$1M home purchase - can we afford it?

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Topic Author
KH2020
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Joined: Wed Mar 11, 2020 7:18 pm

$1M home purchase - can we afford it?

Post by KH2020 » Fri Apr 17, 2020 4:09 pm

Hi Bogleheads,

I've been a long term lurker on the site and am grateful for all of the fantastic advice here that allowed me to get an early start with investing and personal finance. I'm hoping to get a 2nd opinion on whether I can afford a home purchase or if there are any alternatives you'd advise that I consider. Would greatly appreciate your input!

facts about us and our situation:
We're married / both 28 and live in a HCOL area and the average 3-4 BR 2k SQF home that we're targeting is around $1M. We plan to put 20% down. We work in accounting / corporate finance and feel the salary part of our income is very secure but the bonus / equity components are volatile.

Income: we made ~340k last year. Our income is comprised of $250k salary, 60k bonus (expected range between 20% and 200%) and 30k stock options/RSU (expected range between 0 and 300%). We'd expect our income to plateau in the 400-500k range over the next 5 years.

Expenses: Non-housing consumption is ~60k. We'd like to have 2 kids over the next 3-5 years and would anticipate increasing this to ~100k + front load 529's at that time.

Long Term Financial goals: we'd like to be financially independent in our early 40's (maybe not retire but have the option to move to part time).

Investments :
High Yield Savings: 130k
Roth IRA: 220k
401k: 260k
Taxable Brokerage: 210k
Stock options: 165k
RSUs: 37k

Debt: None.

Plan would be to fund down payment with high yield savings and stock options. For EF, I'm comfortable accessing liquidity through low cost margin loan (~2%) on interactive brokers if it was ever needed but would plan to build up 2-3 months of cash savings from cash flow.

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btq96r
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Re: $1M home purchase - can we afford it?

Post by btq96r » Fri Apr 17, 2020 4:53 pm

I would work a total household budget model simulation that factors in the house you're wanting, the future kids expenses (w/ a modest 529 allotment), and all the rest based on just your salary without counting any of the bonuses (those can just fund lifestyle perks as rewards). That way you can get a warm and fuzzy that lets you be comfortable with the math, while allowing you and the wife to conceptualize the life changes you're thinking about in a budget document (easy format for accounting/corporate finance folks).

Be conservative with it, and you'll have a good chance at seeing a wide menu of options when you hit that decision point in your 40s as discussed.
Moderation is for Canadians.

Trader Joe
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Re: $1M home purchase - can we afford it?

Post by Trader Joe » Fri Apr 17, 2020 6:03 pm

KH2020 wrote:
Fri Apr 17, 2020 4:09 pm
Hi Bogleheads,

I've been a long term lurker on the site and am grateful for all of the fantastic advice here that allowed me to get an early start with investing and personal finance. I'm hoping to get a 2nd opinion on whether I can afford a home purchase or if there are any alternatives you'd advise that I consider. Would greatly appreciate your input!

facts about us and our situation:
We're married / both 28 and live in a HCOL area and the average 3-4 BR 2k SQF home that we're targeting is around $1M. We plan to put 20% down. We work in accounting / corporate finance and feel the salary part of our income is very secure but the bonus / equity components are volatile.

Income: we made ~340k last year. Our income is comprised of $250k salary, 60k bonus (expected range between 20% and 200%) and 30k stock options/RSU (expected range between 0 and 300%). We'd expect our income to plateau in the 400-500k range over the next 5 years.

Expenses: Non-housing consumption is ~60k. We'd like to have 2 kids over the next 3-5 years and would anticipate increasing this to ~100k + front load 529's at that time.

Long Term Financial goals: we'd like to be financially independent in our early 40's (maybe not retire but have the option to move to part time).

Investments :
High Yield Savings: 130k
Roth IRA: 220k
401k: 260k
Taxable Brokerage: 210k
Stock options: 165k
RSUs: 37k

Debt: None.

Plan would be to fund down payment with high yield savings and stock options. For EF, I'm comfortable accessing liquidity through low cost margin loan (~2%) on interactive brokers if it was ever needed but would plan to build up 2-3 months of cash savings from cash flow.
No, you cannot afford it. If I had your stated income and net worth. I would not do this. Too low.

CoAndy
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Re: $1M home purchase - can we afford it?

Post by CoAndy » Fri Apr 17, 2020 7:35 pm

I think $1M is a little steep. I think I would go no higher than $800K.

HEDGEFUNDIE
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Re: $1M home purchase - can we afford it?

Post by HEDGEFUNDIE » Fri Apr 17, 2020 7:37 pm

Yes you can afford it. PITI will probably be only $5k/month for a $800k loan. That’s $60k/yr. Your base alone is $250k. Of course you can afford it.

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HomerJ
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Re: $1M home purchase - can we afford it?

