Can we afford a $1.75M house?

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Topic Author
sunverge
Posts: 5
Joined: Mon May 03, 2021 12:39 am

Can we afford a $1.75M house?

Post by sunverge »

Hey,

Long time reader, first time writer here.

My wife and I have have a 9-month old baby now, so I started to think about buying a house where we can live for a long time (10+ years). Unfortunately in Southern California right now the houses that we would want to buy are in the range of $1.6M-$1.75M. Can you tell me if I am crazy to buy such an expensive house?

I reached a bit of analysis paralysis situation here with so many variables, so I decided to ask for an opinion from folks of this great forum. Here is a quick summary of our finances.

My age: 38
Wife's age: 34

Income, per year
- W2: $350K (only I work, wife will start work as a nurse in about 2x years)
- Rental income: $33.5K (renting out half of duplex, we live in the other half)

Savings/assets
- RSUs: $600K vested, $400K vesting over the next 3x years
- 401k/457: $340K
- Checking: $10K
- Trading account: $200K (large and small cap ETFs)
- Duplex equity: $900K (market price - mortgage)
- Car equity: $25K (market price - car loan)

Liabilities
- Duplex mortgage balance: $210K@2.625%, 8x years of payments left
- EV car loan balance: $25K, 2x years of payments left

Our plan to buy a $1.75M house
- Downpayment source:
-- sell RSUs: $500K (long term gain tax will apply)
-- sell stock from trading account: $100K (long term gain tax will apply)
-- take out equity from duplex, $200K and refi the new balance at 30 years mortgage
- to supplement income, we will move out from the second half of duplex, so the rental income will go up to around $65K from current $33.5K

Do you think I am crazy to divest of this much stock and buy such an expensive house? Please share your thoughts and let me know if I need to clarify anything.

Thank you!
khram
Posts: 176
Joined: Sat Dec 16, 2017 1:36 am

Re: Can we afford a $1.75M house?

Post by khram »

I wouldn't feel comfortable with it. Are you set on California, or could you move to another state and make, say, $250k?
Topic Author
sunverge
Posts: 5
Joined: Mon May 03, 2021 12:39 am

Re: Can we afford a $1.75M house?

Post by sunverge »

Thanks @khram.
Why you wouldn't be comfortable with the plan above?
We are in love with CA, so planing to stay here for a while. Plus my job requires it.
jack.bauer
Posts: 35
Joined: Wed Feb 02, 2011 3:17 pm

Re: Can we afford a $1.75M house?

Post by jack.bauer »

950k mortgage on 350k salary. Though ~1.25% property tax on 1.75m will be high; so you are stretching it a bit but still doable.
Think you are more than fine with following assumptions:

- rental property is cash flow positive.
- you are okay being super heavily invested in real estate.

Did you consider dumping the duplex as part of the upgrade ? You’ll lose some income but you may not be so real estate heavy. That’s what I would probably do.
ShowMeTheER
Posts: 454
Joined: Mon May 24, 2010 9:12 am

Re: Can we afford a $1.75M house?

Post by ShowMeTheER »

You’re OK financially and it sounds like this is what you want. Get to it!
bluebolt
Posts: 1437
Joined: Sat Jan 14, 2017 9:01 am

Re: Can we afford a $1.75M house?

Post by bluebolt »

Independent of buying a house, I would be diversifying out of the RSUs, so that part seems like a reasonable plan.
tashnewbie
Posts: 1557
Joined: Thu Apr 23, 2020 12:44 pm

Re: Can we afford a $1.75M house?

Post by tashnewbie »

bluebolt wrote: Mon May 03, 2021 6:51 am Independent of buying a house, I would be diversifying out of the RSUs, so that part seems like a reasonable plan.
+1. Over 50% of your non-real estate net worth is concentrated in one company (plus you work there too). At the very least, you probably should sell the RSUs as soon as you can get LTCG (I'd probably be doing it as soon as they can be sold).

