Another home thread: 2mil / 40K in taxes

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Salmon
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Another home thread: 2mil / 40K in taxes

Post by Salmon » Sat Jun 09, 2018 8:19 am

Revisiting this again with updated stats. We are both 36, one toddler, one on the way and possibly more in the near future. We live in a very HCOL area. Houses we are considering are about $1.8-2mil with $30-40K in taxes.

His income: ranges from minimum $500k - $800K (mostly closer to the lower number)
Her income: currently about $300K, but this will be a lot lower in the next few years. She is planning to slow down and will likely be around a $100k/annum
Current rent: $3000/month
Debt: $0
Cash Savings: $1mil
Retirement accounts: $750K combined
No after tax investing accounts
Expenses: about $120k annum (this includes everything EXCEPT the rent)
Toddler 529 plan: $15K

We expect our expenses to go up with our family growing as well home ownership. We want to purchase a house, but don’t want to be “house poor”. In addition, we don’t really want to put all of our money in the house and have to cut back on our current lifestyle.

Taxes are insane!

Questions:
1. Can we comfortably afford a 2mil house with $40k in taxes? There are other cheaper homes i.e. around $1.5m but these will require renovations (which we would like to avoid)

2. If we do buy such a $2mil home, should we put more than the 20% down?

3. If buying such a home, would private school still be an option?
Last edited by Salmon on Sat Jun 09, 2018 9:03 am, edited 1 time in total.

wrongfunds
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Re: Another home thread: 2mil / 40K in taxes

Post by wrongfunds » Sat Jun 09, 2018 8:27 am

I have no suggestion but when you quote this earning power at age 32, I would certainly like to know the industry and the job specific so that I can get my future grand-kids in those fields. It is too late for me or my kids to change the careers at this stage.

jminv
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Re: Another home thread: 2mil / 40K in taxes

Post by jminv » Sat Jun 09, 2018 8:38 am

Yes, you can afford it but I don't know if I would want to buy a $2 million house if your wife's income drops by as much as you are planning. Not sure why the focus is on 40k in taxes and not the $2 million purchase and ongoing principal, interest, and maintenance payments. You are renting something so in that rent you have taxes, principal, interest, maintenance, and profit for the landlord - you are paying for your landlord to pay taxes now.

Not sure why you're worried about having to cut back on your lifestyle. Even if you only put 20% down your lifestyle at 120k, which presumably also includes 3k rent now, would be maintained. You would just save less money each month. What is 3k/month getting you? It is a big jump to the 2 mil house in terms of expense.

Why do you have so much of your net worth in cash, ie, a negative return asset?

I'd only put more than 20% down if your alternative is to keep your money in cash like you're doing now.

The alternative to preschool is your wife taking care of the child. Your wife makes more than preschool costs even at the low end of her new, lower salary range so she should keep working and the child should continue going to preschool.

stoptothink
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Re: Another home thread: 2mil / 40K in taxes

Post by stoptothink » Sat Jun 09, 2018 8:43 am

wrongfunds wrote:
Sat Jun 09, 2018 8:27 am
I have no suggestion but when you quote this earning power at age 32, I would certainly like to know the industry and the job specific so that I can get my future grand-kids in those fields. It is too late for me or my kids to change the careers at this stage.
Of course, I may be wrong, but I think we can all make a pretty good guess as to what industry OP works in and what area they are referring to. We can also postulate as to whether those opportunities will be around when your future grandkids are old enough to join the workforce. The industry and area I am thinking of throws every "rule of thumb" out the door.

student
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Re: Another home thread: 2mil / 40K in taxes

Post by student » Sat Jun 09, 2018 8:51 am

These numbers are way way beyond my reach. If someone come along with a combined income in the range of $80k to $130k with the possibility of dropping it down to the range of $60k to $110k. With $100k in savings and wants a house in the range of $150k to $200k, I would say there is no problem buying such a house.

BogleWogle
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Re: Another home thread: 2mil / 40K in taxes

Post by BogleWogle » Sat Jun 09, 2018 9:11 am

Yes you can afford it but it’s a huge leap from what you’re spending on housing today. You’ll be spending the same amount on taxes on your new home as you are on your annual rent today.

Are you happy in your current rental? If not, it might be worth it to rent a better place before taking the plunge.

cherijoh
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Location: Charlotte NC

Re: Another home thread: 2mil / 40K in taxes

Post by cherijoh » Sat Jun 09, 2018 9:25 am

Salmon wrote:
Sat Jun 09, 2018 8:19 am
Revisiting this again with updated stats. We are both 36, one toddler, one on the way and possibly more in the near future. We live in a very HCOL area. Houses we are considering are about $1.8-2mil with $30-40K in taxes.

His income: ranges from minimum $500k - $800K (mostly closer to the lower number)
Her income: currently about $300K, but this will be a lot lower in the next few years. She is planning to slow down and will likely be around a $100k/annum
Current rent: $3000/month
Debt: $0
Cash Savings: $1mil
Retirement accounts: $750K combined
No after tax investing accounts
Expenses: about $120k annum (this includes everything)
Toddler 529 plan: $15K

We expect our expenses to go up with our family growing as well home ownership. We want to purchase a house, but don’t want to be “house poor”. In addition, we don’t really want to put all of our money in the house and have to cut back on our current lifestyle.

Taxes are insane!

Questions:
1. Can we comfortably afford a 2mil house with $40k in taxes? There are other cheaper homes i.e. around $1.5m but these will require renovations (which we would like to avoid)

2. If we do buy such a $2mil home, should we put more than the 20% down?

3. If buying such a home, would private school still be an option?
IMO, you are going to end up being house poor whether you buy a house for $1.5 M or $2M - especially if your combined salary is reduced to $600k/year. IMO you are being totally unrealistic if you think that you can maintain your current lifestyle and buy a house in this expense range without sacrificing your future retirement. And you want to add on private school tuition on top of that? Doesn't that home price tag come with a decent school district?

