Can we afford to build this house?

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Topic Author
dollarbillz
Posts: 49
Joined: Tue Dec 04, 2018 4:44 pm

Can we afford to build this house?

Post by dollarbillz » Tue Feb 04, 2020 9:43 pm

I made a similar post almost a year ago. Our situation has changed and I need some insights again. Data below:

Desired home (new construction): $2.7 M

Late 30s dual income household. 3 kids.
Cash: $900k
Retirement: $1.15M
Post tax invested: $1.35M
529s: $235k
Current home equity: $335k
Annual HHI: $750k very stable, modest annual increase expected
Zero debt

We’d be drawing from cash + post tax for down payment of ~$1.2M and borrowing $1.5M at 3.375%.

Property tax expected $40k.

I know we qualify. But does this make any sense whatsoever or are we asking for trouble/house poverty?

Thanks

BusterMcTaco
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Joined: Tue Jul 11, 2017 6:36 pm

Re: Can we afford to build this house?

Post by BusterMcTaco » Tue Feb 04, 2020 9:53 pm

$2.7M is not ridiculous with your numbers but I guess the question is why? You're jumping to a house 8x the value of your current one. That's not normal unless you are also moving from a LCOL to VHCOL area.

Can you? Surely. Should you? That's up to you!

EHEngineer
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Re: Can we afford to build this house?

Post by EHEngineer » Tue Feb 04, 2020 9:54 pm

You can afford it. The key is the stable income. But do you want to afford it?

1) Have you calculated how much this will delay your financial independence? aka, can you meet your retirement savings goals?
2) Do both have disability insurance and life insurance that can cover your new/higher living expenses if you should be disabled or unexpectedly pass?
3) Will your income be stable until you can pay off the loan and meet your retirement savings goals?
4) why do you need to pull from your post-tax investments? Cash and current equity can get to 1.2M.

2.7M? wow. pls post a pic of the front elevation and floor plans!
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

Dottie57
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Re: Can we afford to build this house?

Post by Dottie57 » Tue Feb 04, 2020 9:59 pm

How long will it take you to pay the loan off?
How will you pay the mortgage if by some strange circumstance the person with the larger paycheck looses their job?

Beyond those questions I have no insight.

Good luck.

bloom2708
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Location: Fargo, ND

Re: Can we afford to build this house?

Post by bloom2708 » Tue Feb 04, 2020 10:02 pm

I'd like to see a $10 million + net worth before going that big.

I know there are no rules for these scenarios.

If you have to ask, maybe "not yet" is the answer. :wink:
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

Topic Author
dollarbillz
Posts: 49
Joined: Tue Dec 04, 2018 4:44 pm

Re: Can we afford to build this house?

Post by dollarbillz » Tue Feb 04, 2020 10:14 pm

EHEngineer wrote:
Tue Feb 04, 2020 9:54 pm
You can afford it. The key is the stable income. But do you want to afford it?

1) Have you calculated how much this will delay your financial independence? aka, can you meet your retirement savings goals?
2) Do both have disability insurance and life insurance that can cover your new/higher living expenses if you should be disabled or unexpectedly pass?
3) Will your income be stable until you can pay off the loan and meet your retirement savings goals?
4) why do you need to pull from your post-tax investments? Cash and current equity can get to 1.2M.

2.7M? wow. pls post a pic of the front elevation and floor plans!
1. Will have no bearing on maxing tax advantages ($57k x2 and $6 Backdoor Roth x2). Obviously taxable investing will slow down, but I expect we will still be able to save an additional $100k.
2. Very well insured.
3. Income is really as stable as it gets.
4. Live in current home until construction done. Can do a principal reduction with current equity when we take occupancy. But won’t be available for down payment at time of close.

You honestly won’t be super impressed. We are HCOL. Roughly 4500 ft2 with 2000ft2 finished basement and 3 car heated garage On 0.5 acre. Very family/entertaining friendly floor plan with high end finishes. Lots of budget accounted for by outdoor space including in ground pool, hot tub, outdoor fireplace, etc.

Topic Author
dollarbillz
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Joined: Tue Dec 04, 2018 4:44 pm

Re: Can we afford to build this house?

Post by dollarbillz » Tue Feb 04, 2020 10:16 pm

Dottie57 wrote:
Tue Feb 04, 2020 9:59 pm
How long will it take you to pay the loan off?
How will you pay the mortgage if by some strange circumstance the person with the larger paycheck looses their job?

Beyond those questions I have no insight.

Good luck.
I expect 7-10 years. Loan would be a 10/1 construction to permanent at 3.375.

Anything can happen but the likelihood of job loss is as close to zero as it gets.

