Housing Budget Check (paging Watty / KlangFool)

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Atilla
Posts: 1399
Joined: Tue Feb 09, 2010 7:44 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by Atilla » Sat Mar 03, 2018 5:00 pm

Dude, seriously rent a bigger place for a year. I work from home and my wife used to. I get it about the space thing.

But job insecurity, a new baby and a major new debt do not mix. And you are trying to do it all real fast. You have no idea what you are in for over the next two years. At least.

Don't. You both make a ton of money. Rent a nice new big place for a year or two.
Moderator Warning-Free Since 2017.

DrGoogle2017
Posts: 2528
Joined: Mon Aug 14, 2017 12:31 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by DrGoogle2017 » Sat Mar 03, 2018 5:26 pm

I had to hire a nanny even though I was working at home. The positive thing is that I can keep an eye on the new nanny. But I think if job is disappearing in a year, then you are taking too much risk. Why not just rent?

bayview
Posts: 1878
Joined: Thu Aug 02, 2012 7:05 pm
Location: WNC

Re: Housing Budget Check (paging Watty / KlangFool)

Post by bayview » Sat Mar 03, 2018 5:46 pm

topofthebellcurve wrote:
Fri Mar 02, 2018 11:57 pm
... When I consider why I want a house, I think a big part of it is the psychological nesting instinct related to having a kid -- the concept of being "settled" is very appealing at a lizard-brain level. And, if I'm being honest, there's a component of "I have $1.5-2MM, I can buy a dang house". This is not a particularly solid bit of logic (if it can even be called that), but it's there.

Again, appreciate all of the food for thought! And the place I'm in is a very recent renovation and shouldn't have lead issues, thankfully.
Congratulations, that's a very honest insight!

How will you and your wife be handling child care? Will you hire someone to come into your home (apartment)? Or will you do tag-team parenting?

I can see keeping the second bedroom as your office + add a crib for nighttime. In the day, have a second fold-down crib/ portable play-pen thingy in your bedroom.

The ideal solution IMO would be to rent a one-level 3BR, should such a thing exist, and then eventually buy. I'm a big believer in KISS (keep it simple, stupid/ sweetheart.)

I am a new grandparent and have been deeply amused watching my MD daughter and PhD part-time professor/ mostly stay-at-home dad SIL deal with their newborn. They were both home full time the first two months, and she was home another month, and they were zombies, especially the first six-eight weeks, despite lots of relief care from grandparents and aunt. The baby was a screamer, but has now pretty well settled down, other than for teething and drooling and gnawing everything in sight, grinning.

A note --he's not yet really crawling, but he nevertheless dominates the 1200 sq ft 2 BR 1 BA home.

Congratulations on your expanding family!
Last edited by bayview on Sat Mar 03, 2018 5:48 pm, edited 1 time in total.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

bayview
Posts: 1878
Joined: Thu Aug 02, 2012 7:05 pm
Location: WNC

Re: Housing Budget Check (paging Watty / KlangFool)

Post by bayview » Sat Mar 03, 2018 5:48 pm

DrGoogle2017 wrote:
Sat Mar 03, 2018 5:26 pm
I had to hire a nanny even though I was working at home. The positive thing is that I can keep an eye on the new nanny. But I think if job is disappearing in a year, then you are taking too much risk. Why not just rent?
Good for you! I work with other virtual employees, and I have to listen to one whose baby is continually crying in the background. It's pretty obvious that she takes care of her child while working, and others are pretty resentful about this.

Having an in-home nanny, even part-time, sounds like absolute heaven.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Sat Mar 03, 2018 6:37 pm

bayview wrote:
Sat Mar 03, 2018 5:46 pm
topofthebellcurve wrote:
Fri Mar 02, 2018 11:57 pm
... When I consider why I want a house, I think a big part of it is the psychological nesting instinct related to having a kid -- the concept of being "settled" is very appealing at a lizard-brain level. And, if I'm being honest, there's a component of "I have $1.5-2MM, I can buy a dang house". This is not a particularly solid bit of logic (if it can even be called that), but it's there.

Again, appreciate all of the food for thought! And the place I'm in is a very recent renovation and shouldn't have lead issues, thankfully.
Congratulations, that's a very honest insight!

How will you and your wife be handling child care? Will you hire someone to come into your home (apartment)? Or will you do tag-team parenting?

I can see keeping the second bedroom as your office + add a crib for nighttime. In the day, have a second fold-down crib/ portable play-pen thingy in your bedroom.

The ideal solution IMO would be to rent a one-level 3BR, should such a thing exist, and then eventually buy. I'm a big believer in KISS (keep it simple, stupid/ sweetheart.)

I am a new grandparent and have been deeply amused watching my MD daughter and PhD part-time professor/ mostly stay-at-home dad SIL deal with their newborn. They were both home full time the first two months, and she was home another month, and they were zombies, especially the first six-eight weeks, despite lots of relief care from grandparents and aunt. The baby was a screamer, but has now pretty well settled down, other than for teething and drooling and gnawing everything in sight, grinning.