Post by HomerJ » Fri Apr 17, 2020 7:38 pm

Plan around only one salary.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”

jeroly
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Re: $1M home purchase - can we afford it?

Post by jeroly » Fri Apr 17, 2020 7:47 pm

You could swing it but it would be a little tight if your earnings don't rise as your childrearing expenses rise. Think $3-4k/month for childcare for two kids on top of your 529 savings, on top of your retirement savings, taxes, and mortgage/house expenses...even with low spending on everything else, it adds up fast.

When coupled with the uncertain economic situation (even companies that seem secure could surprise with layoffs or closures, or the overall economic situation could deteriorate to the point that employers feel emboldened to cut salaries and benefits like happened in the 1930s) and the uncertain housing market (there could be a new wave of mortgage foreclosures and drops in demand due to tax law changes or reluctance to go out and shop for a house with the coronavirus), I don't think I'd be looking to stretch things too much at this moment in history.

Normchad
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Re: $1M home purchase - can we afford it?

Post by Normchad » Fri Apr 17, 2020 7:53 pm

You can afford it.

You can afford anything you want, but you can’t afford everything you want. If you buy it, you almost certainly won’t be able to retire in your 40s.

Kids are expensive. Retirement is expensive. Life is expensive. You can afford it, and a good life no doubt. But all that comes at a cost. And it’s a personal decision which to prioritize.

Other posters have suggested putting together a longer term family plan. If you do that, you might find that with your assumptions you can do all that, and retire in your mid 50s.

bgf
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Re: $1M home purchase - can we afford it?

Post by bgf » Fri Apr 17, 2020 7:55 pm

If a couple making $340k a year can't afford a TWO THOUSAND SQUARE FOOT HOUSE there's something seriously wrong. I mean, thats tiny.

There may be something seriously wrong though.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

Archimedes
Posts: 246
Joined: Wed Feb 15, 2017 11:27 am

Re: $1M home purchase - can we afford it?

Post by Archimedes » Fri Apr 17, 2020 7:56 pm

You can afford it, but in your shoes I would wait 6 months to see where things shake out with the current recession.

Topic Author
KH2020
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Joined: Wed Mar 11, 2020 7:18 pm

Re: $1M home purchase - can we afford it?

Post by KH2020 » Fri Apr 17, 2020 8:08 pm

Normchad wrote:
Fri Apr 17, 2020 7:53 pm
You can afford it.

You can afford anything you want, but you can’t afford everything you want. If you buy it, you almost certainly won’t be able to retire in your 40s.

Kids are expensive. Retirement is expensive. Life is expensive. You can afford it, and a good life no doubt. But all that comes at a cost. And it’s a personal decision which to prioritize.

Other posters have suggested putting together a longer term family plan. If you do that, you might find that with your assumptions you can do all that, and retire in your mid 50s.
Thanks, I like how you framed that. I think we're going to move slowly and spend the next few months getting more familiar with the market and letting things settle down a bit in the economy (and building a nice spreadsheet as some other posters have suggested :D ). My thought process is I want to buy a place that I'll stay in for the next 10-20 years. Don't want to buy a "starter home" and waste money on transaction fees.

Thanks for all the responses!

BanquetBeer
Posts: 478
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Re: $1M home purchase - can we afford it?

Post by BanquetBeer » Fri Apr 17, 2020 8:13 pm

Probably a few years past you and I’m still pushing to keep costs low and grow savings. We have talked about a more $$ house in a few years. More expensive houses are better in high income tax states (they rely less on property taxes).

If I were you I would wait until you have/planning on kids to get a house. Your goals/wants may change and unless there is some great temporary deal, you will save quite a bit by staying put a few years.

softmax
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Joined: Tue Feb 04, 2020 1:27 am

Re: $1M home purchase - can we afford it?

Post by softmax » Fri Apr 17, 2020 8:22 pm

KH2020 wrote:
Fri Apr 17, 2020 4:09 pm
Hi Bogleheads,

I've been a long term lurker on the site and am grateful for all of the fantastic advice here that allowed me to get an early start with investing and personal finance. I'm hoping to get a 2nd opinion on whether I can afford a home purchase or if there are any alternatives you'd advise that I consider. Would greatly appreciate your input!

facts about us and our situation:
We're married / both 28 and live in a HCOL area and the average 3-4 BR 2k SQF home that we're targeting is around $1M. We plan to put 20% down. We work in accounting / corporate finance and feel the salary part of our income is very secure but the bonus / equity components are volatile.

Income: we made ~340k last year. Our income is comprised of $250k salary, 60k bonus (expected range between 20% and 200%) and 30k stock options/RSU (expected range between 0 and 300%). We'd expect our income to plateau in the 400-500k range over the next 5 years.

Expenses: Non-housing consumption is ~60k. We'd like to have 2 kids over the next 3-5 years and would anticipate increasing this to ~100k + front load 529's at that time.

Long Term Financial goals: we'd like to be financially independent in our early 40's (maybe not retire but have the option to move to part time).

