How do I determine house purchase budget?

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lafaro
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How do I determine house purchase budget?

Post by lafaro »

Looking for input here - me, my wife and my two small children recently moved from the SF bay area to a cheaper but still relatively HCOL area in the midwest (Minneapolis burbs). We have ~600k in retirement accounts and ~2M in taxable accounts. The taxable money is all in VUSXX or equivalents right now so we wouldn't be having any taxable events by using the money to make a downpayment or to outright purchase a house. My startup that I founded recently failed and I'll be taking some time off with the kids and don't expect to generate income for a bit (assume my salary is not part of calculation). Wife salary is ~200k. Might have one more additional child but none after that.

I'm struggling to understand how much house we can responsibly afford - in the bay you could immediately hit the minimum needed in terms of sq ft, school district, commute time and be priced out - here we could get something very nice without a mortgage, but I want to be responsible with the money despite being antsy to purchase after living in a tiny apartment for years. It is really hard for me to estimate how much I'd care about having a nicer house vs. more money to invest. I don't want to regret buying in a worse place than we can afford and I also don't want to wish I had more money invested instead of a slightly nicer house.
Olemiss540
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Re: How do I determine house purchase budget?

Post by Olemiss540 »

Current age? Non-housing expenses per year? Planned retirement age?
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
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lthenderson
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Re: How do I determine house purchase budget?

Post by lthenderson »

lafaro wrote: Mon May 13, 2024 7:00 am I'm struggling to understand how much house we can responsibly afford
I think the better question to ask is how much does a house cost that provides you everything you want/need?
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retired@50
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Re: How do I determine house purchase budget?

Post by retired@50 »

lafaro wrote: Mon May 13, 2024 7:00 am
I'm struggling to understand how much house we can responsibly afford
Welcome to the forum.

The normal rule of thumb for housing price is 3 times income.

So, in this case start looking at houses near $600k (3 * wife's $200k income) and go from there.

I would try not to let the huge sum in VUSXX burn a hole in your pocket. The property taxes, insurance, etc. on a larger house will add to the carrying costs forever.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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lafaro
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Re: How do I determine house purchase budget?

Post by lafaro »

Olemiss540 wrote: Mon May 13, 2024 8:51 am Current age? Non-housing expenses per year? Planned retirement age?
Mid thirties. We haven't planned a retirement age but we're not planning on FIRE or anything like that so I guess 60?
Current non housing expenses (childcare, COBRA health insurance if wife got laid off, food/misc) I estimate at 137k. If wife still has insurance it would be 97k.
Topic Author
lafaro
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Re: How do I determine house purchase budget?

Post by lafaro »

lthenderson wrote: Mon May 13, 2024 9:23 am
lafaro wrote: Mon May 13, 2024 7:00 am I'm struggling to understand how much house we can responsibly afford
I think the better question to ask is how much does a house cost that provides you everything you want/need?
The challenge with it is that I can make that decision for the need, the size of the house (don't want a bunch of extra sq ft. I won't use and pay to heat and maintain) and school district, but it doesn't help for solving more optional things like location (I like some level of walkability) and lot size (I like to garden, would like my kids to have a larger yard to play in).
Normchad
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Re: How do I determine house purchase budget?

Post by Normchad »

800K.
barnaclebob
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Re: How do I determine house purchase budget?

Post by barnaclebob »

Its all a balance between your down payment, monthly payment and long term goals. One way to approach it is to see what the cheapest suitable housing costs and work backwards to see what feels most comfortable between down/monthly payments. After that if you feel like you can pay more, start trading between the min cost and your wants like gardening space and walkability. Then you can make a decision on if thats worth the price difference.

Or you can figure out how big of a mortgage you can comfortably pay on your wifes salary. Then add whatever down payment you are comfortable making and see what that buys you.
tashnewbie
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Re: How do I determine house purchase budget?