Here is a reality check - you are currently spending $36k/year on rent but looking at having just your property taxes in the range of $30K - $40K. That does NOT include your mortgage payment or your homeowners insurance. Whether or not you can afford to buy a house in this price range will require you to do a lot more homework. Have you talked to any lenders for jumbo mortgages? For how much and at what interest rate would you be qualified? I think they are up to around 4.5 - 4.75%. What would be the principal and interest on various size loans?

You are aware that the new tax laws limit mortgage deductions to the first $750K of mortgage debt, aren't you? And then there is the 10K limit on SALT (state and local taxes including state income tax, real estate taxes, and personal property taxes). So you would be receiving little to no tax subsidy towards mortgage and property taxes.

EDITED to ADD: I see OP modified original post to say that rent was not included in the original $120k expense estimate. Clearly taxes are also not included - which I think some of the more sanguine posters have overlooked. Does your expense estimate include any savings for retirement or 529 or is that also a separate category? How about a breakdown that shows how much you are currently putting towards retirement, 529, and other forms of savings. What is your current excess cash flow that you could use to pay for the additional expenses of home ownership.
Last edited by cherijoh on Sat Jun 09, 2018 10:22 am, edited 1 time in total.

cherijoh
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Re: Another home thread: 2mil / 40K in taxes

Post by cherijoh » Sat Jun 09, 2018 9:35 am

jminv wrote:
Sat Jun 09, 2018 8:38 am
Yes, you can afford it but I don't know if I would want to buy a $2 million house if your wife's income drops by as much as you are planning. Not sure why the focus is on 40k in taxes and not the $2 million purchase and ongoing principal, interest, and maintenance payments. You are renting something so in that rent you have taxes, principal, interest, maintenance, and profit for the landlord - you are paying for your landlord to pay taxes now.

Not sure why you're worried about having to cut back on your lifestyle. Even if you only put 20% down your lifestyle at 120k, which presumably also includes 3k rent now, would be maintained. You would just save less money each month. What is 3k/month getting you? It is a big jump to the 2 mil house in terms of expense.

Why do you have so much of your net worth in cash, ie, a negative return asset?

I'd only put more than 20% down if your alternative is to keep your money in cash like you're doing now.

The alternative to preschool is your wife taking care of the child. Your wife makes more than preschool costs even at the low end of her new, lower salary range so she should keep working and the child should continue going to preschool.
Presumably the cash is for a down payment on the house. I expect he sold some vested company stock options. My guess is that stock options explains the huge range in annual salary.

OP didn't mention pre-school, he wrote private school, which I took to mean pre-K through 12th grade. They will soon have 2 kids, which presumably ties into his wife slowing down and earning less. And a growing family always means growing expenses.

desafinado
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Re: Another home thread: 2mil / 40K in taxes

Post by desafinado » Sat Jun 09, 2018 9:36 am

how committed are you really to staying in your vhcol area? would you want to stay there if you were no longer working for such a high income?

SQRT
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Re: Another home thread: 2mil / 40K in taxes

Post by SQRT » Sat Jun 09, 2018 9:42 am

Sounds like you are a very smart successful guy. Not sure why you would think you need advice from an anonymous chat room mostly populated with conservative, LBYM, people who earn a fraction of what you do?

letsgobobby
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Re: Another home thread: 2mil / 40K in taxes

Post by letsgobobby » Sat Jun 09, 2018 9:43 am

Salmon wrote:
Sat Jun 09, 2018 8:19 am
Revisiting this again with updated stats. We are both 36, one toddler, one on the way and possibly more in the near future. We live in a very HCOL area. Houses we are considering are about $1.8-2mil with $30-40K in taxes.

His income: ranges from minimum $500k - $800K (mostly closer to the lower number)
Her income: currently about $300K, but this will be a lot lower in the next few years. She is planning to slow down and will likely be around a $100k/annum
Current rent: $3000/month
Debt: $0
Cash Savings: $1mil
Retirement accounts: $750K combined
No after tax investing accounts
Expenses: about $120k annum (this includes everything EXCEPT the rent)
Toddler 529 plan: $15K

We expect our expenses to go up with our family growing as well home ownership. We want to purchase a house, but don’t want to be “house poor”. In addition, we don’t really want to put all of our money in the house and have to cut back on our current lifestyle.

Taxes are insane!

Questions:
1. Can we comfortably afford a 2mil house with $40k in taxes? There are other cheaper homes i.e. around $1.5m but these will require renovations (which we would like to avoid)

2. If we do buy such a $2mil home, should we put more than the 20% down?

3. If buying such a home, would private school still be an option?
Assuming stable income, you can afford it. Yes, you will be somewhat house poor, and your other spending may take a hit. So what? That’s the choice you make when you live in the area you live in. Everyone else is doing it and has driven up the cost of housing so you either take it or leave it. If you leave it there are plenty of other fields to play ball on. If you take it, your jobs/incomes/homes become the defining feature of your life.

cherijoh
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Location: Charlotte NC

Re: Another home thread: 2mil / 40K in taxes

Post by cherijoh » Sat Jun 09, 2018 9:51 am

student wrote:
Sat Jun 09, 2018 8:51 am
These numbers are way way beyond my reach. If someone come along with a combined income in the range of $80k to $130k with the possibility of dropping it down to the range of $60k to $110k. With $100k in savings and wants a house in the range of $150k to $200k, I would say there is no problem buying such a house.
I assume you were trying to cut the numbers down by a factor of 10 - that would make it $80k - $110k, dropping down to $60k - $90k. I'm not sure where you came up with the extra $20k ($200k for the actual salary) on the upper end.

