$2 million dollar house pre requisites

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Edge215
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$2 million dollar house pre requisites

Post by Edge215 »

If someone wanted to buy a $2 million dollar house in a HCOLA, what would be the pre requisites needed in order to gain the boglehead Seal of approval ?
Monsterflockster
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Re: $2 million dollar house pre requisites

Post by Monsterflockster »

A 2 bed, one bath in Palo Alto should suffice.
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Edge215
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Re: $2 million dollar house pre requisites

Post by Edge215 »

I’m talking things like annual income. Savings. Down payment.
runner540
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Re: $2 million dollar house pre requisites

Post by runner540 »

This should be fun :sharebeer

I’ll start with subjective terms (you tell us what numbers you have in each category)
you need, post purchase:
1. a robust emergency fund
2. well funded retirement accounts (on or ahead of what you’ll need to sustain your lifestyle),
3. stable income (excluding RSUs and bonuses) that will cover continued savings, all housing costs and other expenses. (Where I live, a $2MM house comes with $50k/year property taxes...)
Last edited by runner540 on Sat May 09, 2020 2:07 pm, edited 1 time in total.
ofckrupke
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Re: $2 million dollar house pre requisites

Post by ofckrupke »

A need for the bogleheads seal of approval arguably disqualifies.

Put more charitably: such approval is not a necessity, and its pursuit probably a waste of one's time and mental energy in such a situation.
Last edited by ofckrupke on Sat May 09, 2020 2:07 pm, edited 1 time in total.
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wander
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Re: $2 million dollar house pre requisites

Post by wander »

This is a general question, so the answers are going to be general.
dachshunddad
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Re: $2 million dollar house pre requisites

Post by dachshunddad »

I think it depends on what your net worth is and if you want to retire early. If you aren’t trying to FIRE, less than 20% of income cost for total housing/ year and 20% down are good ballparks for conservative bogleheads .

If you want to FIRE: I’d personally say you need to be making close to $1M/year or have net worth significantly greater than $2M. Again, depends on age and job stability.

I’m in the camp that a house is a consumption item and not a investment or way to make money.
bluebolt
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Re: $2 million dollar house pre requisites

Post by bluebolt »

runner540 wrote: Sat May 09, 2020 2:02 pm This should be fun :sharebeer

I’ll start with subjective terms (you tell us what numbers you have in each category)
you need, post purchase:
1. a robust emergency fund
2. well funded retirement accounts (on or ahead of what you’ll need to sustain your lifestyle),
3. stable income (excluding RSUs and bonuses) that will cover continued savings, all housing costs and other expenses.
4. 2 millon dollars

But seriously, OP, there's too many variables to answer your question reasonably. Can you provide your current income, spending, assets? How stable is your job? What are your other goals besides owning a home? How old are you? When do you want to retire?

Then, the answers can be narrowed down enough to be useful
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Re: $2 million dollar house pre requisites

Post by KyleAAA »

At least 20% down and PITI no more than 35% of your income should do it. Preferably less than 28%. Everything else is so contextual it's impossible to give more specific advice. People in VHCOL areas often have no choice bit to break the usual homebuying rules.
njdealguy
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Re: $2 million dollar house pre requisites

Post by njdealguy »

Based on spending no more than 3 years annual income on a house, that means income should be 1/3 of purchase price or around 667,000. If one doesn't work/retired, then should have net worth/assets worth 16.675 million as that gives the 667k at a 4% safe withdrawal rate of portfolio. If one earns let's say 300k, then to cover the 367k shortfall on income formula should have additional 9.175 million to cover the difference at the 4% withdrawal rate. May be too generic for all cases and others can disagree, or state higher asset requirements/lower withdrawal percentage rates!
Helo80
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Re: $2 million dollar house pre requisites

Post by Helo80 »

I guess if you plan on staying there for a long time.... If you're just doing the SV or Bay Area dip for a few years and then jet move... maybe don't buy a $2 million dollar home. Then again, prices have been solid there so you probably wouldn't lose your shirt if you did just buy a home for 3 years and jet.
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ram
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Re: $2 million dollar house pre requisites

Post by ram »

Minimum requirements:
400K for down payment.
Stable >500K/yr income. (>600K preferable)
Last edited by ram on Sat May 09, 2020 2:21 pm, edited 1 time in total.
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22twain
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Re: $2 million dollar house pre requisites

Post by 22twain »