Post by tashnewbie »

lafaro wrote: Mon May 13, 2024 9:43 am
lthenderson wrote: Mon May 13, 2024 9:23 am
lafaro wrote: Mon May 13, 2024 7:00 am I'm struggling to understand how much house we can responsibly afford
I think the better question to ask is how much does a house cost that provides you everything you want/need?
The challenge with it is that I can make that decision for the need, the size of the house (don't want a bunch of extra sq ft. I won't use and pay to heat and maintain) and school district, but it doesn't help for solving more optional things like location (I like some level of walkability) and lot size (I like to garden, would like my kids to have a larger yard to play in).
Look at what houses that fit your desired walkability and yard space cost and work from there to determine if it seems comfortable financially.

I would first confirm that you want to live in Minneapolis long term. You said you moved there recently, but maybe you have family or other ties to it, but nothing was mentioned.

After that, I would base affordability on wife's salary plus whatever you'd be willing to part with from taxable. But I would hope you can get a desirable home for no more than around $600k.

If wife is mid-30s, you'll have to make a decision about a 3rd kid relatively soon. You should also consider her work plans after the 3rd. If I were you, I'd want your (OP's) work plans to be firmed up before you have any more kids.
Last edited by tashnewbie on Mon May 13, 2024 10:00 am, edited 1 time in total.
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lthenderson
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Re: How do I determine house purchase budget?

Post by lthenderson »

lafaro wrote: Mon May 13, 2024 9:43 am
lthenderson wrote: Mon May 13, 2024 9:23 am
lafaro wrote: Mon May 13, 2024 7:00 am I'm struggling to understand how much house we can responsibly afford
I think the better question to ask is how much does a house cost that provides you everything you want/need?
The challenge with it is that I can make that decision for the need, the size of the house (don't want a bunch of extra sq ft. I won't use and pay to heat and maintain) and school district, but it doesn't help for solving more optional things like location (I like some level of walkability) and lot size (I like to garden, would like my kids to have a larger yard to play in).
I have always started out looking at houses that meet all my needs, including location and lot size and seeing what they cost. Then it is fairly easy, as barnaclebob said above, to work backwards and see how the payment which you figure out percentage down, insurance, etc., would affect your monthly budget. Doing it in reverse order, i.e. figuring out how much I can afford first, just seemed like it would guarantee I am buying more house than I need or taking me closer to the financial edge of ruin than necessary. I would add the caveat that I say this from the point of view of living in a VLCOL area where I could easily have afforded a house ten times more expensive than what I paid for this one. In the end, I have a house that meets all my needs and was paid off in 10 years.
barnaby444
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Re: How do I determine house purchase budget?

Post by barnaby444 »

lafaro wrote: Mon May 13, 2024 7:00 am I also don't want to wish I had more money invested instead of a slightly nicer house.

Why is the $2MM in a money market fund? That money isn't really "invested" anyway.
stan1
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Re: How do I determine house purchase budget?

Post by stan1 »

lafaro wrote: Mon May 13, 2024 9:43 am
lthenderson wrote: Mon May 13, 2024 9:23 am
lafaro wrote: Mon May 13, 2024 7:00 am I'm struggling to understand how much house we can responsibly afford
I think the better question to ask is how much does a house cost that provides you everything you want/need?
The challenge with it is that I can make that decision for the need, the size of the house (don't want a bunch of extra sq ft. I won't use and pay to heat and maintain) and school district, but it doesn't help for solving more optional things like location (I like some level of walkability) and lot size (I like to garden, would like my kids to have a larger yard to play in).
Then its negotiation with your spouse and yourself. Start with what you'll be happy with (within reason) before you compromise. You don't want to buy a house this year that has a very small yard then sell/buy another one in three years in general.

People who are self-employed and own their own businesses don't fit into cookie cutter guidelines and rules. You have to pick your risk tolerance, which is likely already higher on this forum because you have been involved in a start up before. You have to make reasonable assumptions about the future not unreasonable. For example, assuming you will never be able to find work again is likely an unreasonable assumption.

