Will we be house poor in Boston? Help us to set a budget limit

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Lottino
Posts: 12
Joined: Mon Oct 30, 2017 7:35 pm

Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Mon Oct 30, 2017 8:25 pm

Hello everyone, I am a new comer to bogleheads and financial planning, rather starting late in age! I read through Panchilly’s post “we bought a house – are we housepoor now” and the responses made me rethink of our house budget. We are in the Boston market and have been trying to buy a house for a year. I am looking for everyone’s view (from Panchilly to KlangFool) on: 1) what is the maximum house value we should buy 2) how best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment 3) we had a substantial income growth this year as one of us got a better paid job. How best to manage our tax exposure while having two W2s?

Married couple early to mid 40s with a preschooler

Income:
Salary 1: 180
Bonus1: 120-140
Salary 2: 175
Bonus: 35
Total: 510k-530k

Liquid Accounts:
Bank checking account: USD 337k (US) Plus GBP 373k (UK)
Stock account: USD 95k (55k is cash)
Retirement Accounts:
401k and Roth IRA: USD 345k (US) Plus GBP 193k (UK) Plus EURO 150k
TOTAL in USD: Liquid - 925k; Retirement - 774k; NO debt

Expenses:
Current Monthly Expenses (net of annual family travels 2/year about 10k): $7,050 ($5k in rents and childcare~$1,850)

House:
The budget has been increased from 800k to 1m to bids in 1.25m range due to market competition. We would like to limit our commute to 45mins to 1hour, good school towns with public transport to Boston downtown.

Major short to medium term needs:
1) Purchase a home and associated works – we are surprised that the conditions of the Boston homes are so poor; about 80% of the houses we bid on need some element of work and near term budget - $300k to $400k
2) Potential need for additional car if house location is not public commutable – $20k
3) Contingency – 6 mon of living expenses - $50-60k
4) Funds for taking care of parents - $100k
5) Additional major expenses – Au Pair - $19k/ year, generally a “wash” with nursery cost we have

So would appreciate anyone’s advice here to help us understand:
1) What is the maximum house value we should buy?
The majority of the responses that Panchilly got was $900k he bought was overhoused. But $900k cannot get much in Boston if you don’t want to be in the far suburbs. We are city people, husband wants a yard in a good school town and that is it. $1m - $1.2m is more realistic to get an okay house in the neighborhood we are interested. Another option is to buy a multi-family in the good towns to share the cost with renters and fend some downside risk.

2) How best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment?
We lost a huge amount of USD asset due to BREXIT – GBP used to be 1.65+ levels. Currently at 1.32. Most of the cash after home purchase is in GBP. We do not know exactly what to do – i.e. taking the loss and transfer everything from GBP to USD (about $500k) and then invest in rental property, stocks and bonds. Not extremely comfortable with stocks/bonds and see the benefit of leverage in real properties to get to our retirement goal ($12m needed when hitting age 65).

3) We had a substantial income growth this year due to one of us having a job upgrade. How best to manage our tax exposure while having two W2s?
We will max our 401k and backdoor Roth IRA contributions, 529, HSA etc… but we are burdened with 2 W2s – any other suggestions here to better manage tax liabilities?

I am quite concerned as where we are in the financial health given our age and our assets. All your advices will be greatly appreciated -

Lottino

student
Posts: 2580
Joined: Fri Apr 03, 2015 6:58 am

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by student » Mon Oct 30, 2017 8:57 pm

You have 1.6 million dollars and your income is over $500,000. Buying a 1.2 million dollars house should be no problem on the surface. Are you saying that even a 1.2 million dollars house requires $300k-$400k to renovate? You said $100k to take care of parents. Is this a one-time expense? I guess the bottom line is hard to say. You are living in a different world than me. I like to say that at your income level, any reasonable action is fine. Congratulations on achieving such high salaries.

KlangFool
Posts: 10429
Joined: Sat Oct 11, 2008 12:35 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by KlangFool » Mon Oct 30, 2017 9:05 pm

OP,

1) Before the 500K income, how much was the household income?

2) How stable is the 500K? Do either one of you have an employment contract that guaranteed X years of salary in case of lay off?

3) Why renting is not a viable option?

4) What is the immigration status of both spouses?

KlangFool

finite_difference
Posts: 1048
Joined: Thu Jul 09, 2015 7:00 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by finite_difference » Mon Oct 30, 2017 9:17 pm

student wrote:
Mon Oct 30, 2017 8:57 pm
You have 1.6 million dollars and your income is over $500,000. Buying a 1.2 million dollars house should be no problem on the surface. Are you saying that even a 1.2 million dollars house requires $300k-$400k to renovate? You said $100k to take care of parents. Is this a one-time expense? I guess the bottom line is hard to say. You are living in a different world than me. I like to say that at your income level, any reasonable action is fine. Congratulations on achieving such high salaries.
++.

You can afford a $1.2 million dollar house with $500k income. I would not spend $400k to renovate though. Some renovations if needed before moving in might make sense — for a good price — and then I’d cashflow the rest piecemeal from salary. For example paint, replace carpets and sand/varnish hardwood floors, update kitchen and appliances, washer/dryer, should be doable for like $30-50k if you don’t go crazy. Maybe update one bathroom, which if you don’t go crazy shouldn’t be more than like $20k. Even in a HCOL area $400k on renovations is pretty insane.

Not that you can’t spend $50k updating a bathroom or $100k on a kitchen. But I would feel more comfortable doing that bit by bit. And if you move in to a perfectly renovated house you won’t even appreciate it as much. I lived with our old, crappy dishwasher for like a year, and when we got a new one, it makes me happy every time I open it :) I think it’s good to let the charm of the old house rub in on you a little bit, and then spend money to fix and improve what really bothers you.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

panchilly
Posts: 212
Joined: Sat May 14, 2016 9:57 am

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by panchilly » Mon Oct 30, 2017 9:30 pm

Lottino wrote:
Mon Oct 30, 2017 8:25 pm
Hello everyone, I am a new comer to bogleheads and financial planning, rather starting late in age! I read through Panchilly’s post “we bought a house – are we housepoor now” and the responses made me rethink of our house budget. We are in the Boston market and have been trying to buy a house for a year. I am looking for everyone’s view (from Panchilly to KlangFool) on: 1) what is the maximum house value we should buy 2) how best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment 3) we had a substantial income growth this year as one of us got a better paid job. How best to manage our tax exposure while having two W2s?

Married couple early to mid 40s with a preschooler

Income:
Salary 1: 180
Bonus1: 120-140
Salary 2: 175
Bonus: 35
Total: 510k-530k

Liquid Accounts:
Bank checking account: USD 337k (US) Plus GBP 373k (UK)
Stock account: USD 95k (55k is cash)
Retirement Accounts:
401k and Roth IRA: USD 345k (US) Plus GBP 193k (UK) Plus EURO 150k
TOTAL in USD: Liquid - 925k; Retirement - 774k; NO debt

Expenses:
Current Monthly Expenses (net of annual family travels 2/year about 10k): $7,050 ($5k in rents and childcare~$1,850)

House:
The budget has been increased from 800k to 1m to bids in 1.25m range due to market competition. We would like to limit our commute to 45mins to 1hour, good school towns with public transport to Boston downtown.