Edge215 wrote: Sat May 09, 2020 1:40 pm If someone wanted to buy
You, or someone you know?
Help save endangered words! When you write "princiPLE", make sure you don't really mean "princiPAL"!
Lookingforanswers
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Re: $2 million dollar house pre requisites

Post by Lookingforanswers »

KyleAAA wrote: Sat May 09, 2020 2:13 pm At least 20% down and PITI no more than 35% of your income should do it. Preferably less than 28%. Everything else is so contextual it's impossible to give more specific advice. People in VHCOL areas often have no choice bit to break the usual homebuying rules.
Good advice at any price point.
Last edited by Lookingforanswers on Sun May 10, 2020 2:24 pm, edited 2 times in total.
Ron Ronnerson
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Re: $2 million dollar house pre requisites

Post by Ron Ronnerson »

Edge215 wrote: Sat May 09, 2020 1:57 pm I’m talking things like annual income. Savings. Down payment.
The different variables have an affect on each other. For example, greater savings could result in lower income needed. Your age and job stability could be important factors to consider along with the interest rate on the mortgage.
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unclescrooge
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Re: $2 million dollar house pre requisites

Post by unclescrooge »

Monsterflockster wrote: Sat May 09, 2020 1:44 pm A 2 bed, one bath in Palo Alto should suffice.
Haha. I was thinking the something similar.
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Nate79
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Re: $2 million dollar house pre requisites

Post by Nate79 »

Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
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Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE »

Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
Where are these “rules” coming from?

My $1.2M mortgage costs me $55k/yr in ITI (no “P” as it’s interest only)

Why can’t I afford that on $250k income?
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willthrill81
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Re: $2 million dollar house pre requisites

Post by willthrill81 »

Edge215 wrote: Sat May 09, 2020 1:40 pm If someone wanted to buy a $2 million dollar house in a HCOLA, what would be the pre requisites needed in order to gain the boglehead Seal of approval ?
A large enough income/downpayment combination so that the mortgage would be no more than triple the household's gross annual income.

Thomas Stanley, the author of the Millionaire Next Door books, said that the measure for being able to 'easily afford' one's home was being able to pay the mortgage even if your income was cut in half. We lived by that metric, and it served us well. Unfortunately, I don't think that it's really possible for most to follow that in HCOL areas if they want to buy. It's certainly possible if you rent though.
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Re: $2 million dollar house pre requisites

Post by KyleAAA »

Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
That's way too conservative. We bought a house in a VHCOL area at 4x income and still save a full 50% of gross. We aren't remotely house poor. We could have paid 6x income and still saved over 25%.
delamer
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Re: $2 million dollar house pre requisites

Post by delamer »

bluebolt wrote: Sat May 09, 2020 2:06 pm
runner540 wrote: Sat May 09, 2020 2:02 pm This should be fun :sharebeer

I’ll start with subjective terms (you tell us what numbers you have in each category)
you need, post purchase:
1. a robust emergency fund
2. well funded retirement accounts (on or ahead of what you’ll need to sustain your lifestyle),
3. stable income (excluding RSUs and bonuses) that will cover continued savings, all housing costs and other expenses.
4. 2 millon dollars

But seriously, OP, there's too many variables to answer your question reasonably. Can you provide your current income, spending, assets? How stable is your job? What are your other goals besides owning a home? How old are you? When do you want to retire?

Then, the answers can be narrowed down enough to be useful
All good points.

To add to #4 above — $2 million CASH.

I have former neighbors who bought a $2.2 million house about 3 miles from here (their old neighborhood). Had a $1 million adjustable rate mortgage as of a year or so ago. Not to mention the property taxes and utilities on a 7500 square foot house.

The husband (in his early 60’s) is a sole practitioner family medicine doctor, with no other source of earned income for the household. Those practices are doing very poorly during the pandemic, because so many people are afraid to seek non-emergency medical care.

I do wonder how the family is doing...
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Re: $2 million dollar house pre requisites

Post by willthrill81 »

KyleAAA wrote: Sat May 09, 2020 4:11 pm
Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
That's way too conservative. We bought a house in a VHCOL area at 4x income and still save a full 50% of gross. We aren't remotely house poor. We could have paid 6x income and still saved over 25%.
I'd love to see the math showing how you do this.