Topic Author
dollarbillz
Posts: 49
Joined: Tue Dec 04, 2018 4:44 pm

Re: Can we afford to build this house?

Post by dollarbillz » Tue Feb 04, 2020 10:17 pm

bloom2708 wrote:
Tue Feb 04, 2020 10:02 pm
I'd like to see a $10 million + net worth before going that big.

I know there are no rules for these scenarios.

If you have to ask, maybe "not yet" is the answer. :wink:
“Not yet” is exactly how I feel. But I also feel “now or never.” Don’t intend to make the mistake of building the amazing family home when the kids are on the way out the door.

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mrspock
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Location: Vulcan

Re: Can we afford to build this house?

Post by mrspock » Tue Feb 04, 2020 10:20 pm

dollarbillz wrote:
Tue Feb 04, 2020 9:43 pm
I made a similar post almost a year ago. Our situation has changed and I need some insights again. Data below:

Desired home (new construction): $2.7 M

Late 30s dual income household. 3 kids.
Cash: $900k
Retirement: $1.15M
Post tax invested: $1.35M
529s: $235k
Current home equity: $335k
Annual HHI: $750k very stable, modest annual increase expected
Zero debt

We’d be drawing from cash + post tax for down payment of ~$1.2M and borrowing $1.5M at 3.375%.

Property tax expected $40k.

I know we qualify. But does this make any sense whatsoever or are we asking for trouble/house poverty?

Thanks
I think it depends on if you want to keep the house in retirement, when you want to retire, where, and what your expenses are now/in retirement. It’s all a matter of trade offs, and you should first figure out what they are before taking the plunge.

In other words, what’s the opportunity cost here: time? monthly spend in RE? sequence of return risk? And then it’s all about if you are willing to pay it for the benefit(s) this house affords you: space, sanity, prestige, commute time etc.

ohai
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Re: Can we afford to build this house?

Post by ohai » Tue Feb 04, 2020 10:22 pm

I'm going against the previous responses. This house is probably too expensive for you. Sure, you probably *could* buy it if you devoted your being to it, but at a huge cost of future financial safety and freedom. If you live in a $1 million house for the next 10 years instead, you'll be able to do whatever you want after that - retire, start crazy businesses, travel everywhere with no job... if you choose to. Buying a house that is almost $3 million today will enslave you to your debt and potentially prevent you from making lifestyle choices if your situation changes later.

If your living standard will be abysmal without such an expensive residence, then maybe it is worth considering. Otherwise, this doesn't seem like such a responsible idea.

The way I approach this sort of decision is to focus 90% on building a substantial nest egg, and anything leftover from "the number" can be used for such things as buying a non-earning asset like a house. This is not realistic for many people, but is possible for people above some earnings threshold.

dukeblue219
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Re: Can we afford to build this house?

Post by dukeblue219 » Tue Feb 04, 2020 10:44 pm

I agree that you can afford it. As to whether you should, I think it depends on the COL for your area. If you're in NYC or DC or SF, this might be a pretty modest (using the term loosely) house in a really nice location; to me that's a more justifiable circumstance than blowing it on a palacial estate in the middle of nowhere.

Can't take the money with you when you die, after all. If you feel comfortable with your income stability and this is how you want to live, I say go for it.

EHEngineer
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Re: Can we afford to build this house?

Post by EHEngineer » Tue Feb 04, 2020 10:59 pm

dollarbillz wrote:
Tue Feb 04, 2020 10:17 pm
bloom2708 wrote:
Tue Feb 04, 2020 10:02 pm
I'd like to see a $10 million + net worth before going that big.

I know there are no rules for these scenarios.

If you have to ask, maybe "not yet" is the answer. :wink:
“Not yet” is exactly how I feel. But I also feel “now or never.” Don’t intend to make the mistake of building the amazing family home when the kids are on the way out the door.
I underbought when my kids were younger with a small mortgage at less than 1x income, intending to upgrade later. We never found an upgrade house that fit us, and our house has shortcomings that bother me daily. First world problems, i know. Now that things have turned out well, i wish we would have gone for the big house. on the plus side, the small mortgage allowed us to take maximum advantage of this bull market, and have more disposable income.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

EnjoyIt
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Re: Can we afford to build this house?

Post by EnjoyIt » Tue Feb 04, 2020 11:07 pm

Here is what I see:
After you buy build this house you will have $2millionnin investments and looking to save an additional $160k a year on top of that. You are in your late 30s and maybe you want to retire a little early. If all goes well and you continue like this for another 18 years at 5% real returns you will have close to $10million. Will that be enough for an early retirement? Will you have the house paid off by then? Will the kids be launched and on their own? At 4% returns you will have $8.3 million. Will that be enough to sustain your lifestyle?

