Another Home Affordability Thread

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dollarbillz
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Another Home Affordability Thread

Post by dollarbillz » Tue Dec 04, 2018 5:28 pm

All,

Long time lurker here, first time posting.

Background data:

Late 30s couple, married, three children (not yet in school). Live in a condo that we've FAR outgrown. We have managed, for 10 years of marriage to live well below our means. Cars paid. Student loans paid. No CC debt.

Now have gotten to the point where we NEED to relocate. This is not optional, we will be moving. Desired location is HCOL. Home cost expected $1.5-$1.7M; property taxes also high, millage rate around 40 ($30-40k in property taxes annually :shock: ). Interest rate 4.8%

While in theory we would be "happier" moving into the house in the nicer neighborhood, I'm not so sure it's the smartest thing to do. Can we afford it? How will it affect our ability to save? The debt-averse side of me is telling me to walk away and find a more reasonably priced house in a less desirable (but still safe/nice/livable) location and continue saving. The other side is telling me, if you're not going to spend it on a house for your family, what are you going to spend it on?

With regards to a downpayment, we both prefer to stay relatively liquid (as you will see from our relatively large cash position). Maximum $500,000 down, as this will leave us with enough cash to make minor renovations/furnish the home and maintain a reasonable emergency fund.

Secondary question: what is the smart thing to do with our current condo, cash out or rent? Some estimates related to the condo provided below.

Thanks in advance.

Income
Me: $400,000 (annual bonus of ~$30,000 very common, but not guaranteed)
Wife: $150,000 (self employed so varies somewhat, this is a conservative average)
Both stable jobs; no major changes to income anticipated.

Tax bracket: 35% Fed (2018) and 4.5% State

Savings
401k me: $200,000
401k wife: $600,000
Cash (including emergency fund): $750k
After tax investments: $1M (95% stocks, 5% bonds)
529s: $125k

Other assets
Current condo: would sell for $325,000 conservatively. Paid cash, $200,000 10 years ago.
Rent option: would rent for $3,000/m; annual expenses of $12,000

bloom2708
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Re: Another Home Affordability Thread

Post by bloom2708 » Tue Dec 04, 2018 6:22 pm

What do the commutes look like in the new location?

Any desire for spouse to stay home with the kids when they are a bit older?

$1.2 million is < 2.5 x salary. In theory you easily qualify. In practice, those are some big numbers and you are locking in to a lifestyle.

In certain areas, $1.7 might not be that nice. 3/2 rambler style. Big incomes come big tax bills so you don't see some of the benefits of those big salaries. Especially in a CA state with high state taxes too. Or east coast.

Have you thought of renting in the perfect location? Short commutes, maximize home time, etc. As your kids get older you actually want to spend more time with them. When young, off to daycare, bed early, repeat. Home maintenance and constant upgrades is another item to consider in a $1.7+ home.

The high taxes and carrying costs and the close to 5% interest would give me pause. If you owe $1.2m and the economy tanks, tech tanks, jobs disappear, that would be tough to carry. Getting a bigger rental might still save you money over owning.

Really just kind of brainstorming as there are quite a number of these threads and the answers are complicated.

I would lean toward renting a "perfect place" with more space just based on the big numbers. Hopefully others will give you their ideas. If you do buy, I would sell the current place. You likely don't want to add small business owner to the three young kids and careers.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

randomguy
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Re: Another Home Affordability Thread

Post by randomguy » Tue Dec 04, 2018 6:37 pm

bloom2708 wrote:
Tue Dec 04, 2018 6:22 pm


I would lean toward renting a "perfect place" with more space just based on the big numbers. Hopefully others will give you their ideas.
Renting can get very expensive in a hurry. When your 6k rent goes to 10k in 10 years, you realize you should have bought:) It is really all about alternatives. If your 1.5 million house is a 3/2 1200 sq foot condo, then your room for getting something cheaper is limited. If your 1.5 million dollar house is 5000 sq ft, 6/5, then you probably have a lot more possibiltilies. Given you are living in a 325k place today, I would suspect there are a bunch of 800-900k places that are a lot nicer than you have that would do the trick . Then the question is if you wan to spend the added money to get what your really want or not.

You have 2.2 million dollars today. YOu can definitely afford a 1.5 million dollar house without really stretching. It might limit some future choices (i.e. retiring at 50 instead of 45). Nobody can answer that for you.