If the $2M in cash is intended for a home purchase and much of it came from sale of a previous house then you could consider something in the low $1Ms if you wanted to. However, if some of that cash is likely desired to live off while you start another business that's a very different situation you have to work through. You don't have to have all the answers. You don't want to catastrophize and assume every worst case scenario will play out. Just make reasonable assumptions.
Sax32
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Re: How do I determine house purchase budget?

Post by Sax32 »

I use the 25% of your Net Income rule for PITI. This allows you to not be house poor. I have owned property in South Minneapolis, Richfield, Waterville and now Apple Valley. Minneapolis real estate is very affordable compared to other parts of the nation. Taxes are high in Minneapolis and in Carver County.
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lafaro
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Re: How do I determine house purchase budget?

Post by lafaro »

barnaby444 wrote: Mon May 13, 2024 10:04 am
lafaro wrote: Mon May 13, 2024 7:00 am I also don't want to wish I had more money invested instead of a slightly nicer house.

Why is the $2MM in a money market fund? That money isn't really "invested" anyway.
I'm aware I need to allocate it somewhere else, am a beginner at this and have been reading up on this forum and the wiki. Part of figuring out house budget would be to know how much I needed to keep around vs. putting into equities.
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icrf
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Re: How do I determine house purchase budget?

Post by icrf »

I understand the difficulty in deciding budget. I went through the same thing about 15 years ago when I bought my first house. In my LCOL area, those "3x salary" and "25% net for PITI" (which are in the same ballpark of each other) were way more than I was comfortable with. I ended up 30-50% below that.

I think the best option for now is to ignore price completely. Just look for places that make you and your family happy. The fact that you don't want lots of extra square footage means you'll at least keep away from some of more obscenely priced ones. Lot size and walkability tend to be in conflict, though. At least both of those are wants.
bombcar
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Re: How do I determine house purchase budget?

Post by bombcar »

You don't have to be ansy to purchase. You say you've already moved so clearly you're living somewhere.

You can rent more than just apartments! If you're not certain what you want to buy or where, that might be the thing to do for a year or two.

As it is, reading between the lines, you seem to feel you could buy "too much house" easily and want to avoid that. In general, if you're liable to buy too much house, you want to look at nicer locations so that the excess is spent on "location, location, location" rather than sq feet or other amenities.

How tied are you to Minneapolis? Is St Paul a bridge too far? The suburb cities around it like Stillwater or Woodbury? It can depend on what you mean by "walkability", too - is that "everything we enjoy in walking distance" or is it "kids can walk to school, we can get to transit" or something different?

How old are you? The rule of thumb is you should buy a house that you see yourself at least 10 years (and no fewer than 7) which is most of a child's elementary years. What will your family look like in 10 years?

Based on nothing but what you've listed so far, you can "afford" something like $800k of house on your wife's salary alone. Whether you mortgage or buy outright is another question - a mortgage is a loan against income not assets so you're effectively buying a "mortgage rate" bond if you purchase outright. That may be a good deal.

Also, it's Minneapolis. If you haven't lived through a winter from hell here yet, you may want to wait until you do. New construction vs old can really REALLY make a comfort difference when it's -40 below. That may affect the calculus.

I would work backwards from other things and ignore your salary and money. You're enough above the average income in the area, even with just your wife's salary, that you should be relatively fine anywhere.

Find the school districts you're interested in first (or the private schools you're looking at) and use those as an overlay map on Zillow, and look around.

Interesting neighborhood? Airbnb there for a week or two, see how it "feels on the ground" - a hotel is somewhat like this, but an airbnb is perfect.

Check the prices. Discuss. Continue.
Last edited by bombcar on Mon May 13, 2024 11:10 am, edited 1 time in total.
adamthesmythe
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Re: How do I determine house purchase budget?

Post by adamthesmythe »

Outside HCOL

1. Find out how much you can afford according to the bank.

2. Spend less.
rockstar
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Re: How do I determine house purchase budget?