Investments :
High Yield Savings: 130k
Roth IRA: 220k
401k: 260k
Taxable Brokerage: 210k
Stock options: 165k
RSUs: 37k

Debt: None.

Plan would be to fund down payment with high yield savings and stock options. For EF, I'm comfortable accessing liquidity through low cost margin loan (~2%) on interactive brokers if it was ever needed but would plan to build up 2-3 months of cash savings from cash flow.
We are also 28 and we make almost the same as you and live in a HCOL area.

Prior to the covid19 crisis(?), I was convinced that renting isn’t that bad and owning a house can be expensive.

But... quarantine in a 800sqft bento box apartment for a couple of months? I seriously prefer not to do it again. :oops:

I think you can afford it. Just work harder after buying.

Topic Author
KH2020
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Joined: Wed Mar 11, 2020 7:18 pm

Re: $1M home purchase - can we afford it?

Post by KH2020 » Fri Apr 17, 2020 8:25 pm

BanquetBeer wrote:
Fri Apr 17, 2020 8:13 pm
Probably a few years past you and I’m still pushing to keep costs low and grow savings. We have talked about a more $$ house in a few years. More expensive houses are better in high income tax states (they rely less on property taxes).

If I were you I would wait until you have/planning on kids to get a house. Your goals/wants may change and unless there is some great temporary deal, you will save quite a bit by staying put a few years.
Yes, where I'm at property taxes are pretty reasonable (~1%) and can't rise by more than 2% annually. My hesitation with waiting multiple years is the interest rate environment and the fact that rent is almost as much as my mortgage payment would be on a 30 yr fixed.

Topic Author
KH2020
Posts: 7
Joined: Wed Mar 11, 2020 7:18 pm

Re: $1M home purchase - can we afford it?

Post by KH2020 » Fri Apr 17, 2020 8:26 pm

softmax wrote:
Fri Apr 17, 2020 8:22 pm
KH2020 wrote:
Fri Apr 17, 2020 4:09 pm
Hi Bogleheads,

I've been a long term lurker on the site and am grateful for all of the fantastic advice here that allowed me to get an early start with investing and personal finance. I'm hoping to get a 2nd opinion on whether I can afford a home purchase or if there are any alternatives you'd advise that I consider. Would greatly appreciate your input!

facts about us and our situation:
We're married / both 28 and live in a HCOL area and the average 3-4 BR 2k SQF home that we're targeting is around $1M. We plan to put 20% down. We work in accounting / corporate finance and feel the salary part of our income is very secure but the bonus / equity components are volatile.

Income: we made ~340k last year. Our income is comprised of $250k salary, 60k bonus (expected range between 20% and 200%) and 30k stock options/RSU (expected range between 0 and 300%). We'd expect our income to plateau in the 400-500k range over the next 5 years.

Expenses: Non-housing consumption is ~60k. We'd like to have 2 kids over the next 3-5 years and would anticipate increasing this to ~100k + front load 529's at that time.

Long Term Financial goals: we'd like to be financially independent in our early 40's (maybe not retire but have the option to move to part time).

Investments :
High Yield Savings: 130k
Roth IRA: 220k
401k: 260k
Taxable Brokerage: 210k
Stock options: 165k
RSUs: 37k

Debt: None.

Plan would be to fund down payment with high yield savings and stock options. For EF, I'm comfortable accessing liquidity through low cost margin loan (~2%) on interactive brokers if it was ever needed but would plan to build up 2-3 months of cash savings from cash flow.
We are also 28 and we make almost the same as you and live in a HCOL area.

Prior to the covid19 crisis(?), I was convinced that renting isn’t that bad and owning a house can be expensive.

But... quarantine in a 800sqft bento box apartment for a couple of months? I seriously prefer not to do it again. :oops:

I think you can afford it. Just work harder after buying.
haha we have 1000 sqft right now but I feel you!

decapod10
Posts: 656
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Re: $1M home purchase - can we afford it?

Post by decapod10 » Fri Apr 17, 2020 8:26 pm

I would probably take a closer look at your estimate spending on kids also. If your current spending is $60k, looks like you are expecting around $40k of expenses per year for the kids. I would do some research as to whether that $40k number is realistic, considering it sounds like both of you work, especially since you live in a HCOL area. Childcare can be a huge cost. We have a full time nanny, and her gross salary is more than $40k per year, not even including employer taxes. Not to say you necessarily need a nanny, and there may be cheaper options that work for your family, but just a warning to make sure not to underestimate how expensive children can be, especially in a HCOL area.

Also, if you want to reach FI in 15 years, that may be a difficult task with 2 kids and a $1M home, unless you go full rice and beans Money Mustache mode.

I could be wrong of course, you know your budget and needs better than me.

runner540
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Re: $1M home purchase - can we afford it?

