Should I buy the $1.5M home in cash?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Topic Author
Banstick86
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Joined: Tue Jul 09, 2024 1:25 am

Should I buy the $1.5M home in cash?

Post by Banstick86 »

I'm in southern California. Our household earns about $300k and we're in our early 40s with two kids under 2. We're looking for a bigger home, safer neighborhood, and better schooling. It has to be close to my employer. I plan to live here at least 18 years (when kids leave the house). Maybe after that we'd consider moving back to the current home we're in since it's cheaper.

I've been lucky in the stock market and have about $2.3M worth of positions in my taxable account, which comes out to about $1.7 after federal and state taxes. Part of me wants to "solidify" the gains I've made in the market (majority of gains have come from within the last 6 months alone for assets owned for 1 or more years).

Given the interest rates, we're thinking to go all cash and look for homes around $1.5M (maybe more).

We have about $100k in cash for emergency funds and we think if we sell our house we can get 250 to 300k. However, we're leaning towards renting it out because we have a 3% rate.

Keep me honest. Is it crazy to dump my positions into a house? One other caveat: my employer requires me to liquidate my entire brokerage account because the cash I would generate from specific issues breach thresholds (I can't sell over $X amount within a rolling 30 days). So to get the funds for this, the exceptional route requires me to sell everything.

In Summary here is my financial picture:

$2.3M in taxable investments (1.7 mil after taxes)
$100k for emergency savings after selling current home

Retirement
$1.3M 401k (pretax)
$80k Roth

Other
40k 529
Current home, 250 to 300k if we were to sell

I am just asking this group here to keep me honest since I'm going to be dumping such a large percentage of my liquid assets into something non liquid. Is it crazy to do this? Having a large payment doesn't sit well with me. The property tax in itself is already going to hurt (about $2k a month).
diabelli
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Re: Should I buy the $1.5M home in cash?

Post by diabelli »

Seems like a big opportunity cost to me. Imagine what the 2m+ becomes over time, if you just leave it to compound, rather than dump almost all of into a crazy heated housing market -- after which you'll have property taxes, insurance, maintenance costs etc to boot.

Personally I'd try to sit and hope for rates to come down.
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snackdog
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Re: Should I buy the $1.5M home in cash?

Post by snackdog »

Just get a mortgage. Rates are ok in historical terms. Don't lock up all your cash in a home when you can use the magic of leverage, even at 7% interest.
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jodhpur
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Re: Should I buy the $1.5M home in cash?

Post by jodhpur »

Buy the house, but get a mortgage....maybe get one that is 750k though for the tax deduction. So put 750k down.
You'll hit all the mortgage ratios easily, so you can offer to buy with no mortgage contingency.
You would have a huge cash buffer and easily keep your 529/Roth/401k Contributions high for a few years.
muffins14
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Re: Should I buy the $1.5M home in cash?

Post by muffins14 »

Banstick86 wrote: Tue Jul 09, 2024 1:57 am
Keep me honest. Is it crazy to dump my positions into a house?
Yes
Crom laughs at your Four Winds
OnTrack2020
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Re: Should I buy the $1.5M home in cash?

Post by OnTrack2020 »

Housing is grossly overinflated everywhere in the country right now, and there simply isn't enough of it.

I would not throw that much cash into a home.

What are current rental rates where you live to rent something larger in a better area? How much rent could you get for your current property?
PowderDay9
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Re: Should I buy the $1.5M home in cash?

Post by PowderDay9 »

I don't think you're crazy. Imagine a scenario where stocks and housing both drop 30-50%. Run your financials with both scenarios and compare the results.

Leverage always adds more risk to seek more return. Do you need more return to hit your financial goals? Is paying 7% interest worth the potential for more return?
MikeG62
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Re: Should I buy the $1.5M home in cash?

Post by MikeG62 »

Would I buy a home for cash and use close to 90% of my non-retirement assets to do it? Not a chance.

Put a substantial amount down (1/3rd or maybe more) and take a mortgage for the rest.
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muffins14
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Re: Should I buy the $1.5M home in cash?

Post by muffins14 »

PowderDay9 wrote: Tue Jul 09, 2024 7:27 am I don't think you're crazy. Imagine a scenario where stocks and housing both drop 30-50%. Run your financials with both scenarios and compare the results.

