stock market based on your current situation. That is:

Option A: I have 1 million dollars. I'll buy a house for $1M..

Option B: I have 1 million dollars. I'll buy a house for $1M, and borrow $500,000 and invest 500K in the stock market.

I'd suggest (a) is the better answer.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by DurangoWino » Sun Feb 19, 2017 4:59 pm

I would put the money into a house and not look back.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Meg77 » Sun Feb 19, 2017 5:24 pm

Pay cash for the house. You'll save a lot on closing costs and title work (not to mention mortgage interest) and also you should get a better deal with a cash offer, especially in a hot market - or at least have a better chance of winning a bidding war. Being able to close quickly and without a financing contingency is a huge benefit for sellers considering multiple offers.

You'll still be able to save and invest plenty since you won't have a mortgage payment each month. Personally though I wouldn't borrow against a home to invest a huge lump sum in the stock market, especially when the market is at all time highs and while stocks are in one of the longest bull runs in history. Think how you'll feel if you invest $750K and then watch the balance go to $600K while you are stroking huge mortgage payments each month. Now imagine how secure and flexible you'll feel with a paid off house regardless of what the market is doing.

Sure, over 30 years you may come out ahead by using cheap leverage to invest, but the spread is likely to be unimpressive and the ride would be a volatile one. Plus success would depend upon you not selling, not straying from the course, and not spending any of the investments on anything for the duration. Long odds.
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by randomguy » Sun Feb 19, 2017 5:36 pm

stlutz wrote:Your real question isn't whether you should put $1M into the house--if that is what is cost then that is what you'll pay. The real question is whether you have a need to take a leverage position in the stock market based on your current situation. That is:

Option A: I have 1 million dollars. I'll buy a house for $1M..

Option B: I have 1 million dollars. I'll buy a house for $1M, and borrow $500,000 and invest 500K in the stock market.

I'd suggest (a) is the better answer.
I'd suggest b is a much better answer.:) There are two big reasons
a) it is likely that you will end up with more money by taking on a bit of leverage. The odds of it paying off are extremely stacked in your favor. If someone was willing to lend me money at 2% aftertax that wouldn't be called for 30 years, I would defintiely reconsider how much leverage I use.

b) it prevents lifestyle inflation. I assume right now you are paying 3-4k+ in rent. Change it over to a paid off house and you are looking at say 10k for property taxes and another 10k for maintenance. Pay off the house and you have another 1k+ a month to spend.

Obviously the arguements the other way are all about debt is bad and so on. In the end this choice just doesn't matter. You are not going to end up in a drastically different spot one way or the other in 30 years (or even 15) and which one will win is unknowable.

As far as buying the house or not, if you want to live there buy they house. The price is what it is. If in 10 years you change your mind, you can sell it and move somewhere else. Don't let money run your live. Use money to let you live how you want to live.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by adamthesmythe » Sun Feb 19, 2017 5:37 pm

At your stage of life I would get a mortgage for some of the cost of the house. Maybe not 80%, maybe closer to 50%.

The Bay area has the possibility of earthquake damage. You can't fully insure against this risk even if you are willing to buy the insurance. I would not like so many eggs in one basket.

This does assume you are not going to use the remainder to buy matching Teslas.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by MP123 » Sun Feb 19, 2017 5:43 pm

Put 50% down and take a mortgage, keep some powder dry. You can always accelerate your payments or just write a check for the entire balance if things go well. No requirement to keep it for 30 years but this way you'll have some flexibility.

I will say that $800k doesn't go too far in Marin...

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Wildebeest » Sun Feb 19, 2017 5:58 pm

My answer would be: It all depends.

Before even considering buying a home, I would like to state considering home ownership an investment is tenuous.

I do not consider my home an investment. I used to when I was hoping it would be my ticket to financial independence. In our case it turned out to be an anchor weighing us down.

You have the money so clearly, you can afford a million dollar home, but is it the right move?

I wish when I was considering this the Rent or buy calculator of the NYT was available. http://www.nytimes.com/interactive/busi ... ulator.php. If you do not plan to live in the house for the next 10 years the transaction costs are deplorable.

If you think buying a house is the right move the next question is: How much do you need to retire?

If you feel you right on track and it makes you feel good to live in house without mortgage or you are set to invest conservatively and you have access to 401 K with match I would pay with cash. If you feel you need your monies to grow more than 5% per year I would put 20 % down and put the rest in the stock market/bonds as to what you think would get you to financial independence.
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Carefreeap » Sun Feb 19, 2017 6:35 pm

You must be looking at Novato or San Rafael? I can't imagine where else you could find a SFR in Marin for <$1M.