Post by rockstar »

I would try to go no higher than 25% of take home pay. This is after all deductions and maxing out 401k and HSA. Of course, at the end of each year, you’ll get a pay boost as you will have paid the max for social security. This should easily cover incremental spend over the holidays.

This will give you a lot of flexibility. The biggest challenge is high interest rates and making this happen.
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lafaro
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Re: How do I determine house purchase budget?

Post by lafaro »

bombcar wrote: Mon May 13, 2024 11:07 am You don't have to be ansy to purchase. You say you've already moved so clearly you're living somewhere.

You can rent more than just apartments! If you're not certain what you want to buy or where, that might be the thing to do for a year or two.

As it is, reading between the lines, you seem to feel you could buy "too much house" easily and want to avoid that. In general, if you're liable to buy too much house, you want to look at nicer locations so that the excess is spent on "location, location, location" rather than sq feet or other amenities.

How tied are you to Minneapolis? Is St Paul a bridge too far? The suburb cities around it like Stillwater or Woodbury? It can depend on what you mean by "walkability", too - is that "everything we enjoy in walking distance" or is it "kids can walk to school, we can get to transit" or something different?

How old are you? The rule of thumb is you should buy a house that you see yourself at least 10 years (and no fewer than 7) which is most of a child's elementary years. What will your family look like in 10 years?

Based on nothing but what you've listed so far, you can "afford" something like $800k of house on your wife's salary alone. Whether you mortgage or buy outright is another question - a mortgage is a loan against income not assets so you're effectively buying a "mortgage rate" bond if you purchase outright. That may be a good deal.

Also, it's Minneapolis. If you haven't lived through a winter from hell here yet, you may want to wait until you do. New construction vs old can really REALLY make a comfort difference when it's -40 below. That may affect the calculus.

I would work backwards from other things and ignore your salary and money. You're enough above the average income in the area, even with just your wife's salary, that you should be relatively fine anywhere.

Find the school districts you're interested in first (or the private schools you're looking at) and use those as an overlay map on Zillow, and look around.

Interesting neighborhood? Airbnb there for a week or two, see how it "feels on the ground" - a hotel is somewhat like this, but an airbnb is perfect.

Check the prices. Discuss. Continue.
We are in a house in the west metro right now (central place between relatives in St. Paul and ones further out in west metro) and are fine being here for another year while we evaluate living here and neighborhoods. The house budget stuff is also about figuring how much money I absolutely need to leave in cash equivalents (for downpayment or purchase price) vs. allocating to equities, so I want to figure it out sooner rather than later.
OatmealAddict
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Re: How do I determine house purchase budget?

Post by OatmealAddict »

I'm not a fan of rules when it comes to large purchases like this.

Take a good, hard look at your budget over the last year. Think long & hard about likely expenses over the next year. Build in some padding for emergencies. Ensure all needed savings & investments are accounted for.

Once you have those numbers along with your monthly net income, that should give you a rough idea of what you can afford. Now, that isn't what you should spend of course, but it's what you can conceivably afford. Just be sure to account for ALL home-related expenses plus some additional padding so you don't feel stretched.
bombcar
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Re: How do I determine house purchase budget?

Post by bombcar »

lafaro wrote: Mon May 13, 2024 11:17 am The house budget stuff is also about figuring how much money I absolutely need to leave in cash equivalents (for downpayment or purchase price) vs. allocating to equities, so I want to figure it out sooner rather than later.
The house budget is dependent on other things, but if you left $200k in cash-equivalents you'd be able to buy $800k with a loan, and as a "worst case" scenario that should cover most anything in the area.

You think you have a house purchase question, but you actually have an allocation question which depends on things like ... how long will you stay at home? If you get a job, would your wife stay at home or reduce hours or ? All these things will have much MUCH bigger changes to allocations than "do I buy a house with cash next year."

But, hey! Good news! You could buy a $600k house with cash, and "pay" yourself $100k a year for 16 years and still be better off than most people at the end of it. Probably not what you'll do, but as a "worst case" it's not that bad.
MrNarwhal
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Re: How do I determine house purchase budget?