This is how I would make the decision. You can afford such a build, but you will sacrifice some things to have it. If those sacrifices are worth it to you, then more power to you. Personally I would not do this, but I value early financial independence and freedom over a fancy home.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

SDLinguist
Posts: 175
Joined: Wed Jan 31, 2018 2:39 pm

Re: Can we afford to build this house?

Post by SDLinguist » Wed Feb 05, 2020 12:38 am

dollarbillz wrote:
Tue Feb 04, 2020 10:14 pm
EHEngineer wrote:
Tue Feb 04, 2020 9:54 pm
You can afford it. The key is the stable income. But do you want to afford it?

1) Have you calculated how much this will delay your financial independence? aka, can you meet your retirement savings goals?
2) Do both have disability insurance and life insurance that can cover your new/higher living expenses if you should be disabled or unexpectedly pass?
3) Will your income be stable until you can pay off the loan and meet your retirement savings goals?
4) why do you need to pull from your post-tax investments? Cash and current equity can get to 1.2M.

2.7M? wow. pls post a pic of the front elevation and floor plans!
1. Will have no bearing on maxing tax advantages ($57k x2 and $6 Backdoor Roth x2). Obviously taxable investing will slow down, but I expect we will still be able to save an additional $100k.
2. Very well insured.
3. Income is really as stable as it gets.
4. Live in current home until construction done. Can do a principal reduction with current equity when we take occupancy. But won’t be available for down payment at time of close.

You honestly won’t be super impressed. We are HCOL. Roughly 4500 ft2 with 2000ft2 finished basement and 3 car heated garage On 0.5 acre. Very family/entertaining friendly floor plan with high end finishes. Lots of budget accounted for by outdoor space including in ground pool, hot tub, outdoor fireplace, etc.
That is a massive house. As someone who grew up as the middle child of 3 in a 4600sqft house I can tell you it was way too big for 5 people, my parents still joke about how dumb such a massive house was! And you have an extra 2000sqft of basement ontop of that!

My dad had an office, my sister and I each had a bedroom, my brother had 2 rooms, my mom had a hobby room and we still had an empty bedroom upstairs. Then there was the formal dining room, never used, the formal family room, never used, and the miles of hallways. We did the vast majority of the actual living in less than half of the square footage.

And at some point within the next decade or so your children will move out and then it will be two people in 6500sqft

You can afford the house, it's a little over x3 gross income, but I suggest to really think about if you need that much house. The reality is that you are in a tiny fractional minority of humanity when it comes to wealth and you really want to spend it on a giant house? IMO there are way more fun things to do in the time we have on this planet.

runswithscissors
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Re: Can we afford to build this house?

Post by runswithscissors » Wed Feb 05, 2020 3:36 am

Although I am in a VHCOL area, a house that large in my area with the amenities that you describing would easily be $2.7M not including the land. What is the cost of the land vs cost of construction? Is the 3.3% post-construction permanent take out mortgage fixed? What is the current appraised value of the new home assuming it was already built?

I always budget 2% of the construction cost for annual maintenance and upkeep. So for a $2M replacement value, that's $40K/year just to keep things from falling apart. That is on top of the $40K property taxes. Massive homes in HCOL areas are extremely costly to maintain.

Topic Author
dollarbillz
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Joined: Tue Dec 04, 2018 4:44 pm

Re: Can we afford to build this house?

Post by dollarbillz » Wed Feb 05, 2020 5:00 am

runswithscissors wrote:
Wed Feb 05, 2020 3:36 am
Although I am in a VHCOL area, a house that large in my area with the amenities that you describing would easily be $2.7M not including the land. What is the cost of the land vs cost of construction? Is the 3.3% post-construction permanent take out mortgage fixed? What is the current appraised value of the new home assuming it was already built?

I always budget 2% of the construction cost for annual maintenance and upkeep. So for a $2M replacement value, that's $40K/year just to keep things from falling apart. That is on top of the $40K property taxes. Massive homes in HCOL areas are extremely costly to maintain.

Land $700k vs construction $2M

Construction to permanent is a 10/1 arm at 3.375% with 5/2/5 cap structure. I see no reason we wouldn’t have this paid within the 10 year fixed period.

Based on recent comps (there are several) appraised value in the 2.5-3M range.

Maintenance/upkeep budget noted. Thank you.

mmcmonster
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Re: Can we afford to build this house?

Post by mmcmonster » Wed Feb 05, 2020 6:12 am

I'd like to give the opposing opinion and say: Do it!

You're only young once. If you and your spouse are both up for this and go in with your eyes open, you can potentially make a beautiful house that you will love for decades.