Post by runner540 » Fri Apr 17, 2020 8:33 pm

KH2020 wrote:
Fri Apr 17, 2020 8:08 pm
Normchad wrote:
Fri Apr 17, 2020 7:53 pm
You can afford it.

You can afford anything you want, but you can’t afford everything you want. If you buy it, you almost certainly won’t be able to retire in your 40s.

Kids are expensive. Retirement is expensive. Life is expensive. You can afford it, and a good life no doubt. But all that comes at a cost. And it’s a personal decision which to prioritize.

Other posters have suggested putting together a longer term family plan. If you do that, you might find that with your assumptions you can do all that, and retire in your mid 50s.
Thanks, I like how you framed that. I think we're going to move slowly and spend the next few months getting more familiar with the market and letting things settle down a bit in the economy (and building a nice spreadsheet as some other posters have suggested :D ). My thought process is I want to buy a place that I'll stay in for the next 10-20 years. Don't want to buy a "starter home" and waste money on transaction fees.

Thanks for all the responses!
I’m with you on buying a home you can stay in. But be conservative in your assumptions for PITI and maintenance within a budget that includes daycare (current salaries, no bonus/RSU). Don’t buy off both of you growing comp esp until after you've had kids. Use the variable comp to save up a fatter down payment to bring PITI down - that can get you a bigger house than your conservative PITI budget would otherwise.

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Watty
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Re: $1M home purchase - can we afford it?

Post by Watty » Fri Apr 17, 2020 8:33 pm

HEDGEFUNDIE wrote:
Fri Apr 17, 2020 7:37 pm
Yes you can afford it. PITI will probably be only $5k/month for a $800k loan. That’s $60k/yr. Your base alone is $250k. Of course you can afford it.
+1

Stick with a 30 year mortage so you will not be in a bind if something happens and you have to go down to one income.

Be sure to buy in an area that has decent schools. Measuring and rating schools is fiendishly difficult since a lot of what is being measured depends on the demographics of the kids and not the quality of the teaching. Getting the very top rated 10 school might not really be better than one that ranks 8 if the top school has better demographics.
KH2020 wrote:
Fri Apr 17, 2020 4:09 pm
Stock options: 165k
RSUs: 37k
If these are vested and you can sell them then you might want to sell then because having too much in your companies stock has caused a lot of people problems. You might want to start a new thread with more details to ask about that.

Topic Author
KH2020
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Re: $1M home purchase - can we afford it?

Post by KH2020 » Fri Apr 17, 2020 9:31 pm

decapod10 wrote:
Fri Apr 17, 2020 8:26 pm
I would probably take a closer look at your estimate spending on kids also. If your current spending is $60k, looks like you are expecting around $40k of expenses per year for the kids. I would do some research as to whether that $40k number is realistic, considering it sounds like both of you work, especially since you live in a HCOL area. Childcare can be a huge cost. We have a full time nanny, and her gross salary is more than $40k per year, not even including employer taxes. Not to say you necessarily need a nanny, and there may be cheaper options that work for your family, but just a warning to make sure not to underestimate how expensive children can be, especially in a HCOL area.

Also, if you want to reach FI in 15 years, that may be a difficult task with 2 kids and a $1M home, unless you go full rice and beans Money Mustache mode.

I could be wrong of course, you know your budget and needs better than me.
Thanks for the tip. We probably have ~10-15k in our current budget on things like international travel / fancy dining that we'd look to cut out upon having kids. So I'm estimating ~50k / year spent on kids. We're also fortunate to have both sets of parents retired and in the same city and wife works from home. My gut check is the median income in our area is ~125k or ~100k after taxes and we'd like to maintain an average lifestyle.

Topic Author
KH2020
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Re: $1M home purchase - can we afford it?

Post by KH2020 » Fri Apr 17, 2020 9:34 pm

Watty wrote:
Fri Apr 17, 2020 8:33 pm
HEDGEFUNDIE wrote:
Fri Apr 17, 2020 7:37 pm
Yes you can afford it. PITI will probably be only $5k/month for a $800k loan. That’s $60k/yr. Your base alone is $250k. Of course you can afford it.
+1

Stick with a 30 year mortage so you will not be in a bind if something happens and you have to go down to one income.

Be sure to buy in an area that has decent schools. Measuring and rating schools is fiendishly difficult since a lot of what is being measured depends on the demographics of the kids and not the quality of the teaching. Getting the very top rated 10 school might not really be better than one that ranks 8 if the top school has better demographics.
KH2020 wrote:
Fri Apr 17, 2020 4:09 pm
Stock options: 165k
RSUs: 37k
If these are vested and you can sell them then you might want to sell then because having too much in your companies stock has caused a lot of people problems. You might want to start a new thread with more details to ask about that.
I sell the RSU's upon vesting, but the options have a 10 year expiration term and vest at 2 yrs, so there's some value I'd be "forfeiting" if I exercised immediately. Something I'll have to look into further from a risk managment perspective and appreciate you pointing it out.