Leverage always adds more risk to seek more return. Do you need more return to hit your financial goals? Is paying 7% interest worth the potential for more return?
In that scenario, likely mortgage rates also fall and they can refinance. I’d rather have 2M-> 1M portfolio than have 250k portfolio and an illiquid house at the bottom of the housing market.
Crom laughs at your Four Winds
snic
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Re: Should I buy the $1.5M home in cash?

Post by snic »

Warren Buffet says you should take out a mortgage:
First and most importantly, a mortgage can be refinanced quickly and easily if rates fall. As Buffett says, "It's a one-way renegotiation. It is an incredibly attractive instrument for the homeowner and you've got a one-way bet."

In other words, if you get a 30-year mortgage with a 7% fixed APR, that is the highest your borrowing costs will be on your home for the next three decades. If rates spike even higher to 10%, your monthly payment stays the same. But if rates plunge to 5%, or even lower, you can simply refinance with a mortgage lender and take advantage. While nobody can predict the future with 100% accuracy, it's fair to say that there's a strong probability that at some point in the next 30 years, the average mortgage rate will be below current levels.

In addition, mortgages have relatively low interest rates compared with other types of consumer debt like credit cards and personal loans. As long as the rate you can get on a mortgage is less than what you could expect to earn from long-term investments, it can be worth using a mortgage even if you can afford to pay cash for a house. Historically, the S&P 500 has delivered 9%-10% annualized returns over long periods, so even with the recent spike in mortgage rates, we're still well below that range.
...And that doesn't even get into the problem of putting most of your savings into an undiversified asset.
raisinsaregrapes
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Re: Should I buy the $1.5M home in cash?

Post by raisinsaregrapes »

Do it. But do it because you are ready to move.

At your income having a 750k mortgage will have tax benefits that offset the interest rate. I would use the windfall to improve my QOL.

I see comments about buying a 750k house, which could be impossible as it depends on what part of SoCal. 1.5 could be overkill, but it could be a very modest SFH. I would do it. We save money for a reason, to spend it or give it away.
mapofuniverse
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Re: Should I buy the $1.5M home in cash?

Post by mapofuniverse »

At your income having a 750k mortgage will have tax benefits that offset the interest rate.
How so?
Carefreeap
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Re: Should I buy the $1.5M home in cash?

Post by Carefreeap »

Banstick86 wrote: Tue Jul 09, 2024 1:57 am One other caveat: my employer requires me to liquidate my entire brokerage account because the cash I would generate from specific issues breach thresholds (I can't sell over $X amount within a rolling 30 days). So to get the funds for this, the exceptional route requires me to sell everything.
Hi and welcome to the forum!

Could you go into more detail with respect to this part of your post? It doesn't make sense to me that an employer can restrict your brokerage unless its company stock.
Every day I can hike is a good day.
AlohaBill
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Re: Should I buy the $1.5M home in cash?

Post by AlohaBill »

I did exactly this in 1989. We returned to the States from 6 long, long years in Saudi Arabia. We were saving up for a house and chose Sacramento. Interest rates were 10% and at closing 11 3/4%! Our house was $125,000 and we put down $70,000. We borrowed $55,000. We didn’t have jobs yet and I wanted to see if we could get a loan. We paid the loan off the next year as house prices dropped. The main factor in this anti-Klang Fool/Bogleheads move was my wife skipping and jumping out of the house saying this is the one. She had no problem buying the house. House poor/house rich!? My wife was happy and happy wife means happy life!😎
I got a job the day we closed. We took the $569 house payments and started investing in the stock market. We were lucky. 🍀
VoiceOfReason
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Re: Should I buy the $1.5M home in cash?

Post by VoiceOfReason »

Banstick86 wrote: Tue Jul 09, 2024 1:57 am

I've been lucky in the stock market and have about $2.3M worth of positions in my taxable account, which comes out to about $1.7 after federal and state taxes. Part of me wants to "solidify" the gains I've made in the market (majority of gains have come from within the last 6 months alone for assets owned for 1 or more years).

