Purchasing a Very expensive home in HCOL Area

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FullYellowJacket
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Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sat Mar 10, 2018 2:05 pm

Hi all,

DW and I purchased a condo in LA a few years ago, and leading up to the purchase we dropped our 401(k)s down to the level where we would get company matches, but no more. This accelerated our savings to the point where we had enough of a DP to purchase a condo that we felt was below market value in a hot market. Since then, we have focused on paying off some debts (which are gone) and catching back up on retirement savings.

I know that we eventually want to live in a nice SFH in LA, and not achieving this likely means leaving the City, which I am hesitant to do. Realistically in the next 5-7 years we will want to purchase a 1-1.5 million dollar home. Assuming the market stays competitive, it may be necessary to have a lot of the payment in cash, to make the offer more likely to be accepted (less of a risk in not securing financing).

my question is, does it make sense to decrease 401(k) savings over the next five years to save the money for a DP? We are currently maxing 401(k)s, Roth IRAs, and saving an additional 2k per month or so on top of that. I'm going to contribute to the Roth IRA either way due to the flexibility it provides.

If it helps, we are way ahead of retirement savings for our age (late 20s). We could probably stop saving completely now and be able to retire in early 60s with a 4% real return. Also we will have the option to sell the condo at that time. If we do, I'm projecting we get about 150k after fees.

KlangFool
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Re: Purchasing a Very expensive home in HCOL Area

Post by KlangFool » Sat Mar 10, 2018 2:11 pm

OP,

1) What are your marginal tax rate and state income tax rate?

2) Why won't you contribute to Trad. 401K and put the tax savings into your taxable account and Roth IRA?

3) Then, you can use that money for your house downpayment.

<<If it helps, we are way ahead of retirement savings for our age (late 20s). We could probably stop saving completely now and be able to retire in early 60s with a 4% real return.>>

4) Are you Financially Independent now? Aka, you can stop working now. If not, you still need to survive for the next 40 years before you reach the 60s.

KlangFool

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sat Mar 10, 2018 5:00 pm

1) The new 22% federal bracket, 9.3% state bracket.

2) Less 401(k) contribution means more cash-in-hand, even at a combined 31.3% marginal rate.

3) That's what we are doing, but i wouldn't mind having more cash-in-hand come house shopping time. Really we are looking at "boosting" after tax savings.

4) No, we are not financially independent yet. Currently we are saving about 40% of our gross income. This move would make it more like 35% of our gross income, but the benefit is we could more easily get the house we want to raise the family we want. We will be saving significant money other way. With employer match we would still be saving 10% of gross income each into 401(k), we just won't be maxing 401(k)s.

KlangFool
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Re: Purchasing a Very expensive home in HCOL Area

Post by KlangFool » Sat Mar 10, 2018 7:49 pm

FullYellowJacket wrote:
Sat Mar 10, 2018 5:00 pm

2) Less 401(k) contribution means more cash-in-hand, even at a combined 31.3% marginal rate.
FullYellowJacket,

Does it really matter?

A) Do you have enough for 20% downpayment?

B) Or, do you need more downpayment in order to qualify for the loan?

We are talking about a 20K to 30K difference in 401K contribution. After tax, you get about 2/3 of that. Or, I am wrong in my calculation?

KlangFool

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sat Mar 10, 2018 10:11 pm

Klangfool,
We currently don't have any amount saved for the down payment, because we just spent a significant amount on the DP for our current condo. That is apart of the 150k in proceeds I would expect from selling. I think we could have 200k + whatever money from selling for a DP saved up in seven or eight years without changing our retirement savings. We would have 300k ready if we adjusted downward on our 401(k), or have the 200k in six or seven years. We will meet our retirement goals either way.

AlohaJoe
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Re: Purchasing a Very expensive home in HCOL Area

Post by AlohaJoe » Sat Mar 10, 2018 10:29 pm

FullYellowJacket wrote:
Sat Mar 10, 2018 2:05 pm
If it helps, we are way ahead of retirement savings for our age (late 20s). We could probably stop saving completely now and be able to retire in early 60s with a 4% real return.
If this is true then I don't see anything wrong with saving to buy the house you want instead of saving for retirement for a few years.

