Can I afford around a $2M home?

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aks40655
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Joined: Wed Apr 17, 2013 5:09 pm

Can I afford around a $2M home?

Post by aks40655 »

My wife and I currently own a condo in VHCOL and are contemplating a home purchase in the suburbs in 2020 or 2021. We have two toddlers. We're trying to figure out 1) TIMING of the purchase and 2) PRICE RANGE that we should be looking at. We would like to hold on to our current home and rent it out for the foreseeable future. Our jobs and incomes are very stable (would only decrease if we made a choice to work less).

:?

Ages: nearing 40
Net Worth: $1.9M
My Income: $500K (very stable)
Wife's income: $400K (could go down to $300K if she goes to part-time in a few years)
Cash: $375K (projected approx $500K in 2020 and $600-650K in 2021)
401K: $780K
Other IRA/HSA: $175K
529: $120K
Taxable retirement fund: $210K
Home Equity: $230K on $670K loan (home worth $850K) (which we plan to keep for a few years and rent out -- mortgage + tax is $5K a month)
Debt: $120K student loans
Annual Savings for Retirement: $160K 
Annual Savings for Down Payment fund : $150K 
Annual Expenditures other than housing: $150K

What's a reasonable price range to look at? $1.5M? $2M? More or less than that? What kind of mortgage amount should I be looking at? Keep in mind in VHCOL (suburban), these are not extravagant places depending on the location.  Also, should I wait the extra year to increase my down payment ability? 

I understand the amount that I can afford technically, but what is a smart reasonable target range that I could look at.
Smart meaning,,,
-Accounting for home maintenance costs, renovations, and such
-Not wanting to be an extravagant person 
-Not spoiling my kids
-Having flexibility for my wife to work less
-Having some extra money lying around to spend on other things like hobbies and vacations
-But still wanting a nice place for my family in a VHCOL area.   

Feel free to advise me (hopefully) or mock! :)

Thank you.
veindoc
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Re: Can I afford around a $2M home?

Post by veindoc »

I would work backwards. If you can afford to save $150k a year for down payment with no issues then you can afford 150k/12 months or $12,500 a month PITA +/- maintenance. Maintenance is a bit of black box because I don’t know what kind of house you are getting. If it is a fairly modest home 2000sq feet then utilities are not likely to be outrageous, lawn care should be reasonable etc.
If your 2 million dollar home is $5000sq feet on 5 acres with stables for horses then obviously that’s a whole different ballgame.
Golf maniac
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Re: Can I afford around a $2M home?

Post by Golf maniac »

First I would only count $300k for wife if there is any possibility that she would reduce hours. By the way, that’s a heck of a part time salary. Second, have a detailed budget for the new home. You will need to think about renovations and all the expenses with a new home. Third, I would wait the extra year to get the mortgage as low as possible but you should know the real estate market in your area and if that is wise.

Why do you want to hold onto the condo? At your income level and stage of life time is much more important than the small amount you may make on it.

I would go for the $1.5M home range if I were you. But that’s just me living well below my means, you could afford the $2M if that’s the lifestyle you want. No one on here can advise you on this, it really is a personal lifestyle choice. The way I always looked at home purchases was is this new home going to cause me to reduce my retirement savings or make me cut back in other areas. If the answer was yes then I was buying too much house.
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Watty
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Re: Can I afford around a $2M home?

Post by Watty »

aks40655 wrote: Wed Sep 25, 2019 8:43 pm Home Equity: $230K on $670K loan (home worth $850K) (which we plan to keep for a few years and rent out -- mortgage + tax is $5K a month)
The first thing to do would be to take the idea of keeping the old house as a rental property off the table since that would give almost three million dollars in residential real estate in the same very high cost city.
That is a diversification problem and even with just one more expensive property you will still have plenty of real estate exposure.

You are also likely in a very high tax bracket so any profit from the rental would be highly taxed and even if you are able to take a lot of depreciation now that will eventually be recaptured and taxed when the house is eventually sold.

Right now you can likely qualify for a homeowners capital gains exemption and not pay any federal taxes on any gains.
HornedToad
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Re: Can I afford around a $2M home?

Post by HornedToad »

Sell the condo.

Anything under 2.5M is doable. 2M would be comfortable depending on other expenses
stan1
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Re: Can I afford around a $2M home?