I built a $1.5M (including landscaping & solar) house with similar square footage. With two children, most of the house gets significant usage on a daily basis. And a fully finished basement for entertainment really made us feel more comfortable entertaining.

Hopefully it's a fully custom job. In which case, look over all the threads regarding people building custom homes, for ideas of things you want and things you need. (ie: in retrospect, my basement should have had 9 foot ceilings unfinished, so that finished it would have been 8 foot).

jharkin
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Re: Can we afford to build this house?

Post by jharkin » Wed Feb 05, 2020 8:15 am

dollarbillz wrote:
Tue Feb 04, 2020 10:14 pm
You honestly won’t be super impressed. We are HCOL. Roughly 4500 ft2 with 2000ft2 finished basement and 3 car heated garage On 0.5 acre. Very family/entertaining friendly floor plan with high end finishes. Lots of budget accounted for by outdoor space including in ground pool, hot tub, outdoor fireplace, etc.
Actually that IS super impressive. Lifestyle inflation can sneak up on you without notice (like the old slow boiling frog adage). Keep in mind the average American family lives in roughly 1,800ft2 (dont get confused by new construction figures, there are a lot of existing smaller homes out there) and in many parts of the country homes are built on slabs with no basement at all. Garages are not standard everywhere either, and even where they are 1 or 2 car is more common.

Don't even get me started on the pool and hot tub....

Topic Author
dollarbillz
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Re: Can we afford to build this house?

Post by dollarbillz » Wed Feb 05, 2020 8:44 am

jharkin wrote:
Wed Feb 05, 2020 8:15 am
dollarbillz wrote:
Tue Feb 04, 2020 10:14 pm
You honestly won’t be super impressed. We are HCOL. Roughly 4500 ft2 with 2000ft2 finished basement and 3 car heated garage On 0.5 acre. Very family/entertaining friendly floor plan with high end finishes. Lots of budget accounted for by outdoor space including in ground pool, hot tub, outdoor fireplace, etc.
Actually that IS super impressive. Lifestyle inflation can sneak up on you without notice (like the old slow boiling frog adage). Keep in mind the average American family lives in roughly 1,800ft2 (dont get confused by new construction figures, there are a lot of existing smaller homes out there) and in many parts of the country homes are built on slabs with no basement at all. Garages are not standard everywhere either, and even where they are 1 or 2 car is more common.

Don't even get me started on the pool and hot tub....
Noted. It’s easy to get caught up for sure. Feel a little foolish. Thanks for the reality check.

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Watty
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Re: Can we afford to build this house?

Post by Watty » Wed Feb 05, 2020 10:55 am

BusterMcTaco wrote:
Tue Feb 04, 2020 9:53 pm
But does this make any sense whatsoever......
.....
We are HCOL. Roughly 4500 ft2 with 2000ft2 finished basement and 3 car heated garage On 0.5 acre.
Without commenting on the finances here are a couple of other comments;

1) Building a custom home should be a last resort when you cannot find a similar existing home to buy. There are lots of problems and additional costs that can come up during the construction and it will be very stressful and you will need to make decisions about every little detail. There is an old joke, "The final step in building a custom home is to file the divorce paperwork." That is an exaggeration but it will put a lot of stress on your marriage.

2) If there no acceptable houses on the market now but they exist in the area then more possible houses will eventually come on the market.

3) If there are no similar houses in the area then you may have a lot of difficulty in ever selling the house if you need to.

4) Be sure to look into what the house could be sold for after it has been built. There was a post recently where someone was having problems with selling their house since it was a split level where part of the house was below grade. The problem was that the appraiser were not counting the below grade area in the square footage of the house. It is not uncommon for a custom built home to not have a market value of what it cost to build it.

5) A half acre lot may be big for your area but you will still be close to your neighbors. If the land next to your lot has not be build on you could end up with some large two story house that looks down on and into your house. Do not underestimate how much it will cost to landscape a half acre for a house of that quality. One problem is that it will take 10+ years for your trees to grow to a decent size.

6) Don't skimp on having a lawyer draw up the building contract and contingencies since even if you have a good builder weird stuff can happen. There was a post a while back by someone who was having a custom home built but the builder was killed in a car accident. It was a mess since there were unpaid subcontractors and some of the house plans could not be found. They could not get any other builder to take over the project to finish it since all the permits were in the original builders name and they would be taking on a lot of liability for the work that was already done. I never heard how that was resolved.

7) Make sure that your building contract allows you to have your home inspector inspect the house as it is being built at key points and at random times. Follow up and pay for the inspector to inspect the house multiple times. If the builder knows that an inspector can drop by at any time you will get a lot better quality house.

Regattamom
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Re: Can we afford to build this house?