There is no foolproof and risk free way through life. Think clearly about the risks you want to take and then make your decision.

Nate79
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Re: Purchasing a Very expensive home in HCOL Area

Post by Nate79 » Sun Mar 11, 2018 12:04 am

I do not see how someone in the 22% tax bracket can or should be buying a home in the $1m+ range. That's way too much house.

Missedtheboat
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Re: Purchasing a Very expensive home in HCOL Area

Post by Missedtheboat » Sun Mar 11, 2018 12:36 am

I know that we eventually want to live in a nice SFH in LA, and not achieving this likely means leaving the City, which I am hesitant to do. Realistically in the next 5-7 years we will want to purchase a 1-1.5 million dollar home.

My question is how do you think you will find a 1 -1.5 million dollar SFH in the city? That's almost impossible now, let alone in the next 5-7 years. LA real estate is shockingly expensive.

Tal-
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Re: Purchasing a Very expensive home in HCOL Area

Post by Tal- » Sun Mar 11, 2018 12:56 am

I feel like there's some info missing here, and it's hard to weigh in without a better understanding of your income, expenses, and assets.

OP - can you provide clarity on these?
Debt is to personal finance as a knife is to cooking.

afan
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Re: Purchasing a Very expensive home in HCOL Area

Post by afan » Sun Mar 11, 2018 7:55 am

Unless speculating on real estate is your, successful, business this sounds like a terrible idea. Planning to buy into an overheated market with your retirement money is not a prudent strategy.

You will be over invested in a single piece of property.
If you own a number of properties in a variety of areas, preferably not all in the greater LA region, then you are a professional real estate investor and hopefully you understand the risks you are taking. Note that plenty of professional investors got killed in the crash.

If your job is something else then I would focus on doing what everyone else does: build a diversified portfolio for retirement that is not sensitive to the fortunes of one market in one city. Every year that you fail to maximize your tax favored assets is an opportunity you cannot get back. Compounding this by using all your taxable savings to buy one house, rather than building a diversified taxable portfolio just makes it worse.

Your alternatives: adjust your aspirations to match your income while staying in LA or move to a lower cost area.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

bling
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Re: Purchasing a Very expensive home in HCOL Area

Post by bling » Sun Mar 11, 2018 8:12 am

Nate79 wrote:
Sun Mar 11, 2018 12:04 am
I do not see how someone in the 22% tax bracket can or should be buying a home in the $1m+ range. That's way too much house.
yep, something doesn't add up. with the new tax tables, 22% tax bracket means as a single earner you're making less than $82k a year. married joint is less than $165k. that is not enough to afford a $1m+ house

JoeRetire
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Re: Purchasing a Very expensive home in HCOL Area

Post by JoeRetire » Sun Mar 11, 2018 8:22 am

FullYellowJacket wrote:
Sat Mar 10, 2018 2:05 pm
my question is, does it make sense to decrease 401(k) savings over the next five years to save the money for a DP?
You've already done this once.
Seems like the reasoning this time would be the same.

Frisco Kid
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Re: Purchasing a Very expensive home in HCOL Area

Post by Frisco Kid » Sun Mar 11, 2018 8:51 am

OP, there is no way to forecast home prices 5-7 years forward. Are kids in your future? As others have mentioned, if you are in 22% tax bracket buying a home $1.5M will make you house poor even with a large down payment. What areas are you considering, many parts of LA are considered VHCOL and your price point will buy perhaps a starter home needing upgrades, how will you cover those costs?

limeyx
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Re: Purchasing a Very expensive home in HCOL Area

Post by limeyx » Sun Mar 11, 2018 10:52 am

bling wrote:
Sun Mar 11, 2018 8:12 am
Nate79 wrote:
Sun Mar 11, 2018 12:04 am
I do not see how someone in the 22% tax bracket can or should be buying a home in the $1m+ range. That's way too much house.
yep, something doesn't add up. with the new tax tables, 22% tax bracket means as a single earner you're making less than $82k a year. married joint is less than $165k. that is not enough to afford a $1m+ house
Every house in LA is $1M+ ($1M almost certainly wont get a "nice" SFH in most areas) and people need places to live, so they buy them.
It's the primary reason we had to leave the area to have a family (the shocking state of public schools being the second)