I wouldn't put it all in the house. If you're in the IT or Biomedical field there's a good chance you will wind up relocating at some point. I'd put enough down to make the house cash-flow if you had to relocate and rent out the house. Because once you leave the SF Bay Area and sell it's usually a one-way ticket.

FWIW we had a similar windfall in 2002 (but under different circumstances). Dot-bomb happened and we wound up relocating to Arizona for six years to follow my husband's job. Having that money in the bank really helped negotiate his relocation package and I didn't need to find paid employment. Then we wound up moving to Germany for three years for my husband's "sunset" post. He retired in 2012 and we moved back to our SF Bay Area house. Having that money invested and working for us allowed my husband to retire about 10 years earlier than most of his peers.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by TimeRunner » Sun Feb 19, 2017 6:38 pm

I know it sounds crazy to BH's not in Cali, but is $1 Million house good enough for $1 million, or do you need a $1.5M house to get a better neighborhood, better resale value, etc? If you're going to buy a house, you might need to buy a better one. I know, I know.
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by goodenyou » Sun Feb 19, 2017 6:54 pm

Having a mortgage on a home is to provide a lifestyle for your family that you cannot otherwise afford. I don't think it would be wise to borrow the equity out of your home and leverage it into the stock market. Therefore, I think it would be the equivalent to putting less down on the home and putting the rest as risk capital. Owning a home is often referred to as "psychic income". If many other categories of financial buckets have been filled, I think it would be prudent to use this windfall to avoid a mortgage.
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by 3PKWzh9 » Sun Feb 19, 2017 7:04 pm

Also SF Bay Area. We are in our 30s and in a $1.3MM starter house (tiny house; primo neighborhood/school district) right now. Similar cash in the bank to you.

We're doing 80% financing on our house, and that will be our plan even when we step up to larger houses. A few reasons:

1) If there's a crash, I'd prefer to have as little cash in the house as possible; in a disaster scenario, I'd prefer the bank lose money, not me
2) The money is cheap (was 3.6% in our case on the maximum $1.1MM note for tax deduction purposes)
3) Tax deduction (we are in 39.6% bracket) saves me $19,000/year
4) I can easily make a safe 4% or more return –– utilities, munis, preferreds
5) Being in SV presents manifold interesting private investment opportunities (BH ALARM BELLS!); would rather have plenty of free cash to take advantage of these

I would not encumber the house to get investing money. Some BHs in this thread seem to be assuming that putting debt on the house is that. It isn't. You are deciding on asset allocation. Some of these same BHs probably say, in other threads, that you should consider housing consumption, not investment. They're right. And, being right in that respect, the best move is to get into the right house for you, despite the nosebleed prices and vol here in SF Bay Area, with cheap money, and have the rest of your money free to establish the allocation you want. Do you want to be 100% real estate? Probably not.

3PK

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by randomguy » Sun Feb 19, 2017 7:33 pm

Wildebeest wrote:My answer would be: It all depends.

Before even considering buying a home, I would like to state considering home ownership an investment is tenuous.

I do not consider my home an investment. I used to when I was hoping it would be my ticket to financial independence. In our case it turned out to be an anchor weighing us down.

You have the money so clearly, you can afford a million dollar home, but is it the right move?

I wish when I was considering this the Rent or buy calculator of the NYT was available. http://www.nytimes.com/interactive/busi ... ulator.php. If you do not plan to live in the house for the next 10 years the transaction costs are deplorable.

If you think buying a house is the right move the next question is: How much do you need to retire?

If you feel you right on track and it makes you feel good to live in house without mortgage or you are set to invest conservatively and you have access to 401 K with match I would pay with cash. If you feel you need your monies to grow more than 5% per year I would put 20 % down and put the rest in the stock market/bonds as to what you think would get you to financial independence.
The problem with rent versus buy calculators in areas like the SV is that you have to make a ton of guesses about the inputs. Use the something like 7% house appreciation and the same for rental increases) of the last decade and buying looks like a no brainer. Use the numbers for the rest of the country (say 2-3%) and current rent:buying ratios and renting is a no brainer. You can model the various cases to figure out possible outcomes but there is no way of knowing which one is likely to happen.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Toons » Sun Feb 19, 2017 7:52 pm

Pay Cash.
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Ron Ronnerson » Sun Feb 19, 2017 8:55 pm

3PKWzh9 wrote:Also SF Bay Area. We are in our 30s and in a $1.3MM starter house (tiny house; primo neighborhood/school district) right now. Similar cash in the bank to you.