Post by Regattamom » Wed Feb 05, 2020 11:15 am

Looking back at your post from a little over a year ago:

Why did your target cost for a new home go from $1.5 - $1.7 million to $2.7 million in one year? That's a huge jump.

OnTrack2020
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Re: Can we afford to build this house?

Post by OnTrack2020 » Wed Feb 05, 2020 11:45 am

If I were going to do it, I would use the $900k cash, $800k in taxable, and $335k in current home equity and finance less than $700k. And take out no more than a 15 year mortgage. However, I can't get past the $40k per year in property taxes, but that's me. And I wouldn't put one more penny into the 529s.

Topic Author
dollarbillz
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Re: Can we afford to build this house?

Post by dollarbillz » Thu Feb 06, 2020 8:01 pm

Watty wrote:
Wed Feb 05, 2020 10:55 am
BusterMcTaco wrote:
Tue Feb 04, 2020 9:53 pm
But does this make any sense whatsoever......
.....
We are HCOL. Roughly 4500 ft2 with 2000ft2 finished basement and 3 car heated garage On 0.5 acre.
Without commenting on the finances here are a couple of other comments;

1) Building a custom home should be a last resort when you cannot find a similar existing home to buy. There are lots of problems and additional costs that can come up during the construction and it will be very stressful and you will need to make decisions about every little detail. There is an old joke, "The final step in building a custom home is to file the divorce paperwork." That is an exaggeration but it will put a lot of stress on your marriage.

2) If there no acceptable houses on the market now but they exist in the area then more possible houses will eventually come on the market.

3) If there are no similar houses in the area then you may have a lot of difficulty in ever selling the house if you need to.

4) Be sure to look into what the house could be sold for after it has been built. There was a post recently where someone was having problems with selling their house since it was a split level where part of the house was below grade. The problem was that the appraiser were not counting the below grade area in the square footage of the house. It is not uncommon for a custom built home to not have a market value of what it cost to build it.

5) A half acre lot may be big for your area but you will still be close to your neighbors. If the land next to your lot has not be build on you could end up with some large two story house that looks down on and into your house. Do not underestimate how much it will cost to landscape a half acre for a house of that quality. One problem is that it will take 10+ years for your trees to grow to a decent size.

6) Don't skimp on having a lawyer draw up the building contract and contingencies since even if you have a good builder weird stuff can happen. There was a post a while back by someone who was having a custom home built but the builder was killed in a car accident. It was a mess since there were unpaid subcontractors and some of the house plans could not be found. They could not get any other builder to take over the project to finish it since all the permits were in the original builders name and they would be taking on a lot of liability for the work that was already done. I never heard how that was resolved.

7) Make sure that your building contract allows you to have your home inspector inspect the house as it is being built at key points and at random times. Follow up and pay for the inspector to inspect the house multiple times. If the builder knows that an inspector can drop by at any time you will get a lot better quality house.
This is all great advice. Thank you. To respond to a few of the items:

3) I take comfort in the fact that our home will be in good company in the neighborhood where we would be building.

4) Nothing is certain, but given current market, inventory, etc. the home we are planning could be sold for 2.5-3M without much difficulty.

6/7) Great advice. Thank you.

Topic Author
dollarbillz
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Re: Can we afford to build this house?

Post by dollarbillz » Thu Feb 06, 2020 8:04 pm

Regattamom wrote:
Wed Feb 05, 2020 11:15 am
Looking back at your post from a little over a year ago:

Why did your target cost for a new home go from $1.5 - $1.7 million to $2.7 million in one year? That's a huge jump.
Yes. I know. And I’m not proud of it.

Why is a difficult question to answer. I’d say a combination of limited inventory, frustration with current living situation, growing family/kids with growing needs.

Topic Author
dollarbillz
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Re: Can we afford to build this house?

Post by dollarbillz » Thu Feb 06, 2020 8:06 pm

OnTrack2020 wrote:
Wed Feb 05, 2020 11:45 am
If I were going to do it, I would use the $900k cash, $800k in taxable, and $335k in current home equity and finance less than $700k. And take out no more than a 15 year mortgage. However, I can't get past the $40k per year in property taxes, but that's me. And I wouldn't put one more penny into the 529s.
Thanks for the advice.

The current home equity could be used for a principal reduction at some point down the line but we would need to live here during construction so I wouldn’t be able to use it for downpayment.

Yea, 529s were funded a bit aggressively, I agree.

Wenonah
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Re: Can we afford to build this house?

Post by Wenonah » Fri Feb 07, 2020 2:09 am

Read "The Millionaire Next Door" before you build.

Nearly A Moose
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Re: Can we afford to build this house?