Major short to medium term needs:
1) Purchase a home and associated works – we are surprised that the conditions of the Boston homes are so poor; about 80% of the houses we bid on need some element of work and near term budget - $300k to $400k
2) Potential need for additional car if house location is not public commutable – $20k
3) Contingency – 6 mon of living expenses - $50-60k
4) Funds for taking care of parents - $100k
5) Additional major expenses – Au Pair - $19k/ year, generally a “wash” with nursery cost we have

So would appreciate anyone’s advice here to help us understand:
1) What is the maximum house value we should buy?
The majority of the responses that Panchilly got was $900k he bought was overhoused. But $900k cannot get much in Boston if you don’t want to be in the far suburbs. We are city people, husband wants a yard in a good school town and that is it. $1m - $1.2m is more realistic to get an okay house in the neighborhood we are interested. Another option is to buy a multi-family in the good towns to share the cost with renters and fend some downside risk.

2) How best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment?
We lost a huge amount of USD asset due to BREXIT – GBP used to be 1.65+ levels. Currently at 1.32. Most of the cash after home purchase is in GBP. We do not know exactly what to do – i.e. taking the loss and transfer everything from GBP to USD (about $500k) and then invest in rental property, stocks and bonds. Not extremely comfortable with stocks/bonds and see the benefit of leverage in real properties to get to our retirement goal ($12m needed when hitting age 65).

3) We had a substantial income growth this year due to one of us having a job upgrade. How best to manage our tax exposure while having two W2s?
We will max our 401k and backdoor Roth IRA contributions, 529, HSA etc… but we are burdened with 2 W2s – any other suggestions here to better manage tax liabilities?

I am quite concerned as where we are in the financial health given our age and our assets. All your advices will be greatly appreciated -

Lottino
what towns are you interested in? What about Newton or Wellesley?

ResearchMed
Posts: 7464
Joined: Fri Dec 26, 2008 11:25 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by ResearchMed » Mon Oct 30, 2017 9:41 pm

panchilly wrote:
Mon Oct 30, 2017 9:30 pm

<snip OP post>

what towns are you interested in? What about Newton or Wellesley?
And what size house are you looking for?
How many bedrooms? Flexibility on that? Need a separate room for au pair? Separate in-law apartment type setup?
How many baths (and flexibility)?
Need single family? Townhome with direct outdoor access/etc., okay?
Need garage, or is shoveling snow off okay (thinking here about townhouse)? For both cars if you end up with 2?
Is a long-ish commute by commuter rail okay (vs. long-ish drive)?
Do you like yardwork, enjoy yard but don't want to do it yourself, or hate the entire idea?
I assume that you are thinking of public school?

How willing are you to "give up space" to be "closer to work"?

Because it seems you could afford a home "already fixed up" (or new) or to do some work, I'd suggest doing any major work *before* moving in.
It can be incredibly disruptive to "live there" while major work is going on, and that can also make it take longer (which might increase costs a bit, but it's mostly the inconvenience).

RM
This signature is a placebo. You are in the control group.

WL2034
Posts: 472
Joined: Tue May 21, 2013 10:36 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by WL2034 » Mon Oct 30, 2017 9:51 pm

Lottino wrote:
Mon Oct 30, 2017 8:25 pm
Married couple early to mid 40s with a preschooler

Income:
Salary 1: 180
Bonus1: 120-140
Salary 2: 175
Bonus: 35
Total: 510k-530k

1) What is the maximum house value we should buy?
The majority of the responses that Panchilly got was $900k he bought was overhoused. But $900k cannot get much in Boston if you don’t want to be in the far suburbs. We are city people, husband wants a yard in a good school town and that is it. $1m - $1.2m is more realistic to get an okay house in the neighborhood we are interested.

2) How best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment?
We lost a huge amount of USD asset due to BREXIT – GBP used to be 1.65+ levels. Currently at 1.32. Most of the cash after home purchase is in GBP. We do not know exactly what to do – i.e. taking the loss and transfer everything from GBP to USD (about $500k) and then invest in rental property, stocks and bonds. Not extremely comfortable with stocks/bonds and see the benefit of leverage in real properties to get to our retirement goal ($12m needed when hitting age 65).
1. You have higher net worth and significantly (2x) higher income than the previous example. Even in that example, OP could afford the house, but it was tighter than it is for you. Not sure how to definitively say, "Yes, house poor," or "No, not house poor," about that specific scenario. It depends on how much discretionary income you prefer. The previous example was a bit tight for my taste, but I think it was still totally within reason. I don't think the 1.2M is a stretch for you, at all--as long as the job situation remains stable. The question to me is how secure is the employment. If it is going to give you higher QOL, I think it makes sense to buy. How much is your current rent? How much would it cost to rent an acceptable place in an area that you want to be? With only one child (you didn't mention plans for more), you might not really NEED the bigger place, but perhaps it adds QOL for you.

2. I won't try to play the currency trading game, no good advice for you there. I would not think of it as "taking a loss" or anything similar to that--I don't find that to be a useful consideration. The truth is nobody on here knows how the GBP will fluctuate against the USD in the short (or long) term. $12M at age 65 is a huge amount, to me--what are your age 65+ retirement plans that require so much money? I ask because I am planning for retirement a decade or so earlier rather than working until 65 to reach 8-figures.

mega317
Posts: 2555
Joined: Tue Apr 19, 2016 10:55 am

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by mega317 » Mon Oct 30, 2017 11:07 pm

Just a thought: If your bonus is anything like mine you will be reminded yearly than next year's might be smaller or non-existent. Things are looking a little tighter if your gross income is 350k and your mortgage payment (PI only) is 50-60k a year. Are you sure your expenses beyond rent and childcare are 2k/month? We spend more than that just on utilities, food, and gas.

To your last question, there aren't a ton more options. Tax-advantaged accounts, tax-efficient investments in taxable accounts. You could take out the largest mortgage a bank will approve to have more deductions (not recommended). Donating is another option. If you feel so "burdened" then one of you should quit your job. No more two-W2-problem, no more child care expenses.

beehappy
Posts: 73
Joined: Wed Sep 13, 2017 3:52 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by beehappy » Tue Oct 31, 2017 4:14 am

OP, your monthly expense estimate seems way off. I'm reading that as you spend $5k in rent and $1850 In childcare. If that's correct, then your total monthly spend can't be $7050 as that only leaves $200/month for everything else. Even if the $5k included childcare, you still only have $2k/month to spend on everything else. Not realistic.