If a household made $200k and bought an $800k home on a 3.5% 30 year mortgage, the P&I alone would be $3,600/month or $43k annually. After insurance and taxes, that will probably be closer to $55k, and that's ignoring home maintenance (probably at least $5k annually) and utilities. So if this household saves $100k, that only leaves them $100k with which to pay $60k or more for housing, income taxes, and all the rest of their living expenses. That's possible, but we both know that the lion's share of those in VHCOL areas aren't saving remotely 50% of their income. It's far more typical for them to spend 50% of their income on housing alone.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: $2 million dollar house pre requisites

Post by Jags4186 »

willthrill81 wrote: Sat May 09, 2020 4:23 pm
KyleAAA wrote: Sat May 09, 2020 4:11 pm
Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
That's way too conservative. We bought a house in a VHCOL area at 4x income and still save a full 50% of gross. We aren't remotely house poor. We could have paid 6x income and still saved over 25%.
I'd love to see the math showing how you do this.

If a household made $200k and bought an $800k home on a 3.5% 30 year mortgage, the P&I alone would be $3,600/month or $43k annually. After insurance and taxes, that will probably be closer to $55k, and that's ignoring home maintenance (probably at least $5k annually) and utilities. So if this household saves $100k, that only leaves them $100k with which to pay $60k or more for housing, income taxes, and all the rest of their living expenses. That's possible, but we both know that the lion's share of those in VHCOL areas aren't saving remotely 50% of their income. It's far more typical for them to spend 50% of their income on housing alone.
Perhaps they paid cash :D
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Re: $2 million dollar house pre requisites

Post by willthrill81 »

Jags4186 wrote: Sat May 09, 2020 4:29 pm
willthrill81 wrote: Sat May 09, 2020 4:23 pm
KyleAAA wrote: Sat May 09, 2020 4:11 pm
Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
That's way too conservative. We bought a house in a VHCOL area at 4x income and still save a full 50% of gross. We aren't remotely house poor. We could have paid 6x income and still saved over 25%.
I'd love to see the math showing how you do this.

If a household made $200k and bought an $800k home on a 3.5% 30 year mortgage, the P&I alone would be $3,600/month or $43k annually. After insurance and taxes, that will probably be closer to $55k, and that's ignoring home maintenance (probably at least $5k annually) and utilities. So if this household saves $100k, that only leaves them $100k with which to pay $60k or more for housing, income taxes, and all the rest of their living expenses. That's possible, but we both know that the lion's share of those in VHCOL areas aren't saving remotely 50% of their income. It's far more typical for them to spend 50% of their income on housing alone.
Perhaps they paid cash :D
Perhaps. The only way that I can reasonably see it working is with a very large downpayment.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
EnjoyIt
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Re: $2 million dollar house pre requisites

Post by EnjoyIt »

HEDGEFUNDIE wrote: Sat May 09, 2020 4:05 pm
Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
Where are these “rules” coming from?

My $1.2M mortgage costs me $55k/yr in ITI (no “P” as it’s interest only)

Why can’t I afford that on $250k income?
You have one heck of a comfort level for debt. I could not do that. Am I to understand correctly, you chose this option so that you can afford to live in something more expensive but also be able to invest as much as possible?

BTW, my understanding is that one must be able to qualify for an interest only loan which includes large down payment, and an income to debt ratio which is something like 40%. Which makes me ask, how is an income of $250k able to get a $1.2 million interest only mortgage?

Also, I assume at some point you will have saved/invested “enough” money. Is the plan to one day pay off the actual mortgage?
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
HEDGEFUNDIE
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Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE »

EnjoyIt wrote: Sat May 09, 2020 4:31 pm
HEDGEFUNDIE wrote: Sat May 09, 2020 4:05 pm
Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
Where are these “rules” coming from?

My $1.2M mortgage costs me $55k/yr in ITI (no “P” as it’s interest only)

Why can’t I afford that on $250k income?
You have one heck of a comfort level for debt. I could not do that. Am I to understand correctly, you chose this option so that you can afford to live in something more expensive but also be able to invest as much as possible?

BTW, my understanding is that one must be able to qualify for an interest only loan which includes large down payment, and an income to debt ratio which is something like 40%. Which makes me ask, how is an income of $250k able to get a $1.2 million interest only mortgage?

Also, I assume at some point you will have saved/invested “enough” money. Is the plan to one day pay off the actual mortgage?
And other people have one heck of a comfort level in sinking the majority of their net worth into a single non-diversified illiquid hard asset. No thanks.

From a psychological perspective, what is the difference between a $1.2M interest only mortgage with $55k annual payments vs. renting $55k in annual payments?

