Can we afford a new home?: FI vs YOLO

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tryingtogetahead
Posts: 22
Joined: Tue Apr 07, 2020 11:45 am

Can we afford a new home?: FI vs YOLO

Post by tryingtogetahead » Wed May 27, 2020 3:30 pm

I want to profess my gratitude to the Bogleheads community. Advice from this forum has been invaluable to me in making financial decisions over the years.

About us:
I am 43, DW is 42, one very young child. We live in a MCOL area and both commute 1 hr by PT to local city.

Assets:
Combined NW is just over 6mm (1.78mm retirement accounts (100% S&P 500 index funds), 828k rental property equity (i.e., 2 properties totaling 1.3mm minus mortgage), 2.5mm taxable brokerage accounts (mostly S&P 500 index funds and about 17 individual stocks), 50k cash, 50k 529 plan, 12k HSA, 750k paid-off primary residence, 8k student loan @ 1%, and 35k misc assets.

Income:
Our gross income is 683k/year (410k my salary, 202k DW salary, 29k rental profits (about 84k gross less expenses), and 42k dividends in taxable accounts).

Expenses:
We spend 80k/yr (20k/yr of which is for housing for paid-off house, i.e., RE taxes, insurance, maintenance, etc.) and save 410k/year including retirement savings.

We want:
A house for $2.5mm (32k property taxes). It’s 6,500 sq ft in upscale suburb of our current metro (one town over from where we are now). We look at homes in our new desired town occasionally and this is the only one that checks every single box in terms of the street, house, improvements, location, schools, etc. Our child is going to school soon and we want to keep in same school system for K-12 so we feel we will either move now or not until after child goes to college. We can upgrade homes to a 1.3-1.5mm home that would be very nice and a significant upgrade to what we have now but we cannot get into our desired town for less than 2.3mm for a house we would consider.

DW and I plan to continue to work until age 65. I'm not interested in FIRE beforehand, unless involuntary. When I was in college, I read the Millionaire Next Door and it changed my life. Since then, I have aggressively saved 85% or more of our NI every year for the past 18 years.

Questions:
1. Given these goals, can we “afford” our dream house? We know we have enough money to buy it but is it smart? We have a very hard time balancing saving for our financial security and future with living a lifestyle that we really want. Basically, our struggle is FI vs YOLO. The house is 4x our combined salaries, which we know is high, but if we buy the house with cash we will still have 410k salary + 202k DW salary + 29k rental income + 12k dividends = 653k total income and our expenses would increase to about 120k so we would save 350k/yr all in.
2. If we purchase it, we will sell our current home and net about 710k after closing costs, and will need another 1.8mm to close on the new home. Should we (1) take the tax hit and sell stocks in our taxable account to fund that, (2) take a mortgage or (3) a combination thereof (focusing on selling shares with higher basis first to minimize tax impact)? Naturally, if we sell stocks to fund home purchase, we lose dividend income but then we will have no mortgage.

katrid11
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Re: Can we afford a new home?: FI vs YOLO

Post by katrid11 » Wed May 27, 2020 3:53 pm

Can you afford the $2.5MM home - in a nutshell yes.

Should you buy it? That is your real question. you can pay cash or cash + mortgage or stay put. The ultimate answer is up to you. I dont think you would regret not buying the house but would you like the schools your kid will go to if you stay put?

Based on the numbers, I would do a 50% mortgage. So $1.25M mortgage with $1.25M cash down. You can then resave the $515k you take from savings and then pay down the house. You could be mortgage free by the time your kid hits Middle school (if you so choose). Puts your mortgage around $6k a month which is easily handled along with heavy savings.

Basically, mortgage rates are ridiculously low and to pay all cash is not worth it - IMO. I would leverage some but not the entire $1.8M given your propensity to have tons of liquid assets.

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geerhardusvos
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Re: Can we afford a new home?: FI vs YOLO

Post by geerhardusvos » Wed May 27, 2020 3:56 pm

tryingtogetahead wrote:
Wed May 27, 2020 3:30 pm
I want to profess my gratitude to the Bogleheads community. Advice from this forum has been invaluable to me in making financial decisions over the years.

About us:
I am 43, DW is 42, one very young child. We live in a MCOL area and both commute 1 hr by PT to local city.

Assets:
Combined NW is just over 6mm (1.78mm retirement accounts (100% S&P 500 index funds), 828k rental property equity (i.e., 2 properties totaling 1.3mm minus mortgage), 2.5mm taxable brokerage accounts (mostly S&P 500 index funds and about 17 individual stocks), 50k cash, 50k 529 plan, 12k HSA, 750k paid-off primary residence, 8k student loan @ 1%, and 35k misc assets.

