$2 million dollar house pre requisites

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
bonglehead
Posts: 32
Joined: Thu Mar 15, 2012 7:45 am

Re: $2 million dollar house pre requisites

Post by bonglehead » Sat May 09, 2020 7:15 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 ?
Your need about $100MM, which gives $2MM/yr at 2% withdrawal rate, anything less will disqualify you as a boglehead 😎

HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE » Sat May 09, 2020 7:25 pm

EnjoyIt wrote:
Sat May 09, 2020 6:54 pm
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.
If I have enough money saved I have enough money saved. If that means buying a SPIA to neutralize the effect of the “permanent rent” then so be it.

I would challenge the notion that people with a paid off house have lower expenses. That’s only true if you don’t consider opportunity cost an expense.

$1.2M mortgage @ 2.5% + 1.2% property tax.

sf_tech_saver
Posts: 281
Joined: Sat Sep 08, 2018 9:03 pm

Re: $2 million dollar house pre requisites

Post by sf_tech_saver » Sat May 09, 2020 7:35 pm

I live in SF, and bought a $1.95M condo ($1.3K HOA) in 2019, with these financials (age 41):

Annual household income $1.5-2.0M (equity comp varies)
After-Tax Municipal Bonds: ~$1.0M
After-Tax Stock: $1.5M
401k Stock: $650K

Downpayment: $1.2M
Mortage: $750,000 at 3.15% 7/1 ARM

I dislike having a mortgage and think of paying it off with my bonds every week, but with the 50% CA taxes the deduction + muni-distribution % keeps winning.

I feel this was a pretty conservative approach, but I'm sure you might find people here who think even this approach was spendy.

I wouldn't take out more than a $750k mortgage regardless of income levels or location.
VTI is a modern marvel

HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE » Sat May 09, 2020 7:38 pm

sf_tech_saver wrote:
Sat May 09, 2020 7:35 pm
I wouldn't take out more than a $750k mortgage regardless of income levels or location.
Then you are missing out on $8k worth of CA income tax deduction.

sf_tech_saver
Posts: 281
Joined: Sat Sep 08, 2018 9:03 pm

Re: $2 million dollar house pre requisites

Post by sf_tech_saver » Sat May 09, 2020 7:48 pm

HEDGEFUNDIE wrote:
Sat May 09, 2020 7:38 pm
sf_tech_saver wrote:
Sat May 09, 2020 7:35 pm
I wouldn't take out more than a $750k mortgage regardless of income levels or location.
Then you are missing out on $8k worth of CA income tax deduction.
I didn't know CA went above the federal 750k on new purchases today!

But alas you are likely far better with leverage than me so it makes sense :) I'm a boring 70/30 and work hard at work type...
VTI is a modern marvel

HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE » Sat May 09, 2020 7:50 pm

sf_tech_saver wrote:
Sat May 09, 2020 7:48 pm
HEDGEFUNDIE wrote:
Sat May 09, 2020 7:38 pm
sf_tech_saver wrote:
Sat May 09, 2020 7:35 pm
I wouldn't take out more than a $750k mortgage regardless of income levels or location.
Then you are missing out on $8k worth of CA income tax deduction.
I didn't know CA went above the federal 750k on new purchases today!

But alas you are likely far better with leverage than me so it makes sense :) I'm a boring 70/30 and work hard at work type...
It would only save you $1k in taxes. Probably not worth the effort.

I would consider refi-ing that ARM though, you can probably get very close to 2.0% interest on a new ARM with enough assets moved over.
Last edited by HEDGEFUNDIE on Sat May 09, 2020 8:01 pm, edited 1 time in total.

mervinj7
Posts: 1466
Joined: Thu Mar 27, 2014 3:10 pm

Re: $2 million dollar house pre requisites

Post by mervinj7 » Sat May 09, 2020 7:59 pm

willthrill81 wrote:
Sat May 09, 2020 6:59 pm
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.
Yep. And that's exactly why non actionable posts get locked after some time. OP, if you want feedback on your personal situation, you can edit your post with actual details. Otherwise, responses are going to be all over the spectrum.

technovelist
Posts: 3287
Joined: Wed Dec 30, 2009 9:02 pm
Contact:

Re: $2 million dollar house pre requisites

Post by technovelist » Sat May 09, 2020 10:23 pm

$2 million that you don't need for retirement.
In theory, theory and practice are identical. In practice, they often differ.

EnjoyIt
Posts: 4193
Joined: Sun Dec 29, 2013 8:06 pm

Re: $2 million dollar house pre requisites

Post by EnjoyIt » Sat May 09, 2020 10:48 pm

HEDGEFUNDIE wrote:
Sat May 09, 2020 7:25 pm
EnjoyIt wrote:
Sat May 09, 2020 6:54 pm
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.
If I have enough money saved I have enough money saved. If that means buying a SPIA to neutralize the effect of the “permanent rent” then so be it.

I would challenge the notion that people with a paid off house have lower expenses. That’s only true if you don’t consider opportunity cost an expense.

$1.2M mortgage @ 2.5% + 1.2% property tax.
So your plan is to work well into your 60s/70s where an SPIA has legitimate value. I don’t believe they are very good options in your 40s or 50s.

Opportunity cost? Don’t you still pay property tax when you pay interest only? Or are you telling me that your interest only mortgage is only 2.5% right now?

The last question. Is there a point of wealth where arbitraging a mortgage on possible growth investing is just not worth it anymore?
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

Starfish
Posts: 1854
Joined: Wed Aug 15, 2018 6:33 pm

Re: $2 million dollar house pre requisites

Post by Starfish » Sat May 09, 2020 11:39 pm

njdealguy wrote:
Sat May 09, 2020 2:15 pm
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.
That's novel. It's first time when I hear that you need 17 million to buy a 2 million dollar house, even after missing the taxes.
If one does not work, generally speaking, it would be a bad idea to get a mortgage (assuming they can get one) because generating that amount of income would create all kind of expensive tax consequences (income taxes, ACA etc) resulting in having to create even more income and spending even more.

22twain
Posts: 2436
Joined: Thu May 10, 2012 5:42 pm

Re: $2 million dollar house pre requisites

Post by 22twain » Sun May 10, 2020 6:20 am

Edge215 wrote:
Sat May 09, 2020 1:40 pm
If someone wanted to buy a $2 million dollar house in a HCOLA
A few months ago you were asking about buying a $1.5 million house.

viewtopic.php?f=2&t=297035

Did you happen to find one for $2 million that you're particularly interested in? 8-)
Help save endangered words! When you write "princiPLE", make sure you don't really mean "princiPAL"!