A note --he's not yet really crawling, but he nevertheless dominates the 1200 sq ft 2 BR 1 BA home.

Congratulations on your expanding family!
We're not clear yet on how we'll handle childcare. Both of our jobs are currently pretty relaxed in terms of how much actual working time we need to put in each week, and our schedules are very flexible. So, the short term plan is to take parental/maternity leave, see how we handle the first two months, and then add then go from there. I wouldn't be surprised if I end up in a nanny-share with my sister who lives a mile away and has two little ones, or if we hire someone just for us +/- 20 hrs a week. Like your daughter and SIL, we expect to be zombies in the early months.

I've been looking at the rental market, and it's pretty crap in the $3-4K range. Looks like we'd have to go to $4.5-5K/mo to get a recently renovated, de-leaded nice 3B. While it's definitely a hot buying market, it's also a very hot rental market especially for nicer product.

And thanks!

bayview
Posts: 1878
Joined: Thu Aug 02, 2012 7:05 pm
Location: WNC

Re: Housing Budget Check (paging Watty / KlangFool)

Post by bayview » Sat Mar 03, 2018 6:43 pm

topofthebellcurve wrote:
Sat Mar 03, 2018 6:37 pm
bayview wrote:
Sat Mar 03, 2018 5:46 pm
topofthebellcurve wrote:
Fri Mar 02, 2018 11:57 pm
... When I consider why I want a house, I think a big part of it is the psychological nesting instinct related to having a kid -- the concept of being "settled" is very appealing at a lizard-brain level. And, if I'm being honest, there's a component of "I have $1.5-2MM, I can buy a dang house". This is not a particularly solid bit of logic (if it can even be called that), but it's there.

Again, appreciate all of the food for thought! And the place I'm in is a very recent renovation and shouldn't have lead issues, thankfully.
Congratulations, that's a very honest insight!

How will you and your wife be handling child care? Will you hire someone to come into your home (apartment)? Or will you do tag-team parenting?

I can see keeping the second bedroom as your office + add a crib for nighttime. In the day, have a second fold-down crib/ portable play-pen thingy in your bedroom.

The ideal solution IMO would be to rent a one-level 3BR, should such a thing exist, and then eventually buy. I'm a big believer in KISS (keep it simple, stupid/ sweetheart.)

I am a new grandparent and have been deeply amused watching my MD daughter and PhD part-time professor/ mostly stay-at-home dad SIL deal with their newborn. They were both home full time the first two months, and she was home another month, and they were zombies, especially the first six-eight weeks, despite lots of relief care from grandparents and aunt. The baby was a screamer, but has now pretty well settled down, other than for teething and drooling and gnawing everything in sight, grinning.

A note --he's not yet really crawling, but he nevertheless dominates the 1200 sq ft 2 BR 1 BA home.

Congratulations on your expanding family!
We're not clear yet on how we'll handle childcare. Both of our jobs are currently pretty relaxed in terms of how much actual working time we need to put in each week, and our schedules are very flexible. So, the short term plan is to take parental/maternity leave, see how we handle the first two months, and then add then go from there. I wouldn't be surprised if I end up in a nanny-share with my sister who lives a mile away and has two little ones, or if we hire someone just for us +/- 20 hrs a week. Like your daughter and SIL, we expect to be zombies in the early months.

I've been looking at the rental market, and it's pretty crap in the $3-4K range. Looks like we'd have to go to $4.5-5K/mo to get a recently renovated, de-leaded nice 3B. While it's definitely a hot buying market, it's also a very hot rental market especially for nicer product.

And thanks!
The nanny-share sounds awesome, and it's an example of another reason it can be good staying in a pricey area. The older I get, the more I value having family within shouting distance. :beer
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

dolphintraveler
Posts: 69
Joined: Sun Feb 05, 2012 1:31 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by dolphintraveler » Sat Mar 03, 2018 7:02 pm

When our DS was born, we were almost zombies just like others had mentioned.

We had really really really wanted to buy before that but the math didn't work for us. While it does work for you, we're glad we didn't. We had no idea how much what we'd want (and not want) in a house would change. For the first 0-2 years was keeping the kid safe - not able to get into anything, etc. By the time he was 4 a house with a pool was a golden opportunity and not everything went into his mouth. He gets in to the pool every opportunity. Good schools became important (we had just planned on private, until we realized we didn't actually like any of the private schools in our area). We were in a beautiful awesome neighborhood while he was young right next to a park. It seemed perfect. Until we realized there were no sidewalks and the one lane wide meant very narrow for walking with a young one down the street.

We never looked forward to suburban, but suburban gave us sidewalks and lots of kids his age. Family oriented community. We looked at our wish list before and after kid, and it changed noticeably between < 0 to 0-2 and again 4+. We're glad the math made good for rent.