Is this all in restricted company stock or a single asset? I think there are two separate issues. The first is what you should do with this investment and the second is whether you should buy the house cash. If the investment is volatile that means you are at higher risk of losing what you've gained just as quickly as you've gained it. So considering liquidation and putting the money somewhere else (house or broader investment funds) is the first decision.

In terms of buying for cash, I'd be concerned that it's essentially all your non-retirement $$. I would not sleep easy in that situation.

I'd figure out what monthly housing expenses you are comfortable with and then figure out the mortgage amount that fits accordingly. Ideally you still can get the $1.5MM house, but do it by putting 50-60% down or something like that to get the monthly payment to be in the right spot. Sell the current house and you'd still have $1MM+ in non-retirement funds.
muffins14
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Re: Should I buy the $1.5M home in cash?

Post by muffins14 »

mapofuniverse wrote: Tue Jul 09, 2024 9:26 am
At your income having a 750k mortgage will have tax benefits that offset the interest rate.
How so?
Mortgage interest is tax-deductible up to 750k per tax-filer, if you itemize your taxes.

A married couple can deduct mortgage interest on up to 750k of mortgage debt.

An unmarried couple that jointly owns and pays for the house can deduct mortgage interest on up to 1.5M of mortgage debt (750k each).

A single person can deduct mortgage interest on up to 750k of mortgage debt.

Being unmarried saves us 17k annually and the effective rate is about 2.7% rather than 4.75%
Crom laughs at your Four Winds
Firemenot
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Re: Should I buy the $1.5M home in cash?

Post by Firemenot »

Heck no. You live in a non-recourse state. Mortgage it up. If the big one hits or a big fire burns it down or there’s a massive real estate crash you have the option to walk away from your 20% equity position if you do a standard 80/20 mortgage.
rule of law guy
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Re: Should I buy the $1.5M home in cash?

Post by rule of law guy »

it's a close call, but if you feel your paychecks are secure, I would leverage up to $750,000 tax deductible limit on mortgage. that sort of cuts the baby in half.
Never wrong, unless my wife tells me that I am.
KlangFool
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Re: Should I buy the $1.5M home in cash?

Post by KlangFool »

Firemenot wrote: Tue Jul 09, 2024 11:55 am Heck no. You live in a non-recourse state. Mortgage it up. If the big one hits or a big fire burns it down or there’s a massive real estate crash you have the option to walk away from your 20% equity position if you do a standard 80/20 mortgage.
+1,000.

Borrow as much as possible.

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er999
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Re: Should I buy the $1.5M home in cash?

Post by er999 »

Nice thing about no mortgage is monthly expenses are lower, even though the optimal math choice is a mortgage and invest.

What specifically is in your taxable account? Could do much worse than a paid off house, particularly with how volatile since stocks can be. If it is 1 million in Nvidia, say, I don’t think selling is crazy, although may not want to put all into the new house.
rogue_economist
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Re: Should I buy the $1.5M home in cash?

Post by rogue_economist »

In 2026 the mortgage interest tax deduction becomes a lot more appealing, so that would be one reason to not pay cash.

Rates are elevated, but you can refinance when rates fall also.

I'd say 20%, and let the rest stay in the S&P 500.
Society grows great when old men plant trees whose shade they shall never sit in
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

OnTrack2020 wrote: Tue Jul 09, 2024 7:26 am Housing is grossly overinflated everywhere in the country right now, and there simply isn't enough of it.

I would not throw that much cash into a home.

What are current rental rates where you live to rent something larger in a better area? How much rent could you get for your current property?
4500 to 5000 if I'm trying to do a similar bed bath setup for the better area. For my current property I think I'd break even at best, maybe a small loss each year until I can raise the rental price.
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

raisinsaregrapes wrote: Tue Jul 09, 2024 9:18 am Do it. But do it because you are ready to move.

At your income having a 750k mortgage will have tax benefits that offset the interest rate. I would use the windfall to improve my QOL.

I see comments about buying a 750k house, which could be impossible as it depends on what part of SoCal. 1.5 could be overkill, but it could be a very modest SFH. I would do it. We save money for a reason, to spend it or give it away.
Is the 750k interest deduction across all my properties or per property? I assume it's the former, but wanted to double check.
Firemenot
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Re: Should I buy the $1.5M home in cash?