As far as renting 24k/year on 325k investment is a decent investment. Up to you if you want another job or not though.

bloom2708
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Re: Another Home Affordability Thread

Post by bloom2708 » Tue Dec 04, 2018 6:49 pm

randomguy wrote:
Tue Dec 04, 2018 6:37 pm
bloom2708 wrote:
Tue Dec 04, 2018 6:22 pm


I would lean toward renting a "perfect place" with more space just based on the big numbers. Hopefully others will give you their ideas.
Renting can get very expensive in a hurry. When your 6k rent goes to 10k in 10 years, you realize you should have bought:) It is really all about alternatives. If your 1.5 million house is a 3/2 1200 sq foot condo, then your room for getting something cheaper is limited. If your 1.5 million dollar house is 5000 sq ft, 6/5, then you probably have a lot more possibiltilies. Given you are living in a 325k place today, I would suspect there are a bunch of 800-900k places that are a lot nicer than you have that would do the trick . Then the question is if you wan to spend the added money to get what your really want or not.

You have 2.2 million dollars today. YOu can definitely afford a 1.5 million dollar house without really stretching. It might limit some future choices (i.e. retiring at 50 instead of 45). Nobody can answer that for you.

As far as renting 24k/year on 325k investment is a decent investment. Up to you if you want another job or not though.
I can see renting being expensive. I did a mortgage calculator. $6,400 monthly principle/interest. Monthly taxes ~2,900. Insurance $200/month. Just ballparking. That is $9,500/month outlay. I would be curious to know what you could rent for $5k/month. $6k/month. ~$25k in fees to sign the mortgage. Ongoing maintenance. It will add up.

We toss out ideas. Some flop. Some stick. Some stick and flop.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

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dollarbillz
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Re: Another Home Affordability Thread

Post by dollarbillz » Tue Dec 04, 2018 7:05 pm

Thank you to you both.

I have an unavoidable commute. Our "ideal" location would minimize it.

Inventory in the areas we are looking is tight. Rental inventory is even worse. From a quick perusal, a rental close to what we're looking for would be anywhere from $6-10k/m and look not to be as nice as some of the options we've been considering buying.

For $1.5M should be able to get into 4500 ft2 4/4 built 2000 or newer. It's a big jump from where we are now, you're right. And there is probably some in-between option that we should be pursuing instead.

Appreciate any other insights/suggestions/experience.

wilked
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Re: Another Home Affordability Thread

Post by wilked » Tue Dec 04, 2018 7:13 pm

My advice is don’t buy a 4500 sq ft house. Aim for about half that, see if you can knock the price down by half

randomguy
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Re: Another Home Affordability Thread

Post by randomguy » Tue Dec 04, 2018 7:36 pm

wilked wrote:
Tue Dec 04, 2018 7:13 pm
My advice is don’t buy a 4500 sq ft house. Aim for about half that, see if you can knock the price down by half
I think it is more likely you will pay about 2/3s for half the house as land doesn't get cheaper as you buy a smaller house.And in a lot of areas price dominates. In my area there is a split between the 800k houses (1800 sq ft 200k house on 600k of land) from the 1960s or 1.2 million dollar houses (4000 sq ft 600k houses on 600k of land that were build after tearing down those 1960 house was torn down) and not much in the middle. Obviously you have to know your market.

If the house saved you 30mins of commuting/day, it would be a no brainer to say spend 500k.Time is worth so much more. One problem is that you pretty much always get more for spending more with houses. It makes it easy to keep on spending. As I said you can afford it (rent and buying are about a wash cost wise. With rent you take on the risk of increases. With buying you take on the risk of property depreciation/having to see.You can decide how safe your jobs are/likeliness of moving in the next 10-15 years) which makes it hard. Choices are a lot easier when you don't have money:)

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leeks
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Re: Another Home Affordability Thread

Post by leeks » Tue Dec 04, 2018 8:30 pm

If neither of you have ever lived in the area you are moving to, rent for the first 6-12 months to get to know the area/neighborhoods before you commit to a purchase. It may seem more expensive to rent at first, but it gives you flexibility - and if you will only be there a year or so the rental doesn't have to be huge or perfect. Then you can take your time to find the right home to buy at the right price once you are confident you want to commit to the neighborhood.

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Watty
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Re: Another Home Affordability Thread

Post by Watty » Tue Dec 04, 2018 9:11 pm

dollarbillz wrote:
Tue Dec 04, 2018 5:28 pm
Home cost expected $1.5-$1.7M; property taxes also high, millage rate around 40 ($30-40k in property taxes annually :shock: ).
......
Cash (including emergency fund): $750k
After tax investments: $1M (95% stocks, 5% bonds)
dollarbillz wrote:
Tue Dec 04, 2018 5:28 pm
Secondary question: what is the smart thing to do with our current condo, cash out or rent?
Selling it is a no-brainer since you would almost certainly qualify for the homeowners capital gains exclusion of the federal capital gains tax. If you rent it for more than a few years you would lose that exemption. You would need to check on how your state would tax the sale.