User avatar
unclescrooge
Posts: 4935
Joined: Thu Jun 07, 2012 7:00 pm

Re: $2 million dollar house pre requisites

Post by unclescrooge » Sun May 10, 2020 9:38 am

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.
You forget the government subsidy on housing up until 2019, where you could deduct mortgage interest and property taxes. Compared to the cost of renting, the cost of home ownership wasn't often that much higher.

In certain markets during the past several years, it could actually be significantly cheaper.

JackoC
Posts: 1397
Joined: Sun Aug 12, 2018 11:14 am

Re: $2 million dollar house pre requisites

Post by JackoC » Sun May 10, 2020 11:06 am

22twain wrote:
Sun May 10, 2020 6:20 am
Edge215 wrote:
Sat May 09, 2020 1:40 pm
If someone wanted to buy a $2 million dollar house in a HCOLA
A few months ago you were asking about buying a $1.5 million house.

viewtopic.php?f=2&t=297035
jus
Did you happen to find one for $2 million that you're particularly interested in? 8-)
The previous thread did mention one additional item, $25k property tax on the $1.5mil house. So while many responses assume the SF area, that sounds like it might be where I live, NY area of northern NJ (prop taxes in the City are generally lower, and often not as high in NYS parts of the area). We live a couple of air miles from Midtown. You do have to pay somewhere in the mid $1's to get a house (that doesn't need a gut renovation), not a condo, in this city not just the general area. And 2mil opens up more options, though still small fairly small houses compared to suburban McMansions (1880's-1900's brick/stone row houses mainly). Prop tax to market value ratio is a little lower right here than OP's example but not much, but it's higher in some cities near us with lower absolute prop values than here, but which also have $1.5m+ places at their top ends.

But yeah, why play this guessing game? The answer on very expensive houses depends very heavily whether a high income is facilitated by living close to a workplace offering it. 'Move to a LCOL' is silly advice for high end NY fin or SF tech people in their peak earning years focused on making money: they couldn't make nearly as much in LCOL. Some people further down the scale in both places/industries could do that. And some have made enough $ already. OTOH you can live a little further away from work or have a little less space in a VHCOL area, there are cheaper places to live in practical distance of Manhattan than here. OTOH in some high end jobs, spending extra hours commuting might actually negatively impact your career prospects, we all have only so much time and energy. But again with no specific facts, no useful specific advice can be given.

User avatar
willthrill81
Posts: 19257
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: $2 million dollar house pre requisites

Post by willthrill81 » Sun May 10, 2020 11:26 am

unclescrooge wrote:
Sun May 10, 2020 9:38 am
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.
You forget the government subsidy on housing up until 2019, where you could deduct mortgage interest and property taxes. Compared to the cost of renting, the cost of home ownership wasn't often that much higher.

In certain markets during the past several years, it could actually be significantly cheaper.
That's irrelevant going forward though.
“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

Afty
Posts: 1302
Joined: Sun Sep 07, 2014 5:31 pm

Re: $2 million dollar house pre requisites

Post by Afty » Sun May 10, 2020 12:00 pm

HEDGEFUNDIE wrote:
Sat May 09, 2020 4:34 pm
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.
You've probably answered this question before, but isn't the majority of your net worth sunk into the house whether or not you pay off the mortgage? You're still exposed to ups and downs on the full value of the house. Are you taking into account downside protection through the non-recourseness of CA mortgages?

HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE » Sun May 10, 2020 12:21 pm

Afty wrote:
Sun May 10, 2020 12:00 pm
HEDGEFUNDIE wrote:
Sat May 09, 2020 4:34 pm
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.
You've probably answered this question before, but isn't the majority of your net worth sunk into the house whether or not you pay off the mortgage? You're still exposed to ups and downs on the full value of the house. Are you taking into account downside protection through the non-recourseness of CA mortgages?
I am exposed to the ups and downs on the house the same way whether I carry a mortgage or not. But the equity (principal) I put into the house absolutely factors into my net worth. Two scenarios:

Scenario 1
Assets:
Home value: $1.5M
Investments: $2.0M

Liabilities:
Mortgage: $1.2M

Home equity: $0.3M
Net worth: $2.3M
Home equity as % of net worth: 13%

Scenario 2
Assets:
Home value: $1.5M
Investments: $0.8M

Liabilities:
Mortgage: $0

Home equity: $1.5M
Net worth: $2.3M
Home equity as % of net worth: 65%

Where the rubber hits the road: if I posted my AA and revealed that 65% of my $2M+ net worth was in a single REIT, how many disapproving posts would I get from Bogleheads?

And yet, if I were to post that I paid off my house with cash, would anyone doubt that I would be praised to the high heavens?

The inconsistency is mindBoggling

eigenperson
Posts: 37
Joined: Mon Nov 09, 2015 7:16 pm

Re: $2 million dollar house pre requisites

Post by eigenperson » Sun May 10, 2020 1:48 pm

It's only my opinion, but to buy a $2M house I would have to have money coming out of my ears, to the point that I couldn't figure out how to spend it all. On our income, we "could afford it" (at least according to the mortgage lenders), but actually purchasing a house that expensive would be a complete betrayal of our financial priorities. It's simply unnecessary to spend that much, and I would rather spend it on other things. So to me, that's the prerequisite: money coming out of ears.

By the way, I had the high-paying Bay Area job. We moved recently to a medium-cost area in the US, and I stayed with the same company. (Not the easiest trick to pull off, but no harder than getting the high-paying job in the first place.) My total comp is 85% of what it was in the Bay Area. House prices are 1/5th of what they were in the Bay Area.

novemberrain
Posts: 322
Joined: Wed May 09, 2018 12:26 pm

Re: $2 million dollar house pre requisites

Post by novemberrain » Sun May 10, 2020 2:51 pm

Katietsu wrote:
Sat May 09, 2020 6:05 pm
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.
Why would one pay cash for cars? The interest rate on car loans are much lower than stock market returns.

Also when you say 20% for retirement, do you include taxable brokerage account contributions as well?

Katietsu
Posts: 3519
Joined: Sun Sep 22, 2013 1:48 am

Re: $2 million dollar house pre requisites

Post by Katietsu » Sun May 10, 2020 3:38 pm

novemberrain wrote:
Sun May 10, 2020 2:51 pm
Katietsu wrote:
Sat May 09, 2020 6:05 pm
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.
Why would one pay cash for cars? The interest rate on car loans are much lower than stock market returns.