We plan to sell when he's off to college, but for the school years we think we're set.

One side benefit of waiting was it felt we hit the rentals hard... for example, the flying burp-vomits went just about everywhere.

I'd vote for the renting an office space if you find you need it... "getting away" for your own sanity may be worth every penny. It also becomes clear who has childcare responsibility if one of you is at the office at a time.

Filife20Forty
Posts: 21
Joined: Tue Feb 20, 2018 7:44 am

Re: Housing Budget Check (paging Watty / KlangFool)

Post by Filife20Forty » Sat Mar 03, 2018 7:35 pm

Live within 93/128 belt. Both of us commute to Boston/Cambridge daily. Not sure where your family is located. We just bought a house in the fall, same age as you. We went from condo on the fringe of Boston to about 10 miles outside. We looked at the higher priced houses / better school districts, as well, but settled on something that for us was intermediate, but gave us the benefit of a house (yard, garage, etc.) but the convenience of being close to both work and, for us, family. When we see ourselves having kids in the future, having parents within 20 and 40 mins, respectively, was a big consideration. We may end up moving in 5-7 years, but this is the prime of life and not worth being from our perspective (i) house poor or (ii) stuck in a condo/rental where we're not happy. You may wish to consider, regardless of affordability, to jump into the first house at something that's a little more reasonable from a size / proximity to family standpoint. We're very happy that we did.

random_walker_77
Posts: 852
Joined: Tue May 21, 2013 8:49 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by random_walker_77 » Sat Mar 03, 2018 11:29 pm

Note, just to focus on the financial aspect: 5K/month for rent doesn't sound expensive at all. That's 60K/yr on a ~1M home? For the landlord, that's a p/e of 16 (which looks worse after prop tax, insurance, depreciation, and cost-of-funds).

Or another way to look at it: a $1M home is going to cost you maybe 50K/yr? 1M at 4% plus 1% for property tax. Then add on a little for insurance and maintenance/wear-and-tear, and you're around 60K/yr. My point is simply that paying $60K to rent isn't exactly throwing your money away on rent...

on the contrary, switch to the landlord perspective and you'd never buy a $1M house and rent it out at only $5K/month if you wanted to make money -- at that point, you'd be much better off with passive mutual fund investments. I've heard that landlord investors usually look for 1% / month on a good rental. So that's 12%/yr in rent. So 10K/month for a $1M rental would be reasonably attractive for a landlord. $5K is probably the bare minimum to be worth renting at all.

spammagnet
Posts: 1075
Joined: Wed Apr 27, 2016 9:42 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by spammagnet » Sun Mar 04, 2018 11:23 am

topofthebellcurve wrote:
Sat Mar 03, 2018 4:51 pm
... That said, my work may disappear in a year ...
That would be an argument for not committing to new debt.

jeroly
Posts: 72
Joined: Wed Jan 24, 2018 2:07 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by jeroly » Sun Mar 04, 2018 5:38 pm

topofthebellcurve wrote:
Sat Mar 03, 2018 11:24 am

Unless there is a large cost savings vs. renting, would this forum ever recommend buying? That's not a criticism, just an observation.
1. You can't really think about buying vs. renting as comparing apples and apples when talking about houses. (easier to do the comparisons when looking at rental apartments vs. condos)
(a) For a particular house that you might be interested in living in, it's usually only available as either a rental or for purchase (and more typically only for purchase) so you can't just run the financials both ways and decide which works best for your circumstances.
(b) The overall stock of rental houses is much smaller than the for-sale market in most communities, especially in suburban and rural areas.

2. When considering buy vs. rent in the abstract: It depends your assumtions (e.g. what rent inflation and home price increases will be), but in general it's a better financial move to buy if your time horizon is more than seven years - that lets the fixed costs of purchase (e.g. sales agent commision, mortgage tax) be overtaken by the rising rental costs and rising home sales price.

To more directly answer your question: it's not just about what the current cost difference is, but you need to consider what the cost differences combined with the change in home price will be over the term of your ownership.

jeroly
Posts: 72
Joined: Wed Jan 24, 2018 2:07 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by jeroly » Sun Mar 04, 2018 5:39 pm

jeroly wrote:
Sun Mar 04, 2018 5:38 pm
topofthebellcurve wrote:
Sat Mar 03, 2018 11:24 am

Unless there is a large cost savings vs. renting, would this forum ever recommend buying? That's not a criticism, just an observation.
1. You can't really think about buying vs. renting as comparing apples and apples when talking about houses. (easier to do the comparisons when looking at rental apartments vs. condos)
(a) For a particular house that you might be interested in living in, it's usually only available as either a rental or for purchase (and more typically only for purchase) so you can't just run the financials both ways and decide which works best for your circumstances.
(b) The overall stock of rental houses is much smaller than the for-sale market in most communities, especially in suburban and rural areas.