Mike Scott
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Re: Another home thread: 2mil / 40K in taxes

Post by Mike Scott » Sat Jun 09, 2018 9:52 am

A house priced at 3-4X your lowest estimated annual income seems a bit of a stretch no matter where you are. You will have little margin for errors or income variation. It may be the price of buying into that real estate market but that does not mean it is a good idea.

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TomatoTomahto
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Re: Another home thread: 2mil / 40K in taxes

Post by TomatoTomahto » Sat Jun 09, 2018 10:04 am

You can barely afford it, but not without becoming house poor. Unsustainable house price increases are . . . Unsustainable. It seems safe, but how would you react if your $2M house became a $1.75M house for 5 or 10 years. It can happen.

Around NYC, prices became soft recently in the $1.5M - $4M range, as many Wall Street and Investment Banking jobs went away, or could not be “counted on.” Thousands of workers at Deutsche Bank, for example, are unsure of their futures. Jobs where you are might be more secure, but as the saying goes, that’s until they’re not.

delamer
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Re: Another home thread: 2mil / 40K in taxes

Post by delamer » Sat Jun 09, 2018 10:07 am

Run your numbers, assuming you bought a $2 million house, through TaxCaster or the H&R Block tax estimator to figure out your federal income taxes.

Use the minimums for your expected income, and assume you’ll max out your retirement account contributions.

If you have state income taxes, do an estimate of those too.

Then you’ll know how much you actually take home after payroll taxes, income taxes, and retirement contributions.

What’s left has to cover health insurance, mortgage, property taxes, utilities, food, transportation, college savings, other savings, etc.

Are you comfortable living on “what’s left?” Only you and your wife can answer that question.

surfstar
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Re: Another home thread: 2mil / 40K in taxes

Post by surfstar » Sat Jun 09, 2018 10:16 am

Keep renting. Stash all you can, FIRE to somewhere better to live.

rhornback
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Re: Another home thread: 2mil / 40K in taxes

Post by rhornback » Sat Jun 09, 2018 10:20 am

At risk of not answering the original question and going off topic I want to share a story.

I was very just out of college with my first job and visiting a the parents of a friend in Oak Brook, IL. This is a relatively affluent area with large houses (at least to me at the time). So I asked the dad, "why are there always so many house for sales in Oak Brook?"

His reply, "People can afford to buy here, but they cannot necessary afford to stay here". And even then, something happens: death, divorce, loss of job. When this occurs they cannot afford this house on one income or with less income.

I do not know the field OP is in, but I would not necessarily assume that the money you make now you will continue to make into the future. I work in the I.T. industry and during my lifetime I have seen salaries go up for Y2K and then down due to outsourcing. Where I live now there are many doctors and many of them will privately tell me that their salaries have stagnated.

I paid $790 for my house. As I write this there are 3 houses for sales in my subdivision for less. One is basically the same house for $749. There is also a nice house for sale for $829. None of them to my knowledge are selling.

Where I live (in Chicago) houses selling for 500K or less are selling fine. Over that, not so much. There are two reasons: one you need a jumbo loan which are harder to get and usually require a higher interest rate. The second is there are fewer buyers who can afford a higher price point.

Back again to where I live, houses around here which cost $2 or $3 million are taking a lost of 500K or more. It is brutal.

Maybe you live in California,. Maybe you have a great job which will earn you a great income indefinitely. I wish you good fortune. But in my life I have seen good times and bad. Rarely do the good times last forever.

I hope I have helped someone based of sharing my experiences.

HornedToad
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Re: Another home thread: 2mil / 40K in taxes

Post by HornedToad » Sat Jun 09, 2018 10:40 am

You can afford it; mostly because you already have good savings. Although a current rent of $3k/mo is REALLY good so it depends on how sustainable that is for you right now.

I'd put down the $1mil in cash, bring the loan to closer to within the federal deductible limit and shrink monthly payments to something more manageable. Then you'd have $1mil loan, $40k/yr property taxes on income of $600k+. That's definitely doable and you should still be able to save for retirement/private school/etc. It will just have some effect on HOW much you save and HOW expensive of private school is reasonable without other sacrifices.

Best of luck.

ytrewq
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Re: Another home thread: 2mil / 40K in taxes

Post by ytrewq » Sat Jun 09, 2018 11:00 am

One way could be to check how much income is available for mortgage payment by deducting all expenses and target savings for
long- term goals - retirement/children's college. As an example:
120 Living excl. Housing
054 401K / IRA / HSA for double income couple [some recommend saving 20% of Gross for Retirement, so 20% of 600K = $120K]
040 Prop Taxes
015 Daycare [this gets reduced to 8K - 12K for enrichment, summer camps etc as kids reach elementary/middle school]
015 College [Current top tier annual college cost is $70K and with 4% inflation will increase to $142K in 18-years; assumes savings grow at 5%]
005 Cleaning [Lawn Maintenance, Monthly Cleaning service etc.]
004 Utils [Single Family home being bigger will lead to higher bills for Electricity, Heating/Cooling, Water, Gas, Home Security]
004 HOA/Insurance
003 Maintenance/Repairs [Thumb rule is annual spend equal to square footage so $3K for a 3000 Sq Ft home]
260 Total (if saving $54K min. for retirement)
326 Total (if saving $120K recommended based on thumb rule for retirement)
Take your after tax-income (income left after Federal, State, FICA taxes) and see how much is available for mortgage after deducting $260K or $326K.
Last edited by ytrewq on Sat Jun 09, 2018 11:06 am, edited 1 time in total.

pennylane
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Re: Another home thread: 2mil / 40K in taxes

Post by pennylane » Sat Jun 09, 2018 11:05 am

How do you have a combined income of 800k-1.1mill but only have 2mill saved?