Also when you say 20% for retirement, do you include taxable brokerage account contributions as well?



Whether or not you would rather take out a loan for a car while investing can be a discussion for another thread. They actually already exist on here if you want to here that discussion. My point was just that you should not buy a house that leaves your budget so tight that you NEED to buy/lease your car with spread out monthly payments.

The suggestion of a minimum of 20% going towards retirement savings is just a quick rule of thumb. I viewed it as anything that was being set aside to use after retirement. The actual number should be determined by the individual and could vary quite a bit depending on pensions, early retirement plans, etc. But, again, that would be a full thread on its own.

EnjoyIt
Posts: 4193
Joined: Sun Dec 29, 2013 8:06 pm

Re: $2 million dollar house pre requisites

Post by EnjoyIt » Sun May 10, 2020 3:58 pm

HEDGEFUNDIE wrote:
Sat May 09, 2020 7:25 pm
EnjoyIt wrote:
Sat May 09, 2020 6:54 pm
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.
If I have enough money saved I have enough money saved. If that means buying a SPIA to neutralize the effect of the “permanent rent” then so be it.

I would challenge the notion that people with a paid off house have lower expenses. That’s only true if you don’t consider opportunity cost an expense.

$1.2M mortgage @ 2.5% + 1.2% property tax.
Please, if you don't mind telling me, what is the interest rate on your interest only mortgage?
I am fascinated by this topic as well as the desire to never really have much equity in a home.

I find personal houses more an expense than an investment which is why I am so interested.
I have always been a proponent if not paying down a mortgage faster than necessary and investing the rest. I have never considered the option of never paying down a mortgage.

I think one really nice benefit for this is if the real estate market crumbles in the area, you can just walk away only loosing your downpayment.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE » Sun May 10, 2020 4:00 pm

EnjoyIt wrote:
Sun May 10, 2020 3:58 pm
HEDGEFUNDIE wrote:
Sat May 09, 2020 7:25 pm
EnjoyIt wrote:
Sat May 09, 2020 6:54 pm
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.
If I have enough money saved I have enough money saved. If that means buying a SPIA to neutralize the effect of the “permanent rent” then so be it.

I would challenge the notion that people with a paid off house have lower expenses. That’s only true if you don’t consider opportunity cost an expense.

$1.2M mortgage @ 2.5% + 1.2% property tax.
Please, if you don't mind telling me, what is the interest rate on your interest only mortgage?
I am fascinated by this topic as well as the desire to never really have much equity in a home.

I find personal houses more an expense than an investment which is why I am so interested.
I have always been a proponent if not paying down a mortgage faster than necessary and investing the rest. I have never considered the option of never paying down a mortgage.

I think one really nice benefit for this is if the real estate market crumbles in the area, you can just walk away only loosing your downpayment.
viewtopic.php?t=304655

novemberrain
Posts: 322
Joined: Wed May 09, 2018 12:26 pm

Re: $2 million dollar house pre requisites

Post by novemberrain » Sun May 10, 2020 4:28 pm

Katietsu wrote:
Sun May 10, 2020 3:38 pm

Whether or not you would rather take out a loan for a car while investing can be a discussion for another thread. They actually already exist on here if you want to here that discussion. My point was just that you should not buy a house that leaves your budget so tight that you NEED to buy/lease your car with spread out monthly payments.
I would venture that most of those posts advise investing in stocks even when you have a car loan. I agree each person's situation can be different. And that you shouldn't NEED to buy/lease your car just to afford a costly home. But paying cash for cars is in general a bad investment choice.
Katietsu wrote:
Sun May 10, 2020 3:38 pm
The suggestion of a minimum of 20% going towards retirement savings is just a quick rule of thumb. I viewed it as anything that was being set aside to use after retirement. The actual number should be determined by the individual and could vary quite a bit depending on pensions, early retirement plans, etc. But, again, that would be a full thread on its own.
I asked that question since tax sheltered retirement accounts are capped by government. For a 2 income married tax filers, it is
38000 for two 401ks
11000 for two IRAs
7000 for HSA
So I was curious whether there are other retirement vehicles beyond those. I would love to invest in any such investment vehicle. Currently I am investing everything in excess of that (apart from 529) into taxable brokerage accounts.

OldAtHeart
Posts: 35
Joined: Sat Jun 11, 2011 4:38 pm

Re: $2 million dollar house pre requisites

Post by OldAtHeart » Sun May 10, 2020 4:38 pm

novemberrain wrote:
Sun May 10, 2020 4:28 pm
Katietsu wrote:
Sun May 10, 2020 3:38 pm

Whether or not you would rather take out a loan for a car while investing can be a discussion for another thread. They actually already exist on here if you want to here that discussion. My point was just that you should not buy a house that leaves your budget so tight that you NEED to buy/lease your car with spread out monthly payments.
I would venture that most of those posts advise investing in stocks even when you have a car loan. I agree each person's situation can be different. And that you shouldn't NEED to buy/lease your car just to afford a costly home. But paying cash for cars is in general a bad investment choice.
Katietsu wrote:
Sun May 10, 2020 3:38 pm
The suggestion of a minimum of 20% going towards retirement savings is just a quick rule of thumb. I viewed it as anything that was being set aside to use after retirement. The actual number should be determined by the individual and could vary quite a bit depending on pensions, early retirement plans, etc. But, again, that would be a full thread on its own.
I asked that question since tax sheltered retirement accounts are capped by government. For a 2 income married tax filers, it is
38000 for two 401ks
11000 for two IRAs
7000 for HSA
So I was curious whether there are other retirement vehicles beyond those. I would love to invest in any such investment vehicle. Currently I am investing everything in excess of that (apart from 529) into taxable brokerage accounts.
Search for “mega backdoor Roth”. If your employer allows after-tax contributions and in-service withdraws, you can put up to $57k each into your 401k, broken down by 19.5k employee contribution and 37.5k max for employer match plus after-tax contributions.