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sun Mar 11, 2018 11:10 am

I'll admit that we are projecting ahead income wise. We both expect our incomes to grow quickly. And I should clarify that we are technically in the 24% bracket, but the new standard deduction puts us into the top of the 22% bracket. So income in 170-180 range, but we have quickly grown our income and expect to do so for the next six or seven years. I'll expect income in 250-300k range by the time we make a purchase. If we can't afford it we move.

I don't see how buying a 3 BR house to live in would make me a real estate speculator. We like and want to remain in LA, and we know it takes $$$.

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sun Mar 11, 2018 11:15 am

Frisco Kid wrote:
Sun Mar 11, 2018 8:51 am
OP, there is no way to forecast home prices 5-7 years forward. Are kids in your future? As others have mentioned, if you are in 22% tax bracket buying a home $1.5M will make you house poor even with a large down payment. What areas are you considering, many parts of LA are considered VHCOL and your price point will buy perhaps a starter home needing upgrades, how will you cover those costs?
Currently we are in the SFV, so it is only HCOL here, not VHCOL quite yet. Kids are in the future, which is why we are thinking we will need 3 BR at some point. The task now is making that work. I revised to say that we are in the 24% bracket and are quickly growing our incomes. A 1mm home with 300k DP will be affordable (by LA standards). Obviously 1.5mm is a stretch.

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sun Mar 11, 2018 11:19 am

I'm thinking a better way of asking my question is this:
Does it make sense to lower future retirement savings in order to lower future cash flow needs?

In essence I would be looking to lower current 401(k) contributions for the next few years in order to reduce future expected mortgage payments.

chevca
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Re: Purchasing a Very expensive home in HCOL Area

Post by chevca » Sun Mar 11, 2018 11:21 am

FullYellowJacket wrote:
Sun Mar 11, 2018 11:10 am
I'll admit that we are projecting ahead income wise. We both expect our incomes to grow quickly. And I should clarify that we are technically in the 24% bracket, but the new standard deduction puts us into the top of the 22% bracket. So income in 170-180 range, but we have quickly grown our income and expect to do so for the next six or seven years. I'll expect income in 250-300k range by the time we make a purchase. If we can't afford it we move.

I don't see how buying a 3 BR house to live in would make me a real estate speculator. We like and want to remain in LA, and we know it takes $$$.
Then I see no reason to decrease 401k contributions. The increase in income(s) should be the main driver for the future down payment. Keep contributing to tax advantaged accounts fully, keep increasing the savings rate as income(s) go up, and stash the down payment money in a separate savings account. At the time you go to buy, look into options if needed at the time. A 401k loan maybe? As an example. Don't lose out on the tax advantaged space though. You may not even end up buying a house.. or maybe you move.. or....

chevca
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Re: Purchasing a Very expensive home in HCOL Area

Post by chevca » Sun Mar 11, 2018 11:24 am

FullYellowJacket wrote:
Sun Mar 11, 2018 11:19 am
I'm thinking a better way of asking my question is this:
Does it make sense to lower future retirement savings in order to lower future cash flow needs?

In essence I would be looking to lower current 401(k) contributions for the next few years in order to reduce future expected mortgage payments.
No, I don't think that makes sense. At the house prices you're talking, the difference in mortgage payments by lowering your 401k contributions to have that cash available will be very minimal. You have a $6000 mortgage payment or a $5925 mortgage payment, for example. Does that matter? If it does, you can't afford it.

afan
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Re: Purchasing a Very expensive home in HCOL Area

Post by afan » Sun Mar 11, 2018 1:58 pm

It does not make sense to lower retirement contributions in order to buy a more expensive house. Each year you fail to maximize your retirement savings in tax favored accounts you give up the right to get that money into such accounts. You cannot make that up later.