Post by MrNarwhal »

lafaro wrote: Mon May 13, 2024 11:17 am We are in a house in the west metro right now (central place between relatives in St. Paul and ones further out in west metro) and are fine being here for another year while we evaluate living here and neighborhoods. The house budget stuff is also about figuring how much money I absolutely need to leave in cash equivalents (for downpayment or purchase price) vs. allocating to equities, so I want to figure it out sooner rather than later.
Welcome to Minnesota! I bought a house in the metro last year.

Since you aren't in a rush, I'd suggest the following as a thought experiment for this season: start looking at houses in the $400-$500k range. You can get a nice house in many nice suburbs for that price* and can easily afford it. If you aren't finding what you want, start looking at the $500-$600k range. If you can't find anything at that point then remove the price constraint and update this thread with the house you *really* want and get opinions on whether you can afford it.

What is your wife's commute, if any? The west metro is generally more expensive.

*By nice house in many nice suburbs I am speaking strictly in terms of objective amenities and conveniences. If you are also looking to purchase social status, maybe not.
Last edited by MrNarwhal on Mon May 13, 2024 12:38 pm, edited 1 time in total.
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Watty
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Re: How do I determine house purchase budget?

Post by Watty »

Another way to look at the question is how large(not expensive) of a house you need.

You can google and find various formulas but one in the US is to get 400 to 600 square feet per person. If you have another kid then for five people that would be from 2,000 to 3,000 square feet. Using that logic you could rule out the large McMansions which are much larger than that. I really like having an unfinished basement for storage, crafts, washer and dryer, a place for kids to play, etc. I do not know how common they are there but if you can find a house with an unfinished basement the the lower end of that square footage range would be a good size.

Especially when you have kids bigger is not better. The reason is that when kids are small you want to be able to easily keep track of what they are doing even when they are in their room. When you are house hunting you might want to have one of your kids go into what would be their bedroom and sing a song. If you cannot hear them in the living room or kitchen then the house is too big. When they are teenagers having a not too big house will also be good so that not only can you keep track of what they and their friends are doing but when you have a sulky teenager some enforced closeness can be a good thing to help keep the communications open. You do not want to be a helicopter parent but some supervision of teenagers is needed.

With kids getting them into good public schools is also a good thing and I would assume that there are very acceptable school districts in the area.

My situation was much different but I once did a corporate relocation to a city I did not know when I had a kid in middle school. Our basic house hunting stragety was to find high schools which would have been acceptable then to look for houses where my kid would go to one of those high schools.

In your case I would suggest finding where the good schools are and looking at the houses in those areas which have less than 3,000 square feet and use that as a starting point in your house search. Once you do that you might decide to alter your criteria some but that is OK since figuring out what sort of house you want to buy will likely take a few iterations as you learn the local housing market and factor in possible commutes to your decision.

One search tip, on Realtor.com you can search for a specific school by typing it in the search box.
lafaro wrote: Mon May 13, 2024 7:00 am We have ~600k in retirement accounts and ~2M in taxable accounts.
You did not mention college savings. It is just me but if I was in your situation I would also set aside enough money to fully pay for each of my kids to go to a state university since you have the money now. For example if you have a three year old then you could set aside enough so that it would likely grow enough to pay for their college in 15 years. There are lots of details about how best to do that but that can be a different thread. Especially with you being an entrepreneur there are lots of Murphy's Law type of situations which could make funding their college more difficult in the future.

If you could get into time machine and ask your grown up kids if they would rather have been raised in a fancy house or not have any student loans I would be willing to bet that they would rather not have student loans.
Olemiss540
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Re: How do I determine house purchase budget?