2. When considering buy vs. rent in the abstract: It depends your assumtions (e.g. what rent inflation and home price increases will be), but in general it's a better financial move to buy if your time horizon is more than seven years - that lets the fixed costs of purchase and sale (e.g. sales agent commision, mortgage tax) be overtaken by the rising rental costs and rising home sales price.

To more directly answer your question: it's not just about what the current cost difference is, but you need to consider what the cost differences combined with the change in home price will be over the term of your ownership.

random_walker_77
Posts: 852
Joined: Tue May 21, 2013 8:49 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by random_walker_77 » Mon Mar 05, 2018 9:07 am

jeroly wrote:
Sun Mar 04, 2018 5:38 pm
topofthebellcurve wrote:
Sat Mar 03, 2018 11:24 am

Unless there is a large cost savings vs. renting, would this forum ever recommend buying? That's not a criticism, just an observation.
1. You can't really think about buying vs. renting as comparing apples and apples when talking about houses. (easier to do the comparisons when looking at rental apartments vs. condos)
(a) For a particular house that you might be interested in living in, it's usually only available as either a rental or for purchase (and more typically only for purchase) so you can't just run the financials both ways and decide which works best for your circumstances.
(b) The overall stock of rental houses is much smaller than the for-sale market in most communities, especially in suburban and rural areas.

2. When considering buy vs. rent in the abstract: It depends your assumtions (e.g. what rent inflation and home price increases will be), but in general it's a better financial move to buy if your time horizon is more than seven years - that lets the fixed costs of purchase (e.g. sales agent commision, mortgage tax) be overtaken by the rising rental costs and rising home sales price.

To more directly answer your question: it's not just about what the current cost difference is, but you need to consider what the cost differences combined with the change in home price will be over the term of your ownership.
Those are really good points, and I fully agree. I'd add that there are also some twists in the analysis.

1) If you have the funds to buy outright, to be financially honest, you need to also consider the best alternative to investing the money in a house. If you don't, you end up bragging (if only to yourself) that your house was an awesome investment because it's gone up 50% in the last 12 years, when in reality, stocks might be expected to have doubled in the same time period.

1b) similarly, you need to look honestly at inflation. That hypothetical 50% gain is more than 25% after factoring out inflation. Someone who bought their house for $700K in '07, saw it plunge to 350K during the housing crisis, and who sees it finally edge back to 900K now might think it was a scary but great investment. But after taking into account inflation, they're treading water, whereas a balanced bond+stock investment would've doubled.

2) The leverage factor. Most people are buying using leverage, and at a 5x factor (w/ 20% down) that you can't get anywhere else. With historically low interest rates, this means that increases in home value, even due to inflation, are juiced by 5x, which can make home ownership remarkably profitable. This has a dark side, as losses are magnified too.

Example: buy a home for $1M putting 200K down. Live in it for 3 years. Interest & insurance are approx the cost of rent. Let's say it goes up 16% over the 3 years. Sell. Lose 6% to commissions, walk away with 10% of 1M. But you've roughly put in 200K and walk away with 100K in profits. That's 50% in 3 years!!! Of course, you could just as easily have lost 200% of your money in those 3 years.

2b) Beware the argument that paper losses only matter if you sell. With housing, often the market value correlates to wider problems. Recessions. Job losses. Investment crashes. If you lose your job and are forced to sell, it'll make you sell at the worst possible time, and this effect shouldn't be discounted. Exhibit A: see foreclosures during '08-'09

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Mon Mar 05, 2018 1:00 pm

Again, really appreciate all of the discussion and insight here -- thank you! And apologies for the delay in responding; the last 24hrs have been non-stop housing discussion with wife, family, broker, etc. etc.

I just submitted a bid for the house just over asking which was the origin of this thread. It's new construction from a reputable builder, excellent school district, close to family, walking distance to town center, etc. 2,300 sq.ft., 4 bed 3.5 bath, excellent layout. Downsides are a smaller than desired yard, and a bit further from public transit than I'd like. Given the state of the market, I fully expect to lose the bid to someone offering $50K over, but we will see. That said, I'd like to lay out the reasoning behind making an offer at all, some of which is highly specific to my situation, some of which is more widely applicable.

1. As referenced above, the buying and renting market are not the same. I spent a good chunk of yesterday trying to see what I could get for $4-5K in the same geography, and it was uniformly much older stock and smaller than the prospective house (granted, I do not need all of the space I'd be buying). The closest I could come to a true comp was $6K/month, and even that had poorer fit-out. There's really nothing of the quality and size we're looking to buy for rent.

2. At some point in the next 2-3 years, I do want to buy a house, and it is very likely to be highly similar to the prospective house. There were only 15 4-beds on the market in the last 18 months built since 2000; what I am looking for is relatively rare, particularly within the radius of my family that I'm looking to achieve.