In effect you are (speculating) that the returns to your real estate investment will more than make up for the tax advantages you forego.

You are also assuming that your less than maximum retirement savings plus your real estate returns will be enough. Since most people should be maximizing their tax favored retirement funds and save more.outside of them planning to save much less is a terrible idea. It is possible, again speculative, that your expensive house will appreciate so much that you can sell it and close the gap in your savings. But even if that were true you would have been better off with a less expensive house and putting that money into something like a REIT inside your retirement account that would give you the appreciation without sacrificing diversification.

Hence my opinion that this approach requires speculating on the returns on one highly undiversified real estate investment.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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randomizer
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Re: Purchasing a Very expensive home in HCOL Area

Post by randomizer » Sun Mar 11, 2018 2:18 pm

I think in the end you have to do what you want. Personally, I'd be scared of becoming "house poor" in this situation.
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FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sun Mar 11, 2018 3:05 pm

Once again, I don’t factor House appreciation at all in my retirement planning. I’m just trying to figure out how we are going to manage to stay in LA long term. If I kept our retirement savings at the downshifted amount, I’d expect to be able to retire in mid-50s. At our current pace we could retire in our 40s. Put another way: the housing market tanking after we purchase wouldn’t significantly change our retirement picture.

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Watty
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Re: Purchasing a Very expensive home in HCOL Area

Post by Watty » Sun Mar 11, 2018 3:39 pm

The concept of "maxing" out your retirement accounts is somewhat arbitrary since for some couples that could be over $100K a year or only $11,000 a year. Getting the employer match is always a good deal but you might think of your retirement account contributions as a percentage of your gross income. I would be very cautious about saving less than 15% of your gross income not including any employer match.

You seem to be on the borderline of the 24 and 22 percent federal tax bracket. If possible you might try to contribute enough to deductible retirement accounts to get below the 24% tax bracket.
FullYellowJacket wrote:
Sun Mar 11, 2018 11:15 am
A 1mm home with 300k DP will be affordable (by LA standards).
By sumo wrestler standards I am downright skinny, but that does not make it true. :D

Be very careful of getting blinded by your local conditions.

When you are on vacation or traveling for business try to check out the housing in other parts of the country to get some perspective. In much of the country you can get a McMansion for $300K in a good school district or a true estate home for a million dollars.

Here is what you could get for a million dollars in the outer suburbs of Atlanta.
https://www.realtor.com/realestateandho ... 602#photo0

Once again, I don’t factor House appreciation at all in my retirement planning. I’m just trying to figure out how we are going to manage to stay in LA long term.
Put a lot into your retirement accounts and also save up like crazy until you have a couple of healthy kids and then buy a house before they start school. If you have difficulty in having kids or they have any health issues then that can greatly change your situation.

I think that problem is that you are trying to buy a million dollar house real soon when you could wait five or more years.

PFInterest
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Re: Purchasing a Very expensive home in HCOL Area

Post by PFInterest » Sun Mar 11, 2018 3:59 pm

FullYellowJacket wrote:
Sat Mar 10, 2018 2:05 pm
Hi all,

DW and I purchased a condo in LA a few years ago, and leading up to the purchase we dropped our 401(k)s down to the level where we would get company matches, but no more. This accelerated our savings to the point where we had enough of a DP to purchase a condo that we felt was below market value in a hot market. Since then, we have focused on paying off some debts (which are gone) and catching back up on retirement savings.

I know that we eventually want to live in a nice SFH in LA, and not achieving this likely means leaving the City, which I am hesitant to do. Realistically in the next 5-7 years we will want to purchase a 1-1.5 million dollar home. Assuming the market stays competitive, it may be necessary to have a lot of the payment in cash, to make the offer more likely to be accepted (less of a risk in not securing financing).

my question is, does it make sense to decrease 401(k) savings over the next five years to save the money for a DP? We are currently maxing 401(k)s, Roth IRAs, and saving an additional 2k per month or so on top of that. I'm going to contribute to the Roth IRA either way due to the flexibility it provides.