$250k is plenty of income for a $1.2M mortgage in the Bay Area. Talk to BoA or First Republic and they’ll prequalify you for even more than that. Why would they do it? Well, because it’s only $55k on a $250k salary! They are rational actors, unlike so much of the emotional behavioral nonsense I see everyday on this board.
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Re: $2 million dollar house pre requisites

Post by EnjoyIt »

willthrill81 wrote: Sat May 09, 2020 4:30 pm
Jags4186 wrote: Sat May 09, 2020 4:29 pm
willthrill81 wrote: Sat May 09, 2020 4:23 pm
KyleAAA wrote: Sat May 09, 2020 4:11 pm
Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
That's way too conservative. We bought a house in a VHCOL area at 4x income and still save a full 50% of gross. We aren't remotely house poor. We could have paid 6x income and still saved over 25%.
I'd love to see the math showing how you do this.

If a household made $200k and bought an $800k home on a 3.5% 30 year mortgage, the P&I alone would be $3,600/month or $43k annually. After insurance and taxes, that will probably be closer to $55k, and that's ignoring home maintenance (probably at least $5k annually) and utilities. So if this household saves $100k, that only leaves them $100k with which to pay $60k or more for housing, income taxes, and all the rest of their living expenses. That's possible, but we both know that the lion's share of those in VHCOL areas aren't saving remotely 50% of their income. It's far more typical for them to spend 50% of their income on housing alone.
Perhaps they paid cash :D
Perhaps. The only way that I can reasonably see it working is with a very large downpayment.
Some people when they say they save 50% of income, especially those in high tax brackets tend to mean after tax income. At high incomes particulate in high tax states it is not uncommon to be paying an effective 30%+ in taxes.

When I calculate my percent savings I use after tax as well.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: $2 million dollar house pre requisites

Post by willthrill81 »

EnjoyIt wrote: Sat May 09, 2020 4:40 pm
willthrill81 wrote: Sat May 09, 2020 4:30 pm
Jags4186 wrote: Sat May 09, 2020 4:29 pm
willthrill81 wrote: Sat May 09, 2020 4:23 pm
KyleAAA wrote: Sat May 09, 2020 4:11 pm

That's way too conservative. We bought a house in a VHCOL area at 4x income and still save a full 50% of gross. We aren't remotely house poor. We could have paid 6x income and still saved over 25%.
I'd love to see the math showing how you do this.

If a household made $200k and bought an $800k home on a 3.5% 30 year mortgage, the P&I alone would be $3,600/month or $43k annually. After insurance and taxes, that will probably be closer to $55k, and that's ignoring home maintenance (probably at least $5k annually) and utilities. So if this household saves $100k, that only leaves them $100k with which to pay $60k or more for housing, income taxes, and all the rest of their living expenses. That's possible, but we both know that the lion's share of those in VHCOL areas aren't saving remotely 50% of their income. It's far more typical for them to spend 50% of their income on housing alone.
Perhaps they paid cash :D
Perhaps. The only way that I can reasonably see it working is with a very large downpayment.
Some people when they say they save 50% of income, especially those in high tax brackets tend to mean after tax income. At high incomes particulate in high tax states it is not uncommon to be paying an effective 30%+ in taxes.

When I calculate my percent savings I use after tax as well.
KyleAAA specifically said gross, not net, so that's why I used it in my example.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
EnjoyIt
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Re: $2 million dollar house pre requisites

Post by EnjoyIt »

HEDGEFUNDIE wrote: Sat May 09, 2020 4:34 pm
EnjoyIt wrote: Sat May 09, 2020 4:31 pm
HEDGEFUNDIE wrote: Sat May 09, 2020 4:05 pm
Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
Where are these “rules” coming from?

My $1.2M mortgage costs me $55k/yr in ITI (no “P” as it’s interest only)

Why can’t I afford that on $250k income?
You have one heck of a comfort level for debt. I could not do that. Am I to understand correctly, you chose this option so that you can afford to live in something more expensive but also be able to invest as much as possible?

BTW, my understanding is that one must be able to qualify for an interest only loan which includes large down payment, and an income to debt ratio which is something like 40%. Which makes me ask, how is an income of $250k able to get a $1.2 million interest only mortgage?

Also, I assume at some point you will have saved/invested “enough” money. Is the plan to one day pay off the actual mortgage?
And other people have one heck of a comfort level in sinking the majority of their net worth into a single non-diversified illiquid hard asset. No thanks.