BillWalters
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Re: $1M home purchase - can we afford it?

Post by BillWalters » Fri Apr 17, 2020 10:24 pm

This board is insane on this topic.

You can easily afford it.

oldfort
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Re: $1M home purchase - can we afford it?

Post by oldfort » Fri Apr 17, 2020 10:59 pm

BillWalters wrote:
Fri Apr 17, 2020 10:24 pm
This board is insane on this topic.

You can easily afford it.
+1

The mortgage comes in at 2.35x gross comp. If that's too much, no one would ever be able to buy a house in a HCOL area.

cowbman
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Re: $1M home purchase - can we afford it?

Post by cowbman » Fri Apr 17, 2020 11:08 pm

KH2020 wrote:
Fri Apr 17, 2020 8:25 pm
BanquetBeer wrote:
Fri Apr 17, 2020 8:13 pm
Probably a few years past you and I’m still pushing to keep costs low and grow savings. We have talked about a more $$ house in a few years. More expensive houses are better in high income tax states (they rely less on property taxes).

If I were you I would wait until you have/planning on kids to get a house. Your goals/wants may change and unless there is some great temporary deal, you will save quite a bit by staying put a few years.
Yes, where I'm at property taxes are pretty reasonable (~1%) and can't rise by more than 2% annually. My hesitation with waiting multiple years is the interest rate environment and the fact that rent is almost as much as my mortgage payment would be on a 30 yr fixed.
So, California. That's Prop 13. Bonds can and do get added. Are there Mello-Roos where you're at?

dellfanboy
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Re: $1M home purchase - can we afford it?

Post by dellfanboy » Sat Apr 18, 2020 12:11 am

I’m in a similar income bracket ~$400k ish income and in a HCOL area. We’ve run the numbers on a $1.2-$1.5m house and couldn’t get comfortable with it. We’ve got $300k for the down payment and currently own a $650k condo. Things are tight but we realized we could “win the game” with a small sacrifice on space.

That sacrifice allows us to travel often, eat out whenever and whatever we want, hire a nanny full-time, and rent a larger house for a month during the summer in a city of our choice (LA, NYC,etc). We plan on doing international stays once our little one gets older (think a month in Paris or Barcelona)

Someone said it best: “You can do anything but you can’t do everything”. For us, it came down to freedom and knowing that if we ever needed to leave this HCOL, that we’d be A-Okay!

I know that doesn’t answer your question but just giving you some additional thoughts. Either way, you’re in a fortunate position compared to most folks! Count your blessings!

jharkin
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Re: $1M home purchase - can we afford it?

Post by jharkin » Sat Apr 18, 2020 6:28 am

bgf wrote:
Fri Apr 17, 2020 7:55 pm
If a couple making $340k a year can't afford a TWO THOUSAND SQUARE FOOT HOUSE there's something seriously wrong. I mean, thats tiny.

There may be something seriously wrong though.
We lived in 1300 with 1 bathroom and 2 kids for a decade. Most generations before the current lived in even less.

People have lost their ability to distinguish wants from needs I think.


And no, OP I would not reccomend buying a house 4 times your base salary income with big future expense increases. That’s risky in good times, and these and most definitely NOT good times.

We have a house 3x income, no other debt, very stable jobs and the kid expenses are baked in and it still feels rather uncomfortable at times...

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TomatoTomahto
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Re: $1M home purchase - can we afford it?

Post by TomatoTomahto » Sat Apr 18, 2020 6:41 am

BillWalters wrote:
Fri Apr 17, 2020 10:24 pm
This board is insane on this topic.

You can easily afford it.
Put me in the insane cohort.

Also, what @jharkin said.
Okay, I get it; I won't be political or controversial. The Earth is flat.

dukeblue219
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Re: $1M home purchase - can we afford it?

Post by dukeblue219 » Sat Apr 18, 2020 6:46 am

You can afford it. Since you aren't having kids immediately, you could wait a bit and save more, or buy and save like hell the next couple years when youre making $400 to $500k. Then you can throw a ton of money at the mortgage and recast. Maybe you'll have it down to $600k when you decide to have kids? Then you're only talking about a $3.5k payment ish?

I know it's expensive, but in a HCOL area sometimes you do what you gotta do. Maybe that means no 529 contribs and reduced retirement contribs while the kids are in preschool, then they go to public school and you go back in and save hard.

Edit - why do people focus on the multiple of house price to annual income? If you can get a 30 year at 3.00% that's a very different payment than a mortgage 15 years ago at 5.5% when that rule of thumb might have made sense. At that income they'll still be able to pay this off very early if that's what they want to call FI.

I strongly suggest OP just build out some sample budgets including (realistic) childcare costs and reduced employment for one spouse (just in case). Not everyone wants to live in a cramped house so that they can retire early - I'd gladly retire at 67 so that I can have the house I want for my family in my 30s and 40s. That's really a personal choice only OP can make, and I don't think it's necessarily reckless.

bgf
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Re: $1M home purchase - can we afford it?