If it helps, we are way ahead of retirement savings for our age (late 20s). We could probably stop saving completely now and be able to retire in early 60s with a 4% real return. Also we will have the option to sell the condo at that time. If we do, I'm projecting we get about 150k after fees.
I'm in LA so I get the point. No it doesn't make sense to lower retirement IMO.
I wouldn't trade the future for this. Hit 18.5 X2, 5.5 X2. Everything else goes into a DP fund. If you can't reach your goal this way then you need a budget first.

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sun Mar 11, 2018 4:17 pm

Watty wrote:
Sun Mar 11, 2018 3:39 pm
The concept of "maxing" out your retirement accounts is somewhat arbitrary since for some couples that could be over $100K a year or only $11,000 a year. Getting the employer match is always a good deal but you might think of your retirement account contributions as a percentage of your gross income. I would be very cautious about saving less than 15% of your gross income not including any employer match.

You seem to be on the borderline of the 24 and 22 percent federal tax bracket. If possible you might try to contribute enough to deductible retirement accounts to get below the 24% tax bracket.
FullYellowJacket wrote:
Sun Mar 11, 2018 11:15 am
A 1mm home with 300k DP will be affordable (by LA standards).
By sumo wrestler standards I am downright skinny, but that does not make it true. :D

Be very careful of getting blinded by your local conditions.

When you are on vacation or traveling for business try to check out the housing in other parts of the country to get some perspective. In much of the country you can get a McMansion for $300K in a good school district or a true estate home for a million dollars.

Here is what you could get for a million dollars in the outer suburbs of Atlanta.
https://www.realtor.com/realestateandho ... 602#photo0

Once again, I don’t factor House appreciation at all in my retirement planning. I’m just trying to figure out how we are going to manage to stay in LA long term.
Put a lot into your retirement accounts and also save up like crazy until you have a couple of healthy kids and then buy a house before they start school. If you have difficulty in having kids or they have any health issues then that can greatly change your situation.

I think that problem is that you are trying to buy a million dollar house real soon when you could wait five or more years.
I grew up in a LCOL McMansion, so I’m aware of what I’m giving up my being in LA. DW reminds me as well.

HRPennypacker
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Re: Purchasing a Very expensive home in HCOL Area

Post by HRPennypacker » Sun Mar 11, 2018 4:19 pm

Watty wrote:
Sun Mar 11, 2018 3:39 pm

Here is what you could get for a million dollars in the outer suburbs of Atlanta.
https://www.realtor.com/realestateandho ... 602#photo0
I gotta stop clicking on these when people post them. And the place has 7/9/9 schools!

afan
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Re: Purchasing a Very expensive home in HCOL Area

Post by afan » Sun Mar 11, 2018 5:47 pm

If I kept our retirement savings at the downshifted amount, I’d expect to be able to retire in mid-50s. At our current pace we could retire in our 40s.
See, here I am confused. How could one be saving enough for retirement, in an expensive area, without maxing out the, limited, amounts one is able to put into tax favored accounts? If you were saving 50% of income and considering taking that down to 40% then the discussion would be worth having. That does not seem to be the case.

You can live in the LA area, but at this point it does not appear that you can buy the kind of house you want in that area without severely compromising your long term financial future. If you have kids, do you plan to help them with college?

Painful as it can be, sometimes you have to say "I cannot afford it"
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sun Mar 11, 2018 6:58 pm

afan wrote:
Sun Mar 11, 2018 5:47 pm
If I kept our retirement savings at the downshifted amount, I’d expect to be able to retire in mid-50s. At our current pace we could retire in our 40s.
See, here I am confused. How could one be saving enough for retirement, in an expensive area, without maxing out the, limited, amounts one is able to put into tax favored accounts? If you were saving 50% of income and considering taking that down to 40% then the discussion would be worth having. That does not seem to be the case.

You can live in the LA area, but at this point it does not appear that you can buy the kind of house you want in that area without severely compromising your long term financial future. If you have kids, do you plan to help them with college?