Income:
Our gross income is 683k/year (410k my salary, 202k DW salary, 29k rental profits (about 84k gross less expenses), and 42k dividends in taxable accounts).

Expenses:
We spend 80k/yr (20k/yr of which is for housing for paid-off house, i.e., RE taxes, insurance, maintenance, etc.) and save 410k/year including retirement savings.

We want:
A house for $2.5mm (32k property taxes). It’s 6,500 sq ft in upscale suburb of our current metro (one town over from where we are now). We look at homes in our new desired town occasionally and this is the only one that checks every single box in terms of the street, house, improvements, location, schools, etc. Our child is going to school soon and we want to keep in same school system for K-12 so we feel we will either move now or not until after child goes to college. We can upgrade homes to a 1.3-1.5mm home that would be very nice and a significant upgrade to what we have now but we cannot get into our desired town for less than 2.3mm for a house we would consider.

DW and I plan to continue to work until age 65. I'm not interested in FIRE beforehand, unless involuntary. When I was in college, I read the Millionaire Next Door and it changed my life. Since then, I have aggressively saved 85% or more of our NI every year for the past 18 years.

Questions:
1. Given these goals, can we “afford” our dream house? We know we have enough money to buy it but is it smart? We have a very hard time balancing saving for our financial security and future with living a lifestyle that we really want. Basically, our struggle is FI vs YOLO. The house is 4x our combined salaries, which we know is high, but if we buy the house with cash we will still have 410k salary + 202k DW salary + 29k rental income + 12k dividends = 653k total income and our expenses would increase to about 120k so we would save 350k/yr all in.
2. If we purchase it, we will sell our current home and net about 710k after closing costs, and will need another 1.8mm to close on the new home. Should we (1) take the tax hit and sell stocks in our taxable account to fund that, (2) take a mortgage or (3) a combination thereof (focusing on selling shares with higher basis first to minimize tax impact)? Naturally, if we sell stocks to fund home purchase, we lose dividend income but then we will have no mortgage.
You can definitely afford the house, and if you want to keep working, you are the exact type of people who can be buying $2 million houses. Congrats!

I personally would not be working in your position, but I would transition to a whole new life which may involve a different type of work. But if you like what you do and this is what you want, you have the money and income no questions asked. Transaction costs, maintenance of the house, and putting down $2 million roots is something to pause about, but hey, you’ll have $10 million here pretty soon and you’ve done well at least in the money department.

What do you want your legacy to be? What do you want your life to be about? If you feel comfortable with your answers to those questions with your path, then continue on
VTSAX and chill

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Quirkz
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Re: Can we afford a new home?: FI vs YOLO

Post by Quirkz » Wed May 27, 2020 4:07 pm

Normally, this is a question about prioritization, trading off one want for another. If you wanted to retire early, it might be a tough question. But since you want to keep working for years, there's no reason not to spend the money. You don't spend much, you've already got enough to retire, so if you're going to keep earning more you might as well spend it on something that you'll enjoy.

Worst case scenario: you regret the house, sell it in a few years, and maybe lose a few percent in the process, but that still leaves you in a totally fine position.

Edited to add: If you're really put off by spending that much, have you considered whether you could build your dream home for less than $2.5 million?

knowledge
Posts: 249
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Re: Can we afford a new home?: FI vs YOLO

Post by knowledge » Wed May 27, 2020 5:00 pm

This is an odd one. First things first, you can clearly afford the house. What's befuddling to me is that you clearly have a spending problem (i.e., you're not spending enough) and yet you want a $2.3M home? That feels like quite a leap from where you are right now, what's spurred this on?

Also, in reading your post again, it seems obvious that you should try to lower your commute time, hopefully this new place does that.

Olemiss540
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Re: Can we afford a new home?: FI vs YOLO

Post by Olemiss540 » Wed May 27, 2020 5:04 pm

Definitely can afford it.

Would mortgage a good sized chunk due to the low rate environment. Why do your $1.3mm rentals only return 29k in profit? Seems light considering the amount of additional headache and amount of equity in play.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

warner25
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Re: Can we afford a new home?: FI vs YOLO

Post by warner25 » Wed May 27, 2020 5:14 pm

You could pay cash for a $2.5M home, stop working (and commuting) today, and increase your spending to $100k/year (3% of your remaining $3.5M net worth). You won the game a long time ago.