Post by Firemenot »

Banstick86 wrote: Tue Jul 09, 2024 12:51 pm
raisinsaregrapes wrote: Tue Jul 09, 2024 9:18 am Do it. But do it because you are ready to move.

At your income having a 750k mortgage will have tax benefits that offset the interest rate. I would use the windfall to improve my QOL.

I see comments about buying a 750k house, which could be impossible as it depends on what part of SoCal. 1.5 could be overkill, but it could be a very modest SFH. I would do it. We save money for a reason, to spend it or give it away.
Is the 750k interest deduction across all my properties or per property? I assume it's the former, but wanted to double check.
If you rent your current property that’s a business. Becomes a business expense. Different.
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

Carefreeap wrote: Tue Jul 09, 2024 9:34 am
Banstick86 wrote: Tue Jul 09, 2024 1:57 am One other caveat: my employer requires me to liquidate my entire brokerage account because the cash I would generate from specific issues breach thresholds (I can't sell over $X amount within a rolling 30 days). So to get the funds for this, the exceptional route requires me to sell everything.
Hi and welcome to the forum!

Could you go into more detail with respect to this part of your post? It doesn't make sense to me that an employer can restrict your brokerage unless its company stock.
I work for a large investment management firm (ie managing 401ks and pensions, for example) and employees are subject to regulatory authorities (ie SEC). I assume this is to minimize risk of employees abusing the market with potential access to internal activities. I didn't get into the deeper understanding of why this was implemented but it's what I signed to for when I decided to work for them.
the_wiki
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Re: Should I buy the $1.5M home in cash?

Post by the_wiki »

If you do the math, leaving your money invested comes out a bit ahead over the long run. But with your income, there is no way you can afford a mortgage on a house like that unless you put at least 50% down.
anoop
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Re: Should I buy the $1.5M home in cash?

Post by anoop »

At your income of $300K, even if you buy the $1.5M house, my worry would be long term affordability since the house is 5x income. A more expensive house comes with more expensive taxes, insurance, and upkeep. Do you expect your income to go up substantially (i.e. exceed the rate of inflation) over time?

That said, I'm conservative and the last thing I would want would be in a hole with an expensive house, no job and a depressed stock portfolio. So, if I had to do it, I would sell the stock and pay cash for the house.
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

VoiceOfReason wrote: Tue Jul 09, 2024 10:58 am
Banstick86 wrote: Tue Jul 09, 2024 1:57 am

I've been lucky in the stock market and have about $2.3M worth of positions in my taxable account, which comes out to about $1.7 after federal and state taxes. Part of me wants to "solidify" the gains I've made in the market (majority of gains have come from within the last 6 months alone for assets owned for 1 or more years).

Is this all in restricted company stock or a single asset? I think there are two separate issues. The first is what you should do with this investment and the second is whether you should buy the house cash. If the investment is volatile that means you are at higher risk of losing what you've gained just as quickly as you've gained it. So considering liquidation and putting the money somewhere else (house or broader investment funds) is the first decision.

In terms of buying for cash, I'd be concerned that it's essentially all your non-retirement $$. I would not sleep easy in that situation.

I'd figure out what monthly housing expenses you are comfortable with and then figure out the mortgage amount that fits accordingly. Ideally you still can get the $1.5MM house, but do it by putting 50-60% down or something like that to get the monthly payment to be in the right spot. Sell the current house and you'd still have $1MM+ in non-retirement funds.
So I hold only 5 equity positions (or that's roughly my philosophy for stocks). One of them has run up far away (ai) and makes up 60% of my holdings. I only invest in large (some mega) caps.

I love the breakdown of the decisions I have to make and it really resonates with me and gives me more to think about.

It bothers me that a mortgage payment could be so high that we might not be able to save or run at a deficit relative to our employment income.

Another thing we might consider is private school. It comes out to about 25 to 30k per child for an accredited one.

Anyhow, thank you and everyone else who has posted so far. This helps and I'm moved by your effort in responding and reading my problem statement.
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

er999 wrote: Tue Jul 09, 2024 12:12 pm Nice thing about no mortgage is monthly expenses are lower, even though the optimal math choice is a mortgage and invest.

