UPDATE: How much can I spend on a house?

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blackburnian
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UPDATE: How much can I spend on a house?

Post by blackburnian » Sat May 05, 2018 5:59 am

PLEASE SEE UPDATE BELOW (about 15 posts downthread)
I am looking for a condo and just put an offer on one that was outbid (this was the first offer I’ve made—first place I’ve seen in a year that meets all my criteria). My agent said “Offer what you can afford,” and I realized that I wasn’t sure how high I could go. I am currently renting and live in a HCOL area where properties go fast, usually quite a bit over asking price. In this case, asking price was $520,000, I bid 575 (cash), and winner bid over 600. Could I have offered more? Did I offer too much? Here are my stats:

Taxable: $1,350,000 (with ~ $400,000 more to come in a few months after inheritance is finalized)
Savings acct: $250,000 (waiting to be put into house)
Retirement: $300,000
AA: aiming for 50/50

Age: 60, single, no children
Income: $75,000 (putting max into 403b and Roth IRA, so withdrawing some from taxable for living expenses)
Work until: 64 or 65
Budget: $50,000/yr (~ $4200/mo)
Take SS at: 70, expect ~ $2000/mo
TIAA annuity: start at 65, expect ~ $1200/mo

I want to be sure I keep enough money to pay for any medical costs I may have later. Other than that, I don’t care if I use up all my money. Any ideas on how to calculate how much can I afford to spend on a house? Thanks for help.
Last edited by blackburnian on Sun Apr 14, 2019 6:06 am, edited 5 times in total.

runner540
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Re: How much can I spend on a house?

Post by runner540 » Sat May 05, 2018 7:04 am

Interesting twist on the house affordability question.

Very important: does the $50k annual budget include property taxes, maintenance, insurance, etc. for a new $600k condo? If not, please revise that number to include those costs.

If the $50k budget holds, you need $3k/month from investments for age 65-70, then you need $1k per month after SS kicks in.

student
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Re: How much can I spend on a house?

Post by student » Sat May 05, 2018 7:15 am

I know this is not what you ask. However, since you are within a few years of planned retirement age, this current thread may be of interest to you. viewtopic.php?f=2&t=248742

cherijoh
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Re: How much can I spend on a house?

Post by cherijoh » Sat May 05, 2018 7:34 am

blackburnian wrote:
Sat May 05, 2018 5:59 am
I am looking for a condo and just put an offer on one that was outbid (this was the first offer I’ve made—first place I’ve seen in a year that meets all my criteria). My agent said “Offer what you can afford,” and I realized that I wasn’t sure how high I could go. I am currently renting and live in a HCOL area where properties go fast, usually quite a bit over asking price. In this case, asking price was $520,000, I bid 575 (cash), and winner bid over 600. Could I have offered more? Did I offer too much? Here are my stats:

Taxable: $1,350,000 (with ~ $400,000 more to come in a few months after inheritance is finalized)
Savings acct: $250,000 (waiting to be put into house)
Retirement: $300,000
AA: aiming for 50/50

Age: 60, single, no children
Income: $75,000 (putting max into 403b and Roth IRA, so withdrawing some from taxable for living expenses)
Work until: 64 or 65
Budget: $50,000/yr (~ $4200/mo)
Take SS at: 70, expect ~ $2000/mo
TIAA annuity: start at 65, expect ~ $1200/mo

I want to be sure I keep enough money to pay for any medical costs I may have later. Other than that, I don’t care if I use up all my money. Any ideas on how to calculate how much can I afford to spend on a house? Thanks for help.
Have you calculated how much capital gains tax you would need to pay to make an all cash offer on a condo? You would need to sell enough investments in taxable accounts to cover the balance of the condo plus all the taxes.

Runner540 raises some good points. You also need to consider how much you want to put into decorating - window treatments, new furniture, etc.

What is the motivating factor for becoming a first-time homebuyer NOW (a few years before you retire) in a HCOL area? Have you considered waiting until you retire and moving to a LCOL area or at least further out from your job where homes may be less expensive?

Topic Author
blackburnian
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Re: How much can I spend on a house?

Post by blackburnian » Sat May 05, 2018 9:31 am

Thanks, all, for useful ideas. To answer a few questions:

1. I have money in taxable in a money market that I could use for the condo, so I wouldn't have to pay any cap gains to get that money (unless I went over about 620,000--then I could sell bonds for a loss).