For $1.2m to $1.5m, you should be able to get a 3-4 bedroom home that meets all your criteria and doesn't need renovations.

runner540
Posts: 756
Joined: Sun Feb 26, 2017 5:43 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by runner540 » Tue Oct 31, 2017 6:22 am

KlangFool wrote:
Mon Oct 30, 2017 9:05 pm
OP,

1) Before the 500K income, how much was the household income?

2) How stable is the 500K? Do either one of you have an employment contract that guaranteed X years of salary in case of lay off?

3) Why renting is not a viable option?

4) What is the immigration status of both spouses?

KlangFool
These are really important questions. Please also provide more info on:
-Beyond the mortgage, what are the taxes, insurance and maintenance expenses for a $1.2MM house?
-Have you done a complete tax forecast with your new income level to understand how take home pay will change? If your income just went up dramatically, you may be surprised how much of the increase goes to taxes.
-Clarify your expenses. A family can certainly live on $7k/month, but your list included only rent, travel and childcare. What about healthcare, food, clothing, transportation, etc.?

One thing in common with both this thread and the previous panchilly one is looking for "good schools". I certainly understand that priority, I just want to reiterate that every school is different, and the things that drive school ratings in the US are usually test scores, which in turn are highly predictable based on parent income and education level. So when I see someone say they want good schools or the "best schools" they effectively are saying they want to live in a neighborhood with other high income, highly educated parents. At some point on the ratings scale, the desire for a good school becomes a conspicuous consumption item.

The best way to manage tax exposure is to max out 401ks, backdoor Roth IRAs and HSAs. Learn about the AMT tax - you may be in the range.

Lottino
Posts: 12
Joined: Mon Oct 30, 2017 7:35 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 6:39 am

student wrote:
Mon Oct 30, 2017 8:57 pm
You have 1.6 million dollars and your income is over $500,000. Buying a 1.2 million dollars house should be no problem on the surface. Are you saying that even a 1.2 million dollars house requires $300k-$400k to renovate? You said $100k to take care of parents. Is this a one-time expense? I guess the bottom line is hard to say. You are living in a different world than me. I like to say that at your income level, any reasonable action is fine. Congratulations on achieving such high salaries.
Thanks- We have worked hard but not hard enough to have our own business - 2 W2s at our age have a lot of risks like some mentioned in other posts. I should have been clear - the 400k housing budget includes down payment say 200-250k and another 100-150k renovation allowance.

Lottino
Posts: 12
Joined: Mon Oct 30, 2017 7:35 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 7:01 am

KlangFool wrote:
Mon Oct 30, 2017 9:05 pm
OP,

1) Before the 500K income, how much was the household income?

2) How stable is the 500K? Do either one of you have an employment contract that guaranteed X years of salary in case of lay off?

3) Why renting is not a viable option?

4) What is the immigration status of both spouses?

KlangFool
Really great questions.
1) before 500k, was 400k. Also should be clear, out of 500k, 50-75k /year is accumuted and paid out say at year 5, totaling 250k-375k
2) no such contract both at two weeks notice or at least we are preparing for this - US corporate rule #1 - but we would see quite stable status in the next 3-5 years. And at least 320k after then for the next 5 year
3) we moved continents and rented in the last 10 years and kick ourselves for not buying - saw huge property appreciation and accumulate wealth for owners. Having a child approaching school age and the wish to settle down is another factor
4) we have dual citizenship and can either stay here and move back to Europe after retirement. Short to medium term is here for job prospect

jlcnuke
Posts: 434
Joined: Thu Mar 16, 2017 10:26 am

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by jlcnuke » Tue Oct 31, 2017 7:03 am

I'd concur with the above sentiment that you shouldn't count bonus income when planning your budget. Bonuses disappear a lot faster than salary in many cases. To me, bonuses are like overtime pay - great to have but never bank on them.

That said, I see your income as $355k/year and your assets currently at ~$1.7M, with over half of that liquid. I believe that people should limit their housing to 3x their income or less as a very general rule, which would put your housing costs at upwards of $1,065,000. Put 20% down and the mortgage shouldn't make you "house poor" at all imo.

As far as investments, I'd be going stock market personally (outside of my personal residence I'm almost 100% equities) but I know some people are comfortable with real estate investing (I haven't found any real estate that would be close enough for me to be comfortable yet also meet the 1% rule here).

FS51
Posts: 13
Joined: Thu Sep 11, 2014 11:15 am

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by FS51 » Tue Oct 31, 2017 7:33 am

DW and I are in a similar position with not quite the income or savings you have. I have been extensively researching locations around Boston and at your price point you should be able to find a house no problem within your range without the need for significant renovations. What areas are you looking in? You said 45min to 1 hour commute to Boston. That should be no problem at your price point.

We have 2 young children and are looking for a 4 bedroom which is a little more difficult as you get closer to Boston. I'm assuming you must be looking at Brookline, Belmont, Cambridge, etc. The closer to Boston, the less likely of a yard. What was most important to us was commute, school system, walkability, etc. Every town is soo different that you really need to prioritize what's most important to you and be willing to compromise (ie. yard vs. commute, house size vs distance to the city, etc.)

Based on your income levels, I don't see you being house poor, even in Boston. :sharebeer

Lottino
Posts: 12
Joined: Mon Oct 30, 2017 7:35 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 8:04 am

panchilly wrote:
Mon Oct 30, 2017 9:30 pm
Lottino wrote:
Mon Oct 30, 2017 8:25 pm
Hello everyone, I am a new comer to bogleheads and financial planning, rather starting late in age! I read through Panchilly’s post “we bought a house – are we housepoor now” and the responses made me rethink of our house budget. We are in the Boston market and have been trying to buy a house for a year. I am looking for everyone’s view (from Panchilly to KlangFool) on: 1) what is the maximum house value we should buy 2) how best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment 3) we had a substantial income growth this year as one of us got a better paid job. How best to manage our tax exposure while having two W2s?

Married couple early to mid 40s with a preschooler

Income:
Salary 1: 180
Bonus1: 120-140
Salary 2: 175
Bonus: 35
Total: 510k-530k

Liquid Accounts:
Bank checking account: USD 337k (US) Plus GBP 373k (UK)
Stock account: USD 95k (55k is cash)
Retirement Accounts:
401k and Roth IRA: USD 345k (US) Plus GBP 193k (UK) Plus EURO 150k
TOTAL in USD: Liquid - 925k; Retirement - 774k; NO debt

Expenses:
Current Monthly Expenses (net of annual family travels 2/year about 10k): $7,050 ($5k in rents and childcare~$1,850)

House:
The budget has been increased from 800k to 1m to bids in 1.25m range due to market competition. We would like to limit our commute to 45mins to 1hour, good school towns with public transport to Boston downtown.