Painful as it can be, sometimes you have to say "I cannot afford it"
Thanks for the condescension! I’ve stated elsewhere that we can not currently afford the house that we will want, but that’s ok. But I do think you missed one of the points of this post. We can absolutely keep maxing accounts and then some and eventually reach our goals (assuming incomes keep increasing as I project). DW and I have decided to hold steady for now, but as the future becomes less murky we will re-examine.

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Re: Purchasing a Very expensive home in HCOL Area

Post by Clever_Username » Sun Mar 11, 2018 7:06 pm

I'd like to send this in a slightly different direction: what are you looking for in a house? I get the 3BR part, and I imagine some square footage.

I bought a 3BR townhouse in Pasadena less than a year ago at cost well under your budget (I can send you details if you want). I believe the schools nearby are good, although that wasn't a criteria for me. I wonder if you can accomplish your goal on less than you might be worrying about.
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Re: Purchasing a Very expensive home in HCOL Area

Post by KlangFool » Sun Mar 11, 2018 7:21 pm

FullYellowJacket wrote:
Sun Mar 11, 2018 6:58 pm

Thanks for the condescension! I’ve stated elsewhere that we can not currently afford the house that we will want, but that’s ok. But I do think you missed one of the points of this post. We can absolutely keep maxing accounts and then some and eventually reach our goals (assuming incomes keep increasing as I project). DW and I have decided to hold steady for now, but as the future becomes less murky we will re-examine.
FullYellowJacket,

To answer your original question, it does not make sense to pay a lot of taxes in order to build up your downpayment fund. It won't matter a bit. If your income goes up as you predicted, you can build up your downpayment fund in less than a year. Or, your condo would sell for a big gain and enough for your downpayment.

KlangFool
Last edited by KlangFool on Sun Mar 11, 2018 8:33 pm, edited 1 time in total.

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Sun Mar 11, 2018 8:14 pm

Clever_Username wrote:
Sun Mar 11, 2018 7:06 pm
I'd like to send this in a slightly different direction: what are you looking for in a house? I get the 3BR part, and I imagine some square footage.

I bought a 3BR townhouse in Pasadena less than a year ago at cost well under your budget (I can send you details if you want). I believe the schools nearby are good, although that wasn't a criteria for me. I wonder if you can accomplish your goal on less than you might be worrying about.
3 BR, 1500 sqft, detached house. I'd be OK with condo for life and eventually move to a 3 BR condo, wants at least a townhouse. Out-of-date is OK as long as it is livable. Good public schools (which is the real cost driver). It doesn't have to be city of LA exactly, but it needs to be close enough that the cultural amenities of LA would be available without too much burden. We would consider a place like Pasadena.

afan
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Re: Purchasing a Very expensive home in HCOL Area

Post by afan » Sun Mar 11, 2018 8:22 pm

Or, your condo would sell for a big gain and enough for your downpayment.
I think part of the goal was to have cash on hand, so there would be no contingencies that could make the OP's offer less competitive. So they would want to be able to buy without selling.

Not condescension. Just an opinion about the wisdom of reducing retirement savings in order to buy a more expensive home.
One of the unfortunate consequences of the existence of maximum retirement contributions is that people assume that this is enough for retirement. The maximum values are set based on how much tax money the government can afford to give up. Maximizing the tax favored retirement funds does not mean one has saved enough for retirement. Most people should be saving more than that.

This is why I am alarmed by people who are planning to save even less than the maximum tax favored amounts. You cannot make up the gap in the future.

People who are forced to save less than even the tax favored maximum because their incomes are so low they need every cent to survive are in one boat. Deciding to cut back on retirement savings to buy a more expensive house is proof the house is too expensive.

Don't take it personally. A lot of people make decisions like this during their working lives. That is why so many have too little for retirement when the time comes.
Last edited by afan on Tue Mar 13, 2018 8:15 am, edited 1 time in total.
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H-Town
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Re: Purchasing a Very expensive home in HCOL Area

Post by H-Town » Sun Mar 11, 2018 8:37 pm

FullYellowJacket wrote:
Sat Mar 10, 2018 2:05 pm
Hi all,

DW and I purchased a condo in LA a few years ago, and leading up to the purchase we dropped our 401(k)s down to the level where we would get company matches, but no more. This accelerated our savings to the point where we had enough of a DP to purchase a condo that we felt was below market value in a hot market. Since then, we have focused on paying off some debts (which are gone) and catching back up on retirement savings.