3. While I am having a baby soon (potentially quite soon), my wife and I believe this particular purchase is doable. This is because it is new construction, we have minimal possessions / furniture (just returned from 8 yrs abroad), and we know the area. We will not be bidding on houses a month from now. This is a one-shot gamble, and if it fails, we'll reconvene in X months. We're still running up against our lease ending in September, and my (highly rational) wife is very pessimistic about the continued viability of our functionally 1-bed open layout apartment given that we both work from home.

4. While housing is generally liquid, this is about as liquid as a house can get. It's new, a highly desirable layout / neighborhood, etc. Absent a major market downturn, I expect it to retain capital value. If we wake up and decide it was a horrible idea and sell 1-2 years from now, I may end up burning $100K in broker fees, lost equity, etc.; I can live with that. Worst worst case, there is a major downturn, I'm out of work for X years, etc. -- I will still have $1MM++ in savings to float us. Being able to fully repay the mortgage and still have significant buffer limits my fear. I do, however, wonder how people ever gin up the confidence to buy when all they can muster is the down payment; that is terrifying.

5. Also as mentioned above, if one has the funds to buy outright (which we thankfully have), then this needs to be seen as one of many forms of capital deployment. Given interest rates (and the one-way option on rates provided by a fixed-rate mortgage) and the tax incentives to buy, it is not a horrible place to park money. When I plug everything into the NYT rent/buy calculator https://www.nytimes.com/interactive/201 ... lator.html, I get a break-even rent of $2,300 - $3,500 depending on assumptions. As reference, I'm paying $3K/mo for my current place.

6. I'm only committing to a $1K deposit at this point and have 10 days to bail for whatever reason. Working in real estate development, I have many very knowledgeable senior colleagues who are going to assist with inspection, docs, etc.; during the same time I'll continue to be on this thread, and you can talk me out of my lunacy (if you see it as such). I'm still assuming significant child-care costs, renting a shared office, etc.

Thanks again!

User avatar
Watty
Posts: 18070
Joined: Wed Oct 10, 2007 3:55 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by Watty » Mon Mar 05, 2018 1:50 pm

topofthebellcurve wrote:
Mon Mar 05, 2018 1:00 pm
and you can talk me out of my lunacy (if you see it as such).
Some things are not financial decisions so be careful about over analyzing it as a financial decision, other than to determine what is possible.

Financially what choice will turn out to be "best" is is unknowable for another ten years or more and even if it turns out to be a terrible choice and you lose half your money you will be fine since you have ample means.

nepats
Posts: 306
Joined: Mon Jul 20, 2009 11:56 am

Re: Housing Budget Check (paging Watty / KlangFool)

Post by nepats » Mon Mar 05, 2018 3:35 pm

I don't have anything to add besides all the discussions so far, but wanted to comment because this whole thread reminded about the time when I was 30 and bought our house. We didn't' have kids but knew we wanted them in the near future, had moved to different state and there was uncertainty about the jobs. I didn't have even 20% of the thoughtfulness like the OP or the money, but things turned out okay even after few kids and the housing meltdown right after we bought a house!

However, If I had a chance to redo, I would choose to stay put in the rental/smaller house close to work/family, until the kids hit at least Kindergarden. Either way, you and your spouse seem like well grounded, thoughtful people with good jobs and savings so I think you will be fine. This problem is only a speed bump on the bumpy ride ahead :wink:

Congrats and good luck! I miss Boston :(

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Mon Mar 05, 2018 3:47 pm

nepats wrote:
Mon Mar 05, 2018 3:35 pm
I don't have anything to add besides all the discussions so far, but wanted to comment because this whole thread reminded about the time when I was 30 and bought our house. We didn't' have kids but knew we wanted them in the near future, had moved to different state and there was uncertainty about the jobs. I didn't have even 20% of the thoughtfulness like the OP or the money, but things turned out okay even after few kids and the housing meltdown right after we bought a house!

However, If I had a chance to redo, I would choose to stay put in the rental/smaller house close to work/family, until the kids hit at least Kindergarden. Either way, you and your spouse seem like well grounded, thoughtful people with good jobs and savings so I think you will be fine. This problem is only a speed bump on the bumpy ride ahead :wink:

Congrats and good luck! I miss Boston :(
This put a smile on my face, thank you :D

It happens to be that this house would put us even closer to family than our already pretty close rental (20 min walk instead of 30 min walk). And we can't get much closer to work since we both work from home.

But, I appreciate the sentiment. We shall see!

KlangFool
Posts: 14630
Joined: Sat Oct 11, 2008 12:35 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by KlangFool » Mon Mar 05, 2018 4:14 pm

topofthebellcurve wrote:
Mon Mar 05, 2018 1:00 pm
Again, really appreciate all of the discussion and insight here -- thank you! And apologies for the delay in responding; the last 24hrs have been non-stop housing discussion with wife, family, broker, etc. etc.