Major short to medium term needs:
1) Purchase a home and associated works – we are surprised that the conditions of the Boston homes are so poor; about 80% of the houses we bid on need some element of work and near term budget - $300k to $400k
2) Potential need for additional car if house location is not public commutable – $20k
3) Contingency – 6 mon of living expenses - $50-60k
4) Funds for taking care of parents - $100k
5) Additional major expenses – Au Pair - $19k/ year, generally a “wash” with nursery cost we have

So would appreciate anyone’s advice here to help us understand:
1) What is the maximum house value we should buy?
The majority of the responses that Panchilly got was $900k he bought was overhoused. But $900k cannot get much in Boston if you don’t want to be in the far suburbs. We are city people, husband wants a yard in a good school town and that is it. $1m - $1.2m is more realistic to get an okay house in the neighborhood we are interested. Another option is to buy a multi-family in the good towns to share the cost with renters and fend some downside risk.

2) How best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment?
We lost a huge amount of USD asset due to BREXIT – GBP used to be 1.65+ levels. Currently at 1.32. Most of the cash after home purchase is in GBP. We do not know exactly what to do – i.e. taking the loss and transfer everything from GBP to USD (about $500k) and then invest in rental property, stocks and bonds. Not extremely comfortable with stocks/bonds and see the benefit of leverage in real properties to get to our retirement goal ($12m needed when hitting age 65).

3) We had a substantial income growth this year due to one of us having a job upgrade. How best to manage our tax exposure while having two W2s?
We will max our 401k and backdoor Roth IRA contributions, 529, HSA etc… but we are burdened with 2 W2s – any other suggestions here to better manage tax liabilities?

I am quite concerned as where we are in the financial health given our age and our assets. All your advices will be greatly appreciated -

Lottino
what towns are you interested in? What about Newton or Wellesley?
I was curious about where you can buy with 900k. We are looking everywhere from winchester, Belmont, Newton to Cambridge. Would love to stay in Cambridge but can not afford it there even with the low property taxes

KlangFool
Posts: 10429
Joined: Sat Oct 11, 2008 12:35 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by KlangFool » Tue Oct 31, 2017 8:07 am

Lottino wrote:
Tue Oct 31, 2017 7:01 am
KlangFool wrote:
Mon Oct 30, 2017 9:05 pm
OP,

1) Before the 500K income, how much was the household income?

2) How stable is the 500K? Do either one of you have an employment contract that guaranteed X years of salary in case of lay off?

3) Why renting is not a viable option?

4) What is the immigration status of both spouses?

KlangFool
Really great questions.
1) before 500k, was 400k. Also should be clear, out of 500k, 50-75k /year is accumuted and paid out say at year 5, totaling 250k-375k
2) no such contract both at two weeks notice or at least we are preparing for this - US corporate rule #1 - but we would see quite stable status in the next 3-5 years. And at least 320k after then for the next 5 year
3) we moved continents and rented in the last 10 years and kick ourselves for not buying - saw huge property appreciation and accumulate wealth for owners. Having a child approaching school age and the wish to settle down is another factor
4) we have dual citizenship and can either stay here and move back to Europe after retirement. Short to medium term is here for job prospect
Lottino,

It is very simple.

3) we moved continents and rented in the last 10 years

1) If the spouse with the high-income loss his/her job with this employer, can he/she find another job with another employer in this area? If not, you may have to move and sell at a loss.

2) Historically, there is at least one US recession every 10 years since 1836. The last US recession was 2007/2009. So, the chance of the next US recession occurring over the next 5 years is very high.

One of my family members had high-income in the mid to high six figures. He lost money on every house that he bought over 20+ years. The reason is he seldom stay in any place longer than 5 years. There are not many job opportunities in that income range at any single location. He had to move continent in order to continue to earn at that income level.

Is this the kind of employment situation that you are in?

If the US is in a recession but Great Britain is doing, will you move back again to Great Britain? Or, some employer in Great Britain offers a 50% increase in salary/bonus, will you move?

The million dollar house can be an obstacle to your mobility.

IMHO, those are the key questions that you need to answer before buying any house. If you cannot answer this to your own satisfaction, rent.

KlangFool

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simplesimon
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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by simplesimon » Tue Oct 31, 2017 8:14 am

As I said in the other thread, my definition of house poor looks more at cash flow rather than net worth.

What would be your PITI on a $1.2m house compared to your $5k/month in rent? Depending on the size of your down payment, it might be kind of close. If you're making $500k pre-tax and your annual expenses including rent are about $95-100k, I think you have some wiggle room. You have the liquidity to cover your short term needs.

I wouldn't call you house poor if your $500k income is stable for the next few years.

Lottino
Posts: 12
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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 8:19 am

ResearchMed wrote:
Mon Oct 30, 2017 9:41 pm
panchilly wrote:
Mon Oct 30, 2017 9:30 pm

<snip OP post>

what towns are you interested in? What about Newton or Wellesley?
And what size house are you looking for?

3bedroom with 1.5 bath, 2,000sf with ability to expand to addition 2 bed in the attic or on ground floor

How many bedrooms? Flexibility on that? Need a separate room for au pair? Separate in-law apartment type setup?
How many baths (and flexibility)?
Ideally 2+ but can deal with 1.5+
Need single family? Townhome with direct outdoor access/etc., okay?

Ok for town house but husband would like yard in single family setting

Need garage, or is shoveling snow off okay (thinking here about townhouse)? For both cars if you end up with 2?
Is a long-ish commute by commuter rail okay (vs. long-ish drive)?

Garage for 1 car is okay - don’t mind snow shoveling

Do you like yardwork, enjoy yard but don't want to do it yourself, or hate the entire idea?

Husband love yard work

I assume that you are thinking of public school?
Yes

How willing are you to "give up space" to be "closer to work"?

Willing

Because it seems you could afford a home "already fixed up" (or new) or to do some work, I'd suggest doing any major work *before* moving in.

It can be incredibly disruptive to "live there" while major work is going on, and that can also make it take longer (which might increase costs a bit, but it's mostly the inconvenience).

Yes, would agree. It is just the contractor market is so hot, it takes a longer time to get things done...
RM

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Watty
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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Watty » Tue Oct 31, 2017 8:25 am

Lottino wrote:
Mon Oct 30, 2017 8:25 pm
Married couple early to mid 40s....
If you get a 30 year mortgage then you will be in your 70's by the time it is paid off. There is no one right answer but for many people it really makes the numbers work better to have a paid off house when they retire. One possible exception is for people that have a large pension that can be used to pay the mortgage.

Unless you can come up with a compelling reason not it it would be good to consider a 15 year mortgage so the house will be paid off by the time you are about 60. That would also have the house paid off by about the time your kid starts college.