2. The reason for moving now is that I have more money (owing to inheritance) and would like a place with more features that I want (laundry--I am tired of going to laundromat--and guest room); also my landlord wants to remodel within a year or so.

3. Reason for buying rather than renting is that in this area, for the kind of place I want (old), there are not a lot of rentals.

4. Reason for staying here after retirement is that I have friends/community here. I figure I could sell and move to retirement community later if I had to.

5. I have not priced taxes, insurance, etc. but I am figuring it will come out to about the same as what I am now paying in rent + storage. (I am storing furniture from my mother's house that will go into new condo.)

6. Runner540, thanks for calculations. That means I would need 216,000 until SS, then 360,000 after that if I live to 95, or 576,000 (before inflation). Add another 500,000 for medical etc. So it seems like I could spend up to 620,000 now?

runner540
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Re: How much can I spend on a house?

Post by runner540 » Sat May 05, 2018 10:27 am

blackburnian wrote:
Sat May 05, 2018 9:31 am
Thanks, all, for useful ideas. To answer a few questions:

1. I have money in taxable in a money market that I could use for the condo, so I wouldn't have to pay any cap gains to get that money (unless I went over about 620,000--then I could sell bonds for a loss).

2. The reason for moving now is that I have more money (owing to inheritance) and would like a place with more features that I want (laundry--I am tired of going to laundromat--and guest room); also my landlord wants to remodel within a year or so.

3. Reason for buying rather than renting is that in this area, for the kind of place I want (old), there are not a lot of rentals.

4. Reason for staying here after retirement is that I have friends/community here. I figure I could sell and move to retirement community later if I had to.

5. I have not priced taxes, insurance, etc. but I am figuring it will come out to about the same as what I am now paying in rent + storage. (I am storing furniture from my mother's house that will go into new condo.)

6. Runner540, thanks for calculations. That means I would need 216,000 until SS, then 360,000 after that if I live to 95, or 576,000 (before inflation). Add another 500,000 for medical etc. So it seems like I could spend up to 620,000 now?
#2 I think with ~$2M of assets you should be able to do your laundry at home! That will be a huge jump in lifestyle, well worth it.
#5: Don't make this assumption without actually running the calcs. $600k is not too much house compared to your assets, but it is a lot compared to your income and budget. A very rough assumption (each locality varies) would be at least 2% of house value for taxes and insurance every year, plus you'll need to cover common charges, assessments and maintenance for your condo building.

bogglizer
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Re: How much can I spend on a house?

Post by bogglizer » Sat May 05, 2018 10:33 am

If you buy a house that you can just afford, then you have no contingency. Don't do that.

gotester2000
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Re: How much can I spend on a house?

Post by gotester2000 » Sat May 05, 2018 11:13 am

Have you considered moving close to family after retiring? 600k depletes your corpus substantially and high for a condo.

Topic Author
blackburnian
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Re: How much can I spend on a house?

Post by blackburnian » Sun May 06, 2018 10:07 am

Thanks for more good suggestions.

-> I got some estimates of tax, insurance, maintenance, and condo fees for the places I've been looking at, and they do indeed come out to about what I'm now paying for rent and storage.

-> I have a very, very small family (just a sister), so moving near "family" isn't really an option.

Any other ideas about how to come up with a number are welcome, while I wait for next batch of condos to come on the market this week.

Rob1
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Re: How much can I spend on a house?

Post by Rob1 » Sun May 06, 2018 10:25 am

This probably won’t be a popular idea, but have you considered a mortgage?

I’m semi-retired and considering a new house (a few years out) that I’ll buy with a mix of current home equity, cash down, mortgage. It is not ideal, but like you I live in a HCOL area and want to remain close to my social network. If/when needed, I’ll sell the place to unlock the equity.

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blackburnian
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Re: How much can I spend on a house?

Post by blackburnian » Sun May 06, 2018 10:29 am

Rob1: Could you explain what the advantage of a mortgage would be? Wouldn't I end up spending more money in the long run, since I would be paying interest on the mortgage? The other thing is that around here cash offers tend to get preference when there are multiple bids (which is--always). But maybe there are some factors I'm not aware of.

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Watty
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Re: How much can I spend on a house?

Post by Watty » Sun May 06, 2018 10:52 am

blackburnian wrote:
Sat May 05, 2018 5:59 am
Could I have offered more? Did I offer too much?
I think you can afford anything in the ballpark that you were looking at.