I would just consider unwinding the rental property investments and moving all your assets to a balanced mutual fund for simplicity, and maybe moving to a lower-cost area where you could build a palace for "only" $1M.

Serious question: If you both work until age 65 and save 85% of your net income, what on earth are you going to do with all the money? Are you looking to leave a $100M+ legacy?

EDITED TO ADD: In another thread last month, you said you were in your 30s with a $3M net worth. :confused

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Watty
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Re: Can we afford a new home?: FI vs YOLO

Post by Watty » Wed May 27, 2020 5:47 pm

You can afford it and in your situation I would be real tempted to just pay cash for it, including the money from the sale of your current house.

You would need to look at the tax impact of selling investments to raise the cash but one thing to keep in mind it that with a lot of taxes it is just a question when you pay the taxes not if you will pay them. There is a chance that tax rates could be higher in the future so you could delay paying the taxes for ten years only to end up paying a higher rate when you eventually sell the investments.

With a paid off house you could then invest your "mortgage payment" each month and maybe work part time if you wanted to.
tryingtogetahead wrote:
Wed May 27, 2020 3:30 pm
It’s 6,500 sq ft......

one very young child....

We know we have enough money to buy it but is it smart?
Financially I don't think it really makes any difference.

As far as being smart it is not something that I would do. That is way too big a house for three people and you would still have a terrible commute since it sounds like it is one hour each way.

I don't know your area but in your situation I would look for a smaller house with a much shorter commute even if it cost the same.

The pre-teen years are really special with kids since in a lot of ways their lives are centered around their parents so there is a limited time when they want to spend as much time with you as possible. As they get older they will have their own activities and friends so while you will still have some good times with them it will be a lot different. If your commute is an hour each way there will likely be some days when you leave the house while they are asleep and get home after they have gone to bed, or just see them for a very limited time. From birth to the day your kid turns 10 is only 3,650 days so be cautious about wasting a lot of those days.

One other problem with such a large house is that you will likely not use two thirds of it very often. I know someone that ended up in a large house with one kid after a divorce. The laundry was upstairs so they had no reason to go into the basement very often. They ended up having a water leak that was sending water into the basement and when they eventually found the leak it had caused significant damage and they think the leak may have been going on for up to six months before they found it. Fortunately the basement was unfinished so most of the damage was to the stuff that was down there.

I was in a much different situation but we did a job relocation when we had a kid in middle school. When we were house hunting we looked at some large houses that had things like inlaw suites which my son would have likely claimed. We intentionally bought a smaller house that is a bit less than 2,000 square feet and that worked well since when he was a teenager that sort of enforced a bit of closeness so he could not go off and sulk too much when he was having a bad day.

With a very young kid having such a large house can also make it hard to keep track of the kid and you may not be able to hear them if they fall or call out for help.

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corn18
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Re: Can we afford a new home?: FI vs YOLO

Post by corn18 » Wed May 27, 2020 6:19 pm

warner25 wrote:
Wed May 27, 2020 5:14 pm
EDITED TO ADD: In another thread last month, you said you were in your 30s with a $3M net worth. :confused
OP, you aged a lot in 1 month.
Don't do something, just stand there!

Topic Author
tryingtogetahead
Posts: 22
Joined: Tue Apr 07, 2020 11:45 am

Re: Can we afford a new home?: FI vs YOLO

Post by tryingtogetahead » Wed May 27, 2020 6:20 pm

@katrid11 Whether I "should" buy it is the real problem that my DW and I have been struggling with for a while. We feel fortunate that we have earned, and continue to earn, a good amount of income and want to try to get as much out of it as we can at this point, especially now with our kid going to school soon. We envision many house parties, BBQs, pool parties, holidays, etc. ahead. The caveat to this is we have been strongly conditioned to save, save, save (and then save more), so this would be a 180 in some sense. We feel that we have a very solid base now (that we didn't have 12 years ago when we bought our current home), so we can buy out dream home now and enjoy it for 20 years until we retire and downsize. Good point re: mortgage. I know that's the smarter way to go. It's been so long since we have had one on our primary residence so that would be an adjustment (at least mentally).

@geerhardusvos I wish we knew what we wanted our legacy to be or our life to be about. We think about that every day and haven't found an answer. We both enjoy our work, especially me. I feel like I make a difference with what I do and I enjoy going to work every day (especially now with no commute). Being a parent is extremely meaningful and rewarding. We will continue to search and find meaning every day the best we can.