Post by stan1 »

If it was me I would buy a smaller house with a smaller yard in a great location.

What does that mean? Here's an example. I would avoid a 5000 square foot house with an acre plus in land. I would buy a 2500 square foot home on 1/4 acre near work, parks, schools, and shops.

But you may have different preferences.
blackholescion
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Re: Can I afford around a $2M home?

Post by blackholescion »

Since you said mock, when did you come into your income? 1.9m net worth at 900k salary means you either came into it recently or are catching up. You should be saving at least 300k a year at that income level (which you’re doing), spend 300k and taxes for the rest. You say that you’re spending 150k a year. That’s 450k between spend and savings. Where the rest? If you’re nearing 40, I’d expect a higher net worth.

At your income, you can definitely afford it. Most people look at 2-3x salary for a home purchase as living below your means. You wouldn’t be stretched. As others have noted, the cheaper you can buy, the better (1.5m vs 2) or even 1.75. But obviously pick a good location with good schools.

When you buy this house, make sure you don’t tank your savings rate to afford it.
KyleAAA
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Re: Can I afford around a $2M home?

Post by KyleAAA »

You could probably afford up to $3mm IFF you are cash flow positive on the rental.
ohai
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Re: Can I afford around a $2M home?

Post by ohai »

I'd recommend that you take the lesser of your two incomes, or just yours if you think it's very stable, and use that for your budgeting. According to Elizabeth Warren's (Sad!) book, 2 income households are more subject to financial issues since the budget tends to be off balance if either income is disrupted.
sixty40
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Re: Can I afford around a $2M home?

Post by sixty40 »

At $800k income, you can probably afford a $1.5-$2.0M home (from an income standpoint), but I would look at your savings and net worth more closely. You mention your net worth is $1.9M. Based on the Millionaire Next Door formula, ($800k/yr x 40 yrs old) / 10 = $3.2M. If you had NW of $3.2M you would be an Average Wealth Accumulator (AAW), underachiever (UAW) would be $3.2M/2 = $1.6M, overachiever/prodigious accumulator ( PAW) $3.2M x 2 = $6.4M. These are just general rules, but based on your income, you should be saving a lot more and maybe become an AAW or close to an AAW before spending a large portion of your income on a home.

I would buy a home maybe in the $1.0M to $1.5M range if you really need to do it, although if this is anywhere like SF and Silicon Valley area, like you said, it may not "look" like a millions dollar home.

I would try and make the mortgage payment as low as possible, maybe put 30%-50% down. Also all your expenses will increase substantially, which is my experience when we moved up.

Just as a comparison, when I moved up to a nicer home in a MCL area, I had enough net worth to buy my home 2-times over and I went with a home I can easily afford. But I am just a very big saver and would not ever want to be in debt to the point that I cannot pay all my expenses off.

You make more than 3-times my income so I am really not familiar with your territory.
HEDGEFUNDIE
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Re: Can I afford around a $2M home?

Post by HEDGEFUNDIE »

sixty40 wrote: Thu Sep 26, 2019 10:54 am At $800k income, you can probably afford a $1.5-$2.0M home (from an income standpoint), but I would look at your savings and net worth more closely. You mention your net worth is $1.9M. Based on the Millionaire Next Door formula, ($800k/yr x 40 yrs old) / 10 = $3.2M. If you had NW of $3.2M you would be an Average Wealth Accumulator (AAW), underachiever (UAW) would be $3.2M/2 = $1.6M, overachiever/prodigious accumulator ( PAW) $3.2M x 2 = $6.4M. These are just general rules, but based on your income, you should be saving a lot more and maybe become an AAW or close to an AAW before spending a large portion of your income on a home.

I would buy a home maybe in the $1.0M to $1.5M range if you really need to do it, although if this is anywhere like SF and Silicon Valley area, like you said, it may not "look" like a millions dollar home.

I would try and make the mortgage payment as low as possible, maybe put 30%-50% down. Also all your expenses will increase substantially, which is my experience when we moved up.

Just as a comparison, when I moved up to a nicer home in a MCL area, I had enough net worth to buy my home 2-times over and I went with a home I can easily afford. But I am just a very big saver and would not ever want to be in debt to the point that I cannot pay all my expenses off.

You make more than 3-times my income so I am really not familiar with your territory.
Who made Millionaire Next Door the official judge of whether someone is saving enough?