The big question is how much you can spend without overpaying for it.
blackburnian wrote:
Sat May 05, 2018 5:59 am
My agent said “Offer what you can afford,”
:oops: Get a new agent this one is not serving you well. They will not have ESP but a good agent should have been able to give you a more constructive suggestion and in an ideal world they would also helped you not overpay for a house.
blackburnian wrote:
Sat May 05, 2018 5:59 am
this was the first offer I’ve made—first place I’ve seen in a year that meets all my criteria
In a hot housing market you may need to rethink your criteria and make some compromises.

I would make a make must have items but also consider a lot of items as being nice to have items that are not critical.

Some things like kitchen features you may be able to get by remodeling the place after you buy it.

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blackburnian
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Re: How much can I spend on a house?

Post by blackburnian » Sun May 06, 2018 1:41 pm

Watty: Yes, I think you are right. I have a list of "must have" and "would be nice" features, but I may have to rethink the "must" list.

Rob1
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Re: How much can I spend on a house?

Post by Rob1 » Sun May 06, 2018 3:24 pm

blackburnian wrote:
Sun May 06, 2018 10:29 am
Rob1: Could you explain what the advantage of a mortgage would be? Wouldn't I end up spending more money in the long run, since I would be paying interest on the mortgage? The other thing is that around here cash offers tend to get preference when there are multiple bids (which is--always). But maybe there are some factors I'm not aware of.
First off, I'm probably a little more comfortable with debt than most (maybe due to my business background). To me, it's simply leverage. I'm open to it as long as it isn't bad debt (like credit cards), and I'm not overly leveraged. If I die with a mortgage, good for me. If I need to move into assisted living, I'll sell and unlock the home equity. Anyway, a few advantages of a mortgage are:
  • Mortgage rates are low, so money instead left in a well diversified portfolio will likely earn more over the long-term (albeit the mortgage tax advantage is now gone for most)
  • It may allow one to keep money invested longer in tax advantaged accounts and/or to avoid selling assets for a down payment at an otherwise less than ideal time
  • Money in the portfolio is more liquid
  • Money in the portfolio is more diversified than money invested in one real-estate property
To be clear, there are disadvantages as well. By the way, I think psychological factors (like the peace of mind from having no mortgage) can be valid as well.

md&pharmacist
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Re: How much can I spend on a house?

Post by md&pharmacist » Sun May 06, 2018 9:01 pm

Can or should? Very different.

Take your time, rushed decisions are usually the wrong one. You have some time to keep looking and consider different zip codes.

Should buy only what you need, especially at your age. What are your requirements - neighborhood, safety, nearby shopping, bedroom count, pool, community amenities, age of property/appliances/HVAC units, association fees, etc.

You are single, you have options. Consider a foreclosure if you want instant equity and are handy at home. This decision is personal, but some consider a room mate to share costs.

Why not lease for 4-5 years and move into a lower COL area (unless you have extended family or other ties to the area)? Your retirement can go a whole lot further and if not too far, you can still come to visit family/friends.

$500,000-$600,000 is a very large chunk of what you have at this age. You may opt to take out a mortgage rather than use existing, but there is probably no good reason to.

Topic Author
blackburnian
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Re: How much can I spend on a house?

Post by blackburnian » Sat Apr 13, 2019 10:58 pm

UPDATE
I am the OP, still house-hunting. I have found a condo I like now and am wondering (again) if it is too expensive. My numbers have changed a little from when I first posted, so I am updating. The condo is $635,000. I would pay cash (prefer not to have a mortgage). (Large carryover losses means no capital gains to raise cash.) Should I buy this place, or is it too expensive?

Here are updated stats:

Taxable: $1,950,000, AA 50/50
Savings acct: $220,000 (waiting to be put into house)
Retirement (403b and Roth): $350,000

Age: 61, single, no children, currently renting
Income: $78,000 gross (putting max into 403b and Roth IRA, so withdrawing some from taxable for living expenses). Currently paying 22% federal tax, 6.25% state
Work until: 65
Expenses: $71,000/yr (includes estimated monthly costs for new condo; includes Roth contribution, so will be reduced after 65; includes some other expenses that mean spending is more than income)
TIAA annuity: start at 65, expect ~ $16,000/yr
Take SS at: 70, expect ~ $24,000/yr

I figure between ages 61 and 65 I need to withdraw about $40,000/yr for expenses; between 65 and 70, $47,000 per year, and after age 70, about $23,000/yr.
Let's say price of condo plus costs, moving, etc. comes to $660,000. I would have roughly $1.5 million left in taxable, plus about $150,000 in Roth IRA. Is that enough?
Last edited by blackburnian on Sun Apr 14, 2019 8:19 am, edited 1 time in total.