I know that we eventually want to live in a nice SFH in LA, and not achieving this likely means leaving the City, which I am hesitant to do. Realistically in the next 5-7 years we will want to purchase a 1-1.5 million dollar home. Assuming the market stays competitive, it may be necessary to have a lot of the payment in cash, to make the offer more likely to be accepted (less of a risk in not securing financing).

my question is, does it make sense to decrease 401(k) savings over the next five years to save the money for a DP? We are currently maxing 401(k)s, Roth IRAs, and saving an additional 2k per month or so on top of that. I'm going to contribute to the Roth IRA either way due to the flexibility it provides.

If it helps, we are way ahead of retirement savings for our age (late 20s). We could probably stop saving completely now and be able to retire in early 60s with a 4% real return. Also we will have the option to sell the condo at that time. If we do, I'm projecting we get about 150k after fees.
Just keep saving 40-50% gross income and things will fall into places. In the next 5-7 years, when it's time to buy a house, it's either you can afford it or you can't. Having this discussion right now is premature. Things change quickly in a hurry, especially jobs, life events, kids, etc. You'll be surprised that 5-7 years down the road, somehow you'll change your mind about LA area.

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Clever_Username
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Re: Purchasing a Very expensive home in HCOL Area

Post by Clever_Username » Sun Mar 11, 2018 9:05 pm

FullYellowJacket wrote:
Sun Mar 11, 2018 8:14 pm
Clever_Username wrote:
Sun Mar 11, 2018 7:06 pm
I'd like to send this in a slightly different direction: what are you looking for in a house? I get the 3BR part, and I imagine some square footage.

I bought a 3BR townhouse in Pasadena less than a year ago at cost well under your budget (I can send you details if you want). I believe the schools nearby are good, although that wasn't a criteria for me. I wonder if you can accomplish your goal on less than you might be worrying about.
3 BR, 1500 sqft, detached house. I'd be OK with condo for life and eventually move to a 3 BR condo, wants at least a townhouse. Out-of-date is OK as long as it is livable. Good public schools (which is the real cost driver). It doesn't have to be city of LA exactly, but it needs to be close enough that the cultural amenities of LA would be available without too much burden. We would consider a place like Pasadena.
Other than the detached requirement, it sounds like the place I bought a few months ago meets your requirements. I'd encourage you to take a look around Pasadena -- it might fit what you're looking for without being as much of a stress financially.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

jminv
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Re: Purchasing a Very expensive home in HCOL Area

Post by jminv » Sun Mar 11, 2018 10:08 pm

I would continue maximizing my retirement account contributions which are, I would imagine, geographically diversified.

If you divert retirement investments to save up cash for a house you will have 1.) lost on compounding 2.) lost on taxes (paid tax on your house downpayment, essentially) 3.) retire later or poorer and 4.) once you buy an even more expensive place in the area, you will be doubling your geographical concentration of your assets which happen to be in the place you both hold jobs. Since this house will stretch your budget further, by buying it you would also decrease your lifetime savings.

Keep being thrifty and you'll have the money eventually in any case. As long as you maintain that, the cash will follow. At some point, a buying opportunity will appear where it's not as competitive as it is in today's market.

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Cycle
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Re: Purchasing a Very expensive home in HCOL Area

Post by Cycle » Sun Mar 11, 2018 10:20 pm

Max out your tax efficient accounts including backdoor Roth and HSA, after that see what kind of housing you can afford and weigh that against other housing that will allow a FIRE at like 40 or 45.

crystalbank
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Re: Purchasing a Very expensive home in HCOL Area

Post by crystalbank » Sun Mar 11, 2018 10:32 pm

OP, decide how important being in LA is to you. If you think you will be in Los Angeles area for the foreseeable future (or maybe until your retirement) then I would recommend buying a house if you can afford it.