We're doing 80% financing on our house, and that will be our plan even when we step up to larger houses. A few reasons:

1) If there's a crash, I'd prefer to have as little cash in the house as possible; in a disaster scenario, I'd prefer the bank lose money, not me
2) The money is cheap (was 3.6% in our case on the maximum $1.1MM note for tax deduction purposes)
3) Tax deduction (we are in 39.6% bracket) saves me $19,000/year
4) I can easily make a safe 4% or more return –– utilities, munis, preferreds
5) Being in SV presents manifold interesting private investment opportunities (BH ALARM BELLS!); would rather have plenty of free cash to take advantage of these

I would not encumber the house to get investing money. Some BHs in this thread seem to be assuming that putting debt on the house is that. It isn't. You are deciding on asset allocation. Some of these same BHs probably say, in other threads, that you should consider housing consumption, not investment. They're right. And, being right in that respect, the best move is to get into the right house for you, despite the nosebleed prices and vol here in SF Bay Area, with cheap money, and have the rest of your money free to establish the allocation you want. Do you want to be 100% real estate? Probably not.

3PK
I agree with this for the most part. My wife and I are 42 and own a home in a great neighborhood with excellent schools in the Bay Area. If you are well ahead on your investments/retirement accounts, you may want to pay $1M cash for a home. Otherwise, I'd consider taking out a loan for part of it.

We have a 30-year fixed rate mortgage at 3.25%. The entire interest is deductible since the property taxes and state income taxes combined exceed the standard deduction. That brings us to a (current) effective rate of 2.17%. The rate of inflation in the Bay Area in recent years has been higher than that. We've locked in a low rate with a small mortgage that is being withered away by inflation as well as the principal payments we've been making. To get the lowest rate we could, we had to do a conforming loan. I believe the current max on a conforming is about $424k so you may want to consider borrowing that much and doing cash for the rest.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by grabiner » Sun Feb 19, 2017 10:56 pm

3PKWzh9 wrote:4) I can easily make a safe 4% or more return –– utilities, munis, preferreds
Utilities are not safe; look at the 2007-2009 decline. Preferred stocks are also not safe (although safer than most stocks), and they have a lot of interest-rate risk; a preferred yielding 5% has a 20-year duration, which is longer than the effective duration of a mortgage. The third class, municipal bonds, is a reasonable comparison for a mortgage, but doesn't yield 4%.

In CA in a high tax bracket, you may well be able to earn more after-tax on CA munis than you pay in interest on a mortgage of the same duration. The current yield on Vanguard CA Long-Term Tax-Exempt Admiral shares is 2.62%, with a duration of 7.3 years. This is a reasonable low-risk comparison; 7.3 years is slightly more than the effective duration of a 15-year loan, and slightly less than the effective duration of a 30-year loan.
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by TroutMD » Mon Feb 20, 2017 12:26 am

Invest the 1.5m, move to the midwest, purchase a 250K home that will be 3x bigger than the 1m home in the bay area. Live happily ever after.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by harrychan » Mon Feb 20, 2017 1:14 am

TroutMD wrote:Invest the 1.5m, move to the midwest, purchase a 250K home that will be 3x bigger than the 1m home in the bay area. Live happily ever after.
How many startups get acquired in the mid-west relatively speaking?
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Pajamas » Mon Feb 20, 2017 1:39 am

You should hold off on buying a house at all regardless of whether you pay cash or finance. Your startup was just acquired. You don't know what you will be doing in a year or where you will be doing it. Take a little breather and don't make any significant financial or personal decisions for a few months.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by jumppilot » Mon Feb 20, 2017 2:46 am

I like what a previos poster suggested and would do the same - put down enough that you'd be able to cash flow if you moved and rented out your property sometime in the future.

You have the best of all worlds in that scenario - a lower mortgage payment, cash in the bank, and the ability to move without having the stress of selling the house - in fact, it would be an investment.

I own two rental properties, max out my 401k and save after tax - I hit many different buckets - and the suggestion above really sits well with me.