Post by bgf » Sat Apr 18, 2020 7:41 am

jharkin wrote:
Sat Apr 18, 2020 6:28 am
bgf wrote:
Fri Apr 17, 2020 7:55 pm
If a couple making $340k a year can't afford a TWO THOUSAND SQUARE FOOT HOUSE there's something seriously wrong. I mean, thats tiny.

There may be something seriously wrong though.
We lived in 1300 with 1 bathroom and 2 kids for a decade. Most generations before the current lived in even less.

People have lost their ability to distinguish wants from needs I think.
People are always pretty much just people. People don't tend to change that much when it comes to basic things.

1300 is TINY. We're talking about people making a better income than probably 95% of the country and telling them they can't afford a small home.

That sucks.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

Ron Ronnerson
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Re: $1M home purchase - can we afford it?

Post by Ron Ronnerson » Sat Apr 18, 2020 10:25 am

Yes, you can afford it.

bluebolt
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Re: $1M home purchase - can we afford it?

Post by bluebolt » Sat Apr 18, 2020 11:52 am

You can afford it, but I'd recommend not doing it. I'd wait until after you had your first child. Your view of pros/cons in a house changes dramatically, and in ways you might not be able to anticipate.

Isabelle77
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Re: $1M home purchase - can we afford it?

Post by Isabelle77 » Sat Apr 18, 2020 11:54 am

You can afford it. I would probably wait until after the first child, just because kids change a lot and there's a lot that can happen that maybe you wouldn't be prepared for. But, I guess you could always sell the house if you needed to.

hookemhorns
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Re: $1M home purchase - can we afford it?

Post by hookemhorns » Sat Apr 18, 2020 12:13 pm

We bought a house with similar numbers to yours (ours was a ~650k mortgage). It has been totally fine so far and our state has much higher property taxes, though no income tax. To put it into perspective, we're still saving 40-50% of our pretax income, so there is plenty of buffer in the equation.

As somebody else mentioned, you might wait a few months to see if the housing market dips due to COVID, which seems likely in most if not all cities. If nothing else you can be a bit more aggressive in making offers.

BV3273
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Re: $1M home purchase - can we afford it?

Post by BV3273 » Sat Apr 18, 2020 12:21 pm

Archimedes wrote:
Fri Apr 17, 2020 7:56 pm
You can afford it, but in your shoes I would wait 6 months to see where things shake out with the current recession.
+1

KyleAAA
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Re: $1M home purchase - can we afford it?

Post by KyleAAA » Sat Apr 18, 2020 1:17 pm

Yeah, you can easily afford it on your base alone at current rates.

AlphaLess
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Re: $1M home purchase - can we afford it?

Post by AlphaLess » Sat Apr 18, 2020 1:23 pm

I would encourage you to consider 3 factors:

1. How secure are your jobs, not just now, but in case of a deep depression,

2. What are the chances that you can purchase that house for an X% further discount, Y months from now,

3. How convenient it is to make the transaction now, vs later.

Housing will get hit: no question about that. But housing hit can come in a number of ways:

a. reduced transaction count,
b. reduced prices,
c. difficulty of closing transactions.

Housing market has poor price discovery. As a result, true prices take a very long time to be determined. Exhibit A: the financial crisis. House prices were dropping all the way to 2011 / 2012, primarily due to lack of transparency in pricing.

Stocks, on the other hand, are rather liquid, ESPECIALLY in times of crisis.

I would hesitate to give you adivse on the affordability.

When we purchased our first condo, the price was exactly 100% of our gross annual income.

Our current condo is 34% of our gross annual income (depending on who you ask, it may even be 30%).

So, probably WAY more conservative than you are.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.

fareastwarriors
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Re: $1M home purchase - can we afford it?

Post by fareastwarriors » Sat Apr 18, 2020 3:11 pm

BV3273 wrote:
Sat Apr 18, 2020 12:21 pm
Archimedes wrote:
Fri Apr 17, 2020 7:56 pm
You can afford it, but in your shoes I would wait 6 months to see where things shake out with the current recession.
+1
+2

Wait and see a bit. Maybe there should be some discounts in 3-6 months and you'll get a better view on how your companies are doing.
.
You can afford it, comfortably. This board is always more conservative (not a bad thing) but if we wait for 1.5/2x income v house prices, some people in V/HCOL might be waiting forever

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Gray
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Re: $1M home purchase - can we afford it?

Post by Gray » Sat Apr 18, 2020 3:52 pm

Normchad wrote:
Fri Apr 17, 2020 7:53 pm
You can afford it.

You can afford anything you want, but you can’t afford everything you want. If you buy it, you almost certainly won’t be able to retire in your 40s.