A $2M house with $1.6M mortgage will cost $100k/yr in PITI. Does anyone honestly think that’s not affordable on a $800k income? Or even $500k?
sixty40
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Re: Can I afford around a $2M home?

Post by sixty40 »

HEDGEFUNDIE wrote: Thu Sep 26, 2019 10:59 am
sixty40 wrote: Thu Sep 26, 2019 10:54 am At $800k income, you can probably afford a $1.5-$2.0M home (from an income standpoint), but I would look at your savings and net worth more closely. You mention your net worth is $1.9M. Based on the Millionaire Next Door formula, ($800k/yr x 40 yrs old) / 10 = $3.2M. If you had NW of $3.2M you would be an Average Wealth Accumulator (AAW), underachiever (UAW) would be $3.2M/2 = $1.6M, overachiever/prodigious accumulator ( PAW) $3.2M x 2 = $6.4M. These are just general rules, but based on your income, you should be saving a lot more and maybe become an AAW or close to an AAW before spending a large portion of your income on a home.

I would buy a home maybe in the $1.0M to $1.5M range if you really need to do it, although if this is anywhere like SF and Silicon Valley area, like you said, it may not "look" like a millions dollar home.

I would try and make the mortgage payment as low as possible, maybe put 30%-50% down. Also all your expenses will increase substantially, which is my experience when we moved up.

Just as a comparison, when I moved up to a nicer home in a MCL area, I had enough net worth to buy my home 2-times over and I went with a home I can easily afford. But I am just a very big saver and would not ever want to be in debt to the point that I cannot pay all my expenses off.

You make more than 3-times my income so I am really not familiar with your territory.
Who made Millionaire Next Door the official judge of whether someone is saving enough?

A $2M house with $1.6M mortgage will cost $100k/yr in PITI. Does anyone honestly think that’s not affordable on a $800k income? Or even $500k?
I did not say they could not afford it, in fact look at my first statement. I never said MND is the defato standard. Just giving an example. I think the OP is just asking for opinions.
knowledge
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Re: Can I afford around a $2M home?

Post by knowledge »

You can clearly afford a $2M home, on a rock solid $800k income. Are you in the Bay? Anywhere outside of the Bay Area, a suburban $2M home would be a phenomenal home, but in the Bay, it would be quite modest. So answers re: home maintenance and extravagance would needs that extra context.
Admiral
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Re: Can I afford around a $2M home?

Post by Admiral »

You can afford it. The question is do you need to? What kind of square footage are you contemplating? Many people buy way more than they need, which means they've overpaid (in the sense that they spent more for space they don't use).

Is this a 3500-5000ftsq mini-mansion or a 2000-2500ftsq normal (normal, that is, before the 1980s) suburban house?

I've raised 2 kids in an 1872ftsq home (city) and it's plenty of room. They have their own floor. Granted, in SF my home would be $2.5-$3m. But the point is if you can get a nice home with adequate space, why take on that much debt? Spend less to buy less. If possible. It may not be a viable option where you are.
njdealguy
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Re: Can I afford around a $2M home?

Post by njdealguy »

One factor I'd consider is if you ever need to sell it how difficult would the pricier home be based on your local market. For instance in my town in central NJ have seen most homes of over 800k to be sitting around for over a year on the market unsold, while any homes under 650-700k seem to sell fairly quickly. That worries me as my own home is worth a bit over the 800k!
Topic Author
aks40655
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Re: Can I afford around a $2M home?

Post by aks40655 »

To add some context for the lower net worth, neither of us started earning proper income (anything above median) until about 5-7 years ago. I think I’ve done fairly okay on saving since then. I’m in the NYC suburbs, perhaps not as bad as the Bay Area but close behind.

No real reason to hold onto the condo other than that it’s in a booming area and we love the location. I’m willing to sell it but I’ll have to convince my wife who is attached.

I think we’re targeting something around 3500-4000 square ft.

Is there a rough formula to estimate home maintenance / all associated costs for homes in this range?
Admiral
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Re: Can I afford around a $2M home?

Post by Admiral »

aks40655 wrote: Thu Sep 26, 2019 1:01 pm To add some context for the lower net worth, neither of us started earning proper income (anything above median) until about 5-7 years ago. I think I’ve done fairly okay on saving since then. I’m in the NYC suburbs, perhaps not as bad as the Bay Area but close behind.