To answer the original question, I wouldn’t feel comfortable buying a $2m house unless I had ~$500-700k liquid (for down payment plus reserves), $500k-1m+ in retirement and a stable income of ~$600k-800k+. That’s just my rough numbers.
Last edited by OldAtHeart on Sun May 10, 2020 4:41 pm, edited 1 time in total.

novemberrain
Posts: 322
Joined: Wed May 09, 2018 12:26 pm

Re: $2 million dollar house pre requisites

Post by novemberrain » Sun May 10, 2020 4:41 pm

OldAtHeart wrote:
Sun May 10, 2020 4:38 pm
Search for “mega backdoor Roth”. If your employer allows after-tax contributions and in-service withdraws, you can put up to $57k each into your 401k, broken down by 19.5k employee contribution and 37.5k max for employer match plus after-tax contributions.
Thanks. I think neither of our employers allow that

somekevinguy
Posts: 155
Joined: Mon Jan 16, 2017 9:23 pm

Re: $2 million dollar house pre requisites

Post by somekevinguy » Sun May 10, 2020 4:51 pm

Having taken this plunge and bought a 2.X M home in VHCOL area, I'll say that the general "rules of thumb" tend not to work well and be quite conservative. They also assume that your other spending tracks linearly with your housing costs which just isn't the case. i.e. you can buy a pretty modest 4/2 house in the bay area, live like someone who earns 60-100K in a lower cost of living area, and have plenty leftover to save for goals like retirement etc. as well as the occasional splurge. So while you do need some floor of income, I think making sure that you have stable jobs that will allow you to meet your savings goals is really the bottom line. Having a down payment that allows you to avoid PMI would also be a good goal (whether through the traditional 20% route or via something like a physician loan etc).

DesertDiva
Posts: 846
Joined: Thu Mar 01, 2018 12:49 pm
Location: In the desert

Re: $2 million dollar house pre requisites

Post by DesertDiva » Sun May 10, 2020 5:26 pm


cherijoh
Posts: 6590
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: $2 million dollar house pre requisites

Post by cherijoh » Sun May 10, 2020 5:34 pm

njdealguy wrote:
Sat May 09, 2020 2:15 pm
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!
Rules of thumb based on home value and salary are problematical because what you can afford depends on the interest rate of the loan. What matters is how much of income you will have to devote to servicing the loan (P&I) and covering taxes, insurance, HO dues and maintenance.

But some people get around this by scraping every last dollar they can get their hands on and using it for a big downpayment, which lowers their monthly housng costs into an "affordable" monthly payment. But it also tends to leave them "house poor". IMO, if you have to make a large downpayment (>>20%) in order to make the monthly payments work, then you really need to be asking yourself if you can afford that house. Especially if after the purchase your home equity represents more than 50% of your total net worth.

I also think that age comes into play. If you are buying a house in your 20's or early 30's you might expect your salary to increase in real terms due to promotions and it is reasonable to expect the house to be paid off prior to retirement. Thus you probably won't remain house poor. But people who have bought into the "dream home" myth and have upgraded to a larger house in their 40's and 50's, need to watch out that they haven't put too many eggs into the home equity basket.

When I bought my house (in my early 30's), I put down a 20% downpayment but I still had an adequate EF plus 2x - 2.5x the downpayment amount in my 401k. The full cost of the house was well under 2x my salary at the time. I don't recall what my debt-to-income ratio was, but I know it wasn't nearly as high as the amount the bank would have allowed me to borrow. This was when interest rates were higher, so in addition to salary increases, I was able to refinance to a 15-yr mortgage and drop the rate by 1.5% with only a nominal increase in my monthly payment amount.

BalancedJCB19
Posts: 128
Joined: Sat Jul 13, 2019 11:30 am

Re: $2 million dollar house pre requisites

Post by BalancedJCB19 » Sun May 10, 2020 8:56 pm

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?

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.
LOL. I'm sorry but I was just being sarcastic because some of the other replies. I love that expression "that dog just won't hunt". I never heard that one before but I love it. Have a good day.

darrvao777
Posts: 276
Joined: Wed Sep 10, 2014 1:34 pm

Re: $2 million dollar house pre requisites

Post by darrvao777 » Sun May 10, 2020 10:24 pm

Edge215 wrote:
Sat May 09, 2020 1:57 pm
I’m talking things like annual income. Savings. Down payment.
i have a modified version of wci’s rules on this

i would have at least 20% down payment ($400k)

if i’m borrowing $1.6M i would want to be making at least $800k/yr

i would ideally like to have at least $1.6M in savings (i recently purchased a very expensive home and it would have made me feel a lot more comfortable to have purchased it in cash. my so was not willing to wait that long though. so the next best option is to make sure i have enough in my taxable account to cover the entirety of the mortgage in case anything crazy were to happen. it’s a silly and probably unnecessary rule but one that makes me feel better about taking out such a large mortgage)

JackoC
Posts: 1397
Joined: Sun Aug 12, 2018 11:14 am

Re: $2 million dollar house pre requisites

Post by JackoC » Mon May 11, 2020 10:17 am

HEDGEFUNDIE wrote:
Sun May 10, 2020 12:21 pm
Afty wrote:
Sun May 10, 2020 12:00 pm
HEDGEFUNDIE wrote:
Sat May 09, 2020 4:34 pm
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.
You've probably answered this question before, but isn't the majority of your net worth sunk into the house whether or not you pay off the mortgage? You're still exposed to ups and downs on the full value of the house. Are you taking into account downside protection through the non-recourseness of CA mortgages?
I am exposed to the ups and downs on the house the same way whether I carry a mortgage or not. But the equity (principal) I put into the house absolutely factors into my net worth. Two scenarios:

1. Scenario 1
Home equity as % of net worth: 13%
Scenario 2
Home equity as % of net worth: 65%
2. Where the rubber hits the road: if I posted my AA and revealed that 65% of my $2M+ net worth was in a single REIT,
The inconsistency is mindBoggling
1. As Afty suggested, that distinction is only meaningful if the mortgage is non recourse, as is generally true in CA, which attracts disproportionate attention in discussion of very expensive houses on this forum. But it's generally not true in NY and NJ as to the also very expensive NY area, and in that case 'home equity as % of NW' as you calculate it doesn't mean much. Maybe you realize this and just missed Afty's question, but to explain for anyone who might not:

If 'The Big One' were to totally destroy the SF area, even if there wasn't insurance coverage or govt bailouts, the $1.2mil mortgage borrower could probably at worst can just turn the formerly $1.5mil house, now worth perhaps close to zero, over to the bank and walk away, losing only $0.3mil. Having a non-recourse mortgage limits downside risk. But if NJ right next to Manhattan were to be rendered uninhabitable for centuries by a dirty bomb, and insurance or bailouts didn't rescue them, a mortgage borrower would still owe the $1.2 mil against the zero value house and land. It's not that common in everyday foreclosures for banks to go after non-house assets, because few people who default on mortgages have enough other assets to make it worth their while, and some assets are protected (tax deferred retirement accounts generally are). But if you have significant taxable account assets relative to the deficiency, they will. Therefore, there is little risk mitigation effect in having a recourse mortgage if you have non-home taxable account assets more than mortgage balance, as would be true for me for example. I could say 'my home equity % of net worth is X and Y in scenario's 1 and 2' but it means little in risk terms. I pay higher rates on commercial non-recourse loans on my rental properties, specifically for protection against the tail risk of a massive drop in area real estate values. I can't get a non-recourse mortgage on my house, so there is no point in me having a mortgage.