You should not be purchasing a 2Mill home. You can’t afford it, even if you buy it cash.

runner3081
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Re: Another home thread: 2mil / 40K in taxes

Post by runner3081 » Sat Jun 09, 2018 11:16 am

pennylane wrote:
Sat Jun 09, 2018 11:05 am
How do you have a combined income of 800k-1.1mill but only have 2mill saved?
Could very easily be physicians who walked out with mid six-figures of student loans. If in a specialty, they are probably only a couple of years out of residency/fellowship.

HEDGEFUNDIE
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Re: Another home thread: 2mil / 40K in taxes

Post by HEDGEFUNDIE » Sat Jun 09, 2018 11:23 am

Of course you can afford it. DW & I just bought a house for $1.8M and we only make $300k combined.

SelfEmployed123
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Re: Another home thread: 2mil / 40K in taxes

Post by SelfEmployed123 » Sat Jun 09, 2018 11:31 am

OP: Why do you want to buy a house? Even if you could afford it, at those numbers I just don't see how you come out ahead (at least financially). Like other posters have said, unforeseen events may significantly change whether you will always be able to afford to own where you live. Owning a home is not just a financial decision, but in your market the housing costs just don't seem sustainable. Take a look at the below resources and run your own numbers:

https://www.nytimes.com/interactive/201 ... lator.html
http://jlcollinsnh.com/2012/02/23/rent- ... e-numbers/
http://jlcollinsnh.com/2013/05/29/why-y ... nvestment/

Chris K Jones
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Re: Another home thread: 2mil / 40K in taxes

Post by Chris K Jones » Sat Jun 09, 2018 11:35 am

You are projecting a minimum of 600 k income per year for you and your wife. If your income is stable, you can afford the house. Private schools in my area vary from 10 k to more than 50 k per year. If you have three or more kids and tuition is high, you might not be able to afford private school. I am 25 years older than you and have mostly finished raising kids. I had a big house. Kids mostly went to private school. If I had it all to do over, would not buy the big house but would buy a house in very good school district and would send kids to pubic school. Expensive houses, in my experience, generate expensive repairs and maintenance and most people that work on your house will inflate their bills because they think they can get away with it. Property tax bills usually grow faster than inflation. To each their own though. Best wishes to you and your family. Congratulations on your financial success.
Last edited by Chris K Jones on Sat Jun 09, 2018 11:37 am, edited 2 times in total.

KyleAAA
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Re: Another home thread: 2mil / 40K in taxes

Post by KyleAAA » Sat Jun 09, 2018 11:36 am

I’m guessing either tech in San Francisco or finance in New York at those TC numbers. At $800-1000k I’d say you can easily afford a $2mm house with a 20% down payment. At $600k I’d still say yes but you’ll be house poor. I’d be inclined to be more conservative to the extent your compensation is equity-based because a bear market could tank your TC real quick.

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Re: Another home thread: 2mil / 40K in taxes

Post by KyleAAA » Sat Jun 09, 2018 11:40 am

pennylane wrote:
Sat Jun 09, 2018 11:05 am
How do you have a combined income of 800k-1.1mill but only have 2mill saved?

You should not be purchasing a 2Mill home. You can’t afford it, even if you buy it cash.
OP could have only recently started earning that much. If I started making $1mm per year 3 years ago there’s no way I’m going to have more than $2mm saved today. A lot of people have very steep income trajectories.

student
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Re: Another home thread: 2mil / 40K in taxes

Post by student » Sat Jun 09, 2018 12:09 pm

cherijoh wrote:
Sat Jun 09, 2018 9:51 am
student wrote:
Sat Jun 09, 2018 8:51 am
These numbers are way way beyond my reach. If someone come along with a combined income in the range of $80k to $130k with the possibility of dropping it down to the range of $60k to $110k. With $100k in savings and wants a house in the range of $150k to $200k, I would say there is no problem buying such a house.
I assume you were trying to cut the numbers down by a factor of 10 - that would make it $80k - $110k, dropping down to $60k - $90k. I'm not sure where you came up with the extra $20k ($200k for the actual salary) on the upper end.
I misread the numbers. In any case, I believe they can afford it. The wife may have to continue to with in the higher paying job for a few more years. Again I am working at a different level. Obviously there is a difference between earning $800k and buying a $2M house, and earning $80k and buying a $200k house.

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celia
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Re: Another home thread: 2mil / 40K in taxes

Post by celia » Sat Jun 09, 2018 12:39 pm

wrongfunds wrote:
Sat Jun 09, 2018 8:27 am
I have no suggestion but when you quote this earning power at age 32, I would certainly like to know the industry and the job specific so that I can get my future grand-kids in those fields. It is too late for me or my kids to change the careers at this stage.
Medical specialty
Tech
Entertainment/athlete
Entrepreneur (own company)
Bank robber
:D


OP, To help you plan your overall costs, let's assume you put $500K down. A $1.5M mortgage for 30 years will cost:
3.6% interest $4,500/mo ($54,000/yr)
4.0% interest $5.000/mo ($60,000/yr)
4.4% interest $5,500/mo ($66,000/yr)
So the mortgage payment is not a problem for you.

In California, the property tax would start at $20K per year and go up 2% a year. (This could also change if we change the law which might happen later this year.)
You should allow 1% of the house value for maintenance each year, so that's another $20K.
I have no idea what homeowners/ earthquake/ flood insurance would cost in your area. You'll probably also want liability insurance in case someone gets hurt on your property. Then there's yard/pool maintenance, unless you do it yourself.