@knowledge 100% agree with your comment re lowering our commute time but that's a tricky one. Both of our families live in our immediate area. Think inlaws and granparents and cousins. We do a family dinner with inlaws here and there on a weeknight. My inlaws watch the kid, which is special and also a big money saver. If we didn't have family here, I would 100% live closer. No question.

@Olemiss540 Good question re yield on my rental property. One property was purchased at a 6.5% cap, which is good in my area. I only paid 350k for it--all cash. I have the same tenant there for 7 years, who also happens to be a relative, and they do not call us for anything at all. I do not even think of the property. Period. So I let the rent stay flat so the cap rate has trended down as the property appreciated. The other property has a very low cap rate, but it's in a very high appreciation market, so it has some very healthy unrealized cap gains. The rent barely covers the costs, but I get the appreciation and extra built in appreciation with the mortgage being paid down monthly, although there is no cash flow. It's fine.

@warner25 Very perceptive with you identifying the inconsistency with my other post! A friend asked if he could pose a question under my account. We were having a long conversation one day and talking about life and what savings is really all about in the end and how to "maximize happiness." I suggested he open an account, but he didn't want to so I posted the question for him. As far as your questions, I take it you don't like rental property. I love them and wish I had bought much more aggressively earlier in my career when there were more opportunities. My after tax yield is good and it adds diversification to my portfolio. I think I will hold tightly to what I have. As far as legacy, I do not seek to leave a $100mm inheritience to my kid ... but that could happen (or at least something substantial but far less than 100mm). Honestly, I like big nice homes in nice towns and I enjoy traveling, but my DW and I prefer to eat home and do not value cars or luxury clothing brands, so a large part of our savings is really a function of us enjoying jobs that pay pretty well and not really valuing things that tend to use up alot of people's money. We did also want to save to put ourselves in a situation where we would have the ability to have this option now to upgrade homes before kindergarten. That was always in our minds--at least the back of our minds. We love our jobs so we feel no reason to FIRE and we don't see the point of buying a 100k car just because we can since we do not want one. We are charitable with a few relatives who need it, but nothing huge. We help but also want people to be respoinble and do what they can for themseleves.

@Watty You raise a great point about having a house that is too big. The problem is we really want to be in this particular town and that's just the way it is there. Plus the homes look really stately outside, although I agree it's a lot of space inside. This is another issue we are trying to content with.

Topic Author
tryingtogetahead
Posts: 22
Joined: Tue Apr 07, 2020 11:45 am

Re: Can we afford a new home?: FI vs YOLO

Post by tryingtogetahead » Wed May 27, 2020 6:22 pm

corn18 wrote:
Wed May 27, 2020 6:19 pm
warner25 wrote:
Wed May 27, 2020 5:14 pm
EDITED TO ADD: In another thread last month, you said you were in your 30s with a $3M net worth. :confused
OP, you aged a lot in 1 month.
Haha. Very perceptive with you identifying the inconsistency with my other post! A friend asked if he could pose a question under my account. We were having a long conversation one day and talking about life and what savings is really all about in the end and how to "maximize happiness." I suggested he open an account, but he didn't want to so I posted the question for him under my account. Perhaps that was a bad idea. :oops:

toocold
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Re: Can we afford a new home?: FI vs YOLO

Post by toocold » Wed May 27, 2020 6:25 pm

I suspect you already know the answer financially. So the best answer for you is, if you want.

ThankYouJack
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Re: Can we afford a new home?: FI vs YOLO

Post by ThankYouJack » Wed May 27, 2020 7:31 pm

tryingtogetahead wrote:
Wed May 27, 2020 3:30 pm


We want:
A house for $2.5mm (32k property taxes). It’s 6,500 sq ft in upscale suburb of our current metro (one town over from where we are now). We look at homes in our new desired town occasionally and this is the only one that checks every single box in terms of the street, house, improvements, location, schools, etc. Our child is going to school soon and we want to keep in same school system for K-12 so we feel we will either move now or not until after child goes to college. We can upgrade homes to a 1.3-1.5mm home that would be very nice and a significant upgrade to what we have now but we cannot get into our desired town for less than 2.3mm for a house we would consider.

What is so great about the street, improvements, town and schools to be worth 1m+ more?
I would do a deep dive with your spouse into how you think this house will make you happier. I would hate for it to backfire and for you to have buyers remorse. To me it sounds less desirable - a massive, $2.5m dollar home in a MCOLA with zero socio-economic diversity.

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