What specifically is in your taxable account? Could do much worse than a paid off house, particularly with how volatile since stocks can be. If it is 1 million in Nvidia, say, I don’t think selling is crazy, although may not want to put all into the new house.
I'll say this. You're a good guesser!
anoop
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Re: Should I buy the $1.5M home in cash?

Post by anoop »

muffins14 wrote: Tue Jul 09, 2024 7:35 am
PowderDay9 wrote: Tue Jul 09, 2024 7:27 am I don't think you're crazy. Imagine a scenario where stocks and housing both drop 30-50%. Run your financials with both scenarios and compare the results.

Leverage always adds more risk to seek more return. Do you need more return to hit your financial goals? Is paying 7% interest worth the potential for more return?
In that scenario, likely mortgage rates also fall and they can refinance. I’d rather have 2M-> 1M portfolio than have 250k portfolio and an illiquid house at the bottom of the housing market.
How is the house illiquid? If you own it free and clear you can always borrow against it.
Firemenot
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Re: Should I buy the $1.5M home in cash?

Post by Firemenot »

Banstick86 wrote: Tue Jul 09, 2024 1:27 pm
er999 wrote: Tue Jul 09, 2024 12:12 pm Nice thing about no mortgage is monthly expenses are lower, even though the optimal math choice is a mortgage and invest.

What specifically is in your taxable account? Could do much worse than a paid off house, particularly with how volatile since stocks can be. If it is 1 million in Nvidia, say, I don’t think selling is crazy, although may not want to put all into the new house.
I'll say this. You're a good guesser!
If NVIDIA is the > 60% holding you need to come up with a plan to wind that down and diversify. I don’t know how soon, but it’s going to get hit. They are the early mover, but competition is going to come in AI chip space. I’d start reducing that exposure ASAP.

You basically bought a winning lottery ticket. It will be hard to ever replicate that. Bank some of your winnings.
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

anoop wrote: Tue Jul 09, 2024 1:21 pm At your income of $300K, even if you buy the $1.5M house, my worry would be long term affordability since the house is 5x income. A more expensive house comes with more expensive taxes, insurance, and upkeep. Do you expect your income to go up substantially (i.e. exceed the rate of inflation) over time?

That said, I'm conservative and the last thing I would want would be in a hole with an expensive house, no job and a depressed stock portfolio. So, if I had to do it, I would sell the stock and pay cash for the house.
I don't think it'll go up substantially. Probably keep up with inflation or slightly ahead (3 to 5%).
Carefreeap
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Re: Should I buy the $1.5M home in cash?

Post by Carefreeap »

Banstick86 wrote: Tue Jul 09, 2024 12:55 pm
Carefreeap wrote: Tue Jul 09, 2024 9:34 am
Banstick86 wrote: Tue Jul 09, 2024 1:57 am One other caveat: my employer requires me to liquidate my entire brokerage account because the cash I would generate from specific issues breach thresholds (I can't sell over $X amount within a rolling 30 days). So to get the funds for this, the exceptional route requires me to sell everything.
Hi and welcome to the forum!

Could you go into more detail with respect to this part of your post? It doesn't make sense to me that an employer can restrict your brokerage unless its company stock.
I work for a large investment management firm (ie managing 401ks and pensions, for example) and employees are subject to regulatory authorities (ie SEC). I assume this is to minimize risk of employees abusing the market with potential access to internal activities. I didn't get into the deeper understanding of why this was implemented but it's what I signed to for when I decided to work for them.
That's interesting. I guess that makes sense. If the subsequent comment is accurate about owning about $1M in Nvidia, I can understand the angst. I'd probably want to move half of that off the table.

I'm also curious about your existing home. That's a big difference between $300k and $1.5M. I'm kinda scratching my head about where one finds a $300k home in So. CA anymore. Is it a condo? I'd probably sell it after you buy the house and reinvest the proceeds in an index fund. I've been a landlord in CA and it's no fun anymore.
Every day I can hike is a good day.
muffins14
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Re: Should I buy the $1.5M home in cash?