You'll want disability insurance for you at least, in case you can't work (after a car accident/surgery). If you only have it through your employer who pays premiums to the state, there may be a max payout that is too low for you in which case you should buy your own policy.

Add all these to your original living expenses and throw in education for the kids. If you didn't include your high income taxes as part of your living expenses, you also need to include that.

And don't forget that when you sell, not may people can afford to buy your house. The pool of buyers will be small, so you will need a real estate agent who will likely charge you 5% of the selling price. But the rest of the equity will be yours.

Good luck. You should be able to do it!

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celia
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Re: Another home thread: 2mil / 40K in taxes

Post by celia » Sat Jun 09, 2018 12:52 pm

student wrote:
Sat Jun 09, 2018 12:09 pm
Obviously there is a difference between earning $800k and buying a $2M house, and earning $80k and buying a $200k house.
Of course, because you won't eat 10 times the amount of food or use 10 times the amount of electricity, although you could pay 10 times the amount for transportation and MORE THAN 10 times as much for education and income taxes.

financeguy88
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Re: Another home thread: 2mil / 40K in taxes

Post by financeguy88 » Sat Jun 09, 2018 12:57 pm

Salmon wrote:
Sat Jun 09, 2018 8:19 am
Revisiting this again with updated stats. We are both 36, one toddler, one on the way and possibly more in the near future. We live in a very HCOL area. Houses we are considering are about $1.8-2mil with $30-40K in taxes.

His income: ranges from minimum $500k - $800K (mostly closer to the lower number)
Her income: currently about $300K, but this will be a lot lower in the next few years. She is planning to slow down and will likely be around a $100k/annum
Current rent: $3000/month
Debt: $0
Cash Savings: $1mil
Retirement accounts: $750K combined
No after tax investing accounts
Expenses: about $120k annum (this includes everything EXCEPT the rent)
Toddler 529 plan: $15K

We expect our expenses to go up with our family growing as well home ownership. We want to purchase a house, but don’t want to be “house poor”. In addition, we don’t really want to put all of our money in the house and have to cut back on our current lifestyle.

Taxes are insane!

Questions:
1. Can we comfortably afford a 2mil house with $40k in taxes? There are other cheaper homes i.e. around $1.5m but these will require renovations (which we would like to avoid)

2. If we do buy such a $2mil home, should we put more than the 20% down?

3. If buying such a home, would private school still be an option?
You can afford it but it comes down to how stable and the trajectory of your income stream. I wouldn't do it. If I was even going to consider it I would have to believe that the $2M house was actually a good investment and even then I'd be uncomfortable having that much of my assets in one asset.

What % of the value of the house do you think is the land vs. the structure? Is there some reason why you think the house will go up in value?

You shouldn't put more than the mininum down unless you can get a much lower mortgage rate putting more down. You can always pay down the loan down if you want but can't take the money back out.

Private school still obviously an option but again comes down to your income stream stability and how much risk you want to take

The question is why do you need to buy right now? Why not wait until you get a few more years of savings and then buy, and have much more of a cushion?

alex11
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Re: Another home thread: 2mil / 40K in taxes

Post by alex11 » Sat Jun 09, 2018 1:12 pm

OP, If you're open to sharing I would also like to hear the field you are in. I like to present as many opportunities to my children as possible.
One would assume medical or tech, but I know there are some specialty sales positions that can pull this kind of money.

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Re: Another home thread: 2mil / 40K in taxes

Post by cherijoh » Sat Jun 09, 2018 2:02 pm

rhornback wrote:
Sat Jun 09, 2018 10:20 am
At risk of not answering the original question and going off topic I want to share a story.

I was very just out of college with my first job and visiting a the parents of a friend in Oak Brook, IL. This is a relatively affluent area with large houses (at least to me at the time). So I asked the dad, "why are there always so many house for sales in Oak Brook?"

His reply, "People can afford to buy here, but they cannot necessary afford to stay here". And even then, something happens: death, divorce, loss of job. When this occurs they cannot afford this house on one income or with less income.

I do not know the field OP is in, but I would not necessarily assume that the money you make now you will continue to make into the future. I work in the I.T. industry and during my lifetime I have seen salaries go up for Y2K and then down due to outsourcing. Where I live now there are many doctors and many of them will privately tell me that their salaries have stagnated.
+1 Good advice - especially for the OP who has a growing family and a spouse who is likely to either go part-time or take on a lower-stress lower-paying job.

When the housing crisis hit in 2007, some of the worst hit neighborhoods in Charlotte were the new fancy neighborhoods of $1M+ homes on Lake Norman just north of uptown. (At that time $1M would buy you a LOT of house - it still does to a lesser extent). No one was even looking in that price range. In my much more modest neighborhood, at least the real estate investors looking for good deals on rental property were keeping the inventory of houses for sale to a reasonable level - even if they were depressing the comps.

IMO anyone looking to buy in a hot market today should be asking themselves if they could survive a perfect storm like we had with the last recession - unemployment skyrocketing at the same time that stock prices and the housing market were tanking. Add to that the interest rates are still low but rising and the new tax law means that fewer homeowners will get a tax subsidy for purchasing a home due to the larger standard deduction and the caps on SALT and the amount of mortgage debt that will be subsidized.

rhornback
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Re: Another home thread: 2mil / 40K in taxes

Post by rhornback » Sat Jun 09, 2018 3:20 pm

cherijoh wrote:
Sat Jun 09, 2018 9:25 am

IMO, you are going to end up being house poor whether you buy a house for $1.5 M or $2M - especially if your combined salary is reduced to $600k/year. IMO you are being totally unrealistic if you think that you can maintain your current lifestyle and buy a house in this expense range without sacrificing your future retirement. And you want to add on private school tuition on top of that? Doesn't that home price tag come with a decent school district?