From a psychological perspective, what is the difference between a $1.2M interest only mortgage with $55k annual payments vs. renting $55k in annual payments?

$250k is plenty of income for a $1.2M mortgage in the Bay Area. Talk to BoA or First Republic and they’ll prequalify you for even more than that. Why would they do it? Well, because it’s only $55k on a $250k salary! They are rational actors, unlike so much of the emotional behavioral nonsense I see everyday on this board.
Renting. That is exactly how I see it. Renting with a large down payment.

How does it work if property values go up? Do you need to add more down payment to hit a minimum LTV?

I agree with you. I would never put a huge percentage of my net worth into my house. My home is 1/6th of my net worth and I still have a mortgage. My goal was to never have home equity that is more than 25%. There will be a time that I pay off my mortgage. I intend to be debt free in retirement.

Do you plan to have a mortgage, even interest only indefinitely or do you plan to actually own outright one day?
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE »

EnjoyIt wrote: Sat May 09, 2020 4:45 pm
HEDGEFUNDIE wrote: Sat May 09, 2020 4:34 pm
EnjoyIt wrote: Sat May 09, 2020 4:31 pm
HEDGEFUNDIE wrote: Sat May 09, 2020 4:05 pm
Nate79 wrote: Sat May 09, 2020 3:50 pm Most people in VHCOL stretch way too far when buying a home and make an excuse that somehow the rules for prudent home purchase don't apply to them. I like the rule of somewhere around no more than 25% of after tax pay on a 15 year fixed putting income at >$1m or around 2-2.5 gross pay at max. Most can't afford and so stretch into a 30 year and probably push way too far on the income side. Welcome to the house poor society.
Where are these “rules” coming from?

My $1.2M mortgage costs me $55k/yr in ITI (no “P” as it’s interest only)

Why can’t I afford that on $250k income?
You have one heck of a comfort level for debt. I could not do that. Am I to understand correctly, you chose this option so that you can afford to live in something more expensive but also be able to invest as much as possible?

BTW, my understanding is that one must be able to qualify for an interest only loan which includes large down payment, and an income to debt ratio which is something like 40%. Which makes me ask, how is an income of $250k able to get a $1.2 million interest only mortgage?

Also, I assume at some point you will have saved/invested “enough” money. Is the plan to one day pay off the actual mortgage?
And other people have one heck of a comfort level in sinking the majority of their net worth into a single non-diversified illiquid hard asset. No thanks.

From a psychological perspective, what is the difference between a $1.2M interest only mortgage with $55k annual payments vs. renting $55k in annual payments?

$250k is plenty of income for a $1.2M mortgage in the Bay Area. Talk to BoA or First Republic and they’ll prequalify you for even more than that. Why would they do it? Well, because it’s only $55k on a $250k salary! They are rational actors, unlike so much of the emotional behavioral nonsense I see everyday on this board.
Renting. That is exactly how I see it. Renting with a large down payment.

How does it work if property values go up? Do you need to add more down payment to hit a minimum LTV?

I agree with you. I would never put a huge percentage of my net worth into my house. My home is 1/6th of my net worth and I still have a mortgage. My goal was to never have home equity that is more than 25%. There will be a time that I pay off my mortgage. I intend to be debt free in retirement.

Do you plan to have a mortgage, even interest only indefinitely or do you plan to actually own outright one day?
The down payment is the guarantee that my “rent” won’t go up and my “lease” can’t be cancelled. So it’s better than renting.

Increased property values increase your equity, not your debt.

Housing is a cost of living just like food is a cost of living. You pay for housing as long as you live, either in the form of rent, mortgage, or foregone rental income (in the case of you living in a paid off house).
Last edited by HEDGEFUNDIE on Sat May 09, 2020 5:07 pm, edited 1 time in total.
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CyclingDuo
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Re: $2 million dollar house pre requisites

Post by CyclingDuo »

Edge215 wrote: Sat May 09, 2020 1:40 pmIf someone wanted to buy a $2 million dollar house in a HCOLA, what would be the pre requisites needed in order to gain the boglehead Seal of approval?
A huge downpayment, and a pair of jobs - both husband and wife - working in positions that are more "bond like" than "stock like" so that even if one lost their job, the salary of the other one could handle all of the household expenses without any strain.
"Save like a pessimist, invest like an optimist." - Morgan Housel
BeneIRA
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Re: $2 million dollar house pre requisites

Post by BeneIRA »

I've seen the 3X rule where you take your pre-tax income, multiply it by 3 and if the final home price is equal to or less than that, you can afford it, floated on here before and that's what I go with even though I am not a home owner (it is partially why I am not a home owner). If anyone has a better way to determine the affordability of a house, I am open to suggestions. I desperately do not want to be house poor. Other people are willing to forego traveling, expensive items such as cars, vacations, fine dining, etc in order to afford a more expensive house.