That's if you want to stay in SF. The smart money would move to a lower cost of living area, pay $250,000 for a great house, save the rest and semi-retire. ;-)

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by mountainish » Mon Feb 20, 2017 3:42 am

You plan to keep working, so the choice is clear.

Conforming loan limits in your area are $636k. Finance that amount. At just 60% LTV you will have lenders offering the best rates. Negotiate hard; you'll be the belle of the ball.

Invest the rest in your favorite Bogle philosophy.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by madbrain » Mon Feb 20, 2017 6:48 am

I'll comment as someone who owns a home in the bay area that is worth > $1M (closer to $1.5M) and still has a mortgage on it ($350k).
I have more than $350k invested in taxable accounts, at about 65/35 equity/bonds allocation. I could pay off the mortgage with a few clicks. I choose not to.

It comes down to a few things :
- I believe the portfolio will appreciate more than home over the long term
- our mortgage rate is quite low (3.375% fixed 30 year) so there is no rush to pay it off. We're paying it off in 15 years instead of 30, ie. making extra principal monthly payments. This should coincide with the time I should have enough saved to stop working.
- liquidity - paying it off would leave most of the funds in tax-advantaged accounts , and we would be cash-poor unless we paid hefty penalty and taxes to access those accounts early
- mortgage interest deduction. This is once you can't get back after you pay it off - if you take home equity subsequently, only $100k are deductible. Purchase mortgages are deductible to a much larger extent. The deduction is particularly valuable as long as you're working, which I assume you will be as you wouldn't have enough to retire after buying such a house.
- with a portfolio, it is easier to rebalance and TLH - no such opportunity if the vast majority of your funds are locked in the house. If your house depreciates and you sell, you don't get a deduction at all
- on the other hand, you do get $500k per couple capital gain exclusion on appreciation upon sale of a house is nice, but that provision doesn't change whether the house has a lien on it or not

Basically, tax & liquidity considerations cause us to keep the mortgage vs paying off the house. YMMV.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by madbrain » Mon Feb 20, 2017 6:49 am

mountainish wrote:You plan to keep working, so the choice is clear.

Conforming loan limits in your area are $636k. Finance that amount. At just 60% LTV you will have lenders offering the best rates. Negotiate hard; you'll be the belle of the ball.

Invest the rest in your favorite Bogle philosophy.
+1, I think this is very good advice.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by sperry8 » Mon Feb 20, 2017 7:20 am

madbrain wrote:
mountainish wrote:You plan to keep working, so the choice is clear.

Conforming loan limits in your area are $636k. Finance that amount. At just 60% LTV you will have lenders offering the best rates. Negotiate hard; you'll be the belle of the ball.

Invest the rest in your favorite Bogle philosophy.
+1, I think this is very good advice.
Agreed, I'd do this (or close to it... e.g., finance half, invest half).

Re the tax write-off everyone is discussing remember that laws can change. Do not make your decision solely based on current tax law. It is a consideration of course but just one of many variables especially since it is not written in stone.

Re those that continuously advise one to move to some ridiculously cheap part of the world when someone has $1mm+, stop it. The OP didn't say he wanted to move. In fact, he said he wanted to buy a home in Marin. Marin cannot be found in these other places, period. And that is why housing costs and other costs are what they are in Marin. If all places were equal supply and demand would ensure prices were equal. They are not for a reason. And from the OPs perspective I'd assume a good one since he didn't ask about other places to live.
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by cherijoh » Mon Feb 20, 2017 7:49 am

adamthesmythe wrote:At your stage of life I would get a mortgage for some of the cost of the house. Maybe not 80%, maybe closer to 50%.

The Bay area has the possibility of earthquake damage. You can't fully insure against this risk even if you are willing to buy the insurance. I would not like so many eggs in one basket.

This does assume you are not going to use the remainder to buy matching Teslas.
:D
Sandi_k wrote:Impossible to answer without knowing your other financial progress.

- Do you have retirement savings?
- Do you have appropriate liquidity in non-retirement accounts?
- Are you maxing out your 401(k), IRAs, etc.?
- What percentage of your current salary are you able to save?
- Do you have kids?
- Do you have good insurance? Any health issues that might mean you could not work until FRA?

Personally, I have always found cash flow to be a huge issue in weathering life. I would be hesitant to tie up all of that capital in one asset, and would be more likely to put down 50%, and stash the rest in retirement and savings accounts...
+1
This is not a decision that should be made in isolation. If you don't have savings outside of retirement accounts and/or are not maxing out your tax-advantaged retirement accounts then you should definitely reserve some of this windfall for boosting your investments and emergency funds.