Here is a reality check - you are currently spending $36k/year on rent but looking at having just your property taxes in the range of $30K - $40K. That does NOT include your mortgage payment or your homeowners insurance. Whether or not you can afford to buy a house in this price range will require you to do a lot more homework. Have you talked to any lenders for jumbo mortgages? For how much and at what interest rate would you be qualified? I think they are up to around 4.5 - 4.75%. What would be the principal and interest on various size loans?

You are aware that the new tax laws limit mortgage deductions to the first $750K of mortgage debt, aren't you? And then there is the 10K limit on SALT (state and local taxes including state income tax, real estate taxes, and personal property taxes). So you would be receiving little to no tax subsidy towards mortgage and property taxes.

EDITED to ADD: I see OP modified original post to say that rent was not included in the original $120k expense estimate. Clearly taxes are also not included - which I think some of the more sanguine posters have overlooked. Does your expense estimate include any savings for retirement or 529 or is that also a separate category? How about a breakdown that shows how much you are currently putting towards retirement, 529, and other forms of savings. What is your current excess cash flow that you could use to pay for the additional expenses of home ownership.
+1 about SALT. I think the 10K ceiling on the property tax and income taxes as well as the 750K cap on mortgage dept will end up having a dramatic effect on New York, California and Illinois as people learn more about it and as it works its way through the system.

Many know about it, but next year when they do their taxes they will 'feel' it. I am not rich, but in Illinois my real estate taxes are $17K and income tax of 4.5%. I am seriously thinking of moving. I think you will see many who can move, will move.

So if you live in California or Manhattan, I would be careful.

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Re: Another home thread: 2mil / 40K in taxes

Post by cherijoh » Sat Jun 09, 2018 4:35 pm

rhornback wrote:
Sat Jun 09, 2018 3:20 pm
+1 about SALT. I think the 10K ceiling on the property tax and income taxes as well as the 750K cap on mortgage dept will end up having a dramatic effect on New York, California and Illinois as people learn more about it and as it works its way through the system.

Many know about it, but next year when they do their taxes they will 'feel' it. I am not rich, but in Illinois my real estate taxes are $17K and income tax of 4.5%. I am seriously thinking of moving. I think you will see many who can move, will move.

So if you live in California or Manhattan, I would be careful.
Another thing regarding SALT is that the $10K limit applies to the entire household. I'm single, live in a small house on a small lot and own only one car (NC has a personal property tax on vehicles :annoyed as well as taxes on real estate). The state income tax is a flat 5.75%. I retired this year, but I would have almost hit the SALT limit this year if I had continued working. Many of my dual-income friends who own a decent sized house and 2 cars definitely will hit that limit and lose a big deduction vs. last year. I'm not sure that the lower marginal rates will make up the difference. When I ran my 2017 numbers under the 2018 rules, I found that my federal taxes would only have been a few hundred dollars less.

Now is probably a good time to do an income tax forecast with Taxcaster (If you haven't already) to see whether the new default withholding is withholding enough in taxes or whether you will be getting a big tax bill come April. I don't think the new W-4 formula accounts for the SALT limits and the fact that you may no longer be itemizing.

AlphaLess
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Re: Another home thread: 2mil / 40K in taxes

Post by AlphaLess » Sat Jun 09, 2018 4:51 pm

Salmon wrote:
Sat Jun 09, 2018 8:19 am
1. Can we comfortably afford a 2mil house with $40k in taxes? There are other cheaper homes i.e. around $1.5m but these will require renovations (which we would like to avoid)
What do you envision home expenses to be:
- mortgage (P+I), also, type of mortgage,
- is there an HOA?
- insurance,
- utilities per month,
- deferred maintenance / reserve fund?

Here is a rough, sample math:
- pay 30% down ($600K),
- finance $1.4 at 7-1 ARM, 4.25%,
- put 0.7% of home value into deferred maintenance.

So:
- mortgage: $7,200,
- taxes: $3,500,
- HOA?
- insurance: $400,
- utilities: $1,500,
- maintenance: $1,200.
Total: $14K a month, give or take.

You now spend $10K a month, without rent. So, after purchasing a house, you will have:
- $24K a month, or $290K a year.

Pre-2018, you would get some federal tax deductions for local taxes paid, but after 2018, that won't apply, so your R/E taxes are most likely not deductible as SALT is limited to $10K, and if your state has income tax, then on the margin, you don't get any benefit.
Also, the first $14K of your mortgage interest paid is not tax deductible. But the mortgage you are shooting for will have a lot of interest (but deductions will be capped).

Considerations:
- how secure is your job,
- if you lost your job, can you easily find a similarly paying job,
- what is your wife's rationale to give up $200K in income?

AlphaLess
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Re: Another home thread: 2mil / 40K in taxes

Post by AlphaLess » Sat Jun 09, 2018 4:55 pm

financeguy88 wrote:
Sat Jun 09, 2018 12:57 pm

The question is why do you need to buy right now? Why not wait until you get a few more years of savings and then buy, and have much more of a cushion?
Good analysis. But may I add: if he can not afford it now, I don't see how he can afford it alter.

I think housing decision should be a function of income, not assets (unless you are really, really rich, like MEGA-lottery rich, or billionaire inheritance rich).