What would be the interest rate on the duplex cash-out refi? I assume it'll be higher than the current 2.625%.
KlangFool
Posts: 20504
Joined: Sat Oct 11, 2008 12:35 pm

Re: Can we afford a $1.75M house?

Post by KlangFool »

sunverge wrote: Mon May 03, 2021 1:57 am Thanks @khram.
Why you wouldn't be comfortable with the plan above?
We are in love with CA, so planing to stay here for a while. Plus my job requires it.
sunverge,

1) Which means that if you are unemployed or your new employment is somewhere else, you would not be living in this area.

2) Please note that with this house and the duplex equity (CA?), your exposure to real estate in this local area is very high. Then, plus your job and so on. Almost everything is the California basket. It is never good to put all your eggs in one basket.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Topic Author
sunverge
Posts: 5
Joined: Mon May 03, 2021 12:39 am

Re: Can we afford a $1.75M house?

Post by sunverge »

KlangFool wrote: Mon May 03, 2021 9:11 am
sunverge wrote: Mon May 03, 2021 1:57 am Thanks @khram.
Why you wouldn't be comfortable with the plan above?
We are in love with CA, so planing to stay here for a while. Plus my job requires it.
sunverge,

1) Which means that if you are unemployed or your new employment is somewhere else, you would not be living in this area.

2) Please note that with this house and the duplex equity (CA?), your exposure to real estate in this local area is very high. Then, plus your job and so on. Almost everything is the California basket. It is never good to put all your eggs in one basket.

KlangFool
Good point.
Yes - duplex is in Hollywood area of Los Angeles. It is close to many employers, so I think it should be relatively easy to rent out. The new house will be in one of the suburbs of Los Angeles. Both places are in parts of LA, but in very different pocket markets.
KlangFool
Posts: 20504
Joined: Sat Oct 11, 2008 12:35 pm

Re: Can we afford a $1.75M house?

Post by KlangFool »

sunverge wrote: Mon May 03, 2021 11:28 am
KlangFool wrote: Mon May 03, 2021 9:11 am
sunverge wrote: Mon May 03, 2021 1:57 am Thanks @khram.
Why you wouldn't be comfortable with the plan above?
We are in love with CA, so planing to stay here for a while. Plus my job requires it.
sunverge,

1) Which means that if you are unemployed or your new employment is somewhere else, you would not be living in this area.

2) Please note that with this house and the duplex equity (CA?), your exposure to real estate in this local area is very high. Then, plus your job and so on. Almost everything is the California basket. It is never good to put all your eggs in one basket.

KlangFool
Good point.
Yes - duplex is in Hollywood area of Los Angeles. It is close to many employers, so I think it should be relatively easy to rent out. The new house will be in one of the suburbs of Los Angeles. Both places are in parts of LA, but in very different pocket markets.
sunverge,

In summary, most of your eggs is in the Los Angeles basket. Real estate plus job. There is no diversification. It could work out very well or very badly. Do you really want to do this?

At your level of wealth, wealth preservation should be your highest priority. If you really want to buy this house, use a non-recourse interest-only mortgage. That would protect your down side.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Topic Author
sunverge
Posts: 5
Joined: Mon May 03, 2021 12:39 am

Re: Can we afford a $1.75M house?

Post by sunverge »

tashnewbie wrote: Mon May 03, 2021 9:07 am
bluebolt wrote: Mon May 03, 2021 6:51 am Independent of buying a house, I would be diversifying out of the RSUs, so that part seems like a reasonable plan.
+1. Over 50% of your non-real estate net worth is concentrated in one company (plus you work there too). At the very least, you probably should sell the RSUs as soon as you can get LTCG (I'd probably be doing it as soon as they can be sold).

What would be the interest rate on the duplex cash-out refi? I assume it'll be higher than the current 2.625%.
Yes, lack of diversification with these RSUs is on my mind also. These RSUs are all , so I have a bit of FOMO about selling RSUs. Would you sell these and invest into the three fund portfolio?
https://www.bogleheads.org/wiki/Three-fund_portfolio

new duplex rate will be around 3.25%@30 years vs current 2.625%@15 years.
mervinj7
Posts: 1781
Joined: Thu Mar 27, 2014 3:10 pm

Re: Can we afford a $1.75M house?