Also you mention continuing to work - if you are considering anything entrepreneurial you should reserve some funds for seed money and/or to cover living expenses during the start-up period.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Frisco Kid » Mon Feb 20, 2017 8:29 am

I agree with going with a conforming loan and investing the balance using BH principles. The OP's price range for Marin county is pretty reasonable, another thing to consider is that this house could attract multiple offers and sell over list. I know this sounds crazy to some however in the SF Bay Area properties selling over asking are commonplace.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by chuppi » Mon Feb 20, 2017 8:51 am

As some suggested, you can consider keeping the mortgage similar or slightly more than the rent obligation you have now.
Any loan greater than 625K is considered jumbo loan. You will get better interest rate if you keep it below jumbo. Also see if you can get a 15 year fixed. In my case keeping the mortgage at 625,500 and 15year fixed got me the best interest rate.

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Watty
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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Watty » Mon Feb 20, 2017 11:00 am

I might have missed it but the original poster is 43 and as a wild guess they I would think they might be ten years or so from an early retirement. Having a large mortgage payment makes it a lot more complicated to retire so their retirement plans should also be taken into account.
harrychan wrote:
TroutMD wrote:Invest the 1.5m, move to the midwest, purchase a 250K home that will be 3x bigger than the 1m home in the bay area. Live happily ever after.
How many startups get acquired in the mid-west relatively speaking?
I don't know about the mid-west but there are lots here in Atlanta. My son is in his 20's and is a software engineer, he and his computer friends have worked for a number of them here in Atlanta and they have jumped between companies many times. They are all well paid but so far none of them have had million dollar payouts.

I would assume that many of the mid-west college towns that have large state universities would have startups too.

Heck, even Detroit which many people had written off as basket case, even has an active startup are in its downtown because the rent is(or was) so inexpensive.

http://www.growdetroit.com/detroit-startup-list/

There are pros and cons to working for large a startup but I would be cautious about having a huge mortgage while working for one. The same goes for a company that was recently bought out since the new owners may choose to move the some of the operations closer to the company headquarters.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by anoop » Mon Feb 20, 2017 11:10 am

harrychan wrote:
TroutMD wrote:Invest the 1.5m, move to the midwest, purchase a 250K home that will be 3x bigger than the 1m home in the bay area. Live happily ever after.
How many startups get acquired in the mid-west relatively speaking?
How many people move to the Bay Area hoping to make it big and end up being worse off? The odds of making it big in the Bay Area are surprisingly small. Most people end up with a quality of life that is worse. That is what 0-2% raises and 10% rent increases does.

I know so many people that make the move after they are supposed to be retired, but are forced to keep working.

During the dotcom boom there were many stories of people that had moved the Bay Area and lost all their savings when the economy tanked.

(Dead men don't tell tales.)

The only reason I see for the OP to not pay cash is the option for strategic default, and that too because CA is a nonrecourse state.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by sfnerd » Mon Feb 20, 2017 12:02 pm

CA is non-recourse. I would not pay cash, since if an earthquake hits or if a mega downturn happens, you're not going to lose as much. This sounds like a crazy thing, but I had a friend lose 300k+ on repairs (not covered) during the last eathquake in wine country, and it wasn't even so big.

I agree with earlier posters. Put a down payment to the point where you get the best rates, and put the rest in a sound set of stock/bond index funds.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by sfnerd » Mon Feb 20, 2017 12:11 pm

anoop wrote:
harrychan wrote:
TroutMD wrote:Invest the 1.5m, move to the midwest, purchase a 250K home that will be 3x bigger than the 1m home in the bay area. Live happily ever after.
How many startups get acquired in the mid-west relatively speaking?
How many people move to the Bay Area hoping to make it big and end up being worse off? The odds of making it big in the Bay Area are surprisingly small. Most people end up with a quality of life that is worse. That is what 0-2% raises and 10% rent increases does.

I know so many people that make the move after they are supposed to be retired, but are forced to keep working.

During the dotcom boom there were many stories of people that had moved the Bay Area and lost all their savings when the economy tanked.

(Dead men don't tell tales.)