AlphaLess
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Re: Another home thread: 2mil / 40K in taxes

Post by AlphaLess » Sat Jun 09, 2018 4:57 pm

rhornback wrote:
Sat Jun 09, 2018 3:20 pm
+1 about SALT. I think the 10K ceiling on the property tax and income taxes as well as the 750K cap on mortgage dept will end up having a dramatic effect on New York, California and Illinois as people learn more about it and as it works its way through the system.
Generally agree. However, I think housing in Illinois is very cheap.
I don't know why Illinois keeps appearing in the same sentence with Manhattan and SFO / California.

denovo
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Re: Another home thread: 2mil / 40K in taxes

Post by denovo » Sat Jun 09, 2018 5:09 pm

AlphaLess wrote:
Sat Jun 09, 2018 4:57 pm
rhornback wrote:
Sat Jun 09, 2018 3:20 pm
+1 about SALT. I think the 10K ceiling on the property tax and income taxes as well as the 750K cap on mortgage dept will end up having a dramatic effect on New York, California and Illinois as people learn more about it and as it works its way through the system.
Generally agree. However, I think housing in Illinois is very cheap.
I don't know why Illinois keeps appearing in the same sentence with Manhattan and SFO / California.
Chicago?
"Don't trust everything you read on the Internet"- Abraham Lincoln

AlphaLess
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Re: Another home thread: 2mil / 40K in taxes

Post by AlphaLess » Sat Jun 09, 2018 5:11 pm

denovo wrote:
Sat Jun 09, 2018 5:09 pm
AlphaLess wrote:
Sat Jun 09, 2018 4:57 pm
rhornback wrote:
Sat Jun 09, 2018 3:20 pm
+1 about SALT. I think the 10K ceiling on the property tax and income taxes as well as the 750K cap on mortgage dept will end up having a dramatic effect on New York, California and Illinois as people learn more about it and as it works its way through the system.
Generally agree. However, I think housing in Illinois is very cheap.
I don't know why Illinois keeps appearing in the same sentence with Manhattan and SFO / California.
Chicago?
Same argument applies to Chicago.
Chicago is substantially cheaper than cities of the same caliber.

Economically lesser cities have substantially higher housing costs.

denovo
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Re: Another home thread: 2mil / 40K in taxes

Post by denovo » Sat Jun 09, 2018 5:13 pm

wrongfunds wrote:
Sat Jun 09, 2018 8:27 am
I have no suggestion but when you quote this earning power at age 32, I would certainly like to know the industry and the job specific so that I can get my future grand-kids in those fields. It is too late for me or my kids to change the careers at this stage.
Salmon wrote:
Sat Jun 09, 2018 8:19 am
Revisiting this again with updated stats. We are both 36, one toddler, one on the way and possibly more in the near future. We live in a very HCOL area. Houses we are considering are about $1.8-2mil with $30-40K in taxes.


I think it's a good idea for the OP to mention the industry, regardless of your grandkids career path.

Stability of industry/career should be a factor when purchasing a home.

Given that property taxes in CA are capped at about 1 percent and he's mentioning 1.5-2 percent a year in taxes, I suspect OP is not a Bay Area techie. I suspect the OP is in finance/banking and looking for housing near Manhattan in NYC or Northern NJ.
"Don't trust everything you read on the Internet"- Abraham Lincoln

AlphaLess
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Re: Another home thread: 2mil / 40K in taxes

Post by AlphaLess » Sat Jun 09, 2018 5:27 pm

denovo wrote:
Sat Jun 09, 2018 5:13 pm
I think it's a good idea for the OP to mention the industry, regardless of your grandkids career path.
Stability of industry/career should be a factor when purchasing a home.
Given that property taxes in CA are capped at about 1 percent and he's mentioning 1.5-2 percent a year in taxes, I suspect OP is not a Bay Area techie. I suspect the OP is in finance/banking and looking for housing near Manhattan in NYC or Northern NJ.
Good points. Manhattan properties are expensive, but tax rate are lower.
NJ tax rates can reach 2%, so this is likely.
$500-600K a year in finance is not a lot.

Lynette
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Re: Another home thread: 2mil / 40K in taxes

Post by Lynette » Sat Jun 09, 2018 5:36 pm

For context the OP asked this question last year but decided not to purchase a house he was considering. There is a lengthy thread on it:

viewtopic.php?f=2&t=221847

The OP mentions that he is revisiting this subject and reading the previous thread may answer some of the questions people are asking.
Last edited by Lynette on Sat Jun 09, 2018 5:59 pm, edited 1 time in total.

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celia
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Re: Another home thread: 2mil / 40K in taxes

Post by celia » Sat Jun 09, 2018 5:44 pm

It doesn't matter what occupation the OP has. Money is fungible and is worth the same in all the states. OP is just to figure out how this $2M house will impact his finances.

denovo
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Re: Another home thread: 2mil / 40K in taxes

Post by denovo » Sat Jun 09, 2018 7:27 pm

celia wrote:
Sat Jun 09, 2018 5:44 pm
It doesn't matter what occupation the OP has.

Do you really think that?

The income of a tenured academic or medical specialist is probably more reliable and less subject to fluctuation than someone in sales, high finance, the oil industry, or a small business owner.

That kind of job and income security should be considered.
"Don't trust everything you read on the Internet"- Abraham Lincoln

AlphaLess
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Re: Another home thread: 2mil / 40K in taxes

Post by AlphaLess » Sat Jun 09, 2018 7:31 pm

celia wrote:
Sat Jun 09, 2018 5:44 pm
It doesn't matter what occupation the OP has. Money is fungible and is worth the same in all the states. OP is just to figure out how this $2M house will impact his finances.
I respectfully disagree.

Depending where you are in the totem-pole of your field, replacing a lost income from a lost job might be easy, hard, or impossible.