Post by mervinj7 »

sunverge wrote: Mon May 03, 2021 1:24 am Hey,

Long time reader, first time writer here.

My wife and I have have a 9-month old baby now, so I started to think about buying a house where we can live for a long time (10+ years). Unfortunately in Southern California right now the houses that we would want to buy are in the range of $1.6M-$1.75M. Can you tell me if I am crazy to buy such an expensive house?

I reached a bit of analysis paralysis situation here with so many variables, so I decided to ask for an opinion from folks of this great forum. Here is a quick summary of our finances.

My age: 38
Wife's age: 34

Income, per year
- W2: $350K (only I work, wife will start work as a nurse in about 2x years)
- Rental income: $33.5K (renting out half of duplex, we live in the other half)

Savings/assets
- RSUs: $600K vested, $400K vesting over the next 3x years
- 401k/457: $340K
- Checking: $10K
- Trading account: $200K (large and small cap ETFs)
- Duplex equity: $900K (market price - mortgage)
- Car equity: $25K (market price - car loan)

Liabilities
- Duplex mortgage balance: $210K@2.625%, 8x years of payments left
- EV car loan balance: $25K, 2x years of payments left

Our plan to buy a $1.75M house
- Downpayment source:
-- sell RSUs: $500K (long term gain tax will apply)
-- sell stock from trading account: $100K (long term gain tax will apply)
-- take out equity from duplex, $200K and refi the new balance at 30 years mortgage
- to supplement income, we will move out from the second half of duplex, so the rental income will go up to around $65K from current $33.5K

Do you think I am crazy to divest of this much stock and buy such an expensive house? Please share your thoughts and let me know if I need to clarify anything.

Thank you!
Yes, you can easily afford this house based on your assets but I would make the following modifications to your strategy.

1. Sell your RSUs. No matter what you decide on the real estate front, there's no reason to keep vested stock. Net gain: $500k
2. Sell your duplex. Your income is high enough that you don't really need the added risk in more local real estate. Since you live in one of the units, part of the appreciation should be tax-free under the capital gains exclusion. You will eventually lose this enormous tax benefit if you change your current unit into investment property.
3. Assuming you get $800k from selling the duplex and paying capital gains taxes plus $500k from selling RSUs, you can (if you really wanted to) put $1.3M down and get a mortgage for $450k. I believe even KlangFool would be ok with a $450k mortgage on $350k income (plus $133k/year RSUs). However, he may also suggest that you put a smaller down payment since CA is a non-recourse state. Personally, I would put down $1M and get a loan for $750k to maximize interest deduction.

In any case, congrats on your achievements. You will be in a fine position no matter what you decide.
Goal33
Posts: 1694
Joined: Sun Apr 12, 2015 12:30 pm

Re: Can we afford a $1.75M house?

Post by Goal33 »

I think you can do it but you're putting too much money down.
Topic Author
sunverge
Posts: 5
Joined: Mon May 03, 2021 12:39 am

Re: Can we afford a $1.75M house?

Post by sunverge »

Thank you for your feedback folks.

@mervinj7,
I am reluctant about selling duplex because it basically a cash cow at this point with 15% ROI per annum. We locked in a low tax rate, since the property was bought a while ago. Even with taking out equity of 200K and new 400K resulting loan, this duplex is cash flow positive.


Also, I agree with @Goal33 that putting $1.3M down is a bit too much given this money could be placed on market for likely better return compared to mortgage interest.

I drafted a quick model on the payments to afford $1.75M house, with refinancing duplex here:
https://docs.google.com/spreadsheets/d/ ... sp=sharing
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Watty
Posts: 22375
Joined: Wed Oct 10, 2007 3:55 pm

Re: Can we afford a $1.75M house?

Post by Watty »

sunverge wrote: Mon May 03, 2021 1:24 am Do you think I am crazy to divest of this much stock and buy such an expensive house?
As others have said selling the RSUs makes sense no matter what you decide to do.