$2 Million divided by 3 = $667,000 per year pre-tax needed to be able to afford it.

Oh, and the 15 year fixed 25% of aftertax income is from Dave Ramsey. Surprised no one caught that.
nydoc
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Re: $2 million dollar house pre requisites

Post by nydoc »

Can only give you my perspective. We planned to buy a house in one to the best NYC suburbs school districts with 25% downpayment and aimed to pay no more than 25% of net base salary for PITI expenses. We just signed contract for a house after seller reduced price about 17%.
TropikThunder
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Re: $2 million dollar house pre requisites

Post by TropikThunder »

Edge215 wrote: Sat May 09, 2020 1:40 pm If someone wanted to buy a $2 million dollar house in a HCOLA, what would be the pre requisites needed in order to gain the boglehead Seal of approval ?
Honestly? No True Boglehead would ever approve of a $2 million house because no matter how much money you have, no one "needs" a $2 million house [if you can't find a reasonable house near you, you should move]. No one needs a $40,000 car. No one needs a $10,000 watch. No one needs anything in excess of the bare minimum utilitarian option, and any money above that should be in an investment portfolio not to exceed a 60/40 equity/bond allocation.

I'm not a True Boglehead though.
nydoc
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Re: $2 million dollar house pre requisites

Post by nydoc »

You are probably confusing bogleheads with MMF. True bogleheads plan for 2 million house too while making sure retirement, 529 and everything else are fully funded too.
Dan3141
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Re: $2 million dollar house pre requisites

Post by Dan3141 »

We have 2...
The first one we bought on 500k total income, the second one on 1.5M total income. We paid of the first one in 5 years and second one in three.
Bay area is a weird place. Buy when things crash and buy as much as you can. With a bit of luck you will pay it off in few years and go again.

Not sure I'd buy now. Now is the time to sit tight and wait.

D
A-Commoner
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Re: $2 million dollar house pre requisites

Post by A-Commoner »

My rules of thumb:

1. You should have enough in liquid assets to buy the house in cash
2. The value of your house should not be more than half of your total net worth. The lower this proportion is, the better.

So in your case, you should have at least $4 million in liquid net worth to be able to afford this $2million house. You can then buy the house outright or you can take out a mortgage and pay a down payment of 20%. Take advantage of cheap leverage even though you can afford to pay cash for the house.

This is exactly what I did 3 years ago here in Los Angeles.
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Re: $2 million dollar house pre requisites

Post by bluebolt »

A-Commoner wrote: Sat May 09, 2020 5:25 pm My rules of thumb:

1. You should have enough in liquid assets to buy the house in cash
2. The value of your house should not be more than half of your total net worth. The lower this proportion is, the better.

So in your case, you should have at least $4 million in liquid net worth to be able to afford this $2million house. You can then buy the house outright or you can take out a mortgage and pay a down payment of 20%. Take advantage of cheap leverage even though you can afford to pay cash for the house.

This is exactly what I did 3 years ago here in Los Angeles.
Rule #1 makes it nearly impossible for early career individuals or couples to buy a home, unless they are in the top 0.1%.
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Re: $2 million dollar house pre requisites

Post by London »

nydoc wrote: Sat May 09, 2020 5:15 pm You are probably confusing bogleheads with MMF. True bogleheads plan for 2 million house too while making sure retirement, 529 and everything else are fully funded too.
Amen. The purpose of this board to the talk about a shared view of low cost investing. For some reason, people take that to mean that spending money is bad in all forms. My view is that as long as you’re taking care of your goals, you shouldn’t feel bad about spending money.
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Re: $2 million dollar house pre requisites

Post by mervinj7 »

OP, last time you posted the same question, it was for a $1.5M house. Has your hypothetical situation changed?
If you were not happy with the answers you got before, it's probably better to use your own specific situation.

viewtopic.php?f=2&t=297035&p=4880299#p4880299
Katietsu
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Re: $2 million dollar house pre requisites

Post by Katietsu »