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Re: Another home thread: 2mil / 40K in taxes

Post by Grt2bOutdoors » Sat Jun 09, 2018 7:34 pm

AlphaLess wrote:
Sat Jun 09, 2018 5:27 pm
denovo wrote:
Sat Jun 09, 2018 5:13 pm
I think it's a good idea for the OP to mention the industry, regardless of your grandkids career path.
Stability of industry/career should be a factor when purchasing a home.
Given that property taxes in CA are capped at about 1 percent and he's mentioning 1.5-2 percent a year in taxes, I suspect OP is not a Bay Area techie. I suspect the OP is in finance/banking and looking for housing near Manhattan in NYC or Northern NJ.
Good points. Manhattan properties are expensive, but tax rate are lower.
NJ tax rates can reach 2%, so this is likely.
$500-600K a year in finance is not a lot.
NJ tax rates can exceed 2% - look at Essex County. Let us know what the tax rates are.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

AlphaLess
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Re: Another home thread: 2mil / 40K in taxes

Post by AlphaLess » Sat Jun 09, 2018 7:38 pm

Grt2bOutdoors wrote:
Sat Jun 09, 2018 7:34 pm
AlphaLess wrote:
Sat Jun 09, 2018 5:27 pm
denovo wrote:
Sat Jun 09, 2018 5:13 pm
I think it's a good idea for the OP to mention the industry, regardless of your grandkids career path.
Stability of industry/career should be a factor when purchasing a home.
Given that property taxes in CA are capped at about 1 percent and he's mentioning 1.5-2 percent a year in taxes, I suspect OP is not a Bay Area techie. I suspect the OP is in finance/banking and looking for housing near Manhattan in NYC or Northern NJ.
Good points. Manhattan properties are expensive, but tax rate are lower.
NJ tax rates can reach 2%, so this is likely.
$500-600K a year in finance is not a lot.
NJ tax rates can exceed 2% - look at Essex County. Let us know what the tax rates are.
But they can also NOT exceed 2%.

My point was: it is *MORE* likely to be New Jersey than New York City.

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Re: Another home thread: 2mil / 40K in taxes

Post by Grt2bOutdoors » Sat Jun 09, 2018 7:38 pm

OP - you are paying less in rent today than you would be in property taxes, on top of that - you STILL have to pay principal, interest, insurance and upkeep. Be prepared to pay more than double your current $3k monthly outlay if you do buy it. I think the answer is staring you in the face - your disposable income is going to decline noticeably.

Good Luck!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Another home thread: 2mil / 40K in taxes

Post by Grt2bOutdoors » Sat Jun 09, 2018 7:40 pm

AlphaLess wrote:
Sat Jun 09, 2018 7:38 pm
Grt2bOutdoors wrote:
Sat Jun 09, 2018 7:34 pm
AlphaLess wrote:
Sat Jun 09, 2018 5:27 pm
denovo wrote:
Sat Jun 09, 2018 5:13 pm
I think it's a good idea for the OP to mention the industry, regardless of your grandkids career path.
Stability of industry/career should be a factor when purchasing a home.
Given that property taxes in CA are capped at about 1 percent and he's mentioning 1.5-2 percent a year in taxes, I suspect OP is not a Bay Area techie. I suspect the OP is in finance/banking and looking for housing near Manhattan in NYC or Northern NJ.
Good points. Manhattan properties are expensive, but tax rate are lower.
NJ tax rates can reach 2%, so this is likely.
$500-600K a year in finance is not a lot.
NJ tax rates can exceed 2% - look at Essex County. Let us know what the tax rates are.
But they can also NOT exceed 2%.

My point was: it is *MORE* likely to be New Jersey than New York City.
The tax rates can exceed 2% in NJ per $100 of assessed value, it’s the annual tax increase that can not exceed 2% with the exception of taxes to pay for pension contributions which can not be cut.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

AlphaLess
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Re: Another home thread: 2mil / 40K in taxes

Post by AlphaLess » Sat Jun 09, 2018 8:00 pm

Grt2bOutdoors wrote:
Sat Jun 09, 2018 7:40 pm
AlphaLess wrote:
Sat Jun 09, 2018 7:38 pm
Grt2bOutdoors wrote:
Sat Jun 09, 2018 7:34 pm
AlphaLess wrote:
Sat Jun 09, 2018 5:27 pm
denovo wrote:
Sat Jun 09, 2018 5:13 pm
I think it's a good idea for the OP to mention the industry, regardless of your grandkids career path.
Stability of industry/career should be a factor when purchasing a home.
Given that property taxes in CA are capped at about 1 percent and he's mentioning 1.5-2 percent a year in taxes, I suspect OP is not a Bay Area techie. I suspect the OP is in finance/banking and looking for housing near Manhattan in NYC or Northern NJ.
Good points. Manhattan properties are expensive, but tax rate are lower.
NJ tax rates can reach 2%, so this is likely.
$500-600K a year in finance is not a lot.
NJ tax rates can exceed 2% - look at Essex County. Let us know what the tax rates are.
But they can also NOT exceed 2%.

My point was: it is *MORE* likely to be New Jersey than New York City.
The tax rates can exceed 2% in NJ per $100 of assessed value, it’s the annual tax increase that can not exceed 2% with the exception of taxes to pay for pension contributions which can not be cut.
Again, you are completely misunderstanding what I am saying:
- I am not talking about increases,
- you brought an example of a county where taxes, as a percentage of assessed value, is higher than 2%,
- I am saying that there are A LOT OF counties, where taxes, as a percentage of assessed value, are LOWER than 2%,
- but more importantly, given the $40K tax, and $2MM house situation, it is *MORE* likely to be in NJ than Manhattan, where the tax rate is much lower.

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