The only reason I see for the OP to not pay cash is the option for strategic default, and that too because CA is a nonrecourse state.
A lot of engineers make ridiculous amounts of money there, without even trying. If you're an engineer in the US, it's hard not to make a killing in the Bay. 0-2% raises? No. Rents increase, but not that much. Salaries have definitely grown faster. The weather is fantastic. I live abroad now, but if I had to return to the US, the bay area would be the place I'd choose. Frankly, if you're in engineering, or rich, it's a very good place to be. If you're not, it still might be, but you have to do the math.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by boglephreak » Mon Feb 20, 2017 1:49 pm

there is no wrong answer here. paying cash is a good idea. taking out a mortgage for a good portion of it (at today's low rates) is a good idea if you are investing the rest of the money. i also live in the bay area and have significantly paid off my home. i just refi'd at 2.75% and kind of regret paying it off instead of investing, but that regret is insignificant since my house payment is so low now i can invest more.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Carefreeap » Mon Feb 20, 2017 2:20 pm

Watty wrote:I might have missed it but the original poster is 43 and as a wild guess they I would think they might be ten years or so from an early retirement. Having a large mortgage payment makes it a lot more complicated to retire so their retirement plans should also be taken into account.

.
But he's got 10 years before early retirement and a lot could happen. That's a full economic cycle.

When we relocated we were gone for 9 years. Effectively the rent we were paid over those 9 years paid off our mortgage. We didn't actually pay off the loan that way, paying off the loan happened in 2010 as part of a larger retirement planning process. We had a ton of money sitting in cash earning nothing, a $250k mortgage at 5.25% and the stock market was still tanked. In hindsight we would have been better off investing the money in an S&P index fund, doubling our money and then would have had enough money to both pay off the mortgage and still have money invested.

I'm not complaining. We have an amazing quality of life in the SF Bay Area; we live a sweet middle class coastal town in a nice house with a gorgeous ocean view and live on less than $75k/yr. The OP could very well duplicate what we did.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Ron Ronnerson » Mon Feb 20, 2017 2:31 pm

sfnerd wrote:
anoop wrote:
harrychan wrote:
TroutMD wrote:Invest the 1.5m, move to the midwest, purchase a 250K home that will be 3x bigger than the 1m home in the bay area. Live happily ever after.
How many startups get acquired in the mid-west relatively speaking?
How many people move to the Bay Area hoping to make it big and end up being worse off? The odds of making it big in the Bay Area are surprisingly small. Most people end up with a quality of life that is worse. That is what 0-2% raises and 10% rent increases does.

I know so many people that make the move after they are supposed to be retired, but are forced to keep working.

During the dotcom boom there were many stories of people that had moved the Bay Area and lost all their savings when the economy tanked.

(Dead men don't tell tales.)

The only reason I see for the OP to not pay cash is the option for strategic default, and that too because CA is a nonrecourse state.
A lot of engineers make ridiculous amounts of money there, without even trying. If you're an engineer in the US, it's hard not to make a killing in the Bay. 0-2% raises? No. Rents increase, but not that much. Salaries have definitely grown faster. The weather is fantastic. I live abroad now, but if I had to return to the US, the bay area would be the place I'd choose. Frankly, if you're in engineering, or rich, it's a very good place to be. If you're not, it still might be, but you have to do the math.
The Bay Area CAN be very expensive but it doesn't need to be. We've found ways to keep costs moderate. I'm a public school teacher in the Bay Area, not a software engineer. Living here has been great for me both personally as well as financially. Many other people I know can barely survive here, though. It is how you set things up.

Doing the math was definitely helpful. I make over $100k teaching 5th graders here. My pension should be close to six-figures around age 60. Our expenses are about $6600/month (for a family of three living in a 4 bedroom/4 bathroom townhouse in a very nice neighborhood with excellent schools) and we feel as if we live a nice lifestyle. The deductions/exemptions keep us in the 15% federal tax bracket with an income of $145k and we're able to save over a quarter of our gross income excluding pension contributions. The weather is great, there are plenty of activities to enjoy, and we live close to family. The Bay Area has been very nice to us. Unfortunately, many people don't go about things as strategically as they can and find themselves overwhelmed.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Nestegg_User » Mon Feb 20, 2017 5:49 pm

The other option, now that you have increased cash and cash flow, is finding a better RENTAL property (not a property that the OP purchased for rental...) that is more expensive than current but meets your needs to live in. Invest the rest-- since OP didn't say that they would retire there.

The nest egg that would be available for creating ones own company, while giving you the flexibility of relocating if/when one wants to would be invaluable. Especially since others opined that a $1M home is barely above margin/base home.