Post by Olemiss540 »

lafaro wrote: Mon May 13, 2024 9:38 am
Olemiss540 wrote: Mon May 13, 2024 8:51 am Current age? Non-housing expenses per year? Planned retirement age?
Mid thirties. We haven't planned a retirement age but we're not planning on FIRE or anything like that so I guess 60?
Current non housing expenses (childcare, COBRA health insurance if wife got laid off, food/misc) I estimate at 137k. If wife still has insurance it would be 97k.
With your wife able to cover all household expenses, no FIRE expectations, and $2M in cash, seems like you could easily afford a $2M house in cash without effecting your long term future. The slider would gain you financial independence earlier if you spent half that obviously. But mid thirties and 2.6M net worth you can afford most anything you want....
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
pancake19
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Re: How do I determine house purchase budget?

Post by pancake19 »

i'm really not understanding a lot of the responses here. the guy has $200k in income and $2M in cash. he is asking what is the max price home he can buy.

if he had a negligible amount in cash we would calculate based off income. but he has plenty of cash. how is the answer here not $2M minus emergency fund. you can argue plus some amount of his income. but to me the simple answer is $2M. you can still fund it partially with debt if you'd like, that has nothing to do with it.

OP did not state his living expenses (aside from housing) exceed $200k in income. this is the same thing has a wealthy person asking "how much car should i buy" except a house doesn't depreciate like a car.
avalpert1
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Re: How do I determine house purchase budget?

Post by avalpert1 »

There aren't going to be an easy outs for you here - given your current finances, the limit on 'affordability' is much higher than the reasonable cost (at least until you get in the 2 million range). So your constraint is going to be the tradeoff between what various things you want to spend money on - and nobody here can tell you what those should be.
toddthebod
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Re: How do I determine house purchase budget?

Post by toddthebod »

Here's how we did it:

1. Based on current monthly cash flows, come up with a number that you want to spend on a mortgage.
2. Use a mortgage calculator to turn #1 into a loan amount.
3. Add what you have saved for a down payment to #2.
4. Go look at a house that is listed for 20% more expensive than the number you came up with in #3.
5. Convince yourselves that you can stretch to make it work, and since it will be a forever home, and your incomes will grow, you really can afford that house.
6. Get into a bidding war, and pay even more because you got emotionally attached to the house.
7. Buy the house and have two kids.
8. Stop saving for retirement for like 5 years because you are living paycheck to paycheck.
rockstar
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Re: How do I determine house purchase budget?

Post by rockstar »

pancake19 wrote: Mon May 13, 2024 3:09 pm i'm really not understanding a lot of the responses here. the guy has $200k in income and $2M in cash. he is asking what is the max price home he can buy.

if he had a negligible amount in cash we would calculate based off income. but he has plenty of cash. how is the answer here not $2M minus emergency fund. you can argue plus some amount of his income. but to me the simple answer is $2M. you can still fund it partially with debt if you'd like, that has nothing to do with it.

OP did not state his living expenses (aside from housing) exceed $200k in income. this is the same thing has a wealthy person asking "how much car should i buy" except a house doesn't depreciate like a car.
It’s monthly cash flow. They can buy as much house as they want as long as they keep their month cash flow tied to housing reasonable. It’s really a question of how much they want. The more they want the more they’ll dip into their taxable. At a certain point, more isn’t better. It’s just more work and headache to maintain.
unwitting_gulag
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Re: How do I determine house purchase budget?

Post by unwitting_gulag »

stan1 wrote: Mon May 13, 2024 10:16 am
lafaro wrote: Mon May 13, 2024 9:43 am
lthenderson wrote: Mon May 13, 2024 9:23 am
lafaro wrote: Mon May 13, 2024 7:00 am I'm struggling to understand how much house we can responsibly afford
I think the better question to ask is how much does a house cost that provides you everything you want/need?
The challenge with it is that I can make that decision for the need, the size of the house (don't want a bunch of extra sq ft. I won't use and pay to heat and maintain) and school district, but it doesn't help for solving more optional things like location (I like some level of walkability) and lot size (I like to garden, would like my kids to have a larger yard to play in).
Then its negotiation with your spouse and yourself. Start with what you'll be happy with (within reason) before you compromise. You don't want to buy a house this year that has a very small yard then sell/buy another one in three years in general. ...
Folks here implicitly assume that a house is a consumption-item, and hence, the smart buyer is maximally frugal. But a house is an investment too! Maybe the same house is $300K is East Impecunia, and $900K is Croesusville. Same square footage, same floorplan, same yard size and so on. But which is the better investment? Hard to say! Maybe in 20 years, in East Impecunia the houses will have appreciated 0%, not even keeping up with inflation. But over in Croesusville they will have doubled. Which would have been the better purchase? And that's before even considering that in the American system, the correlation between school quality and wealth of the neighborhood, is only epsilon less than 1.000.