I too live in a HCOL location in Los Angeles, so I understand your dilemma. I regret not buying a house early on when I had a chance to back in 2012-ish. In my infinite wisdom, I decided to move to a LCOL area instead of buying a house in LA (mind you the prices were low due to the crash). I ended up moving back to LA 18 months later and purchased a house in the same neighborhood. Only this time I ended up paying a LOT more for the house.

WannabeEarlyRetiree
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Re: Purchasing a Very expensive home in HCOL Area

Post by WannabeEarlyRetiree » Mon Mar 12, 2018 12:37 am

Rather than reducing 401k, can you reduce your expenses to increase saving for down payments?

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Mon Mar 12, 2018 10:46 am

WannabeEarlyRetiree wrote:
Mon Mar 12, 2018 12:37 am
Rather than reducing 401k, can you reduce your expenses to increase saving for down payments?
I think we could reasonably cut 100-200 per month before getting truly painful. I have a mental list of things we could cut under a black swan event. I’d rather work more overtime than cut that amount for now, and I hate working OT!

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jharkin
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Re: Purchasing a Very expensive home in HCOL Area

Post by jharkin » Mon Mar 12, 2018 11:06 am

bling wrote:
Sun Mar 11, 2018 8:12 am
Nate79 wrote:
Sun Mar 11, 2018 12:04 am
I do not see how someone in the 22% tax bracket can or should be buying a home in the $1m+ range. That's way too much house.
yep, something doesn't add up. with the new tax tables, 22% tax bracket means as a single earner you're making less than $82k a year. married joint is less than $165k. that is not enough to afford a $1m+ house

Bingo. I was also going to say that for the kind of income that can afford a 1-15M house, the difference between 'just the match' and maxing a 401k is pocket change......

afan
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Re: Purchasing a Very expensive home in HCOL Area

Post by afan » Tue Mar 13, 2018 5:14 am

In very HCOL areas people stretch want they consider reasonable to pay for a house. They move absurdly far from work and accept that they will get little for their money. But even with that, in LA they are still stuck. Commutes are massive and there is little public transportation.

So paying what would otherwise be unthinkable shares of income for housing becomes normative. But one still has to save for retirement and kids.

If someone has to cut back on retirement savings to buy a house they have already answered the question of whether they can afford it.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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goingup
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Re: Purchasing a Very expensive home in HCOL Area

Post by goingup » Tue Mar 13, 2018 7:44 am

OP-
Just start saving for the DP even if you don't know all the details of how much you need.

Your income is $180K, which you think will grow. Can you save $18.5K X 2, plus $11K Roth, and $25K per year right now? Set your DP savings goal per year and try to get there without sacrificing retirement savings. Maybe next year you save $50K for the DP.

Every year set your DP goal and focus on it. It will happen. (I'm a left-coaster and appreciate the joy and struggle of home-buying in HCOL area.) :beer

FullYellowJacket
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Re: Purchasing a Very expensive home in HCOL Area

Post by FullYellowJacket » Tue Mar 13, 2018 11:03 am

goingup wrote:
Tue Mar 13, 2018 7:44 am
OP-
Just start saving for the DP even if you don't know all the details of how much you need.

Your income is $180K, which you think will grow. Can you save $18.5K X 2, plus $11K Roth, and $25K per year right now? Set your DP savings goal per year and try to get there without sacrificing retirement savings. Maybe next year you save $50K for the DP.

Every year set your DP goal and focus on it. It will happen. (I'm a left-coaster and appreciate the joy and struggle of home-buying in HCOL area.) :beer
This is exactly what we are doing right now. We are still in our 20s and both doing very well in our respective careers so I do expect income to keep increasing. My field specifically is heavily concentrated in Southern California. Moving to a LCOL area as some suggest would hamper my career possibilities. Thanks for the encouragements!

If it helps everyone, we have accumulated ~1.5x our income in our retirement accounts, so we are on track by most standards. That's about 4.5 times our expenditures.

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