To be polite I would not use the word "crazy" but since you did it it would would be pretty crazy to buy another house without selling the duplex. The big problem is that would give you something like $2.6 million in residential real estate in the same city when your net worth is around $1.3 million(I did not crunch the numbers). Having 200% of your net worth in one asset class like that is way to risky especially when it is arguably(clearly ?) in a bubble.

A problem with that is after such a large run up in home prices a 20% decline would not be at all unusual and it could be a lot more than that. A 20% decline in home prices would mean that you would lose 40% of your net worth. A 30% decline in home prices would likely just put prices back to where they were a few years ago and that would result in a 60% decline in your net worth.

In a recession it is also likely that the value of your unvested RSUs would also decline.

If you want the house then I would;
1) Sell the vested RSUs, which you should do anyway.
2) Sell the duplex
3) Use all that money for huge down payment.
4) Get a 30 year mortgage on the remaining balance to lock in the low interest rates.

You would have a tax bill to do this but it might not be all that much more than if you delay the sale of these for 10 years and tax rates could be higher then. It may just be a question of when you will pay the taxes and not if you will pay them sooner or later.

You can play with the numbers but that would leave you with a relatively low mortgage payment and a great income so you should be in great financial shape even if you have more kids and your wife delays going back to work for longer than expected.

If you don't want the expensive house enough to sell the RSUs and the Duplex then you do not want it enough to buy it.

There are several variations on the saying, "You can afford anything you want, but not everything you want."
sunverge wrote: Mon May 03, 2021 1:24 am My age: 38
I do not know if there is an official line but some people define middle age as starting at 40. It would be a good time to start being more financially conservative. If you were 28 then the best choice of what to do could be a lot different.

If you have some sort of tech job then finding your next job in your 40s and 50s will be a lot harder especially at the level of total compensation you are getting now. (I am a retired software developer). This does not mean that you will be flipping burgers but when you are 50 if you want to work but you could end up being glad to get a job that pays half of what you are making now.
MarkBarb
Posts: 660
Joined: Mon Aug 03, 2009 11:59 am

Re: Can we afford a $1.75M house?

Post by MarkBarb »

These "can we afford this house" threads are growing common. That's understandable because house prices have increased dramatically. In most cases, the answer is somewhere between "yes, easily" and "no, you'll be unable to make the payments and lose the house". The question is more of a request for whether people think the OP should buy the house rather than a question of whether they can. And that's hard to answer because nobody knows what you value.

To answer the question, I would start by asking myself how much I have to save for retirement to able to retire at my desired retirement age with my desired standard of living. If you can't save at least that much after you've moved into the new house, I would strongly recommend against it. You are front-loading your lifestyle by effectively taking money from your future self. Also consider whether you have upcoming changes, like additional children, elderly parent care expenses, or something like that which will impact your future savings.

If owning the new house doesn't impact your ability to meet your obligations to your future self, then it becomes a question of whether you'll be better off with or without the new house. To answer that, I would ask myself if I would be happier in my current house spending the extra dollar difference on things I want - travel, cars, charitable contributions, maids, landscapers, better education for my kids, more expensive hobbies, or whatever floats your boat. Everyone always wants the expensive new house. You have to push yourself to think about whether you want it more or less than the things you will have to give up to get it. And the grass is never as green as it seems, so if the answer is a close call, I'd be hesitant to spend the money.

We all value things differently. I know some people that live in cheap houses so that they have money for travel and luxuries. They would be much less happy in an more expensive home with less free cash flow. I was also friends with a family that had a large house on a golf course because they were homebodies that liked to host big parties. In their case, they spend much more on their house than was "affordable" by traditional measures but it was a good value for them.

Yes, you can afford the house. Financially, it will be a stretch. Do you want it badly enough to give up all the things you'll give up for it? Only you can answer that.
khram
Posts: 176
Joined: Sat Dec 16, 2017 1:36 am

Re: Can we afford a $1.75M house?