2. I agree there. The biggest problem with the *absolute fallacy* 'my house is not an asset' is where it leads people to ignore the *risk* they are taking on in purchasing this asset, especially with a recourse mortgage. They might tell themselves now 'I ignore the house's value in calcing my NW' but see how they feel about that if the house drops dramatically in value and they still owe the whole balance on a recourse mortgage. A lot of posters here seem to be people with significant savings who live in cheap houses (and good for them if it suits them). In that case it doesn't matter how you view your house...because it's not worth a lot. But 'my house is not an asset' is a dangerous fallacy for people who feel they 'must' sink a large % of NW into a expensive house to live where they want or 'need' to for their job in an expensive urban center. And again much more so where recourse mortgage lending is the rule.

HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE » Mon May 11, 2020 11:16 am

JackoC wrote:
Mon May 11, 2020 10:17 am
HEDGEFUNDIE wrote:
Sun May 10, 2020 12:21 pm
Afty wrote:
Sun May 10, 2020 12:00 pm
HEDGEFUNDIE wrote:
Sat May 09, 2020 4:34 pm
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.
You've probably answered this question before, but isn't the majority of your net worth sunk into the house whether or not you pay off the mortgage? You're still exposed to ups and downs on the full value of the house. Are you taking into account downside protection through the non-recourseness of CA mortgages?
I am exposed to the ups and downs on the house the same way whether I carry a mortgage or not. But the equity (principal) I put into the house absolutely factors into my net worth. Two scenarios:

1. Scenario 1
Home equity as % of net worth: 13%
Scenario 2
Home equity as % of net worth: 65%
1. As Afty suggested, that distinction is only meaningful if the mortgage is non recourse, as is generally true in CA, which attracts disproportionate attention in discussion of very expensive houses on this forum.
I wasn’t even thinking about the non-recourse benefit.

My point was more - do you want your net worth growth trajectory driven by a single undiversified hard asset, or by a globally diversified equity & bond market (minus the mortgage interest)?

Net worth amount is the same in both cases. Expected risk-adjusted return is totally different.

EnjoyIt
Posts: 4193
Joined: Sun Dec 29, 2013 8:06 pm

Re: $2 million dollar house pre requisites

Post by EnjoyIt » Mon May 11, 2020 11:46 am

HEDGEFUNDIE wrote:
Mon May 11, 2020 11:16 am
JackoC wrote:
Mon May 11, 2020 10:17 am
HEDGEFUNDIE wrote:
Sun May 10, 2020 12:21 pm
Afty wrote:
Sun May 10, 2020 12:00 pm
HEDGEFUNDIE wrote:
Sat May 09, 2020 4:34 pm
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.
You've probably answered this question before, but isn't the majority of your net worth sunk into the house whether or not you pay off the mortgage? You're still exposed to ups and downs on the full value of the house. Are you taking into account downside protection through the non-recourseness of CA mortgages?
I am exposed to the ups and downs on the house the same way whether I carry a mortgage or not. But the equity (principal) I put into the house absolutely factors into my net worth. Two scenarios:

1. Scenario 1
Home equity as % of net worth: 13%
Scenario 2
Home equity as % of net worth: 65%
1. As Afty suggested, that distinction is only meaningful if the mortgage is non recourse, as is generally true in CA, which attracts disproportionate attention in discussion of very expensive houses on this forum.
I wasn’t even thinking about the non-recourse benefit.

My point was more - do you want your net worth growth trajectory driven by a single undiversified hard asset, or by a globally diversified equity & bond market?

Net worth amount is the same in both cases. Expected risk-adjusted return is totally different.
Without a doubt your risk increases because you accept more leverage but so does your reward by investing in equities. I also agree that having all your wealth in a house you live in is probably even more risky than taking on the mortgage and investing instead. I love the idea of IO loans early in a career.

I keep asking you, is there a point where taking on the additional risk not worth the potential reward? At what wealth to home equity ratio does is it not worth it? Just as a simple example. Would you bother with a 0.99% $30k car loan if you had $10 million dollars? Just an extreme example for perspective
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

JackoC
Posts: 1397
Joined: Sun Aug 12, 2018 11:14 am

Re: $2 million dollar house pre requisites

Post by JackoC » Tue May 12, 2020 5:41 pm

HEDGEFUNDIE wrote:
Mon May 11, 2020 11:16 am
JackoC wrote:
Mon May 11, 2020 10:17 am
HEDGEFUNDIE wrote:
Sun May 10, 2020 12:21 pm
Afty wrote:
Sun May 10, 2020 12:00 pm
HEDGEFUNDIE wrote:
Sat May 09, 2020 4:34 pm
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.
You've probably answered this question before, but isn't the majority of your net worth sunk into the house whether or not you pay off the mortgage? You're still exposed to ups and downs on the full value of the house. Are you taking into account downside protection through the non-recourseness of CA mortgages?
I am exposed to the ups and downs on the house the same way whether I carry a mortgage or not. But the equity (principal) I put into the house absolutely factors into my net worth. Two scenarios:

1. Scenario 1
Home equity as % of net worth: 13%
Scenario 2
Home equity as % of net worth: 65%
1. As Afty suggested, that distinction is only meaningful if the mortgage is non recourse, as is generally true in CA, which attracts disproportionate attention in discussion of very expensive houses on this forum.
I wasn’t even thinking about the non-recourse benefit.

My point was more - do you want your net worth growth trajectory driven by a single undiversified hard asset, or by a globally diversified equity & bond market (minus the mortgage interest)?

Net worth amount is the same in both cases. Expected risk-adjusted return is totally different.
But your scenario 1 does assume non recourse whether you were thinking of it or not. You only have 13% in real estate with 1.5mil house, 2 mil non house assets and 1.2 mil mortgage if the mortgage is non recourse. In that case your risk allocation to your house is (1.5-1.2)/((1.5-1.2)+2)=13%, right because it's valid to treat house minus mortgage as the net asset 'home equity'. However if there's recourse on the mortgage there's really no such thing as 'home equity' in risk terms. Your exposure to the house in that case is 1.5, ~43% 1.5/(1.5+2) of your risk assets.

