Another Home Affordability Thread

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dollarbillz
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Another Home Affordability Thread

Post by dollarbillz » Tue Dec 04, 2018 5:28 pm

All,

Long time lurker here, first time posting.

Background data:

Late 30s couple, married, three children (not yet in school). Live in a condo that we've FAR outgrown. We have managed, for 10 years of marriage to live well below our means. Cars paid. Student loans paid. No CC debt.

Now have gotten to the point where we NEED to relocate. This is not optional, we will be moving. Desired location is HCOL. Home cost expected $1.5-$1.7M; property taxes also high, millage rate around 40 ($30-40k in property taxes annually :shock: ). Interest rate 4.8%

While in theory we would be "happier" moving into the house in the nicer neighborhood, I'm not so sure it's the smartest thing to do. Can we afford it? How will it affect our ability to save? The debt-averse side of me is telling me to walk away and find a more reasonably priced house in a less desirable (but still safe/nice/livable) location and continue saving. The other side is telling me, if you're not going to spend it on a house for your family, what are you going to spend it on?

With regards to a downpayment, we both prefer to stay relatively liquid (as you will see from our relatively large cash position). Maximum $500,000 down, as this will leave us with enough cash to make minor renovations/furnish the home and maintain a reasonable emergency fund.

Secondary question: what is the smart thing to do with our current condo, cash out or rent? Some estimates related to the condo provided below.

Thanks in advance.

Income
Me: $400,000 (annual bonus of ~$30,000 very common, but not guaranteed)
Wife: $150,000 (self employed so varies somewhat, this is a conservative average)
Both stable jobs; no major changes to income anticipated.

Tax bracket: 35% Fed (2018) and 4.5% State

Savings
401k me: $200,000
401k wife: $600,000
Cash (including emergency fund): $750k
After tax investments: $1M (95% stocks, 5% bonds)
529s: $125k

Other assets
Current condo: would sell for $325,000 conservatively. Paid cash, $200,000 10 years ago.
Rent option: would rent for $3,000/m; annual expenses of $12,000

bloom2708
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Re: Another Home Affordability Thread

Post by bloom2708 » Tue Dec 04, 2018 6:22 pm

What do the commutes look like in the new location?

Any desire for spouse to stay home with the kids when they are a bit older?

$1.2 million is < 2.5 x salary. In theory you easily qualify. In practice, those are some big numbers and you are locking in to a lifestyle.

In certain areas, $1.7 might not be that nice. 3/2 rambler style. Big incomes come big tax bills so you don't see some of the benefits of those big salaries. Especially in a CA state with high state taxes too. Or east coast.

Have you thought of renting in the perfect location? Short commutes, maximize home time, etc. As your kids get older you actually want to spend more time with them. When young, off to daycare, bed early, repeat. Home maintenance and constant upgrades is another item to consider in a $1.7+ home.

The high taxes and carrying costs and the close to 5% interest would give me pause. If you owe $1.2m and the economy tanks, tech tanks, jobs disappear, that would be tough to carry. Getting a bigger rental might still save you money over owning.

Really just kind of brainstorming as there are quite a number of these threads and the answers are complicated.

I would lean toward renting a "perfect place" with more space just based on the big numbers. Hopefully others will give you their ideas. If you do buy, I would sell the current place. You likely don't want to add small business owner to the three young kids and careers.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

randomguy
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Re: Another Home Affordability Thread

Post by randomguy » Tue Dec 04, 2018 6:37 pm

bloom2708 wrote:
Tue Dec 04, 2018 6:22 pm


I would lean toward renting a "perfect place" with more space just based on the big numbers. Hopefully others will give you their ideas.
Renting can get very expensive in a hurry. When your 6k rent goes to 10k in 10 years, you realize you should have bought:) It is really all about alternatives. If your 1.5 million house is a 3/2 1200 sq foot condo, then your room for getting something cheaper is limited. If your 1.5 million dollar house is 5000 sq ft, 6/5, then you probably have a lot more possibiltilies. Given you are living in a 325k place today, I would suspect there are a bunch of 800-900k places that are a lot nicer than you have that would do the trick . Then the question is if you wan to spend the added money to get what your really want or not.

You have 2.2 million dollars today. YOu can definitely afford a 1.5 million dollar house without really stretching. It might limit some future choices (i.e. retiring at 50 instead of 45). Nobody can answer that for you.