No real reason to hold onto the condo other than that it’s in a booming area and we love the location. I’m willing to sell it but I’ll have to convince my wife who is attached.

I think we’re targeting something around 3500-4000 square ft.

Is there a rough formula to estimate home maintenance / all associated costs for homes in this range?
The only formula is the roughest of measures: 1% of the cost per year. But it's all over the map, based on the age and condition of the home.

I would ask why each member of your family needs 1000 square feet. Bigger homes=higher cost, higher taxes, more maintenance, higher utilities, more to clean, and so on.
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Nate79
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Re: Can I afford around a $2M home?

Post by Nate79 »

Yes you can but first I would pay off the student loans today with cash on hand. Then I would only buy contingent on selling your existing condo and ensure you have a minimum of 20% down if not more along with a very strong emergency fund of at least 6 months expenses. All this assumes that your income is projected to be steady.

Also based on your comments you and your wife have no idea how to evaluate a rental - that alone is reason to sell.
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aks40655
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Re: Can I afford around a $2M home?

Post by aks40655 »

I see what you guys are saying about the house size. I guess I’d like a 3 br, plus a guest br, and another room for to accommodate a studio, and perhaps an office. So a 5-6 br — if I can find that under 3000 sqft, I’m game.

Regardless, I’m really looking to figure out a max range, so I can start at lower ranges in my target neighborhoods but at least I could figure out how high I can go in case we can’t find what we’re looking for in some of these towns.

Nate79, you’re right. We have no idea how to deal with a rental property.
Thegame14
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Re: Can I afford around a $2M home?

Post by Thegame14 »

shouldn't one year of down payment or money from cash go to pay off $120K in student loans? I wouldn't take out another mortgage without paying those off on your income...
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aks40655
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Re: Can I afford around a $2M home?

Post by aks40655 »

My student loan rate is 2.5%. I should still pay it down before buying?
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Nate79
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Re: Can I afford around a $2M home?

Post by Nate79 »

aks40655 wrote: Thu Sep 26, 2019 1:59 pm My student loan rate is 2.5%. I should still pay it down before buying?
What is the interest rate of your cash right now? My guess so far it has been the wrong decision to keep cash earning less than the student loan interest rate (remember that is a tax free rate of return) and that is definitely continuing in the wrong direction. The other issue is that it is still a lot of debt over your head that in would want played off asap.
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aks40655
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Re: Can I afford around a $2M home?

Post by aks40655 »

My cash is at 2%.
piperkub
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Re: Can I afford around a $2M home?

Post by piperkub »

Congrats on being in a very solid financial position.I'd sell your current home and put the untaxed gains toward the new house along with your 150,000.00. Residental rentals are pain and at your income level, I suspect you're already busy. My personal aging is teaching me a large home and yard with pool in a coastal area is wonderful for a couple of years when kids are your focus. Now my dream home is a small, single level 3 bedroom open floorplan in a really nice gated community. In other words, more is less now. Although I don't need it, I kind of like having plenty of dry powder to do whatever I want; sail the loop, help build a hospital wing for children, spoil the grandchildren, etc. I find a large expensive home, like the one I live, a burden, not necessarily a comfortable, mind free luxury.
knowledge
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Re: Can I afford around a $2M home?

Post by knowledge »

aks40655 wrote: Thu Sep 26, 2019 1:01 pm I’m in the NYC suburbs, perhaps not as bad as the Bay Area but close behind.
I heartily disagree. $2M in almost any tony suburb of NYC is a damned fine home. You can easily find a new construction, 5 bedroom, 4,500 sq. ft. home in a top school district for less than $1.5M. Just be aware that the property taxes are going to be over $40k/year, and won't be deductible.

For $2M, you can get anywhere you want in any NYC suburb. You won't be able to get 4,500 sq ft in Manhattan, however.
Kagord
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Re: Can I afford around a $2M home?

Post by Kagord »

I always love the, I make $900K/year, and might, unfortunately, go to 800K/year if one of us goes part time posts.

Humble answer for a humble question, if you ask Suze Orman, you need to focus on saving 5 million first, so no, you can't afford anything but a Walmart tent right now.
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Nate79
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Re: Can I afford around a $2M home?