Post by muffins14 »

anoop wrote: Tue Jul 09, 2024 1:29 pm
muffins14 wrote: Tue Jul 09, 2024 7:35 am
PowderDay9 wrote: Tue Jul 09, 2024 7:27 am I don't think you're crazy. Imagine a scenario where stocks and housing both drop 30-50%. Run your financials with both scenarios and compare the results.

Leverage always adds more risk to seek more return. Do you need more return to hit your financial goals? Is paying 7% interest worth the potential for more return?
In that scenario, likely mortgage rates also fall and they can refinance. I’d rather have 2M-> 1M portfolio than have 250k portfolio and an illiquid house at the bottom of the housing market.
How is the house illiquid? If you own it free and clear you can always borrow against it.
It takes some time to get a HELOC, I assume, and you have to qualify for it, which may be harder to do if your portfolio is small because you paid cash for the house, and then dropped 50% from there, and your house has also dropped 50%
Crom laughs at your Four Winds
anoop
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Re: Should I buy the $1.5M home in cash?

Post by anoop »

Banstick86 wrote: Tue Jul 09, 2024 1:51 pm
anoop wrote: Tue Jul 09, 2024 1:21 pm At your income of $300K, even if you buy the $1.5M house, my worry would be long term affordability since the house is 5x income. A more expensive house comes with more expensive taxes, insurance, and upkeep. Do you expect your income to go up substantially (i.e. exceed the rate of inflation) over time?

That said, I'm conservative and the last thing I would want would be in a hole with an expensive house, no job and a depressed stock portfolio. So, if I had to do it, I would sell the stock and pay cash for the house.
I don't think it'll go up substantially. Probably keep up with inflation or slightly ahead (3 to 5%).
In that case you probably want to err on the side of being very conservative. With 2 kids, your expenses are likely to go up substantially until they are done with high school for sure, and most likely through college (if you choose to support them).

Renting out the current house may not be a bad idea if you are the type that fixes things themselves. If you are going to hire help, then I think it will be a wash; i.e. could go either way. But with a $1.5M house (or other more expensive house) you would already have a significant portion of your net worth tied up in local real estate. I've had friends who rent out their first house and a few years later decide that it's requiring too much upkeep as it ages and then sell it.

At your current income, my comfort would be at around $1M or less (about 3.5x). At 2.5x (750k) I would be super comfortable.
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

:annoyed
Carefreeap wrote: Tue Jul 09, 2024 2:00 pm
Banstick86 wrote: Tue Jul 09, 2024 12:55 pm
Carefreeap wrote: Tue Jul 09, 2024 9:34 am
Banstick86 wrote: Tue Jul 09, 2024 1:57 am One other caveat: my employer requires me to liquidate my entire brokerage account because the cash I would generate from specific issues breach thresholds (I can't sell over $X amount within a rolling 30 days). So to get the funds for this, the exceptional route requires me to sell everything.
Hi and welcome to the forum!

Could you go into more detail with respect to this part of your post? It doesn't make sense to me that an employer can restrict your brokerage unless its company stock.
I work for a large investment management firm (ie managing 401ks and pensions, for example) and employees are subject to regulatory authorities (ie SEC). I assume this is to minimize risk of employees abusing the market with potential access to internal activities. I didn't get into the deeper understanding of why this was implemented but it's what I signed to for when I decided to work for them.
That's interesting. I guess that makes sense. If the subsequent comment is accurate about owning about $1M in Nvidia, I can understand the angst. I'd probably want to move half of that off the table.

I'm also curious about your existing home. That's a big difference between $300k and $1.5M. I'm kinda scratching my head about where one finds a $300k home in So. CA anymore. Is it a condo? I'd probably sell it after you buy the house and reinvest the proceeds in an index fund. I've been a landlord in CA and it's no fun anymore.
Sorry I was referring to the gain/loss if I were to sell it.
According to redfin it's worth about 900 to 1mil. Bought it for 800k with 160k down. I still have like 590 balance left.

900-590 = around 300
runningshoes
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Re: Should I buy the $1.5M home in cash?

Post by runningshoes »

I was in favor of the house until you said you were also considering the option of private school for one or both kids. What's the point of moving to a better school district if you're not taking advantage of the local schools?
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

runningshoes wrote: Tue Jul 09, 2024 4:10 pm I was in favor of the house until you said you were also considering the option of private school for one or both kids. What's the point of moving to a better school district if you're not taking advantage of the local schools?
Sorry let me clarify. I meant either

1. Move and go to better public school
2. Stay where I am and send to private school. But we don't get to increase the size of our time.
PowderDay9
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Re: Should I buy the $1.5M home in cash?