If you have a burning desire to be a landlord you could buy another unit in that building and rent it out and the tax situation would likely be a lot better.
dollarbillz wrote:
Tue Dec 04, 2018 5:28 pm
While in theory we would be "happier" moving into the house in the nicer neighborhood, I'm not so sure it's the smartest thing to do. Can we afford it? How will it affect our ability to save? The debt-averse side of me is telling me to walk away and find a more reasonably priced house in a less desirable (but still safe/nice/livable) location and continue saving. The other side is telling me, if you're not going to spend it on a house for your family, what are you going to spend it on?
With the money from the sale of your condo, your cash, and a little bit from your taxable investments you could pay cash for the house so yes you can afford it.

You have no reason to use leverage so if you don't want to pay cash you could and probably should come up with a larger down payment since if you don't you will likely be paying $50,000+ a year in mortage interest. Paying extra is like buying a risk free 4.8% bond. This isn't like a few years ago when you could get mortage rates below 3%.

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dollarbillz
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Re: Another Home Affordability Thread

Post by dollarbillz » Wed Dec 05, 2018 8:08 pm

Watty wrote:
Tue Dec 04, 2018 9:11 pm
Selling it is a no-brainer since you would almost certainly qualify for the homeowners capital gains exclusion of the federal capital gains tax. If you rent it for more than a few years you would lose that exemption.
This is a great point, and not something I had considered. I am not dying to landlord; the expenses I mentioned before included management company fees. Nonetheless, my inclination has always been to cash out. Unless I hear a compelling reason not to, that is what I plan to do.

Watty wrote:
Tue Dec 04, 2018 9:11 pm
Paying extra is like buying a risk free 4.8% bond.
Yes. We have the cash to put more down, or even pay cash. It's just that having almost everything tied up in a totally illiquid, potentially rapidly-depreciating asset just makes me very nervous. Your rationale makes sense to me, however.
randomguy wrote:
Tue Dec 04, 2018 7:36 pm
One problem is that you pretty much always get more for spending more with houses. It makes it easy to keep on spending.
This really resonates with me. The longer we look and the more houses we see, the more of a moving target our budget becomes.

wilked wrote:
Tue Dec 04, 2018 7:13 pm
My advice is don’t buy a 4500 sq ft house. Aim for about half that, see if you can knock the price down by half
We've lived in about 1000 ft2 for 10 years, many of those years with kids. We're ready to spread out a bit. Don't want to be moving again anytime soon, so I'd rather err on the bigger side a bit this time around. Maybe not the most personal-finance-savvy move, but it's reality for us.

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Re: Another Home Affordability Thread

Post by jharkin » Thu Dec 06, 2018 2:36 pm

You can afford the house with that income and assets. Not really a question.

But the thing I'm surprised nobody else has drilled into: Why is your tax deferred/tax free allocation so low? Are you prevented from fully contributing due to HCE rules?

If I where in your shoes I would be maxing everything I can to try and cut down some of the current income tax burden. Max 401k, max HSA. Backdoor Roth. take advantage of mega backdoor or deferred comp programs if they are offered, etc.

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Re: Another Home Affordability Thread

Post by Dottie57 » Thu Dec 06, 2018 3:13 pm

Duplicate
Last edited by Dottie57 on Thu Dec 06, 2018 3:13 pm, edited 1 time in total.

Dottie57
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Re: Another Home Affordability Thread

Post by Dottie57 » Thu Dec 06, 2018 3:13 pm

Just a note: heating and cooling for a 4500sq ft house is going to be a lot.

CoAndy
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Re: Another Home Affordability Thread

Post by CoAndy » Thu Dec 06, 2018 4:55 pm

I think that is way too much house. 2,500 sq. ft. should be fine and much more affordable.

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dollarbillz
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Re: Another Home Affordability Thread

Post by dollarbillz » Sat Jan 12, 2019 11:35 pm

Sorry to resurrect a month old thread.

Some revisions to the original data:

Turns out, 2018 was a relatively strong financial year for us.

Gross Income
Me: $465k
Wife: $220k

We expect similar to steadily increasing income moving forward, but low years should be no lower than $425/$150.

Savings and net worth have not significantly changed given poor market performance in December.

We have a buyer for our condo.

We've identified a home that we are strongly considering purchasing; we believe we can get it for $1.85MM. Taxes $40k/y.

Given above income, assets, and $300k profit (after closing costs) from sale of condo:

a) Are there major concerns about the cost of this home as it fits into our current finances.
b) How would you recommend paying for the home? (ie amount cash down versus amount financed; assume rates ~4.75% for 30 y fixed, ~3.75% for 10 year arm, ~3.5% for 7 year arm). Assume minimum 25 years in this home, probably longer.
c) Anyone who's spent this much on a home in a HCOL area before, please feel free to talk me in to/out of this. I'm obviously having some major anxiety over it and would appreciate hearing the collective wisdom of this forum.