Kids are expensive. Retirement is expensive. Life is expensive. You can afford it, and a good life no doubt. But all that comes at a cost. And it’s a personal decision which to prioritize.
I love this post. Pick your priorities and prepare to sacrifice in others. Our cars get driven until they cannot be resuscitated, for example. When my daughter’s education is totally paid for, but we sacrificed, especially when she was very young and we had child care expenses, to save it, but we did. Our retirement is also a priority and we’re doing well there, totally recovered from the crash.

bluebolt
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Re: $1M home purchase - can we afford it?

Post by bluebolt » Sat Apr 18, 2020 4:06 pm

AlphaLess wrote:
Sat Apr 18, 2020 1:23 pm
I would encourage you to consider 3 factors:

1. How secure are your jobs, not just now, but in case of a deep depression,

2. What are the chances that you can purchase that house for an X% further discount, Y months from now,

3. How convenient it is to make the transaction now, vs later.

Housing will get hit: no question about that. But housing hit can come in a number of ways:

a. reduced transaction count,
b. reduced prices,
c. difficulty of closing transactions.

Housing market has poor price discovery. As a result, true prices take a very long time to be determined. Exhibit A: the financial crisis. House prices were dropping all the way to 2011 / 2012, primarily due to lack of transparency in pricing.

Stocks, on the other hand, are rather liquid, ESPECIALLY in times of crisis.

I would hesitate to give you adivse on the affordability.

When we purchased our first condo, the price was exactly 100% of our gross annual income.

Our current condo is 34% of our gross annual income (depending on who you ask, it may even be 30%).

So, probably WAY more conservative than you are.
You are in Kentucky. Besides being more conservative, the comparison doesn't translate well to a HCOL area where the OP is.

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geerhardusvos
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Re: $1M home purchase - can we afford it?

Post by geerhardusvos » Sat Apr 18, 2020 4:10 pm

KH2020 wrote:
Fri Apr 17, 2020 4:09 pm
Hi Bogleheads,

I've been a long term lurker on the site and am grateful for all of the fantastic advice here that allowed me to get an early start with investing and personal finance. I'm hoping to get a 2nd opinion on whether I can afford a home purchase or if there are any alternatives you'd advise that I consider. Would greatly appreciate your input!

facts about us and our situation:
We're married / both 28 and live in a HCOL area and the average 3-4 BR 2k SQF home that we're targeting is around $1M. We plan to put 20% down. We work in accounting / corporate finance and feel the salary part of our income is very secure but the bonus / equity components are volatile.

Income: we made ~340k last year. Our income is comprised of $250k salary, 60k bonus (expected range between 20% and 200%) and 30k stock options/RSU (expected range between 0 and 300%). We'd expect our income to plateau in the 400-500k range over the next 5 years.

Expenses: Non-housing consumption is ~60k. We'd like to have 2 kids over the next 3-5 years and would anticipate increasing this to ~100k + front load 529's at that time.

Long Term Financial goals: we'd like to be financially independent in our early 40's (maybe not retire but have the option to move to part time).

Investments :
High Yield Savings: 130k
Roth IRA: 220k
401k: 260k
Taxable Brokerage: 210k
Stock options: 165k
RSUs: 37k

Debt: None.

Plan would be to fund down payment with high yield savings and stock options. For EF, I'm comfortable accessing liquidity through low cost margin loan (~2%) on interactive brokers if it was ever needed but would plan to build up 2-3 months of cash savings from cash flow.
Don’t buy the house... rent and retire in <10 years. That’s what we’re doing and we have a similar set up & age
VTSAX and chill

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Gray
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Re: $1M home purchase - can we afford it?

Post by Gray » Sat Apr 18, 2020 5:42 pm

Renting sucks generally in my opinion, especially regarding cost increases that you have no idea what they will be.

BV3273
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Re: $1M home purchase - can we afford it?

Post by BV3273 » Sat Apr 18, 2020 6:12 pm

I’m 34. Income close to yours. We live in a house we purchased for half that amount. Is it perfect? No. Could it be with further construction costs? Probably. Could I afford a bigger place? Yes. I’m not going for it. The way I look at it is I can make it with what I have and hopefully retire early. This is a priority for me and I’m doing what I can to see if to fruition.

Edge215
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Re: $1M home purchase - can we afford it?

Post by Edge215 » Sat Apr 18, 2020 6:53 pm

Can you move to a state with cheaper housing like Texas. Also no state income taxes

AlphaLess
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Re: $1M home purchase - can we afford it?

Post by AlphaLess » Sat Apr 18, 2020 9:33 pm

bluebolt wrote:
Sat Apr 18, 2020 4:06 pm
AlphaLess wrote:
Sat Apr 18, 2020 1:23 pm
I would encourage you to consider 3 factors:

1. How secure are your jobs, not just now, but in case of a deep depression,

2. What are the chances that you can purchase that house for an X% further discount, Y months from now,

3. How convenient it is to make the transaction now, vs later.

Housing will get hit: no question about that. But housing hit can come in a number of ways:

a. reduced transaction count,
b. reduced prices,
c. difficulty of closing transactions.