Post by PowderDay9 »

muffins14 wrote: Tue Jul 09, 2024 7:35 am
PowderDay9 wrote: Tue Jul 09, 2024 7:27 am I don't think you're crazy. Imagine a scenario where stocks and housing both drop 30-50%. Run your financials with both scenarios and compare the results.

Leverage always adds more risk to seek more return. Do you need more return to hit your financial goals? Is paying 7% interest worth the potential for more return?
In that scenario, likely mortgage rates also fall and they can refinance. I’d rather have 2M-> 1M portfolio than have 250k portfolio and an illiquid house at the bottom of the housing market.
What will your mortgage balance be and the value of the house be in this scenario?
runningshoes
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Re: Should I buy the $1.5M home in cash?

Post by runningshoes »

Banstick86 wrote: Tue Jul 09, 2024 4:33 pm
runningshoes wrote: Tue Jul 09, 2024 4:10 pm I was in favor of the house until you said you were also considering the option of private school for one or both kids. What's the point of moving to a better school district if you're not taking advantage of the local schools?
Sorry let me clarify. I meant either

1. Move and go to better public school
2. Stay where I am and send to private school. But we don't get to increase the size of our time.
Got it - thanks.
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

runningshoes wrote: Tue Jul 09, 2024 4:50 pm
Banstick86 wrote: Tue Jul 09, 2024 4:33 pm
runningshoes wrote: Tue Jul 09, 2024 4:10 pm I was in favor of the house until you said you were also considering the option of private school for one or both kids. What's the point of moving to a better school district if you're not taking advantage of the local schools?
Sorry let me clarify. I meant either

1. Move and go to better public school
2. Stay where I am and send to private school. But we don't get to increase the size of our time.
Got it - thanks.
Just curious when you say in favor of the house, did you mean going all cash or mortgaging?
anoop
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Re: Should I buy the $1.5M home in cash?

Post by anoop »

Banstick86 wrote: Tue Jul 09, 2024 4:33 pm
runningshoes wrote: Tue Jul 09, 2024 4:10 pm I was in favor of the house until you said you were also considering the option of private school for one or both kids. What's the point of moving to a better school district if you're not taking advantage of the local schools?
Sorry let me clarify. I meant either

1. Move and go to better public school
2. Stay where I am and send to private school. But we don't get to increase the size of our time.
This is tough call because only locals may appreciate the quality of public schools vs private schools available, the costs which instead of being paid to a school can be put towards a house, and the quality of life from having extra time plus being in a better neighborhood. Too many variables. It's good to have options. :)
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Watty
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Re: Should I buy the $1.5M home in cash?

Post by Watty »

Banstick86 wrote: Tue Jul 09, 2024 1:57 am Maybe after that we'd consider moving back to the current home we're in since it's cheaper.
Keeping your old house as a rental is a question you need to resolve before you can decide your other plans.

When people post the details it almost never makes sense to keep your old house as a rental because;

1) You will lose the homeowners capital gains exclusion.
2) When you look at the numbers hard it would be a terrible rental when you exclude potential price appreciation.
3) You might have something like $2+ million in real estate in the same city which could be more than your net worth so it would be a diversification problem.
4) You live in a state or city with unfavorable landlord laws.
runningshoes
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Re: Should I buy the $1.5M home in cash?

Post by runningshoes »

Banstick86 wrote: Tue Jul 09, 2024 4:59 pm
runningshoes wrote: Tue Jul 09, 2024 4:50 pm
Banstick86 wrote: Tue Jul 09, 2024 4:33 pm
runningshoes wrote: Tue Jul 09, 2024 4:10 pm I was in favor of the house until you said you were also considering the option of private school for one or both kids. What's the point of moving to a better school district if you're not taking advantage of the local schools?
Sorry let me clarify. I meant either

1. Move and go to better public school
2. Stay where I am and send to private school. But we don't get to increase the size of our time.
Got it - thanks.
Just curious when you say in favor of the house, did you mean going all cash or mortgaging?
Since you asked (and as a rental property owner);
- Sell the current home if you can't make money renting it under current conditions + what Watty wrote
- Take a mortgage of ~ 50% of new home price (not a fan of paying all cash nor of being locked into large payments for 30 years)
- Hopefully refi at lower interest rates in a couple of years
mark_in_denver
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Re: Should I buy the $1.5M home in cash?