The good news is that if you are paying $5,000 a month for rent now then that is roughly the same as the payment would be for a $700K 15 year mortgage. With your the money in your taxable account you can afford to pay the other costs to keep your mortgage at that level so you should be able to afford to million dollar plus house.
Lottino wrote:
Mon Oct 30, 2017 8:25 pm
we had a substantial income growth this year as one of us got a better paid job.
A big question is if this job does not work out is that person likely to be able to keep the same income if they change jobs. I have seen people get into a great situation that only lasts a few years and then revert to more average income for their profession, or even have lower income after a great jobs ends.

I would not count on the bonuses when figuring out how large a mortgage you can handle. Some people plan on using bonuses to pay down their mortgage.
Lottino wrote:
Mon Oct 30, 2017 8:25 pm
Current Monthly Expenses (net of annual family travels 2/year about 10k): $7,050 ($5k in rents and childcare~$1,850)
In your post you said "rents" plural, are you renting more than one place now? If you are then would that end if you bought a house?

That number looks like it is leaving out a lot of spending, it would be good to go through several months of checking and credit card statements to get a better number for your actual expenses.

You also need to consider what your expenses will likely be when you retire so you can look to see if buying a house will impact your having enough to retire on. I would suspect that the property taxes on the house will be very high.
Lottino wrote:
Mon Oct 30, 2017 8:25 pm
2) How best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment?
We lost a huge amount of USD asset due to BREXIT – GBP used to be 1.65+ levels. Currently at 1.32. Most of the cash after home purchase is in GBP. We do not know exactly what to do – i.e. taking the loss and transfer everything from GBP to USD (about $500k) and then invest in rental property, stocks and bonds. Not extremely comfortable with stocks/bonds and see the benefit of leverage in real properties to get to our retirement goal ($12m needed when hitting age 65).
You already have the loss. "taking" it or not is not a good way to look at it, the only two questions are;
1) What are the tax impacts of selling the UK investments?
2) Are you likely to retire in the UK?

If you are not likely to retire in the UK and you can take a large capital loss on your taxes then moving the money to the US is an easy choice.
Lottino wrote:
Mon Oct 30, 2017 8:25 pm
3) We had a substantial income growth this year due to one of us having a job upgrade. How best to manage our tax exposure while having two W2s?
We will max our 401k and backdoor Roth IRA contributions, 529, HSA etc… but we are burdened with 2 W2s – any other suggestions here to better manage tax liabilities?
You are at an income level where having your taxes professionally done and getting professional tax planning advice is worth the cost. You can have your taxes professionally done for a few years and then decide if it is worth the continuing to pay for.

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 3:53 pm

Thanks everyone for comments on expenses.

The $7k includes monthly cost on rent, nursery, car insurances, utilities, phone, cable and groceries. Travel costs are on top of this say another 1k or 2k or so per month for the year. So in total $95k to $110k expenses per year.

We are not big spenders on healthcare, medical care or clothes, and etc. We both grow up frugal and expect our child to be brought up that way as well - he has many toys from his father, books from library, etc...

We do max. our 401k, Roth IRA, HSA, 529, medical premium and additional SLTD/SLI from the pay check (56k to 60k) .

Anything that we are missing?

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by blues008 » Tue Oct 31, 2017 4:03 pm

Very exhaustive list and impressive salary gains at your age. Make sure you also review term life insurance options.

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 4:08 pm

jlcnuke wrote:
Tue Oct 31, 2017 7:03 am
I'd concur with the above sentiment that you shouldn't count bonus income when planning your budget. Bonuses disappear a lot faster than salary in many cases. To me, bonuses are like overtime pay - great to have but never bank on them.

That said, I see your income as $355k/year and your assets currently at ~$1.7M, with over half of that liquid. I believe that people should limit their housing to 3x their income or less as a very general rule, which would put your housing costs at upwards of $1,065,000. Put 20% down and the mortgage shouldn't make you "house poor" at all imo.

As far as investments, I'd be going stock market personally (outside of my personal residence I'm almost 100% equities) but I know some people are comfortable with real estate investing (I haven't found any real estate that would be close enough for me to be comfortable yet also meet the 1% rule here).
Jlcnuke, how would you recommend to invest gradually in stock? We are nervous where the market is and thus having been in watching mood for the last 12mon therefore missed the last rally. would you divide total allocated for stocks to 12 installment and go in every month for 1 year or longer period. I guess the question here is how fast do you go in the market at current HIGHs? On real estate, the benefit is in taxes and leverage. This is the asset class that we think can get us to the retirement goal of $12m, otherwise, we do not know how to get there in 25yr's time. Thank you.

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 4:20 pm

watty,

Thank you for noticing we are in early to mid-40s. This is basically the concern we have, therefore, thinking Pancilly is actually in a better place given their age (10 year junior). Yes, to your point 30 year mortgage will get us to 70s. But the same time, we do want to lock in low rates for 30 year.

And we will not count in the bonus component to everyone's advice to be on the conservative side. Ideally, we like to retire in a city/town with lower cost basis than Boston. That includes all US/European towns.

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 4:29 pm

KlangFool wrote:
Tue Oct 31, 2017 8:07 am
Lottino wrote:
Tue Oct 31, 2017 7:01 am
KlangFool wrote:
Mon Oct 30, 2017 9:05 pm
OP,

1) Before the 500K income, how much was the household income?

2) How stable is the 500K? Do either one of you have an employment contract that guaranteed X years of salary in case of lay off?

3) Why renting is not a viable option?

4) What is the immigration status of both spouses?

KlangFool
Really great questions.
1) before 500k, was 400k. Also should be clear, out of 500k, 50-75k /year is accumuted and paid out say at year 5, totaling 250k-375k
2) no such contract both at two weeks notice or at least we are preparing for this - US corporate rule #1 - but we would see quite stable status in the next 3-5 years. And at least 320k after then for the next 5 year
3) we moved continents and rented in the last 10 years and kick ourselves for not buying - saw huge property appreciation and accumulate wealth for owners. Having a child approaching school age and the wish to settle down is another factor
4) we have dual citizenship and can either stay here and move back to Europe after retirement. Short to medium term is here for job prospect
Lottino,

It is very simple.

3) we moved continents and rented in the last 10 years

1) If the spouse with the high-income loss his/her job with this employer, can he/she find another job with another employer in this area? If not, you may have to move and sell at a loss.

2) Historically, there is at least one US recession every 10 years since 1836. The last US recession was 2007/2009. So, the chance of the next US recession occurring over the next 5 years is very high.

One of my family members had high-income in the mid to high six figures. He lost money on every house that he bought over 20+ years. The reason is he seldom stay in any place longer than 5 years. There are not many job opportunities in that income range at any single location. He had to move continent in order to continue to earn at that income level.

Is this the kind of employment situation that you are in?

If the US is in a recession but Great Britain is doing, will you move back again to Great Britain? Or, some employer in Great Britain offers a 50% increase in salary/bonus, will you move?

The million dollar house can be an obstacle to your mobility.

IMHO, those are the key questions that you need to answer before buying any house. If you cannot answer this to your own satisfaction, rent.