As far as renting 24k/year on 325k investment is a decent investment. Up to you if you want another job or not though.

bloom2708
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Location: Fargo, ND

Re: Another Home Affordability Thread

Post by bloom2708 » Tue Dec 04, 2018 6:49 pm

randomguy wrote:
Tue Dec 04, 2018 6:37 pm
bloom2708 wrote:
Tue Dec 04, 2018 6:22 pm


I would lean toward renting a "perfect place" with more space just based on the big numbers. Hopefully others will give you their ideas.
Renting can get very expensive in a hurry. When your 6k rent goes to 10k in 10 years, you realize you should have bought:) It is really all about alternatives. If your 1.5 million house is a 3/2 1200 sq foot condo, then your room for getting something cheaper is limited. If your 1.5 million dollar house is 5000 sq ft, 6/5, then you probably have a lot more possibiltilies. Given you are living in a 325k place today, I would suspect there are a bunch of 800-900k places that are a lot nicer than you have that would do the trick . Then the question is if you wan to spend the added money to get what your really want or not.

You have 2.2 million dollars today. YOu can definitely afford a 1.5 million dollar house without really stretching. It might limit some future choices (i.e. retiring at 50 instead of 45). Nobody can answer that for you.

As far as renting 24k/year on 325k investment is a decent investment. Up to you if you want another job or not though.
I can see renting being expensive. I did a mortgage calculator. $6,400 monthly principle/interest. Monthly taxes ~2,900. Insurance $200/month. Just ballparking. That is $9,500/month outlay. I would be curious to know what you could rent for $5k/month. $6k/month. ~$25k in fees to sign the mortgage. Ongoing maintenance. It will add up.

We toss out ideas. Some flop. Some stick. Some stick and flop.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

dollarbillz
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Re: Another Home Affordability Thread

Post by dollarbillz » Tue Dec 04, 2018 7:05 pm

Thank you to you both.

I have an unavoidable commute. Our "ideal" location would minimize it.

Inventory in the areas we are looking is tight. Rental inventory is even worse. From a quick perusal, a rental close to what we're looking for would be anywhere from $6-10k/m and look not to be as nice as some of the options we've been considering buying.

For $1.5M should be able to get into 4500 ft2 4/4 built 2000 or newer. It's a big jump from where we are now, you're right. And there is probably some in-between option that we should be pursuing instead.

Appreciate any other insights/suggestions/experience.

wilked
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Re: Another Home Affordability Thread

Post by wilked » Tue Dec 04, 2018 7:13 pm

My advice is don’t buy a 4500 sq ft house. Aim for about half that, see if you can knock the price down by half

randomguy
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Re: Another Home Affordability Thread

Post by randomguy » Tue Dec 04, 2018 7:36 pm

wilked wrote:
Tue Dec 04, 2018 7:13 pm
My advice is don’t buy a 4500 sq ft house. Aim for about half that, see if you can knock the price down by half
I think it is more likely you will pay about 2/3s for half the house as land doesn't get cheaper as you buy a smaller house.And in a lot of areas price dominates. In my area there is a split between the 800k houses (1800 sq ft 200k house on 600k of land) from the 1960s or 1.2 million dollar houses (4000 sq ft 600k houses on 600k of land that were build after tearing down those 1960 house was torn down) and not much in the middle. Obviously you have to know your market.

If the house saved you 30mins of commuting/day, it would be a no brainer to say spend 500k.Time is worth so much more. One problem is that you pretty much always get more for spending more with houses. It makes it easy to keep on spending. As I said you can afford it (rent and buying are about a wash cost wise. With rent you take on the risk of increases. With buying you take on the risk of property depreciation/having to see.You can decide how safe your jobs are/likeliness of moving in the next 10-15 years) which makes it hard. Choices are a lot easier when you don't have money:)

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leeks
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Re: Another Home Affordability Thread

Post by leeks » Tue Dec 04, 2018 8:30 pm

If neither of you have ever lived in the area you are moving to, rent for the first 6-12 months to get to know the area/neighborhoods before you commit to a purchase. It may seem more expensive to rent at first, but it gives you flexibility - and if you will only be there a year or so the rental doesn't have to be huge or perfect. Then you can take your time to find the right home to buy at the right price once you are confident you want to commit to the neighborhood.