Post by Nate79 »

aks40655 wrote: Thu Sep 26, 2019 2:10 pm My cash is at 2%.
So after tax your cash has been returning far less than your student loan rate. So why would you continue to lose money on the spread?
Topic Author
aks40655
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Re: Can I afford around a $2M home?

Post by aks40655 »

I would’ve thought it’s better to build the cash even though it’s at a lower rate, so I can get a smaller mortgage rather than pay off the student loan and have a bigger mortgage. Or am I not thinking about it correctly?
Count of Notre Dame
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Re: Can I afford around a $2M home?

Post by Count of Notre Dame »

aks40655 wrote: Wed Sep 25, 2019 8:43 pm My wife and I currently own a condo in VHCOL and are contemplating a home purchase in the suburbs in 2020 or 2021. We have two toddlers. We're trying to figure out 1) TIMING of the purchase and 2) PRICE RANGE that we should be looking at. We would like to hold on to our current home and rent it out for the foreseeable future. Our jobs and incomes are very stable (would only decrease if we made a choice to work less).

:?

Ages: nearing 40
Net Worth: $1.9M
My Income: $500K (very stable)
Wife's income: $400K (could go down to $300K if she goes to part-time in a few years)
Cash: $375K (projected approx $500K in 2020 and $600-650K in 2021)
401K: $780K
Other IRA/HSA: $175K
529: $120K
Taxable retirement fund: $210K
Home Equity: $230K on $670K loan (home worth $850K) (which we plan to keep for a few years and rent out -- mortgage + tax is $5K a month)
Debt: $120K student loans
Annual Savings for Retirement: $160K 
Annual Savings for Down Payment fund : $150K 
Annual Expenditures other than housing: $150K

What's a reasonable price range to look at? $1.5M? $2M? More or less than that? What kind of mortgage amount should I be looking at? Keep in mind in VHCOL (suburban), these are not extravagant places depending on the location.  Also, should I wait the extra year to increase my down payment ability? 

I understand the amount that I can afford technically, but what is a smart reasonable target range that I could look at.
Smart meaning,,,
-Accounting for home maintenance costs, renovations, and such
-Not wanting to be an extravagant person 
-Not spoiling my kids
-Having flexibility for my wife to work less
-Having some extra money lying around to spend on other things like hobbies and vacations
-But still wanting a nice place for my family in a VHCOL area.   

Feel free to advise me (hopefully) or mock! :)

Thank you.
We bought a $1.975M house on income of $750k per year with a ~$500k net worth. Our strategy will likely involve not quite having the mortgage paid off by retirement (for us age 50) and needing to downsize when our kids go to college. I consider these next 15 years to be the best years of our lives - raising kids, young and healthy, etc. Buying a house with a larger lot, entertaining backyard, and lots of storage space meant a lot to us. You have to decide what you prioritize most. There are those out there who would rather live in a tiny house and retire in their 30s, and others (like me) who would rather work until early 50s but live a comfortable life.
Last edited by Count of Notre Dame on Fri Sep 27, 2019 10:00 am, edited 1 time in total.
mcraepat9
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Re: Can I afford around a $2M home?

Post by mcraepat9 »

No mocking! You can afford the house if you want it (but think long and hard about if you do). But please sell the condo - if I had a nickel for every homeowner trading up who decided to "keep the old place and rent it out" with poor results, I would be retired. If you want to be a landlord, then be a landlord. Don't become a landlord because you and your family happen to need more space and better schools.
Amateur investors are not cool-headed logicians.
Kmzizzle
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Re: Can I afford around a $2M home?

Post by Kmzizzle »

Kagord wrote: Thu Sep 26, 2019 4:32 pm I always love the, I make $900K/year, and might, unfortunately, go to 800K/year if one of us goes part time posts.

Humble answer for a humble question, if you ask Suze Orman, you need to focus on saving 5 million first, so no, you can't afford anything but a Walmart tent right now.
Agreed. Also asks if he can afford a home 2x income.. really?
dachshunddad
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Re: Can I afford around a $2M home?

Post by dachshunddad »

You are at a fork in the road for retirement planning in my opinion. You can afford a $2M house. But you may not be able to scale back or retire as early if you went with a more modest house. If you kept it under 1.5M you would have a better chance IMO of hitting a relatively early retirement age. But that is a personal decision as you may be planning on working until 65+. Personally, I'd go for 1.5M or less. Either way will work in the end just a matter of goals.
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