Post by Nearly A Moose » Fri Feb 07, 2020 11:01 am

It sounds like you can do this - no debt, high savings, high earnings. For reference, we make a little less than you but have a mortgage of about 1.35M, a nanny, and private school (in total, waaaayyyyy more than the payments on a $1.5M mortgage). Combined, it's a bit uncomfortable (yet doable), but doing even 2 out of the 3 wouldn't be much of an issue. Presumably, in addition to taxes, you've taken into account the extra costs of furnishing and maintaining a large and well-appointed home that has a pool and hottub. You're looking at 5-figure maintenance/operating costs. And while there's no law saying the sofa(s) in a $2.7M home has to be at least $10k, but I imagine there's a strong correlation.

If you're going to do something like this, and the goal is to make it a sweet family home, and you can afford it comfortably, I'd encourage doing it earlier than later. My parents built their sweet family home when I was in middle school, and while I enjoyed it, it was only for four years, and it was way more house than they needed once they were empty nesters.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

alfaspider
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Re: Can we afford to build this house?

Post by alfaspider » Fri Feb 07, 2020 11:26 am

Watty wrote:
Wed Feb 05, 2020 10:55 am
BusterMcTaco wrote:
Tue Feb 04, 2020 9:53 pm
But does this make any sense whatsoever......
.....
We are HCOL. Roughly 4500 ft2 with 2000ft2 finished basement and 3 car heated garage On 0.5 acre.
Without commenting on the finances here are a couple of other comments;

1) Building a custom home should be a last resort when you cannot find a similar existing home to buy. There are lots of problems and additional costs that can come up during the construction and it will be very stressful and you will need to make decisions about every little detail. There is an old joke, "The final step in building a custom home is to file the divorce paperwork." That is an exaggeration but it will put a lot of stress on your marriage.

2) If there no acceptable houses on the market now but they exist in the area then more possible houses will eventually come on the market.

3) If there are no similar houses in the area then you may have a lot of difficulty in ever selling the house if you need to.

4) Be sure to look into what the house could be sold for after it has been built. There was a post recently where someone was having problems with selling their house since it was a split level where part of the house was below grade. The problem was that the appraiser were not counting the below grade area in the square footage of the house. It is not uncommon for a custom built home to not have a market value of what it cost to build it.

5) A half acre lot may be big for your area but you will still be close to your neighbors. If the land next to your lot has not be build on you could end up with some large two story house that looks down on and into your house. Do not underestimate how much it will cost to landscape a half acre for a house of that quality. One problem is that it will take 10+ years for your trees to grow to a decent size.

6) Don't skimp on having a lawyer draw up the building contract and contingencies since even if you have a good builder weird stuff can happen. There was a post a while back by someone who was having a custom home built but the builder was killed in a car accident. It was a mess since there were unpaid subcontractors and some of the house plans could not be found. They could not get any other builder to take over the project to finish it since all the permits were in the original builders name and they would be taking on a lot of liability for the work that was already done. I never heard how that was resolved.

7) Make sure that your building contract allows you to have your home inspector inspect the house as it is being built at key points and at random times. Follow up and pay for the inspector to inspect the house multiple times. If the builder knows that an inspector can drop by at any time you will get a lot better quality house.
True story RE #1: Back when I was in college I did technology consulting as a side business (usually just getting spyware and viruses off people's computers, setting up computer networks, etc.). Some neighbors were finally building their dream home and wanted Cat 5 internet wiring installed throughout the house (this was in the early days of wifi when consumer grade stuff was still very flaky). Spent a good part of the summer in the heat running Cat 5 wire. We also wired the home theater system and helped selecting speakers. Seriously underbid the job, but it's not like I really knew what I was doing.

I will never forget when I came home for winter break and stopped by to do the final install of the speakers. MASSIVE fight right in front of me and my friend who was helping out with the job. We tried to stay out and ignore it as we worked, but it was super awkward. I don't think the husband ever moved into the house. They were divorced shortly after.

bltn
Posts: 777
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Re: Can we afford to build this house?

Post by bltn » Fri Feb 07, 2020 11:56 am

One more thing to consider. Building a custom home may well involve cost over runs. Even with a contract, if the builder tells you that the expense of some part of the home is more than expected, you will have to decide whether to hold him to the contract and face cost cutting elsewhere or allow the increased cost. I would figure on a custom built house costing 10% more than the initial quote (or more).

We decided to move up in house level to our current home in a mcol area when I was 10 years older than you. About the same size house as in your plans, already built. Did a moderate renovation. Our oldest child left for college 4 years later, our youngest left for college 7 years after that. Now our house is much more than we need. But it is home and we re staying in it, taxes, upkeep costs, and all.
By waiting until I was in my 40 s, I was able to buy the house without a mortgage.
Would I now have more money if we had moved into a 3500 sf house? Of course. Would we have had plenty of room for our family? Sure.