[my bias: I turned down offers in NYC and the Bay Area in ages (decades) ago because of cost of living vs salary issues. The OP "won" this time, but it might not be replicated and the next bust, especially with a huge mortgage, could be tough to handle ]

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by betablocker » Mon Feb 20, 2017 7:37 pm

Consider what a mortgage is. It's a negative bond. I'd make decisions based on that. Set your asset allocation first. How much equity do you want? Then leave that alone and look at the portion you want in bonds. Then look at the spread between your after tax mortgage rate (most likely low to mid 2s depending on tax rate) and a treasury or a muni. I only use intermediate treasuries so that's just under two but the equivalent treasury is the 30 year. That's about 3%. Munis are about the same if you only have taxable space. Treasuries/munis are also liquid in that you can sell them a lot faster than your house. So your spread is about 0 to 1%. Seems like the liquidity is worth taking a mortgage. No one can tell you what you will be most happy with and not having a mortgage gives many peace of mind but on the numbers it seems like a slight edge to a mortgage.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by anoop » Mon Feb 20, 2017 8:15 pm

Nearing_Destination wrote:The other option, now that you have increased cash and cash flow, is finding a better RENTAL property (not a property that the OP purchased for rental...) that is more expensive than current but meets your needs to live in. Invest the rest-- since OP didn't say that they would retire there.
The problem with that approach is the spiraling rents in the bay area. Owning housing when you're young in the Bay Area is a good hedge. As one gets older, it is harder to get/keep a job and to get raises.

The boom bust economy we have now takes it toll in many ways. The survivors end up on bogleheads. :)

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Nestegg_User » Mon Feb 20, 2017 9:12 pm

If I read the original post correctly, the OP is 43 so is most likely reaching the age where employment becomes more "tenuous" at about 45-50 (talk to Klangfool and others about their experiences with older job seekers).

With the extra cash, with normal increases there shouldn't be a problem-- with extraordinarily high increases the rest of the workforce there would be $crewed and the jobs would likely be in jeopardy. All the reason to be able to hightail it out of there if needed. The invested portion should throw off enough to offset any normal rent increases -- again leaving flexibility-- which can be very useful if the OP still needs to work.

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by Carefreeap » Tue Feb 21, 2017 1:57 pm

anoop wrote:
Nearing_Destination wrote:The other option, now that you have increased cash and cash flow, is finding a better RENTAL property (not a property that the OP purchased for rental...) that is more expensive than current but meets your needs to live in. Invest the rest-- since OP didn't say that they would retire there.
The problem with that approach is the spiraling rents in the bay area. Owning housing when you're young in the Bay Area is a good hedge. As one gets older, it is harder to get/keep a job and to get raises.

The boom bust economy we have now takes it toll in many ways. The survivors end up on bogleheads. :)
Laughed at the highlighted section; this is the post of the day!

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Re: Should we purchase a $1 Million dollar home with all cash?

Post by randomguy » Tue Feb 21, 2017 2:12 pm

Nearing_Destination wrote:If I read the original post correctly, the OP is 43 so is most likely reaching the age where employment becomes more "tenuous" at about 45-50 (talk to Klangfool and others about their experiences with older job seekers).

With the extra cash, with normal increases there shouldn't be a problem-- with extraordinarily high increases the rest of the workforce there would be $crewed and the jobs would likely be in jeopardy. All the reason to be able to hightail it out of there if needed. The invested portion should throw off enough to offset any normal rent increases -- again leaving flexibility-- which can be very useful if the OP still needs to work.
If the OP can't get a job in the SV, it is unlikely they are getting jobs anywhere else given the sheer number of companies in the area. Most older people keep their jobs. But if you lose it, it can be a major struggle to get another one. Superstars always get hired. But few people are superstars. Most are in the middle performance wise.

They could dedicate the million to pay for rent increases. But rent increases can rapidly eat that up. Say they are paying 4k/month now. They come out way ahead paying rent. But in 10 years when the rent is 8k/month, they start struggling to keep up. And in 20 years when rent is 16k/month, they are moving because they can't afford the area. You might say those increases are crazy. But they are just about in line with the historical increases. I saw the 1 bedroom I rented in 1996 for 750 dollars now rents for 2900/month. Now you can argue that these increases are unsustainable. But we have beens saying that for a decade plus now. The flexibility you gain by renting isn't free. You have to decide which risk is scarier (say being forced to move in 10 years versus losing 20-30% on the house) to you.

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