Your % real estate is still higher if you have the same house but do not use any leverage to increase your total assets (and risk), 1.5/(1.5+.8)=65% a you said. But it's not nearly as much higher with recourse.

Also, as you more than most people here would have realized I'd have thought given all your threads on futures, you can get leverage with futures as efficiently or more than with a mortgage...particularly a *recourse* mortgage.

HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE » Tue May 12, 2020 6:44 pm

JackoC wrote:
Tue May 12, 2020 5:41 pm

But your scenario 1 does assume non recourse whether you were thinking of it or not. You only have 13% in real estate with 1.5mil house, 2 mil non house assets and 1.2 mil mortgage if the mortgage is non recourse. In that case your risk allocation to your house is (1.5-1.2)/((1.5-1.2)+2)=13%, right because it's valid to treat house minus mortgage as the net asset 'home equity'. However if there's recourse on the mortgage there's really no such thing as 'home equity' in risk terms. Your exposure to the house in that case is 1.5, ~43% 1.5/(1.5+2) of your risk assets.
I think it's the other way around. With a recourse mortgage I have a liability line item that does not go away unless I pay it down. With a non-recourse mortgage I have a home equity asset line item that at worst can go to zero.

Scenario 1a (recourse mortgage)
Assets:
Home value: $1.5M
Investments: $2.0M

Liabilities:
Mortgage: $1.2M

Home equity: $0.3M
Net worth: $2.3M
Home equity as % of net worth: 13%

Scenario 1b (non-recourse mortgage)
Assets:
Home equity: $0.3M
Investments: $2.0M

Liabilities: None

Net worth: $2.3M
Home equity as % of net worth: 13%

User avatar
geerhardusvos
Posts: 694
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: $2 million dollar house pre requisites

Post by geerhardusvos » Tue May 12, 2020 7:19 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 ?
In my opinion, you should never buy a house that is more than 3X your annual income. If you already have a healthy amount of savings in your retirement accounts, and you have an emergency fund, and your income is stable and around $700K per year, go for it.

Otherwise, rent. And I would recommend renting anyways.
VTSAX and chill

bluebolt
Posts: 1183
Joined: Sat Jan 14, 2017 9:01 am

Re: $2 million dollar house pre requisites

Post by bluebolt » Tue May 12, 2020 10:39 pm

geerhardusvos wrote:
Tue May 12, 2020 7:19 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 ?
In my opinion, you should never buy a house that is more than 3X your annual income. If you already have a healthy amount of savings in your retirement accounts, and you have an emergency fund, and your income is stable and around $700K per year, go for it.

Otherwise, rent. And I would recommend renting anyways.
What if your liquid investments are 10x your annual income? 100x? Would you still say never?

JackoC
Posts: 1397
Joined: Sun Aug 12, 2018 11:14 am

Re: $2 million dollar house pre requisites

Post by JackoC » Wed May 13, 2020 7:21 am

HEDGEFUNDIE wrote:
Tue May 12, 2020 6:44 pm
JackoC wrote:
Tue May 12, 2020 5:41 pm

But your scenario 1 does assume non recourse whether you were thinking of it or not. You only have 13% in real estate with 1.5mil house, 2 mil non house assets and 1.2 mil mortgage if the mortgage is non recourse. In that case your risk allocation to your house is (1.5-1.2)/((1.5-1.2)+2)=13%, right because it's valid to treat house minus mortgage as the net asset 'home equity'. However if there's recourse on the mortgage there's really no such thing as 'home equity' in risk terms. Your exposure to the house in that case is 1.5, ~43% 1.5/(1.5+2) of your risk assets.
I think it's the other way around. With a recourse mortgage I have a liability line item that does not go away unless I pay it down. With a non-recourse mortgage I have a home equity asset line item that at worst can go to zero.

Scenario 1a (recourse mortgage)
Assets:
Home value: $1.5M
Investments: $2.0M

Liabilities:
Mortgage: $1.2M

Home equity: $0.3M
Net worth: $2.3M
Home equity as % of net worth: 13%

Scenario 1b (non-recourse mortgage)
Assets:
Home equity: $0.3M
Investments: $2.0M

Liabilities: None

Net worth: $2.3M
Home equity as % of net worth: 13%
Again the first analysis is wrong because 'home equity' is not a meaningful concept with a recourse mortgage. Same point I just made, the right way around. :happy

In case 1a your *asset allocation* to house is 1.5/(1.5+2)=43%. *Separately* there are liabilities of $1.2mil, which could be recourse mortgage, implied borrowing on equity index or bond futures, margin loan, etc. or any combination of those. Your risk exposure is 43% to the unleveraged movement in home prices with floor zero. 13% is not a meaningful measure of anything in this case.

In case 1b it's valid to treat the house as a net asset of (1.5-1.2), IOW 'home equity' is a meaningful concept in case of a non-recourse mortgage. You have 13% allocation to the (highly leveraged) movement in house prices, with floor zero.

deltaneutral83
Posts: 1634
Joined: Tue Mar 07, 2017 4:25 pm

Re: $2 million dollar house pre requisites

Post by deltaneutral83 » Wed May 13, 2020 7:56 am

Hopefully 20% down, and an income that is no less than 1/3 the remaining mortgage. Hopefully no more than 30% of net income to pay PITI. Those are very general terms. I know a lot of people over the years who became house poor and it caused problems in many areas of life. I also know a lot of BH types who own their personal residence unencumbered and it comprises 10% of their net worth or less. The former complains about their situation way more than the latter, sample size is large. Be careful of the "I live in the Bay/NYC so math doesn't apply to me for home purchase/rent" type mindset. A dollar here is a dollar any where.

User avatar
geerhardusvos
Posts: 694
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: $2 million dollar house pre requisites

Post by geerhardusvos » Wed May 13, 2020 8:09 am

bluebolt wrote:
Tue May 12, 2020 10:39 pm
geerhardusvos wrote:
Tue May 12, 2020 7:19 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 ?
In my opinion, you should never buy a house that is more than 3X your annual income. If you already have a healthy amount of savings in your retirement accounts, and you have an emergency fund, and your income is stable and around $700K per year, go for it.