So here are some thoughts. Move up an intermediate step now and see how that works out. A 3500-4000 total sf house, including finished first floor, with a pool, would probably be a very comfortable upgrade. Pay it off in 10 years, and consider upgrading again at that time, if you really want to. You ll have more financial flexibility.

If you re convinced that the increased cost of the current plans will mean that much to your family s enjoyment , then I believe you can afford it. Of course you ll have less money in 20 years, but as I tell friends occasionally, some things are more important than money. (These friends are usually neighbors talking about downsizing to smaller homes.)

gr7070
Posts: 1150
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Re: Can we afford to build this house?

Post by gr7070 » Fri Feb 07, 2020 12:49 pm

With that income (and it far exceeding tax protected savings options) I'd be looking to reduce my risk with this house. While the salary is stated as stable replacement opportunities are few and far between should one be needed.

I'd wait a couple more years. Pile up more cash (0.5M - 1M???) and take a far lesser loan.

Financially the answer is clearly yes. However, my approach would be slightly different.

Enjoy it when the house does materialize!

Topic Author
dollarbillz
Posts: 49
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Re: Can we afford to build this house?

Post by dollarbillz » Sat Feb 08, 2020 10:00 pm

Nearly A Moose wrote:
Fri Feb 07, 2020 11:01 am
If you're going to do something like this, and the goal is to make it a sweet family home, and you can afford it comfortably, I'd encourage doing it earlier than later. My parents built their sweet family home when I was in middle school, and while I enjoyed it, it was only for four years, and it was way more house than they needed once they were empty nesters.
Thanks for sharing the personal experience. This is precisely why we are leaning towards doing this now.

Golf maniac
Posts: 462
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Location: Florida

Re: Can we afford to build this house?

Post by Golf maniac » Sun Feb 09, 2020 10:50 am

For OP, you have your s*** together and have your personal reasons for doing this and you can obviously afford it. It is a lifestyle choice we all make but most of us to a lesser degree. You also need to think about in 15 to 20 years will you look back and kick yourself if you don’t do this now. It sounds like a great place that you and your family can make lifelong memories. Good luck and post pics when you are done!

Topic Author
dollarbillz
Posts: 49
Joined: Tue Dec 04, 2018 4:44 pm

Re: Can we afford to build this house?

Post by dollarbillz » Sun Feb 16, 2020 7:55 pm

Golf maniac wrote:
Sun Feb 09, 2020 10:50 am
For OP, you have your s*** together and have your personal reasons for doing this and you can obviously afford it. It is a lifestyle choice we all make but most of us to a lesser degree. You also need to think about in 15 to 20 years will you look back and kick yourself if you don’t do this now. It sounds like a great place that you and your family can make lifelong memories. Good luck and post pics when you are done!
Thank you. In fact one of our only regrets with regards to housing is not buying more house 10 years ago. I’d hate to have that same regret again 10 years down the line.

So... perhaps we’ll make a decision that will result in other regrets. :oops:

I appreciate everyone’s perspectives and input.

Unladen_Swallow
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Re: Can we afford to build this house?

Post by Unladen_Swallow » Sun Feb 16, 2020 9:52 pm

bloom2708 wrote:
Tue Feb 04, 2020 10:02 pm
I'd like to see a $10 million + net worth before going that big.

I know there are no rules for these scenarios.

If you have to ask, maybe "not yet" is the answer. :wink:
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman

Topic Author
dollarbillz
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Re: Can we afford to build this house?

Post by dollarbillz » Sun Feb 16, 2020 10:06 pm

Unladen_Swallow wrote:
Sun Feb 16, 2020 9:52 pm
bloom2708 wrote:
Tue Feb 04, 2020 10:02 pm
I'd like to see a $10 million + net worth before going that big.

I know there are no rules for these scenarios.

If you have to ask, maybe "not yet" is the answer. :wink:
I appreciate the input, but, I have to ask, is this serious advice? And does it scale linearly? (Ie would you recommend net worth of $1M prior to purchase of a home of $270k with $120k saved for down payment?)

I totally concede it may not be a good idea but I’m trying to understand the logic of this advice.

Unladen_Swallow
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Re: Can we afford to build this house?

Post by Unladen_Swallow » Sun Feb 16, 2020 10:28 pm

It is serious advice, but in the end it is still my own personal wisdom. It is food for thought. Your plan must still be something that makes sense to you.

I am putting myself in your shoes and giving you my perspective.

Many here look at purchases only from the viewpoint of "can you afford the monthly payments". I have never approached my financial life in that way. I view purchases in relation to how they compare to my savings and overall flexibility of life. And how all the other fun things I want to do fit in. I am certainly not a frugal person and have some expensive tastes. And I am very averse to being beholden to a large expenditure that might require regular income.