KlangFool
We plan to be in the Boston area for at least the next 5-10 years. Both can find jobs or start own business if needed (financial and pharma), may not at the income level we are now, but say totaling 300k (2Xincome or loss of 1income) range for down scenarios.

For global moves, generally company will make up the difference for housing losses. I hope your friend have received some of those benefit to mitigate his losses.

On the note of recession, that is why I have started the post and hoping to gain some advice to fend us again recession 1) house budget limit 2) investment of rest of the cash assets

Thank you

Lottino
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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 4:37 pm

FS51 wrote:
Tue Oct 31, 2017 7:33 am
DW and I are in a similar position with not quite the income or savings you have. I have been extensively researching locations around Boston and at your price point you should be able to find a house no problem within your range without the need for significant renovations. What areas are you looking in? You said 45min to 1 hour commute to Boston. That should be no problem at your price point.

We have 2 young children and are looking for a 4 bedroom which is a little more difficult as you get closer to Boston. I'm assuming you must be looking at Brookline, Belmont, Cambridge, etc. The closer to Boston, the less likely of a yard. What was most important to us was commute, school system, walkability, etc. Every town is soo different that you really need to prioritize what's most important to you and be willing to compromise (ie. yard vs. commute, house size vs distance to the city, etc.)

Based on your income levels, I don't see you being house poor, even in Boston. :sharebeer
Thanks, now you understand the pain. Our priority is public school system (cambridge will do actually), commute, walkability and diversity. We are willing to live in a smaller house with a small yard as long as there is an outdoor element. We are searching in Cambridge, pockets of Newton where it is public commutable, Belmont where is public commutable, Winchester where is public commutable. Any other suggestions?

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 4:41 pm

simplesimon wrote:
Tue Oct 31, 2017 8:14 am
As I said in the other thread, my definition of house poor looks more at cash flow rather than net worth.

What would be your PITI on a $1.2m house compared to your $5k/month in rent? Depending on the size of your down payment, it might be kind of close. If you're making $500k pre-tax and your annual expenses including rent are about $95-100k, I think you have some wiggle room. You have the liquidity to cover your short term needs.

I wouldn't call you house poor if your $500k income is stable for the next few years.
How would you weigh this against our age group? We are early to mid-40s and are actively looking at earlier retirement options (earlier than 65). This is the reason we think we are house poor comparing to people at our age that have been in the housing market for a while, therefore, not much liability left on the housing front.

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Buffetologist » Tue Oct 31, 2017 5:10 pm

Lottino wrote:
Tue Oct 31, 2017 8:04 am
panchilly wrote:
Mon Oct 30, 2017 9:30 pm
Lottino wrote:
Mon Oct 30, 2017 8:25 pm
Hello everyone, I am a new comer to bogleheads and financial planning, rather starting late in age! I read through Panchilly’s post “we bought a house – are we housepoor now” and the responses made me rethink of our house budget. We are in the Boston market and have been trying to buy a house for a year. I am looking for everyone’s view (from Panchilly to KlangFool) on: 1) what is the maximum house value we should buy 2) how best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment 3) we had a substantial income growth this year as one of us got a better paid job. How best to manage our tax exposure while having two W2s?

Married couple early to mid 40s with a preschooler

Income:
Salary 1: 180
Bonus1: 120-140
Salary 2: 175
Bonus: 35
Total: 510k-530k

Liquid Accounts:
Bank checking account: USD 337k (US) Plus GBP 373k (UK)
Stock account: USD 95k (55k is cash)
Retirement Accounts:
401k and Roth IRA: USD 345k (US) Plus GBP 193k (UK) Plus EURO 150k
TOTAL in USD: Liquid - 925k; Retirement - 774k; NO debt

Expenses:
Current Monthly Expenses (net of annual family travels 2/year about 10k): $7,050 ($5k in rents and childcare~$1,850)

House:
The budget has been increased from 800k to 1m to bids in 1.25m range due to market competition. We would like to limit our commute to 45mins to 1hour, good school towns with public transport to Boston downtown.

Major short to medium term needs:
1) Purchase a home and associated works – we are surprised that the conditions of the Boston homes are so poor; about 80% of the houses we bid on need some element of work and near term budget - $300k to $400k
2) Potential need for additional car if house location is not public commutable – $20k
3) Contingency – 6 mon of living expenses - $50-60k
4) Funds for taking care of parents - $100k
5) Additional major expenses – Au Pair - $19k/ year, generally a “wash” with nursery cost we have

So would appreciate anyone’s advice here to help us understand:
1) What is the maximum house value we should buy?
The majority of the responses that Panchilly got was $900k he bought was overhoused. But $900k cannot get much in Boston if you don’t want to be in the far suburbs. We are city people, husband wants a yard in a good school town and that is it. $1m - $1.2m is more realistic to get an okay house in the neighborhood we are interested. Another option is to buy a multi-family in the good towns to share the cost with renters and fend some downside risk.

2) How best to invest the rest of our asset – majority cash in USD and GBP, given where the market is at the moment?
We lost a huge amount of USD asset due to BREXIT – GBP used to be 1.65+ levels. Currently at 1.32. Most of the cash after home purchase is in GBP. We do not know exactly what to do – i.e. taking the loss and transfer everything from GBP to USD (about $500k) and then invest in rental property, stocks and bonds. Not extremely comfortable with stocks/bonds and see the benefit of leverage in real properties to get to our retirement goal ($12m needed when hitting age 65).

3) We had a substantial income growth this year due to one of us having a job upgrade. How best to manage our tax exposure while having two W2s?
We will max our 401k and backdoor Roth IRA contributions, 529, HSA etc… but we are burdened with 2 W2s – any other suggestions here to better manage tax liabilities?

I am quite concerned as where we are in the financial health given our age and our assets. All your advices will be greatly appreciated -

Lottino
what towns are you interested in? What about Newton or Wellesley?
I was curious about where you can buy with 900k. We are looking everywhere from winchester, Belmont, Newton to Cambridge. Would love to stay in Cambridge but can not afford it there even with the low property taxes
You are in a very competitive market. I've looked on Trulia. There are some houses for sale below 900K in Belmont, Newton and Winchester, but I'm sure you've looked at them already. Newton is less expensive north of the Mass Pike.

Have you considered buying one of those houses based on your steady income, living with it the way it is for now, and fixing them up slowly using your bonuses?

Have you considered towns one step down from the tippy top schools like Arlington or Melrose. I know a lot of people that are happy with the schools there. There is a brand new home 3000+ sq ft home for sale in Melrose for $925K.

Have you considered living within the city of Boston and using private schools until grade 6, and hoping your children get into Boston Latin. I've met people who have used this strategy well. There are nice neighborhoods with beautiful stately homes in Jamaica Plain (especially Moss Hill), Brighton (near BC), Dorchester (Melville Park, Savin Hill Over the Bridge, the area east of Ashmont station, and in South Boston near City Point.