In other words, better an older shack with loose shingles and cracked driveway, in the "best" part of town, than a lovely McMansion with stainless-steel-and-granite-everything, in the, ahem, not-best part of town.
avalpert1
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Re: How do I determine house purchase budget?

Post by avalpert1 »

unwitting_gulag wrote: Mon May 13, 2024 4:18 pm
stan1 wrote: Mon May 13, 2024 10:16 am
lafaro wrote: Mon May 13, 2024 9:43 am
lthenderson wrote: Mon May 13, 2024 9:23 am
lafaro wrote: Mon May 13, 2024 7:00 am I'm struggling to understand how much house we can responsibly afford
I think the better question to ask is how much does a house cost that provides you everything you want/need?
The challenge with it is that I can make that decision for the need, the size of the house (don't want a bunch of extra sq ft. I won't use and pay to heat and maintain) and school district, but it doesn't help for solving more optional things like location (I like some level of walkability) and lot size (I like to garden, would like my kids to have a larger yard to play in).
Then its negotiation with your spouse and yourself. Start with what you'll be happy with (within reason) before you compromise. You don't want to buy a house this year that has a very small yard then sell/buy another one in three years in general. ...
Folks here implicitly assume that a house is a consumption-item, and hence, the smart buyer is maximally frugal. But a house is an investment too! Maybe the same house is $300K is East Impecunia, and $900K is Croesusville. Same square footage, same floorplan, same yard size and so on. But which is the better investment? Hard to say! Maybe in 20 years, in East Impecunia the houses will have appreciated 0%, not even keeping up with inflation. But over in Croesusville they will have doubled. Which would have been the better purchase? And that's before even considering that in the American system, the correlation between school quality and wealth of the neighborhood, is only epsilon less than 1.000.

In other words, better an older shack with loose shingles and cracked driveway, in the "best" part of town, than a lovely McMansion with stainless-steel-and-granite-everything, in the, ahem, not-best part of town.
You should have stopped after "Hard to say!"... I know plenty of examples of the not-best part of town seeing much greater growth rates than the best part of town (the wonders of gentrification). Unless you have a long successful track record of predicting real estate returns at the individual lot level, you probably aren't going to be better at finding the best investment property then anyone else looking to buy it...

So with that in mind, since you aren't likely to be a great guesser as to the relative investment value, your focus probably should be on the consumption value for you (why you think that means 'maximally frugal' is the smart choice I don't know, maximizing utility is not the same thing as maximizing frugality).
MrNarwhal
Posts: 191
Joined: Sun Dec 19, 2021 8:20 pm

Re: How do I determine house purchase budget?

Post by MrNarwhal »

pancake19 wrote: Mon May 13, 2024 3:09 pm i'm really not understanding a lot of the responses here. the guy has $200k in income and $2M in cash. he is asking what is the max price home he can buy.

if he had a negligible amount in cash we would calculate based off income. but he has plenty of cash. how is the answer here not $2M minus emergency fund. you can argue plus some amount of his income. but to me the simple answer is $2M. you can still fund it partially with debt if you'd like, that has nothing to do with it.

OP did not state his living expenses (aside from housing) exceed $200k in income. this is the same thing has a wealthy person asking "how much car should i buy" except a house doesn't depreciate like a car.
The question is how to determine the budget. "What is the max price home I can buy?" is one way to determine the budget, but not the only way.
Gecko10x
Posts: 420
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Re: How do I determine house purchase budget?