Post by mark_in_denver »

I think I'd go with 60% down. I wouldn't blame you on locking in those stock market gains. Trees don't grow to the sky.
moneyflowin
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Re: Should I buy the $1.5M home in cash?

Post by moneyflowin »

Firemenot wrote: Tue Jul 09, 2024 11:55 am Heck no. You live in a non-recourse state. Mortgage it up. If the big one hits or a big fire burns it down or there’s a massive real estate crash you have the option to walk away from your 20% equity position if you do a standard 80/20 mortgage.
There's no way the OP can qualify for a $1.2M mortgage @ 7% with $300k income. And considering that OP already has an existing mortgage, they're going to qualify for even less.

They could rent out the existing house for additional income but it won't count toward their DTI because banks require 2 years of consistent rental income for it to be considered

OP would probably only qualify for $300k mortgage if they kept their existing house. If they sell first then buy, they'd qualify for $850k.
mark_in_denver
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Re: Should I buy the $1.5M home in cash?

Post by mark_in_denver »

A $1.2M loan over 30 years, you'll be paying $6.5M in interest. If you put that $1.2M in the total market, eyeing the middle of firecalc results (124 cycles) has your balance around $6.5M at 30 years.

Looks like it's mostly a wash.

I'm assuming this is a tech portfolio of stocks? You can always solidify those gains and reposition into a more conservative portfolio. The 2000 tech bubble burst was ugly at best. Do what you need to do to be comfortable.
Topic Author
Banstick86
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Re: Should I buy the $1.5M home in cash?

Post by Banstick86 »

mark_in_denver wrote: Tue Jul 09, 2024 6:12 pm A $1.2M loan over 30 years, you'll be paying $6.5M in interest. If you put that $1.2M in the total market, eyeing the middle of firecalc results (124 cycles) has your balance around $6.5M at 30 years.

Looks like it's mostly a wash.

I'm assuming this is a tech portfolio of stocks? You can always solidify those gains and reposition into a more conservative portfolio. The 2000 tech bubble burst was ugly at best. Do what you need to do to be comfortable.
Yeah mostly tech. I need to do more research on rebalancing to a more conservative distribution. I've always had the diamond hands approach to my positions (my work restrictions certainly enable this).
WhitePuma
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Re: Should I buy the $1.5M home in cash?

Post by WhitePuma »

mark_in_denver wrote: Tue Jul 09, 2024 6:12 pm A $1.2M loan over 30 years, you'll be paying $6.5M in interest. If you put that $1.2M in the total market, eyeing the middle of firecalc results (124 cycles) has your balance around $6.5M at 30 years.

Looks like it's mostly a wash.
I wouldn’t call it a wash when one is a guarantee and the other is 1 of 124 highly dispersed possibilities. If my expected return is the same, I’d go for the lower risk version.
mark_in_denver
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Re: Should I buy the $1.5M home in cash?

Post by mark_in_denver »

WhitePuma wrote: Tue Jul 09, 2024 8:12 pm
mark_in_denver wrote: Tue Jul 09, 2024 6:12 pm A $1.2M loan over 30 years, you'll be paying $6.5M in interest. If you put that $1.2M in the total market, eyeing the middle of firecalc results (124 cycles) has your balance around $6.5M at 30 years.

Looks like it's mostly a wash.
I wouldn’t call it a wash when one is a guarantee and the other is 1 of 124 highly dispersed possibilities. If my expected return is the same, I’d go for the lower risk version.
That's true unless rates fall.
If I was the op I would just pay with cash. Put the 10 grand in monthly income and savings into the market. Personally I wouldn't want to depend on bailing on my mortgage payments if things get tough.

OP, my sincere apologies on the interest paid, you're paying $1.65M in interest.

All of our property is free and clear.
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