I just submitted a bid for the house just over asking which was the origin of this thread. It's new construction from a reputable builder, excellent school district, close to family, walking distance to town center, etc. 2,300 sq.ft., 4 bed 3.5 bath, excellent layout. Downsides are a smaller than desired yard, and a bit further from public transit than I'd like. Given the state of the market, I fully expect to lose the bid to someone offering $50K over, but we will see. That said, I'd like to lay out the reasoning behind making an offer at all, some of which is highly specific to my situation, some of which is more widely applicable.
topofthebellcurve,

<< 2,300 sq.ft., 4 bed 3.5 bath, excellent layout.>>

1) How many floors in this house?

2) Be prepared to fence out most of the spaces if you buy this house.

<< excellent layout.>>

3) We will see. Given that both parents have no experience dealing with baby and toddler, whatever works for you and your spouse may not work with a baby around.

4) Can either one of you work and watch out for the baby at the same time? If yes, which part of the house?

5) Get an experienced parent that worked from home to take a look at the house. Is it baby safe?

KlangFool

Simple Simon
Posts: 106
Joined: Sat Apr 26, 2014 4:37 am

Re: Housing Budget Check (paging Watty / KlangFool)

Post by Simple Simon » Mon Mar 05, 2018 5:01 pm

I'm generally prudent (tightwad) but the single extravagance of buying a large house has been a huge source of happiness in the life of my family. It has been the Petri dish which has allowed all sort of growth. I would not change for one minute.

I expect we would be wealthier if we had invested the cost of the house in index funds instead. But the same could be said for other life choices: whether to having children, and so on

The OP is young and has accumulated a lot of money already. I hope they can use some of that money buy a good way of life for themselves and their family along their- and may it be long, happy and full- journey to the graveyard.
Last edited by Simple Simon on Wed Mar 07, 2018 2:17 am, edited 1 time in total.

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Mon Mar 05, 2018 6:04 pm

Update: I won the bid.

I think I'm going to throw up, but wife is happy.

User avatar
Watty
Posts: 18070
Joined: Wed Oct 10, 2007 3:55 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by Watty » Mon Mar 05, 2018 7:18 pm

topofthebellcurve wrote:
Mon Mar 05, 2018 6:04 pm
Update: I won the bid.

I think I'm going to throw up, but wife is happy.
Congratulations. :beer

In all likelihood you wife has thrown up a few times in the pregnancy so now it is your turn.

Panic is normal.
topofthebellcurve wrote:
Mon Mar 05, 2018 3:47 pm
It happens to be that this house would put us even closer to family than our already pretty close rental (20 min walk instead of 30 min walk). And we can't get much closer to work since we both work from home.
Don't underestimate the importance of that. Just knowing that there is someone that can be there in five minutes in an emergency is worth a lot.

Be sure to add a post in six months or year to give an update.

simas
Posts: 481
Joined: Wed Apr 04, 2007 5:50 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by simas » Mon Mar 05, 2018 7:45 pm

Congratulations! Second the suggestion of adding a follow up post when you are ready

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Mon Mar 05, 2018 8:37 pm

Thank you! I'll be sure to update you in a few months, when I'm plus baby and house. I'm sure it'll be a relaxing interval :D

random_walker_77
Posts: 852
Joined: Tue May 21, 2013 8:49 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by random_walker_77 » Mon Mar 05, 2018 10:28 pm

Congratulations! Best wishes for a smooth closing, move, and a happy healthy baby.

Not sure in your area, but out here, new construction means you'll need to order gutters, and blinds. May I suggest blackout shades in your master bedroom and kids room? The online places are decent (such as blinds.com), and they're pretty easy to install... though for your situation, you've got enough going on that I'd suggest finding yourself a good handyman.

Similarly, for the move, if you have furniture of any size, look into reputable local movers. The first time I paid someone to do it for me, I sort of regretted all the times I moved myself. For not that much more than the price of a u-haul rental, you've got a couple of strong skilled movers w/ a truck. (Well, that was here in Texas. Labor would be more where you're at, but it's not "skilled" labor).

User avatar
randomizer
Posts: 1547
Joined: Sun Jul 06, 2014 3:46 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by randomizer » Tue Mar 06, 2018 12:30 am

When the baby is small, it won't need a room of its own. You could hold off on purchasing for 6 months, 12 months, maybe even 24 months. Might saving you from rushing into a decision you may regret.
87.5:12.5, EM tilt — HODL the course!

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Wed Mar 07, 2018 10:57 am

Hi everyone! Housing saga continues: in this episode, mortgages!

I got quotes from the mortgage broker as follows ($1MM purchase price; $1.5MM liquid assets):

20% Down
30-yr Fixed: 4.125% - $590K total interest expense
20-yr Fixed: 3.875% - $347K total interest expense
15-yr Fixed: 3.625% - $236K total interest expense

40% Down
30-yr Fixed: 4.00% - $427K total interest expense
20-yr Fixed: 3.75% - $251K total interest expense
15-yr Fixed: 3.50% - $170K total interest expense

I have $400K in bonds/cash sitting around for a down payment and could do either 20% or 40% down without taking a cap gains hit.