I would start with having enough income to pay for your housing while still saving 20% towards retirement, paying cash for everything else including cars, and meeting any other financial priorities like funding a 529. Additionally, I would want enough accessible liquid assets to pay for at least 2 years of expenses even if the stock market fell 40%. Personally, I put PMI in the same category as credit card interest, so I would also need to be purchasing with no PMI.
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Re: $2 million dollar house pre requisites

Post by Nate79 »

mervinj7 wrote: Sat May 09, 2020 6:01 pm OP, last time you posted the same question, it was for a $1.5M house. Has your hypothetical situation changed?
If you were not happy with the answers you got before, it's probably better to use your own specific situation.

viewtopic.php?f=2&t=297035&p=4880299#p4880299
Maybe inflation LOL.
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Re: $2 million dollar house pre requisites

Post by AerialWombat »

.....
Last edited by AerialWombat on Sun May 17, 2020 2:49 pm, edited 1 time in total.
delamer
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Re: $2 million dollar house pre requisites

Post by delamer »

TropikThunder wrote: Sat May 09, 2020 5:12 pm
Edge215 wrote: Sat May 09, 2020 1:40 pm If someone wanted to buy a $2 million dollar house in a HCOLA, what would be the pre requisites needed in order to gain the boglehead Seal of approval ?
Honestly? No True Boglehead would ever approve of a $2 million house because no matter how much money you have, no one "needs" a $2 million house [if you can't find a reasonable house near you, you should move]. No one needs a $40,000 car. No one needs a $10,000 watch. No one needs anything in excess of the bare minimum utilitarian option, and any money above that should be in an investment portfolio not to exceed a 60/40 equity/bond allocation.

I'm not a True Boglehead though.
Nothing in the Boglehead principles covers how much money you should spend in a house, or one anything else for that matter.

“Invest early and often” and “minimize taxes” imply a certain commitment to retirement savings, but that’s it.

I certainly consider myself a true Boglehead even though we drive a luxury cars and never saved close to the annual max in our retirement accounts.
Normchad
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Re: $2 million dollar house pre requisites

Post by Normchad »

I like the rule of thumb that the most you should borrow for a house is 3x your gross salary.

So, for a $2M house, I'd say if you annual income is $667K, your good to go. Or if you put down $200K, then a $600K annual income would be fine.
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Re: $2 million dollar house pre requisites

Post by sad2 »

10% of your net worth.
So $20 million in assets.
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Re: $2 million dollar house pre requisites

Post by BalancedJCB19 »

I would think you would have to make about $60K (sixty thousand) a year in order to purchase a $2 million dollar home. That is just a guess on my part. I think the lowest would probably be $50K (fifty thousand) but it would be tight and of course if you made $70K (seventy thousand) would be comfortable. Hope this helped. I just bought a $400,000 (Four hundred thousand) dollar home and I make $32,500.00 (thirty two, five thousand) a year.
EnjoyIt
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Re: $2 million dollar house pre requisites

Post by EnjoyIt »

HEDGEFUNDIE wrote: Sat May 09, 2020 4:49 pm
EnjoyIt wrote: Sat May 09, 2020 4:45 pm
HEDGEFUNDIE wrote: Sat May 09, 2020 4:34 pm
EnjoyIt wrote: Sat May 09, 2020 4:31 pm
HEDGEFUNDIE wrote: Sat May 09, 2020 4:05 pm

Where are these “rules” coming from?

My $1.2M mortgage costs me $55k/yr in ITI (no “P” as it’s interest only)

Why can’t I afford that on $250k income?
You have one heck of a comfort level for debt. I could not do that. Am I to understand correctly, you chose this option so that you can afford to live in something more expensive but also be able to invest as much as possible?

BTW, my understanding is that one must be able to qualify for an interest only loan which includes large down payment, and an income to debt ratio which is something like 40%. Which makes me ask, how is an income of $250k able to get a $1.2 million interest only mortgage?

Also, I assume at some point you will have saved/invested “enough” money. Is the plan to one day pay off the actual mortgage?
And other people have one heck of a comfort level in sinking the majority of their net worth into a single non-diversified illiquid hard asset. No thanks.

From a psychological perspective, what is the difference between a $1.2M interest only mortgage with $55k annual payments vs. renting $55k in annual payments?