FoolMeOnce
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Re: How much can I spend on a house?

Post by FoolMeOnce » Sun Apr 14, 2019 8:03 am

blackburnian wrote:
Sat Apr 13, 2019 10:58 pm
UPDATE
I am the OP, still house-hunting. I have found a condo I like now and am wondering (again) if it is too expensive. My numbers have changed a little from when I first posted, so I am updating. The condo is $635,000. I would pay cash (prefer not to have a mortgage). (Large carryover losses means no capital gains to raise cash.) Should I buy this place, or is it too expensive?

Here are updated stats:

Taxable: $1,950,000, AA 50/50
Savings acct: $220,000 (waiting to be put into house)
Retirement (403b and Roth): $350,000

Age: 61, single, no children, currently renting
Income: $78,000 (putting max into 403b and Roth IRA, so withdrawing some from taxable for living expenses)
Work until: 65
Budget: $71,000/yr (includes estimated monthly costs for new condo; includes Roth contribution, so will be reduced after 65; includes some other expenses that mean spending is more than income)
TIAA annuity: start at 65, expect ~ $16,000/yr
Take SS at: 70, expect ~ $24,000/yr

I figure between ages 61 and 65 I need to withdraw about $40,000/yr for expenses; between 65 and 70, $47,000 per year, and after age 70, about $23,000/yr.
Let's say price of condo plus costs, moving, etc. comes to $660,000. I would have roughly $1.5 million left in taxable, plus about $150,000 in Roth IRA. Is that enough?
It looks like you'll be withdrawing less than $40k between 61-65. That's what you are taking from taxable, but then putting a significant amount back into 403b and Roth accounts, right? That's a wash for portfolio withdrawals (actually a plus for the tax treatment).

If I am right, you are probably withdrawing a fraction of a percent from your portfolio now, and then looking at a 2.8% withdrawal rate for five years followed by a 1.4% rate. That leaves room even for poor returns in the near term. I think you'll be fine.

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blackburnian
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Re: UPDATE: How much can I spend on a house?

Post by blackburnian » Sun Apr 14, 2019 8:17 am

Thanks, FoolMeOnce. I should clarify that the income listed is gross. I will edit post. So indeed I am withdrawing about $40,000/yr now (still as you say, a small fraction of my portfolio). It's good to have a yea vote. Any other yeas or nays welcome.

furnace
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Re: How much can I spend on a house?

Post by furnace » Sun Apr 14, 2019 10:31 am

FoolMeOnce wrote:
Sun Apr 14, 2019 8:03 am
blackburnian wrote:
Sat Apr 13, 2019 10:58 pm
UPDATE
I am the OP, still house-hunting. I have found a condo I like now and am wondering (again) if it is too expensive. My numbers have changed a little from when I first posted, so I am updating. The condo is $635,000. I would pay cash (prefer not to have a mortgage). (Large carryover losses means no capital gains to raise cash.) Should I buy this place, or is it too expensive?

Here are updated stats:

Taxable: $1,950,000, AA 50/50
Savings acct: $220,000 (waiting to be put into house)
Retirement (403b and Roth): $350,000

Age: 61, single, no children, currently renting
Income: $78,000 (putting max into 403b and Roth IRA, so withdrawing some from taxable for living expenses)
Work until: 65
Budget: $71,000/yr (includes estimated monthly costs for new condo; includes Roth contribution, so will be reduced after 65; includes some other expenses that mean spending is more than income)
TIAA annuity: start at 65, expect ~ $16,000/yr
Take SS at: 70, expect ~ $24,000/yr

I figure between ages 61 and 65 I need to withdraw about $40,000/yr for expenses; between 65 and 70, $47,000 per year, and after age 70, about $23,000/yr.
Let's say price of condo plus costs, moving, etc. comes to $660,000. I would have roughly $1.5 million left in taxable, plus about $150,000 in Roth IRA. Is that enough?
It looks like you'll be withdrawing less than $40k between 61-65. That's what you are taking from taxable, but then putting a significant amount back into 403b and Roth accounts, right? That's a wash for portfolio withdrawals (actually a plus for the tax treatment).

If I am right, you are probably withdrawing a fraction of a percent from your portfolio now, and then looking at a 2.8% withdrawal rate for five years followed by a 1.4% rate. That leaves room even for poor returns in the near term. I think you'll be fine.
Due to your large net worth, you have the means to drop $660 on a condo. I think what is giving some of us pause is your personal situation. You are close to retirement and can relocate anywhere and buy something nice for 1/2 or even 1/3 the cost of your condo. In fact, if you move out 20+ miles from your current location, you may find good prices, too.