Your income is good, as are your savings. If you intended to buy a $1.5M home, that is something that would be within consideration (if I were you).

However, if I desired a $2.7M home, I would wait until I was FI and could support purchase without income.

dollarbillz wrote:
Sun Feb 16, 2020 10:06 pm
Unladen_Swallow wrote:
Sun Feb 16, 2020 9:52 pm
bloom2708 wrote:
Tue Feb 04, 2020 10:02 pm
I'd like to see a $10 million + net worth before going that big.

I know there are no rules for these scenarios.

If you have to ask, maybe "not yet" is the answer. :wink:
I appreciate the input, but, I have to ask, is this serious advice? And is does it scale linearly? (Ie would you recommend net worth of $1M prior to purchase of a home of $270k with $120k saved for down payment?)

I totally concede it may not be a good idea but I’m trying to understand the logic of this advice.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman

anoop
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Re: Can we afford to build this house?

Post by anoop » Mon Feb 17, 2020 12:37 am

If your annual HHI is $750K, the "rule of thumb" range would be 2.5-3.5 times that or about $1.875M - $2.625M. I like to stay closer to 2.5 on that scale. Have you thought about what happens in situations such as chronic illness and/or disability? It's those type of scenarios that make others say they need a net worth of $10M to own such an expensive house. An expensive house will typically come with expensive maintenance too.

It might make sense to take a loan to finance a Civic or Accord, definitely not to finance an MB S class.

User avatar
Snert
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Re: Can we afford to build this house?

Post by Snert » Mon Feb 17, 2020 7:30 am

There's no way I'd do this. Back of the napkin math shows about $4M net worth. After the $1.2M draw down to make the down payment, assuming the house is worth the $2.7M you paid for it (unlikely), you still have a $4M net worth, but now 67% of your net worth is tied up in your house.

Looking at it from a different angle, you currently have about $3.6M of production assets working for you. Every dollar is a soldier, put to work to produce a return, right? Impressively, you currently have about 90% of your net worth working for you, producing a return. But now you might want to draw that down by $1.2M (33%!) and add a $2.7M consumption "asset" to the list. Do that and you'll have assets of about $5.5M, but almost HALF of that is dead consumption money, not only failing to produce a monetary return, but costing you even more money every hour of every day. In other words, half of your net worth is now a financial drag.

I'd suggest no more than 25% of anyone's assets tied up in a personal home. Less would probably be much more comfortable.
Don't listen to me, I'm just a dog!

EnjoyIt
Posts: 4181
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Re: Can we afford to build this house?

Post by EnjoyIt » Mon Feb 17, 2020 9:50 am

Unladen_Swallow wrote:
Sun Feb 16, 2020 10:28 pm
It is serious advice, but in the end it is still my own personal wisdom. It is food for thought. Your plan must still be something that makes sense to you.

I am putting myself in your shoes and giving you my perspective.

Many here look at purchases only from the viewpoint of "can you afford the monthly payments". I have never approached my financial life in that way. I view purchases in relation to how they compare to my savings and overall flexibility of life. And how all the other fun things I want to do fit in. I am certainly not a frugal person and have some expensive tastes. And I am very averse to being beholden to a large expenditure that might require regular income.

Your income is good, as are your savings. If you intended to buy a $1.5M home, that is something that would be within consideration (if I were you).

However, if I desired a $2.7M home, I would wait until I was FI and could support purchase without income.

dollarbillz wrote:
Sun Feb 16, 2020 10:06 pm
Unladen_Swallow wrote:
Sun Feb 16, 2020 9:52 pm
bloom2708 wrote:
Tue Feb 04, 2020 10:02 pm
I'd like to see a $10 million + net worth before going that big.

I know there are no rules for these scenarios.

If you have to ask, maybe "not yet" is the answer. :wink:
I appreciate the input, but, I have to ask, is this serious advice? And is does it scale linearly? (Ie would you recommend net worth of $1M prior to purchase of a home of $270k with $120k saved for down payment?)

I totally concede it may not be a good idea but I’m trying to understand the logic of this advice.
I feel and function the same way in my life. I would hate to have a possessions that owns me and a $2.7 million home would do that in this scenario. I would hate to be enslaved to the demands of this house.

Also, I see a few here talking about buying homes and pricing affordability as a multiple of income. I have seen here as high as 3.5x income. In some locations on the west cost and NE 3.5x income may be a necessity but if one want to have financial security they would be wise to stay below 2x income. At 2x one has lots of freedom and flexibility. At 3x or higher one is tied down to the house.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

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