Housing market has poor price discovery. As a result, true prices take a very long time to be determined. Exhibit A: the financial crisis. House prices were dropping all the way to 2011 / 2012, primarily due to lack of transparency in pricing.

Stocks, on the other hand, are rather liquid, ESPECIALLY in times of crisis.

I would hesitate to give you adivse on the affordability.

When we purchased our first condo, the price was exactly 100% of our gross annual income.

Our current condo is 34% of our gross annual income (depending on who you ask, it may even be 30%).

So, probably WAY more conservative than you are.
You are in Kentucky. Besides being more conservative, the comparison doesn't translate well to a HCOL area where the OP is.
My profile says that I am in Kentucky. I have never stepped foot in Kentucky in my life.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.

Firemenot
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Re: $1M home purchase - can we afford it?

Post by Firemenot » Sat Apr 18, 2020 9:41 pm

I haven’t read all of the comments so perhaps this has already been said. I’d wait at least 6 months, on buying a house, if not a year or more. House prices will likely soften, but it takes awhile. That’s what happened in The Great Recession.

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luminous
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Re: $1M home purchase - can we afford it?

Post by luminous » Sat Apr 18, 2020 9:58 pm

bgf wrote:
Sat Apr 18, 2020 7:41 am
jharkin wrote:
Sat Apr 18, 2020 6:28 am
bgf wrote:
Fri Apr 17, 2020 7:55 pm
If a couple making $340k a year can't afford a TWO THOUSAND SQUARE FOOT HOUSE there's something seriously wrong. I mean, thats tiny.

There may be something seriously wrong though.
We lived in 1300 with 1 bathroom and 2 kids for a decade. Most generations before the current lived in even less.

People have lost their ability to distinguish wants from needs I think.
People are always pretty much just people. People don't tend to change that much when it comes to basic things.

1300 is TINY. We're talking about people making a better income than probably 95% of the country and telling them they can't afford a small home.

That sucks.
Just as another data point, we have also lived in 1300 sq ft with 1 bathroom and 2 kids for a decade. We have 4 bedrooms, a lovely eat in kitchen, it doesn’t feel small at all. I’d love another half bath though.

Different families are different and want different things.
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2022.

bluebolt
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Re: $1M home purchase - can we afford it?

Post by bluebolt » Sat Apr 18, 2020 10:05 pm

AlphaLess wrote:
Sat Apr 18, 2020 9:33 pm
bluebolt wrote:
Sat Apr 18, 2020 4:06 pm
You are in Kentucky. Besides being more conservative, the comparison doesn't translate well to a HCOL area where the OP is.
My profile says that I am in Kentucky. I have never stepped foot in Kentucky in my life.
Not sure how I'm supposed to know that. In any case, either you are in a LCOL area and/or you have a crazy high income.

AlphaLess
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Re: $1M home purchase - can we afford it?

Post by AlphaLess » Sat Apr 18, 2020 10:11 pm

bluebolt wrote:
Sat Apr 18, 2020 10:05 pm
AlphaLess wrote:
Sat Apr 18, 2020 9:33 pm
bluebolt wrote:
Sat Apr 18, 2020 4:06 pm
You are in Kentucky. Besides being more conservative, the comparison doesn't translate well to a HCOL area where the OP is.
My profile says that I am in Kentucky. I have never stepped foot in Kentucky in my life.
Not sure how I'm supposed to know that. In any case, either you are in a LCOL area and/or you have a crazy high income.
Why is that relevant?

Does it change my advice in any way?
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.

runner540
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Re: $1M home purchase - can we afford it?

Post by runner540 » Sat Apr 18, 2020 10:13 pm

Edge215 wrote:
Sat Apr 18, 2020 6:53 pm
Can you move to a state with cheaper housing like Texas. Also no state income taxes
Haha just make sure to adjust PITI for 2.5-3.0% property taxes, so $2k+ extra per month...and of course 8+% sales tax in the major metros.

bayview
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Re: $1M home purchase - can we afford it?

Post by bayview » Sat Apr 18, 2020 10:17 pm

KH2020 wrote:
Fri Apr 17, 2020 4:09 pm
Hi Bogleheads,
... ... ...
OP, you might want to edit your original post to enter an addendum that you have already decided to postpone the purchase of a home, or you will continue to get presumably irrelevant and unwanted advice.

Like this. :D
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

catlady
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Re: $1M home purchase - can we afford it?

Post by catlady » Sat Apr 18, 2020 10:21 pm

HomerJ wrote:
Fri Apr 17, 2020 7:38 pm
Plan around only one salary.
This. My husband and I have always tried to live off one salary, usually the smaller one, and it’s made life significantly less stressful when one of us got laid off.

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