My first instinct is to just do 30-yr 20% down and pay it down more aggressively (sidebar: working in commercial real estate, I think home mortgages are magical -- no prepayment penalties and a one-way option on interest rates!). That way I have the safety of a low payment but can reduce the overall interest expense as funds allow. That said, it partially depends on what I'd do with the remaining $200K in cash. I'd probably put it in stocks, since I'm 32 and want to have an aggressive allocation. That said, if I go to a 80/20 AA split, then I'm not sure why I'd hold any bonds at these mortgage rates -- better to just use that for a larger down payment.

I'm also checking into rates for 30% down to see if that makes any difference. It sounds like under the new tax plan I'd want to keep the total mortgage at $750K or lower to maximize interest deductions?

KlangFool
Posts: 14630
Joined: Sat Oct 11, 2008 12:35 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by KlangFool » Wed Mar 07, 2018 11:28 am

topofthebellcurve wrote:
Wed Mar 07, 2018 10:57 am
Hi everyone! Housing saga continues: in this episode, mortgages!

I got quotes from the mortgage broker as follows ($1MM purchase price; $1.5MM liquid assets):

20% Down
30-yr Fixed: 4.125% - $590K total interest expense
20-yr Fixed: 3.875% - $347K total interest expense
15-yr Fixed: 3.625% - $236K total interest expense

40% Down
30-yr Fixed: 4.00% - $427K total interest expense
20-yr Fixed: 3.75% - $251K total interest expense
15-yr Fixed: 3.50% - $170K total interest expense

I have $400K in bonds/cash sitting around for a down payment and could do either 20% or 40% down without taking a cap gains hit.

My first instinct is to just do 30-yr 20% down and pay it down more aggressively (sidebar: working in commercial real estate, I think home mortgages are magical -- no prepayment penalties and a one-way option on interest rates!).
topofthebellcurve,

1) 20% down and 30 years mortgage.

2) Do not pay it down aggressively until your job situation is stable.

KlangFool

bloom2708
Posts: 7090
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Housing Budget Check (paging Watty / KlangFool)

Post by bloom2708 » Wed Mar 07, 2018 11:31 am

Have the healthy baby. Get used to parenting. You stay in a 10 foot circle with an infant.

Then consider a move.

Moving is stressful. Having a baby/being pregnant is stressful. Don't combine them. :wink:
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words: Whole food, plant based

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Wed Mar 07, 2018 2:50 pm

bloom2708 wrote:
Wed Mar 07, 2018 11:31 am
Have the healthy baby. Get used to parenting. You stay in a 10 foot circle with an infant.

Then consider a move.

Moving is stressful. Having a baby/being pregnant is stressful. Don't combine them. :wink:
Yup. We're planning to stay in our current apartment until September when the lease ends; we could push up that timeline if post-baby life is calmer than expected.

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Wed Mar 07, 2018 4:02 pm

I talked to a tax adviser: he said "borrow $750K and not a penny more or less" (i.e. max out deductions under new tax plan)

Given my marginal tax rate, a 30-yr loan would be a 2.8% effective rate after deductions. Sounds good to me :sharebeer

User avatar
ray.james
Posts: 1179
Joined: Tue Jul 19, 2011 4:08 am

Re: Housing Budget Check (paging Watty / KlangFool)

Post by ray.james » Wed Mar 07, 2018 4:18 pm

topofthebellcurve wrote:
Wed Mar 07, 2018 4:02 pm
I talked to a tax adviser: he said "borrow $750K and not a penny more or less" (i.e. max out deductions under new tax plan)

Given my marginal tax rate, a 30-yr loan would be a 2.8% effective rate after deductions. Sounds good to me :sharebeer
I think this math is correct...or i am missing information. Out of 30K interest on 750K loan at 4%, 14K is anyway part of standard deduction.
10K CA tax(capped) + 14K = 24K standard deduction. So only 6K is deductible at marginal rate. (approx 3.7% effective from 4%)
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

User avatar
ray.james
Posts: 1179
Joined: Tue Jul 19, 2011 4:08 am

Re: Housing Budget Check (paging Watty / KlangFool)

Post by ray.james » Wed Mar 07, 2018 4:23 pm

Given your high income, on a risk scale, I will check 7 year ARM. You can pay off the loan at the end of 7 years(if not 100% may be 60-70%) if you make a decision that this is forever home for your kids. Else you have enjoyed a 15 year loan rate anyway and now you can make the move to a different home. This way you get lower interest , leverage that high income(+ future)/plus savings.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Wed Mar 07, 2018 5:10 pm

I'll check out the ARM, but I'm generally reticent since (1) I want the security of a lower payment assuming things go south and (2) we're at very low interest rates, which feel like they can only go up.

Worth looking at if only to have been thorough in surveying my options.