Otherwise, rent. And I would recommend renting anyways.
What if your liquid investments are 10x your annual income? 100x? Would you still say never?
I would be willing to spend about 10% of my net worth on an individual property. So in this case I would need a net worth of around $15-20 million to buy a $2 million house.
VTSAX and chill

HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: $2 million dollar house pre requisites

Post by HEDGEFUNDIE » Wed May 13, 2020 8:50 am

JackoC wrote:
Wed May 13, 2020 7:21 am
HEDGEFUNDIE wrote:
Tue May 12, 2020 6:44 pm
JackoC wrote:
Tue May 12, 2020 5:41 pm

But your scenario 1 does assume non recourse whether you were thinking of it or not. You only have 13% in real estate with 1.5mil house, 2 mil non house assets and 1.2 mil mortgage if the mortgage is non recourse. In that case your risk allocation to your house is (1.5-1.2)/((1.5-1.2)+2)=13%, right because it's valid to treat house minus mortgage as the net asset 'home equity'. However if there's recourse on the mortgage there's really no such thing as 'home equity' in risk terms. Your exposure to the house in that case is 1.5, ~43% 1.5/(1.5+2) of your risk assets.
I think it's the other way around. With a recourse mortgage I have a liability line item that does not go away unless I pay it down. With a non-recourse mortgage I have a home equity asset line item that at worst can go to zero.

Scenario 1a (recourse mortgage)
Assets:
Home value: $1.5M
Investments: $2.0M

Liabilities:
Mortgage: $1.2M

Home equity: $0.3M
Net worth: $2.3M
Home equity as % of net worth: 13%

Scenario 1b (non-recourse mortgage)
Assets:
Home equity: $0.3M
Investments: $2.0M

Liabilities: None

Net worth: $2.3M
Home equity as % of net worth: 13%
Again the first analysis is wrong because 'home equity' is not a meaningful concept with a recourse mortgage. Same point I just made, the right way around. :happy

In case 1a your *asset allocation* to house is 1.5/(1.5+2)=43%. *Separately* there are liabilities of $1.2mil, which could be recourse mortgage, implied borrowing on equity index or bond futures, margin loan, etc. or any combination of those. Your risk exposure is 43% to the unleveraged movement in home prices with floor zero. 13% is not a meaningful measure of anything in this case.

In case 1b it's valid to treat the house as a net asset of (1.5-1.2), IOW 'home equity' is a meaningful concept in case of a non-recourse mortgage. You have 13% allocation to the (highly leveraged) movement in house prices, with floor zero.
I must again object.

If I could sell a recourse-mortgage-burdened house for cash without needing to simultaneously pay off the mortgage, then I would agree with you that home equity is not a thing in that case.

But I can’t, and so it is.

User avatar
djpeteski
Posts: 974
Joined: Fri Mar 31, 2017 9:07 am

Re: $2 million dollar house pre requisites

Post by djpeteski » Wed May 13, 2020 9:25 am

IMHO:

You need enough cash to put 20% down to avoid pmi, so 400K min plus emergency fund.
No other consumer debt
You need enough stable income to afford a 15 year, and a very good income prognosis in case you have to find a new employer.
Home maintenance needs to be included if this is a large run down property you will need a much larger cushion then a newer, smaller home.
Being near salt water would also need to increase the maintenance budget as things like air conditioners, stucco, and cars age at an alarming rate.

When you consider, taxes, retirement contributions, maintenance I am in the ball park of about 750K/year stable income.

JackoC
Posts: 1397
Joined: Sun Aug 12, 2018 11:14 am

Re: $2 million dollar house pre requisites

Post by JackoC » Wed May 13, 2020 10:03 am

HEDGEFUNDIE wrote:
Wed May 13, 2020 8:50 am
JackoC wrote:
Wed May 13, 2020 7:21 am
HEDGEFUNDIE wrote:
Tue May 12, 2020 6:44 pm
JackoC wrote:
Tue May 12, 2020 5:41 pm

But your scenario 1 does assume non recourse whether you were thinking of it or not. You only have 13% in real estate with 1.5mil house, 2 mil non house assets and 1.2 mil mortgage if the mortgage is non recourse. In that case your risk allocation to your house is (1.5-1.2)/((1.5-1.2)+2)=13%, right because it's valid to treat house minus mortgage as the net asset 'home equity'. However if there's recourse on the mortgage there's really no such thing as 'home equity' in risk terms. Your exposure to the house in that case is 1.5, ~43% 1.5/(1.5+2) of your risk assets.
I think it's the other way around. With a recourse mortgage I have a liability line item that does not go away unless I pay it down. With a non-recourse mortgage I have a home equity asset line item that at worst can go to zero.

Scenario 1a (recourse mortgage)
Assets:
Home value: $1.5M
Investments: $2.0M

Liabilities:
Mortgage: $1.2M

Home equity: $0.3M
Net worth: $2.3M
Home equity as % of net worth: 13%

Scenario 1b (non-recourse mortgage)
Assets:
Home equity: $0.3M
Investments: $2.0M

Liabilities: None

Net worth: $2.3M
Home equity as % of net worth: 13%
Again the first analysis is wrong because 'home equity' is not a meaningful concept with a recourse mortgage. Same point I just made, the right way around. :happy

In case 1a your *asset allocation* to house is 1.5/(1.5+2)=43%. *Separately* there are liabilities of $1.2mil, which could be recourse mortgage, implied borrowing on equity index or bond futures, margin loan, etc. or any combination of those. Your risk exposure is 43% to the unleveraged movement in home prices with floor zero. 13% is not a meaningful measure of anything in this case.

In case 1b it's valid to treat the house as a net asset of (1.5-1.2), IOW 'home equity' is a meaningful concept in case of a non-recourse mortgage. You have 13% allocation to the (highly leveraged) movement in house prices, with floor zero.
I must again object.

If I could sell a recourse-mortgage-burdened house for cash without needing to simultaneously pay off the mortgage, then I would agree with you that home equity is not a thing in that case.

But I can’t, and so it is.
That is again the reason *why* your exposure to unleverage home prices is 43% whereas it's 13% exposure to leverage house value in non-recourse case, not the same risk at all. In the recourse case the 'home equity' can in the extreme approach -1.2mil, house value zero, but you still can't get rid of the house without paying that mortgage. Which is why it's meaningless to call the 0.3 mil 'equity' in the recourse case. In the non-recourse case you can get rid of the house without paying the mortgage, when the house value is <1.2mil. Same as I can get rid of my stocks for zero when the company's assets are worth less than its liabilities. If I were responsible for making the company's lenders whole down to zero corporate asset value, that would be a completely different risk that I'd be seriously misleading myself to call 'the same equity % of my net worth'.

alfaspider
Posts: 2799
Joined: Wed Sep 09, 2015 4:44 pm

Re: $2 million dollar house pre requisites

Post by alfaspider » Wed May 13, 2020 10:27 am

Personal situations play a large part of housing affordability. Single metrics or prerequisites don't capture the whole picture. A few considerations:

1) How stable is your income? You need to be honest with yourself about the risk fo an income shock .