$250k is plenty of income for a $1.2M mortgage in the Bay Area. Talk to BoA or First Republic and they’ll prequalify you for even more than that. Why would they do it? Well, because it’s only $55k on a $250k salary! They are rational actors, unlike so much of the emotional behavioral nonsense I see everyday on this board.
Renting. That is exactly how I see it. Renting with a large down payment.

How does it work if property values go up? Do you need to add more down payment to hit a minimum LTV?

I agree with you. I would never put a huge percentage of my net worth into my house. My home is 1/6th of my net worth and I still have a mortgage. My goal was to never have home equity that is more than 25%. There will be a time that I pay off my mortgage. I intend to be debt free in retirement.

Do you plan to have a mortgage, even interest only indefinitely or do you plan to actually own outright one day?
The down payment is the guarantee that my “rent” won’t go up and my “lease” can’t be cancelled. So it’s better than renting.

Increased property values increase your equity, not your debt.

Housing is a cost of living just like food is a cost of living. You pay for housing as long as you live, either in the form of rent, mortgage, or foregone rental income (in the case of you living in a paid off house).
Pros and cons to this form of renting. Sure rent can't go up and lease can't be terminated, but you are the one who is responsible for upkeep. I can definitely see the benefits of your choice.

Allow me to elaborate my previous question. At some point in your life you may find yourself with enough money saved. You will likely choose to retire and live off of your savings. There are two downsides of paying rent like this. First, you are effectively increasing your yearly expenses which means you will need to create more income from assets/SS/pensions which means you pay more in taxes. This won't be the case for low expense people, but if your interest only mortgage is $55k a year, I'm sure income tax will be a relevant consideration. The other is sequence of return risk in retirement. Needing to fund lower yearly expenses such as having no debt decreases one's risk. So, my question to you is: Do you plan on an interest only mortgage in retirement or will there be a time when you have enough money, won't need the leverage anymore and will choose to own a home outright?

Based on what you said, you are paying $55k/yr into a $1.2 million interest only loan which gives you a rate of 4.5% interest. At $55k I would assume you are itemizing taxes so probably a bit lower. I have seen enough threads here of people getting 3% loans at $1.2 million you would have a payment of $60,720/yr. In affect you will be paying an extra $5,720/yr but you will also be getting some equity in the house. In the first year alone you would gain $24k+ in equity for the extra $5,720 outlay. Maybe I am misunderstanding your math.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
TropikThunder
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Re: $2 million dollar house pre requisites

Post by TropikThunder »

A-Commoner wrote: Sat May 09, 2020 5:25 pm My rules of thumb:

1. You should have enough in liquid assets to buy the house in cash
2. The value of your house should not be more than half of your total net worth. The lower this proportion is, the better.

So in your case, you should have at least $4 million in liquid net worth to be able to afford this $2million house.
sad2 wrote: Sat May 09, 2020 6:28 pm 10% of your net worth.
So $20 million in assets.
Is this a contest to see who can have the most ridiculous standards?

Or, from the other end of the spectrum:
BalancedJCB19 wrote: Sat May 09, 2020 6:31 pm I would think you would have to make about $60K (sixty thousand) a year in order to purchase a $2 million dollar home. That is just a guess on my part. I think the lowest would probably be $50K (fifty thousand) but it would be tight and of course if you made $70K (seventy thousand) would be comfortable. Hope this helped. I just bought a $400,000 (Four hundred thousand) dollar home and I make $32,500.00 (thirty two, five thousand) a year.
For a MFJ couple, $60,000 salary is about $4,200/month after withholding but before any deductions (no 401k, no IRA, no HSA, no other payroll deductions) and before any state taxes. A $1,600,000 mortgage (after 20% down) for 30 years at 3.5% is just over $7,000/month. Balanced, that dog just won't hunt.
Last edited by TropikThunder on Sat May 09, 2020 7:02 pm, edited 1 time in total.
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Re: $2 million dollar house pre requisites

Post by willthrill81 »

TropikThunder wrote: Sat May 09, 2020 6:57 pm
A-Commoner wrote: Sat May 09, 2020 5:25 pm My rules of thumb:

1. You should have enough in liquid assets to buy the house in cash
2. The value of your house should not be more than half of your total net worth. The lower this proportion is, the better.

So in your case, you should have at least $4 million in liquid net worth to be able to afford this $2million house.
sad2 wrote: Sat May 09, 2020 6:28 pm 10% of your net worth.
So $20 million in assets.
Is this a contest to see who can have the most ridiculous standards?
I agree that those are completely out of touch with reality.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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