Post by khram »

KlangFool wrote: Mon May 03, 2021 9:11 am
sunverge wrote: Mon May 03, 2021 1:57 am Thanks @khram.
Why you wouldn't be comfortable with the plan above?
We are in love with CA, so planing to stay here for a while. Plus my job requires it.
sunverge,

1) Which means that if you are unemployed or your new employment is somewhere else, you would not be living in this area.

2) Please note that with this house and the duplex equity (CA?), your exposure to real estate in this local area is very high. Then, plus your job and so on. Almost everything is the California basket. It is never good to put all your eggs in one basket.

KlangFool
This is part of why I said I wouldn't be comfortable with it. As someone who once went through a couple years of unemployment, I was probably scarred for life in some ways, I am paranoid about "what if I lose my job." I prefer to live in cheaper areas and keep expenses low, even if I could come out ahead in California if things go well. I still make good money in MCOL area, so I ended up lucking out.

But I also don't like buying so much house either. I live in a relatively small apartment, but it's a comfortable space for me. Houses are a money pit. Bigger space = higher electric/water bills, more TVs, higher cable bills, more furniture to fill the space (most of which doesn't get used often, even some of my furniture never gets used), paying cleaners because you don't have time to clean your house yourself, etc.

The long-term impacts of climate change and the effect on local real estate are also always on my mind. California is no stranger to climate disaster. One thing we've learned over the past 1.5 years is that sometimes things happen very quickly.
FBanks
Posts: 36
Joined: Wed Mar 02, 2016 1:26 pm

Re: Can we afford a $1.75M house?

Post by FBanks »

Please Consider Opportunity Costs!

Trust your gut. This isn’t a good idea. You’d be wiping out a huge chunk of productive, income-producing assets to tie up in your personal residence, where you’d only get appreciation. I know CA is a hot market, but the opportunity costs of selling those assets isn’t prudent.

Otherwise, you’ll lose out on all that AMAZING compounding. I’m the same age as you, same income, with similar net worth, but much more of my holdings are in equities than real estate. The projections on where your portfolio will be in just a few more years of diligent saving could very likely make you financially independent at or before 45. Alternatively, if you take a huge chunk of income producing assets from your portfolio and tie them up in a house you: increase your annual expenses, decrease your savings rate, and decrease your investment returns, thereby increasing the time it will take to reach financial independence (which I consider when you have 25X estimated retirement expenses in stock + net real estate income).

Only you can decide if this works for your family. But please calculate the opportunity cost and increased time to reach financial independence before you do.

Additionally, I wouldn’t sell RSUs. Not a popular opinion in these parts, but why would you take a winner off the track at this point? I’m a faithful indexer, but I also get sizable comp in RSUs from a Fortune 50. I don’t sell, I just save more in indexes so RSUs don’t become an outsized portion of my portfolio. I would never sell a money-maker to buy something less productive in such key years of your wealth accumulation phase. That’s wealth-building in reverse.

Also at 38, you really only have 12 good earning years left. At 50, mega corps start laying people off. Best to reach FI well before that risk starts increasing.

Don’t fret, I’m not a complete scrooge. :twisted: How about this alternative: Stay in the duplex until little babe is ready for kindergarten. During that 5 years, save up a 20% downpayment in cash. Rent out both sides of the duplex and use the net proceeds to cover the mortgage on the new house (if you still want it. At that point, you’ll be wealthy enough to simply retire in another southwestern state). While the baby is little, it won’t care where it lives. Location only starts mattering when you need to get into a good school district. If you think you’ll go private instead of public, I recommend targeting a house that’s costs less that $1.6M, if possible.

Good luck. Let us know what you decide :D
FBanks
Posts: 36
Joined: Wed Mar 02, 2016 1:26 pm

Re: Can we afford a $1.75M house?

Post by FBanks »

MarkBarb wrote: Mon May 03, 2021 4:14 pm These "can we afford this house" threads are growing common. That's understandable because house prices have increased dramatically. In most cases, the answer is somewhere between "yes, easily" and "no, you'll be unable to make the payments and lose the house". The question is more of a request for whether people think the OP should buy the house rather than a question of whether they can. And that's hard to answer because nobody knows what you value.