Post by Gecko10x »

MrNarwhal wrote: Mon May 13, 2024 12:29 pm
lafaro wrote: Mon May 13, 2024 11:17 am We are in a house in the west metro right now (central place between relatives in St. Paul and ones further out in west metro) and are fine being here for another year while we evaluate living here and neighborhoods. The house budget stuff is also about figuring how much money I absolutely need to leave in cash equivalents (for downpayment or purchase price) vs. allocating to equities, so I want to figure it out sooner rather than later.
Welcome to Minnesota! I bought a house in the metro last year.

Since you aren't in a rush, I'd suggest the following as a thought experiment for this season: start looking at houses in the $400-$500k range. You can get a nice house in many nice suburbs for that price* and can easily afford it. If you aren't finding what you want, start looking at the $500-$600k range. If you can't find anything at that point then remove the price constraint and update this thread with the house you *really* want and get opinions on whether you can afford it.

What is your wife's commute, if any? The west metro is generally more expensive.

*By nice house in many nice suburbs I am speaking strictly in terms of objective amenities and conveniences. If you are also looking to purchase social status, maybe not.
This is what I was going to suggest. Go look. You may very well find that listings that look "good" you don't really like for whatever reason. So start low and increase as necessary until you like the choices.

This is basically what we did when we moved last year. Based on looking at listings online, I thought we could find something that met our needs in the $500k-$550k range. After looking at several, it was clear it wasn't going to work and we needed to bump up to around $600k.
Topic Author
lafaro
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Re: How do I determine house purchase budget?

Post by lafaro »

What should I do with my portfolio while I wait to figure this out? I wouldn't want to put everything in VTI and then have it go down / taxable event when I need to sell it to do downpayment (especially if I decide paying cash makes more sense than a mortgage). But I also don't want all of the money to just be sitting in cash equivalents while I go through the slow process of figuring this out.
avalpert1
Posts: 595
Joined: Sat Mar 02, 2024 6:15 pm

Re: How do I determine house purchase budget?

Post by avalpert1 »

lafaro wrote: Tue May 14, 2024 1:52 pm What should I do with my portfolio while I wait to figure this out? I wouldn't want to put everything in VTI and then have it go down / taxable event when I need to sell it to do downpayment (especially if I decide paying cash makes more sense than a mortgage). But I also don't want all of the money to just be sitting in cash equivalents while I go through the slow process of figuring this out.
You are lucky - cash equivalents are paying over 5% at the moment with no risk to principal... Unless 'figuring it out' is going to take you multiple years, money market fund (or similar) is the right choice.
MrNarwhal
Posts: 191
Joined: Sun Dec 19, 2021 8:20 pm

Re: How do I determine house purchase budget?

Post by MrNarwhal »

lafaro wrote: Tue May 14, 2024 1:52 pm What should I do with my portfolio while I wait to figure this out? I wouldn't want to put everything in VTI and then have it go down / taxable event when I need to sell it to do downpayment (especially if I decide paying cash makes more sense than a mortgage). But I also don't want all of the money to just be sitting in cash equivalents while I go through the slow process of figuring this out.
I used 3 and 6 month Treasury bills for this purpose, but if there's a chance you'll buy this summer you might just stick with money market.
Wolverine88
Posts: 7
Joined: Wed May 08, 2024 4:12 pm

Re: How do I determine house purchase budget?

Post by Wolverine88 »

You might find Financial Samurai's 30/30/3 home buying guidelines useful in your situation. It's more flexible than the standard 3x income rule and more applicable to high net worth individuals (relative to current income) like yourself. For example, he recommends tying up no more than 30% of your net worth in your primary residence. In your case I'd guess that's close to a $1m home price unless you have other significant unmentioned assets. Here's a link if you'd like to read more: https://www.financialsamurai.com/three- ... to-follow/

It's a good problem to have. Congrats on your move and good luck!
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