Somerville is hot. We know a lot of people who have had good success with the Somerville school system. It's the new Cambridge. I believe Somerville HS students can take classes at Tufts for free.

There are beautiful neighborhoods in Medford (Lawrence Estates, West Medford) and Watertown but the schools are just ok, but you can afford private school if you find that you are unhappy with the schools.

A little further out, Framingham, north of the Mass Pike, is a very good deal and they have a terrific gifted and talented program. Within that program, the education is as good as it is anywhere. The towns gets a lot of revenue from the Framingham malls so their school system is well funded.

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Lottino » Tue Oct 31, 2017 5:28 pm

Buffetologist. thanks for the recommendations. We love JP and areas you mentioned in the post. The trouble is those towns are just as expensive if not more than the towns with good school systems. So we feel that we are taking a double hit - high $/sf, and need private schooling at some point. (JP, Somerville, Brighton, Dorchester, South Boston). We looked at Melrose as well - price has gone up dramatically in the last 2 years and we feel the pricing delta between say Melrose vs Winchester can not justify the difference in school systems. We might be wrong. Say if we can get in Melrose for 700k range to a comparable house 1m in winchester. That may work, but we are not lucky to identify one. Same goes to Medford. In a high point of the cycle, we feel it is better to go to "core" than go to "up and coming" to fend downside risk. I appreciate your suggestions and please let us know if there are other areas we should look at.

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Slacker » Tue Oct 31, 2017 6:12 pm

Watty wrote:
Tue Oct 31, 2017 8:25 am
Lottino wrote:
Mon Oct 30, 2017 8:25 pm
Married couple early to mid 40s....
If you get a 30 year mortgage then you will be in your 70's by the time it is paid off. There is no one right answer but for many people it really makes the numbers work better to have a paid off house when they retire. One possible exception is for people that have a large pension that can be used to pay the mortgage.

Unless you can come up with a compelling reason not it it would be good to consider a 15 year mortgage so the house will be paid off by the time you are about 60. That would also have the house paid off by about the time your kid starts college.
What do you think of the idea of getting a 30yr loan (for someone in their early to mid 40s) and making normal payments until one gets to within 5 years or so of retirement and then ramping up the payments to have the house paid off around the time you retire. You pay it off on the backend when the tax advantages are diminishing and after you've had time for market gains in retirement and taxable accounts. In the end, if need be - pay off the mortgage with Roth money and/or taxable account money with a cost basis close to the current value (low capital gains tax impact).

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by bigred77 » Tue Oct 31, 2017 7:13 pm

I think you are well served considering a 30 year mortgage based on the current interest rate spread between 15 and 30 year interest rate spreads. You are locking in a 30 year amortization schedule, not 30 years of guaranteed payment obligations. You are buying cashflow flexibility and longer term leverage. You can always self amortize as you see fit.

If I were in your shoes I would be comfortable borrowing up to $1M. That’s roughly 2X gross income and you get a tax benefit on interest up to $1M (not taking AMT considerations into account, which I’m not an expert in but I assume come into play for your household?). I would try to limit purchase price to $1M plus whatever cash you are willing to put down (inclusive of the cost of all renovations). My opinion is you should prioritize school district (tremendous financial advantage if you can avoid private school tuition) and commute above the rest of the criteria. Make sure the property will meet your needs over the coming decades (as much as is feasible) to avoid wanting/having to trade up or laterally in the housing market (transaction costs will be significant in your price range).

The “house poor” term is quite subjective but to me it means you have to make significant sacrifices to your lifestyle in order to pay for housing and still save/invest a prudent percentage of your income. I don’t mean a bogleheads 30%+ either, I mean just 15% or so. Your ratios and figures are nowhere near that level IMO. House poor to me is mortgaging 4-5+ times your income (which is not all that uncommon outside of bogleheads).

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by jodydavis » Tue Oct 31, 2017 8:16 pm

Newton resident here - moved from Cambridge/Somerville for the schools/space. Based on your income and savings (assuming your income is relatively stable), $1.2-1.5MM should be doable, and would not leave you "house poor." And in that range, there should be a good number of decent options, either move-in ready or could be renovated within that budget. Since public transport and walkability seem important to you, I'd look for a place within walking distance to one of the village centers. Newtonville and West Newton have access to the commuter rail, and several other village centers have access to the green line (e.g. Newton Centre, Newton Highlands, Waban, etc.). Schools are good, and there's a nice balance between greenery/outdoor space and shops/village centers, easy access to Boston and the airport. Good luck!

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Watty
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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Watty » Tue Oct 31, 2017 8:29 pm

Slacker wrote:
Tue Oct 31, 2017 6:12 pm
Watty wrote:
Tue Oct 31, 2017 8:25 am
Lottino wrote:
Mon Oct 30, 2017 8:25 pm
Married couple early to mid 40s....
If you get a 30 year mortgage then you will be in your 70's by the time it is paid off. There is no one right answer but for many people it really makes the numbers work better to have a paid off house when they retire. One possible exception is for people that have a large pension that can be used to pay the mortgage.

Unless you can come up with a compelling reason not it it would be good to consider a 15 year mortgage so the house will be paid off by the time you are about 60. That would also have the house paid off by about the time your kid starts college.
What do you think of the idea of getting a 30yr loan (for someone in their early to mid 40s) and making normal payments until one gets to within 5 years or so of retirement and then ramping up the payments to have the house paid off around the time you retire. You pay it off on the backend when the tax advantages are diminishing and after you've had time for market gains in retirement and taxable accounts. In the end, if need be - pay off the mortgage with Roth money and/or taxable account money with a cost basis close to the current value (low capital gains tax impact).
There is a wiki on this choice;

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

There are all sorts of opinions but my personal opinion(which may be a minority) is that is not a good idea even though it would probably work out well in a high percentage of the time because there will also be a significant percentage of the time that it could cause problems.

Some points I would consider are;

1) It is not exact but in a lot of ways a mortgage is like a negative bond. For example if you want to have a desired 50/50 stock and bond asset allocation and you have a million dollars and a $500K mortgage then you might have;
a)$500 K in stocks
b) $500K in bonds
c) a $500k mortgage which is like a negative $500 bonds
They would net out to be $550 in stocks and $0 bonds so in some ways your asset allocation is 100% stocks and 0% bonds, but again this is not exact. There have been threads about this that you can look up about this.

2) You are under the assumption that your life and career with go according to plan. When I was going through my 50s I saw more people than I would have expected; die, develope major health problems, divorce, have career setbacks like being laid off.

3) If you invest with your normal asset allocation then it is harder than it sounds to invest in a taxable account and earn more after taxes. If your asset allocation is 30% bonds then borrowing money at 4% and using 30% of it to buy bonds that pay 2% that makes it kinda hard to come out ahead even with any tax breaks.