2) What are your other expenses? Very different affordability situation if you also have a $3,000/month daycare/college/elder care bills.

3) What are your assets? Income is the main criteria in mortgage approval, but borrowing $2MM with the same amount in the bank is a different proposition from borrowing the same with zero net worth.

4) What is your risk tolerance? How would you react if you end up underwater on the house and have to sell?

5) When do you want to retire? You'll need to economize much more if you want to retire at 50 than 70.

6) What kind of backstop do you have? Is your family struggling financially and often in need of assistance, or do you come from a well-off family who would bail you out in a crisis?

bluebolt
Posts: 1183
Joined: Sat Jan 14, 2017 9:01 am

Re: $2 million dollar house pre requisites

Post by bluebolt » Wed May 13, 2020 5:07 pm

geerhardusvos wrote:
Wed May 13, 2020 8:09 am
bluebolt wrote:
Tue May 12, 2020 10:39 pm
geerhardusvos wrote:
Tue May 12, 2020 7:19 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 ?
In my opinion, you should never buy a house that is more than 3X your annual income. If you already have a healthy amount of savings in your retirement accounts, and you have an emergency fund, and your income is stable and around $700K per year, go for it.

Otherwise, rent. And I would recommend renting anyways.
What if your liquid investments are 10x your annual income? 100x? Would you still say never?
I would be willing to spend about 10% of my net worth on an individual property. So in this case I would need a net worth of around $15-20 million to buy a $2 million house.
Right. So, you wouldn't say never.

User avatar
LadyGeek
Site Admin
Posts: 64031
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: $2 million dollar house pre requisites

Post by LadyGeek » Wed May 13, 2020 5:52 pm

Edge215 - Has your question been answered?
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 ?
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Ron Ronnerson
Posts: 1641
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: $2 million dollar house pre requisites

Post by Ron Ronnerson » Wed May 13, 2020 7:39 pm

People who rely on rules-of-thumb should proceed carefully, in my opinion. They can be problematic because they ignore so many important personal details. When we purchased our house, we violated a number of generalizations. However, we thought that we would likely be just fine given our specific circumstances. We spent over four times our household income on the house, put down only 3%, and didn’t have much in assets at the time either. On the other hand, we had stable income with job security, didn’t pay PMI, and things that so many other people pay vast quantities of money for were minimal expense categories for us.

It’s best to look at the whole picture. A few posts above this one, Alfaspider provides a solid list of things to consider when making the decision on how much to spend on a house. I would also add interest rate as a factor. There just isn’t a simple one-size-fits-all answer to this question. You have to consider a lot of things and, unfortunately, that does require some time and effort.

kimura king
Posts: 61
Joined: Tue Dec 31, 2019 4:59 pm

Re: $2 million dollar house pre requisites

Post by kimura king » Wed May 13, 2020 8:03 pm

I would say if you can put 500k down and have a reliable 500k a year income you could afford the house. That's not an official boglehead answer, just my .02

Normchad
Posts: 682
Joined: Thu Mar 03, 2011 7:20 am

Re: $2 million dollar house pre requisites

Post by Normchad » Wed May 13, 2020 8:11 pm

yep, that can be a problem with "rules of thumb"; although I do find them personally useful, and usually try to follow them myself.

The first home I bought, I only put 3% down, and borrowed 3x my annual salary for the rest. In hind sight of course, it all worked out fine.

But I came to realize something after I had been living there a few years. The first year or two, I was very concerned about foreclosure and "losing the house". Then it dawned on my that was silly. I really didn't have much "skin in the game", and if I did get thrown out, I'd just go back to living in an apartment. (And up to that point in my life I'd always lived in apartments, and been completely content).

So I might be more willing to buy a $2M house if I could put nothing down; than I would be if I had to be put $400K down. (I suppose that is the whole reason why banks like down payments :)

User avatar
geerhardusvos
Posts: 694
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: $2 million dollar house pre requisites

Post by geerhardusvos » Wed May 13, 2020 9:53 pm

bluebolt wrote:
Wed May 13, 2020 5:07 pm
geerhardusvos wrote:
Wed May 13, 2020 8:09 am
bluebolt wrote:
Tue May 12, 2020 10:39 pm
geerhardusvos wrote:
Tue May 12, 2020 7:19 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 ?
In my opinion, you should never buy a house that is more than 3X your annual income. If you already have a healthy amount of savings in your retirement accounts, and you have an emergency fund, and your income is stable and around $700K per year, go for it.

Otherwise, rent. And I would recommend renting anyways.
What if your liquid investments are 10x your annual income? 100x? Would you still say never?
I would be willing to spend about 10% of my net worth on an individual property. So in this case I would need a net worth of around $15-20 million to buy a $2 million house.
Right. So, you wouldn't say never.
I won’t have a net worth of $20 million in today’s dollars, so I meant never
VTSAX and chill

bluebolt
Posts: 1183
Joined: Sat Jan 14, 2017 9:01 am

Re: $2 million dollar house pre requisites

Post by bluebolt » Thu May 14, 2020 4:42 am

geerhardusvos wrote:
Wed May 13, 2020 9:53 pm
bluebolt wrote:
Wed May 13, 2020 5:07 pm
geerhardusvos wrote:
Wed May 13, 2020 8:09 am
bluebolt wrote:
Tue May 12, 2020 10:39 pm
geerhardusvos wrote:
Tue May 12, 2020 7:19 pm


In my opinion, you should never buy a house that is more than 3X your annual income. If you already have a healthy amount of savings in your retirement accounts, and you have an emergency fund, and your income is stable and around $700K per year, go for it.

Otherwise, rent. And I would recommend renting anyways.
What if your liquid investments are 10x your annual income? 100x? Would you still say never?
I would be willing to spend about 10% of my net worth on an individual property. So in this case I would need a net worth of around $15-20 million to buy a $2 million house.
Right. So, you wouldn't say never.
I won’t have a net worth of $20 million in today’s dollars, so I meant never
But you said "YOU should never buy a house that is more than 3X your annual income." You didn't say, "I would never buy a house that is more than 3X my annual income."
I'm just pointing out that as advice to others, your statement does not stand.

Post Reply