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Watty
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Re: Another Home Affordability Thread

Post by Watty » Tue Dec 04, 2018 9:11 pm

dollarbillz wrote:
Tue Dec 04, 2018 5:28 pm
Home cost expected $1.5-$1.7M; property taxes also high, millage rate around 40 ($30-40k in property taxes annually :shock: ).
......
Cash (including emergency fund): $750k
After tax investments: $1M (95% stocks, 5% bonds)
dollarbillz wrote:
Tue Dec 04, 2018 5:28 pm
Secondary question: what is the smart thing to do with our current condo, cash out or rent?
Selling it is a no-brainer since you would almost certainly qualify for the homeowners capital gains exclusion of the federal capital gains tax. If you rent it for more than a few years you would lose that exemption. You would need to check on how your state would tax the sale.

If you have a burning desire to be a landlord you could buy another unit in that building and rent it out and the tax situation would likely be a lot better.
dollarbillz wrote:
Tue Dec 04, 2018 5:28 pm
While in theory we would be "happier" moving into the house in the nicer neighborhood, I'm not so sure it's the smartest thing to do. Can we afford it? How will it affect our ability to save? The debt-averse side of me is telling me to walk away and find a more reasonably priced house in a less desirable (but still safe/nice/livable) location and continue saving. The other side is telling me, if you're not going to spend it on a house for your family, what are you going to spend it on?
With the money from the sale of your condo, your cash, and a little bit from your taxable investments you could pay cash for the house so yes you can afford it.

You have no reason to use leverage so if you don't want to pay cash you could and probably should come up with a larger down payment since if you don't you will likely be paying $50,000+ a year in mortage interest. Paying extra is like buying a risk free 4.8% bond. This isn't like a few years ago when you could get mortage rates below 3%.

dollarbillz
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Re: Another Home Affordability Thread

Post by dollarbillz » Wed Dec 05, 2018 8:08 pm

Watty wrote:
Tue Dec 04, 2018 9:11 pm
Selling it is a no-brainer since you would almost certainly qualify for the homeowners capital gains exclusion of the federal capital gains tax. If you rent it for more than a few years you would lose that exemption.
This is a great point, and not something I had considered. I am not dying to landlord; the expenses I mentioned before included management company fees. Nonetheless, my inclination has always been to cash out. Unless I hear a compelling reason not to, that is what I plan to do.

Watty wrote:
Tue Dec 04, 2018 9:11 pm
Paying extra is like buying a risk free 4.8% bond.
Yes. We have the cash to put more down, or even pay cash. It's just that having almost everything tied up in a totally illiquid, potentially rapidly-depreciating asset just makes me very nervous. Your rationale makes sense to me, however.
randomguy wrote:
Tue Dec 04, 2018 7:36 pm
One problem is that you pretty much always get more for spending more with houses. It makes it easy to keep on spending.
This really resonates with me. The longer we look and the more houses we see, the more of a moving target our budget becomes.

wilked wrote:
Tue Dec 04, 2018 7:13 pm
My advice is don’t buy a 4500 sq ft house. Aim for about half that, see if you can knock the price down by half
We've lived in about 1000 ft2 for 10 years, many of those years with kids. We're ready to spread out a bit. Don't want to be moving again anytime soon, so I'd rather err on the bigger side a bit this time around. Maybe not the most personal-finance-savvy move, but it's reality for us.

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jharkin
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Re: Another Home Affordability Thread

Post by jharkin » Thu Dec 06, 2018 2:36 pm

You can afford the house with that income and assets. Not really a question.

But the thing I'm surprised nobody else has drilled into: Why is your tax deferred/tax free allocation so low? Are you prevented from fully contributing due to HCE rules?

If I where in your shoes I would be maxing everything I can to try and cut down some of the current income tax burden. Max 401k, max HSA. Backdoor Roth. take advantage of mega backdoor or deferred comp programs if they are offered, etc.

Dottie57
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Re: Another Home Affordability Thread

Post by Dottie57 » Thu Dec 06, 2018 3:13 pm

Duplicate
Last edited by Dottie57 on Thu Dec 06, 2018 3:13 pm, edited 1 time in total.

Dottie57
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Re: Another Home Affordability Thread

Post by Dottie57 » Thu Dec 06, 2018 3:13 pm

Just a note: heating and cooling for a 4500sq ft house is going to be a lot.

CoAndy
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Re: Another Home Affordability Thread

Post by CoAndy » Thu Dec 06, 2018 4:55 pm

I think that is way too much house. 2,500 sq. ft. should be fine and much more affordable.

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