To answer the question, I would start by asking myself how much I have to save for retirement to able to retire at my desired retirement age with my desired standard of living. If you can't save at least that much after you've moved into the new house, I would strongly recommend against it. You are front-loading your lifestyle by effectively taking money from your future self. Also consider whether you have upcoming changes, like additional children, elderly parent care expenses, or something like that which will impact your future savings.

If owning the new house doesn't impact your ability to meet your obligations to your future self, then it becomes a question of whether you'll be better off with or without the new house. To answer that, I would ask myself if I would be happier in my current house spending the extra dollar difference on things I want - travel, cars, charitable contributions, maids, landscapers, better education for my kids, more expensive hobbies, or whatever floats your boat. Everyone always wants the expensive new house. You have to push yourself to think about whether you want it more or less than the things you will have to give up to get it. And the grass is never as green as it seems, so if the answer is a close call, I'd be hesitant to spend the money.

We all value things differently. I know some people that live in cheap houses so that they have money for travel and luxuries. They would be much less happy in an more expensive home with less free cash flow. I was also friends with a family that had a large house on a golf course because they were homebodies that liked to host big parties. In their case, they spend much more on their house than was "affordable" by traditional measures but it was a good value for them.

Yes, you can afford the house. Financially, it will be a stretch. Do you want it badly enough to give up all the things you'll give up for it? Only you can answer that.
This is a perfect way of framing how to think about these issues!
RetiredCSProf
Posts: 596
Joined: Tue Feb 28, 2017 4:59 pm

Re: Can we afford a $1.75M house?

Post by RetiredCSProf »

I live in SoCal -- generally, home prices just keep going up. One option is to buy a fixer-upper, but the cost and headaches associated with remodeling are unlikely to realize much savings, unless you can do some of the work yourself.

I know a family who have been renting in my neighborhood for several years. A year ago, they said they would not buy because the prices were too high. Finally, after Baby #7, they are ready to buy a 4-bedroom home. Inventory is low and the prices have risen dramatically in the past year. Waiting to buy just increases the likelihood that mortgage rates will rise before you buy.

On the bright side, I am starting to see more homes going on the market. With more inventory, prices may level off.
PowderDay9
Posts: 345
Joined: Fri Oct 12, 2018 12:29 pm

Re: Can we afford a $1.75M house?

Post by PowderDay9 »

This thread is full of excellent advice. One of the best in a while!

I think your two best options are:
1. Buy the new house and sell the duplex.
2. Stay in the duplex until your child gets to kindergarten.

You don't want to have 2x your net worth in real estate in a HCOL area that just had a very significant 1 year price increase. Sell the RSUs regardless.
skierincolorado
Posts: 66
Joined: Sat Mar 21, 2020 10:56 am

Re: Can we afford a $1.75M house?

Post by skierincolorado »

Sell the RSUs no matter what.

If you buy the house, sell the duplex so you don't have 2x net worth in LA real estate. It's a cash cow currently, but a huge risk. The same money in an appropriate combination of stocks/bonds would likely return similar or more annually with less concentrated risk. The cash flow stream would be more variable, but the net value would be equally or less variable. If you sell the duplex, buying the house is a reasonable level of risk and affordable.

Put remaining assets in a diversified portfolio with an appropriate level of risk for your age, employment, current wealth etc.
HermosaSurfer
Posts: 72
Joined: Thu Nov 29, 2007 7:46 pm

Re: Can we afford a $1.75M house?

Post by HermosaSurfer »

It would be useful to understand your annual spending outside of the mortgage and car loan. It would also be useful to understand if you intend to fund your children's college education and whether you would encourage them to go to community college or private school.

Finally, I'm not sure why people suggest you won't be relevant in your industry in your 50s or 60s. While your salary has the potential to be different than your 30s, many people earn the most in their 50s and 60s.

SoCal real estate pricing has been a source of bewilderment for me these past few decades.
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