If your heart is set on a condo and you want to pay cash, however, consider funding it with the savings & fixed income side of your portfolio. Leave the equity portion alone so it may grow. Take 475 from bonds and 185 from savings. Your resulting asset allocation from the taxable account will be 66%. Between now and the time you draw SS, if you need cash to live, consider drawing down only the bonds and leaving the equity untouched. Your condo is your new bond holding. Good luck with your decision.

quantAndHold
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Re: UPDATE: How much can I spend on a house?

Post by quantAndHold » Sun Apr 14, 2019 10:41 am

You’re fine. Enjoy your new condo.

delamer
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Re: How much can I spend on a house?

Post by delamer » Sun Apr 14, 2019 11:45 am

furnace wrote:
Sun Apr 14, 2019 10:31 am
FoolMeOnce wrote:
Sun Apr 14, 2019 8:03 am
blackburnian wrote:
Sat Apr 13, 2019 10:58 pm
UPDATE
I am the OP, still house-hunting. I have found a condo I like now and am wondering (again) if it is too expensive. My numbers have changed a little from when I first posted, so I am updating. The condo is $635,000. I would pay cash (prefer not to have a mortgage). (Large carryover losses means no capital gains to raise cash.) Should I buy this place, or is it too expensive?

Here are updated stats:

Taxable: $1,950,000, AA 50/50
Savings acct: $220,000 (waiting to be put into house)
Retirement (403b and Roth): $350,000

Age: 61, single, no children, currently renting
Income: $78,000 (putting max into 403b and Roth IRA, so withdrawing some from taxable for living expenses)
Work until: 65
Budget: $71,000/yr (includes estimated monthly costs for new condo; includes Roth contribution, so will be reduced after 65; includes some other expenses that mean spending is more than income)
TIAA annuity: start at 65, expect ~ $16,000/yr
Take SS at: 70, expect ~ $24,000/yr

I figure between ages 61 and 65 I need to withdraw about $40,000/yr for expenses; between 65 and 70, $47,000 per year, and after age 70, about $23,000/yr.
Let's say price of condo plus costs, moving, etc. comes to $660,000. I would have roughly $1.5 million left in taxable, plus about $150,000 in Roth IRA. Is that enough?
It looks like you'll be withdrawing less than $40k between 61-65. That's what you are taking from taxable, but then putting a significant amount back into 403b and Roth accounts, right? That's a wash for portfolio withdrawals (actually a plus for the tax treatment).

If I am right, you are probably withdrawing a fraction of a percent from your portfolio now, and then looking at a 2.8% withdrawal rate for five years followed by a 1.4% rate. That leaves room even for poor returns in the near term. I think you'll be fine.
Due to your large net worth, you have the means to drop $660 on a condo. I think what is giving some of us pause is your personal situation. You are close to retirement and can relocate anywhere and buy something nice for 1/2 or even 1/3 the cost of your condo. In fact, if you move out 20+ miles from your current location, you may find good prices, too.

If your heart is set on a condo and you want to pay cash, however, consider funding it with the savings & fixed income side of your portfolio. Leave the equity portion alone so it may grow. Take 475 from bonds and 185 from savings. Your resulting asset allocation from the taxable account will be 66%. Between now and the time you draw SS, if you need cash to live, consider drawing down only the bonds and leaving the equity untouched. Your condo is your new bond holding. Good luck with your decision.
You’ll be fine financially with the condo, assuming that you plan to stay in your current area after retirement.

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Re: UPDATE: How much can I spend on a house?

Post by LadyGeek » Sun Apr 14, 2019 1:00 pm

schachtw has a question which I've moved into a new thread. See: [Renting now, should we purchase a condo?]

(I also moved 2 replies.)
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Dottie57
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Re: UPDATE: How much can I spend on a house?

Post by Dottie57 » Sun Apr 14, 2019 1:20 pm

quantAndHold wrote:
Sun Apr 14, 2019 10:41 am
You’re fine. Enjoy your new condo.
+1.

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blackburnian
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Re: UPDATE: How much can I spend on a house?

Post by blackburnian » Mon Apr 15, 2019 4:01 pm

In case anyone is wondering how this came out: I had my offer accepted today. Thanks to everyone for helping me decide that I could afford this place.

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