Topic Author
topofthebellcurve
Posts: 113
Joined: Thu Jun 30, 2016 12:11 am
Location: Boston

Re: Housing Budget Check (paging Watty / KlangFool)

Post by topofthebellcurve » Wed Mar 07, 2018 5:12 pm

ray.james wrote:
Wed Mar 07, 2018 4:18 pm
topofthebellcurve wrote:
Wed Mar 07, 2018 4:02 pm
I talked to a tax adviser: he said "borrow $750K and not a penny more or less" (i.e. max out deductions under new tax plan)

Given my marginal tax rate, a 30-yr loan would be a 2.8% effective rate after deductions. Sounds good to me :sharebeer
I think this math is correct...or i am missing information. Out of 30K interest on 750K loan at 4%, 14K is anyway part of standard deduction.
10K CA tax(capped) + 14K = 24K standard deduction. So only 6K is deductible at marginal rate. (approx 3.7% effective from 4%)
Good question -- I'll need to double check it. I've got $20K of interest in first year of a 30-yr loan at 4.125%.

Is the $10K max for state deduction include both income and property tax combined?

User avatar
ray.james
Posts: 1179
Joined: Tue Jul 19, 2011 4:08 am

Re: Housing Budget Check (paging Watty / KlangFool)

Post by ray.james » Wed Mar 07, 2018 5:48 pm

topofthebellcurve wrote:
Wed Mar 07, 2018 5:12 pm

Good question -- I'll need to double check it. I've got $20K of interest in first year of a 30-yr loan at 4.125%.

Is the $10K max for state deduction include both income and property tax combined?
yes , from 2018 as per the TCJA law.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

User avatar
Watty
Posts: 18070
Joined: Wed Oct 10, 2007 3:55 pm

Re: Housing Budget Check (paging Watty / KlangFool)

Post by Watty » Wed Mar 07, 2018 6:11 pm

topofthebellcurve wrote:
Wed Mar 07, 2018 4:02 pm
I talked to a tax adviser: he said "borrow $750K and not a penny more or less" (i.e. max out deductions under new tax plan)

Given my marginal tax rate, a 30-yr loan would be a 2.8% effective rate after deductions. Sounds good to me :sharebeer
That makes sense and you could likely make the payments on one income if you needed to.
topofthebellcurve wrote:
Wed Mar 07, 2018 5:10 pm
I'll check out the ARM, but I'm generally reticent since (1) I want the security of a lower payment assuming things go south and (2) we're at very low interest rates, which feel like they can only go up.
At some point if the rate is low enough they can make sense so be sure to keep an open mind on it.

That said, my parents had a fixed rate loan at around 3.5% during the double digit inflation years of the late 1970's and to say that they did well with it would be an understatement and they ended up keeping it for the full 30 years. They are a great inflation hedge so I would not give that up without a good reason.

In investing you also need to choose WHERE to take your risks. Taking your risks in your other investments, and the situation with your career, might be preferable to taking interest rate risk on your home mortgage.
topofthebellcurve wrote:
Wed Mar 07, 2018 2:50 pm
We're planning to stay in our current apartment until September when the lease ends; we could push up that timeline if post-baby life is calmer than expected.
Check with your lender to see if there is a requirement that you move in within a certain numbers of days(30?) to qualify for the owner occupied rate. I very vaguely remember hearing something about that but I could be mistaken.

There may also be limitations on leaving it vacant for that long for your home insurance policy and any owner occupied property tax breaks.

If rents have gone up in your area and the landlord can easily rent out your current place at a higher rate your landlord maybe more than happy to let you out of your lease early.

jodydavis
Posts: 214
Joined: Wed May 21, 2008 9:50 am

Re: Housing Budget Check (paging Watty / KlangFool)

Post by jodydavis » Thu Mar 08, 2018 8:35 am

Congratulations, on multiple fronts! Based on the amount of thought you've given to this, you are going to be fine. Financially, you can easily swing this, and all of the comments are more along the lines of dealing with the unknowns associated with being a new parent. Even under a worst-case scenario (i.e. you decide the house isn't a perfect fit after all, you lose your job, the real estate market tanks, etc.), you are still going to be okay financially. And on the upside, you get more space, a nicer place, and live close to your family (which is a huge benefit once you have kids). Having been through something close to what you are going through (living in a small apartment in Somerville, having a kid, buying a place a bit farther out, etc.), I think you are going to be fine.

Couple of thoughts:

1. Agree that, given job uncertainty, the 20% 30-year is the safest, as it preserves liquidity and gives you the option value of pre-paying.

2. With new construction,still make sure you have a thorough inspection and make good use of the builder's warranty. Although new construction can be great in that everything is new (duh), it's also the case that new kinks take a while to work out (whereas for an older house, most of them have been worked out already). E.g. until you go through your first winter, you won't know how your house/roof/basement performs, and may need to have adjustments made, etc. So just be aware that a new construction house can also take some work the first year.

Congratulations! And good luck!
J.D.

Post Reply