4) There is no question that using a mortgage like that is using leverage and that adds risk. Whenever you add risk you have to ask if your really need to take additional risk. If you do want to take additional risk then there may be better ways like just increasing your stock asset allocation.

5) Most people don't live in the same house for 30 years so few people will actually have the loan that long. If you have to move how to pay for your next house could be complicated and it could be in a bear market or the mortgage interest rate on your next house might be much higher.

6) 15 years loans are typically more than a half a percent less than a 30 year loan. That is a lot to pay over the length of the loan.

7) There is a risk that your spending will go up if you have the lower mortgage payment.

That isn't to say that there isn't a good argument that having a 4% 30 year fixed interest rate mortgage might not be great to have if interest rates and inflation rise but how it plays out could go a number of ways.

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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by simplesimon » Wed Nov 01, 2017 4:53 am

Lottino wrote:
Tue Oct 31, 2017 4:41 pm
simplesimon wrote:
Tue Oct 31, 2017 8:14 am
As I said in the other thread, my definition of house poor looks more at cash flow rather than net worth.

What would be your PITI on a $1.2m house compared to your $5k/month in rent? Depending on the size of your down payment, it might be kind of close. If you're making $500k pre-tax and your annual expenses including rent are about $95-100k, I think you have some wiggle room. You have the liquidity to cover your short term needs.

I wouldn't call you house poor if your $500k income is stable for the next few years.
How would you weigh this against our age group? We are early to mid-40s and are actively looking at earlier retirement options (earlier than 65). This is the reason we think we are house poor comparing to people at our age that have been in the housing market for a while, therefore, not much liability left on the housing front.
If we're talking about all people in their mid-40's, you're way ahead of the curve. If you're talking about peers that make as much as you...I don't know, you're probably ahead. I've heard of high earners who have very little net worth because they spend everything.

You would need to do a closer analysis of your expenses, but I think early retirement is an option for you if you're aggressively paying off the mortgage. I went back to read what you said your monthly expenses were...you list about $7100/mo in expenses excluding travel, but $7k of that is your rent and childcare. Is that right?

jlcnuke
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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by jlcnuke » Wed Nov 01, 2017 5:09 am

Lottino wrote:
Tue Oct 31, 2017 4:08 pm
jlcnuke wrote:
Tue Oct 31, 2017 7:03 am
I'd concur with the above sentiment that you shouldn't count bonus income when planning your budget. Bonuses disappear a lot faster than salary in many cases. To me, bonuses are like overtime pay - great to have but never bank on them.

That said, I see your income as $355k/year and your assets currently at ~$1.7M, with over half of that liquid. I believe that people should limit their housing to 3x their income or less as a very general rule, which would put your housing costs at upwards of $1,065,000. Put 20% down and the mortgage shouldn't make you "house poor" at all imo.

As far as investments, I'd be going stock market personally (outside of my personal residence I'm almost 100% equities) but I know some people are comfortable with real estate investing (I haven't found any real estate that would be close enough for me to be comfortable yet also meet the 1% rule here).
Jlcnuke, how would you recommend to invest gradually in stock? We are nervous where the market is and thus having been in watching mood for the last 12mon therefore missed the last rally. would you divide total allocated for stocks to 12 installment and go in every month for 1 year or longer period. I guess the question here is how fast do you go in the market at current HIGHs? On real estate, the benefit is in taxes and leverage. This is the asset class that we think can get us to the retirement goal of $12m, otherwise, we do not know how to get there in 25yr's time. Thank you.
I would invest in stocks now, not gradually. The market was at "highs" a year ago, and 2 years ago, and 3 years ago, etc. In fact, since the market has been steadily climbing since its inception, it's spent more time at "highs" than anywhere else. Historically (which is our only data source), waiting because the market was "high" has been a recipe for massively lower performance.

As for the benefits of real estate - "taxes" is bullshit. "Tax savings" makes the leverage less expensive, but every $1 you save in taxes is offset by spending more than that in interest. Give a bank $2 so you can save $1 on taxes still has you net $-1. The advantage of real estate investing is pretty much just "leverage" and, as tons of landlords/flippers/people who leveraged all they could would tell you 6-9 years ago, leverage can work for you or against you. You still need to find a "deal" to make it worthwhile anyway. Real estate investors generally don't do well if they're buying above market value etc.

Bostonhome2014
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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Bostonhome2014 » Wed Nov 01, 2017 8:07 am

I have been watching these two Boston threads with fascination. I had to create a new account because some colleagues know me on here.

I live in the Boston area and think in both cases the OPs will be fine.

Housing is such a personal descision that I find it hard to see how blanket rules can always apply. What works for one might not work for another. What one desires might be worthless to another. I know someone who insists on access to day hiking trails, another that wants to be able to walk to restaurants, etc. To each their own.

Since housing is a comsumption for most, I don't see why being house poor is a bad thing if a big house, backyard, pool, access to conservation land, whatever is your thing (assuming you can fund retirement and pay the electric bill, etc).

No one says "they are vacation poor" if traveling is their thing or they are "theater poor" if going to shows is their thing and so on. If a specific housing characteristic is your thing why is it so bad to spend money on it compared to any other hobby?

I know someone who lives in Cambridge in a big housee with offstreet parking in walking distance to restaurants but they never take a fancy vacation and they drive one car that is almost 20 years old. I don't know their specifics but it seems to me that they made conscious decision to spend money on housing and not other things. I know someone else who takes two fancy vacations every year and lives in a modest house. are they "vacation poor"

Bostonhome2014
Posts: 3
Joined: Mon Oct 30, 2017 3:36 pm

Re: Will we be house poor in Boston? Help us to set a budget limit

Post by Bostonhome2014 » Wed Nov 01, 2017 12:16 pm

I live in Boston and have watched these threads closely. I think the OPs will be fine.

BuffaloBill21
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Re: Will we be house poor in Boston? Help us to set a budget limit

Post by BuffaloBill21 » Wed Nov 01, 2017 1:39 pm

Lottino wrote:
Tue Oct 31, 2017 5:28 pm
Buffetologist. thanks for the recommendations. We love JP and areas you mentioned in the post. The trouble is those towns are just as expensive if not more than the towns with good school systems. So we feel that we are taking a double hit - high $/sf, and need private schooling at some point. (JP, Somerville, Brighton, Dorchester, South Boston). We looked at Melrose as well - price has gone up dramatically in the last 2 years and we feel the pricing delta between say Melrose vs Winchester can not justify the difference in school systems. We might be wrong. Say if we can get in Melrose for 700k range to a comparable house 1m in winchester. That may work, but we are not lucky to identify one. Same goes to Medford. In a high point of the cycle, we feel it is better to go to "core" than go to "up and coming" to fend downside risk. I appreciate your suggestions and please let us know if there are other areas we should look at.
Quincy resident here so I may be a bit biased about the South Shore, have you checked out Hingham and Milton? Both have great school districts and offer decent commuting options.

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