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NotYourAverageJones
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Re: Another Home Affordability Thread

Post by NotYourAverageJones » Sun Jan 13, 2019 3:13 am

Hi there -

We are sort of like you, (have been lurking in the background just trying to suck up as much useful info as possible from all these Brainiac’s on here! :D ) We are by no means Brainiac’s when it comes to investing, so we save and keep it simple through indexing. That said, we are a bit older 48/55, we have saved around the same as you have ($3mil) and my hubby earns about the same income as you and your wife combined ($725k). We have a 24-year-old who is out on his own (thank GOD!) with zero debt or mortgages. A major financial benefit for us is that we are “tax equalized” by his employer since we currently live overseas. So that make a huge difference to our bottom line and allows us to stash the money away that normally we’d be donating to the IRS. We did have a house in a SoCal HCOL area, but made the choice to sell it a year ago and kept the cap gains vice turning into rental and losing that tax benefit. Plus, we just didn’t want the headache and expenses of a rental home in the USA while living overseas.

Regarding taxes; that is usually where we start first. I'm a tax geek but my husband would rather get a root canal without Novocaine. Not that it’s the right or wrong way to think, but taxes are a killer for those in the higher tax brackets and make a difference to the bottom line. Have you spoken with your CPA or tax adviser yet regarding different tax scenarios related to buying outright with cash or using a mortgage? Sometimes they are the last ones people turn to, but prob should be one of the first with incomes like you have. It’s money well spent to get a better picture of your taxes with this mortgage. Also, if you don’t already, set up a living trust to protect your assets.

Now these scenarios below are my “take it or leave it” opinions. You seem to like to hold more cash, but you also have combined high incomes, which allows you to build it back up if you choose to draw down on it to buy a home. Obviously, you both have done well, only in your upper 30s to have saved this much already is a awesome job. 😊 But just be mindful, like other have said about the cost creep associated with owning a bigger house: EVERYTHING is more and it take on a life of its own.

So here goes! (Using info you provided, assuming you have pre-approved for loan)

If you draw $500k from your $750k in emergency cash as a down payment on the now $1.85mil place, and take out a $1.35mil @ 3.5% 7 year ARM: $73k in PI payments and another $50,000 in prop tax and HO insurances with umbrella liability policy since you’re HNW and have more to lose in our litigious society. So annual cost are around $123k

If you take a 30-year fixed @ 4.75 with $500k down LTV of $1,35Mil: $84K in PI payments, $50K property taxes and insurances: annual $132K
Your combined income (average from both posts): $620K minus fed/state taxes = net $372,000. Of course, this is a pretty high estimate for taxes because your effective tax rate will be lower after all deductions, etc. But I like to work with worst case scenarios for wiggle room. Again, a CPA or EA can give you a pretty accurate forward look at what your up against as to net income.

For the 2 scenarios (omitted 10 yr ARM) let’s use net income before mortgage of $372K
• 3.5% 7 year ARM is $123k: net income $249k annual
• 4.75% 30-year fixed is $132k: net income $240k annual

Of course this doesn’t take into account all your families monthly recurring expenses, maintenance cost, 529 savings, 401k investments for both, after tax investments, building back up your withdrawal from emergency savings, etc. The right answer is one that only you can your wife can live with and is related to your comfort level on debt and savings levels. Also, I always base our finances on a 1-income scenario. We can’t control everything and even “guaranteed jobs” can go away. It happens to the most stellar of employees. Good thing is you have money saved to cover it, God forbid one of you lose their job. But how much debt to take on vs. how much to have in savings in order to feel secure and sleep at night, that's up to you both to decide. Personally, I think paying off a home outright, as fast as possible, is a good strategy. Especially in a higher interest rate environment. If you really plan on staying there for 25 years, you will save yourself so much in mortgage interest over that time to get it paid off. I don’t like owing anyone, anything. But that's what helps us sleep at night.

The ARM gets you a lower monthly payment for those 7 years. Just familiarize yourself on details of the contract and negotiate the contract on what happens after those 7 years as to the interest rate adjustments, how often, prepayments penalties and IR caps. The 30-year fixed is “set it and forget it mentality,” sort of like indexing! It gives peace of mind that your payments “are what they are” and allows you to pay if off sooner as your incomes grow. You can't avoid the higher property taxes and high insurance when buying such an expensive home in HCOL states.

I know this was long answer, but we have been there and it can be very stressful. In the end, you must do what’s best for your family. Good luck!

BTW - If you haven’t checked this site, it’s a good resource: https://www.dinkytown.net
Last edited by NotYourAverageJones on Mon Feb 11, 2019 2:47 am, edited 1 time in total.

msk
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Re: Another Home Affordability Thread

Post by msk » Sun Jan 13, 2019 3:47 am

My rules of thumb that worked well for 4+ decades:
Save and invest 30% of after tax income. Paying off principal on a home mortgage counts as investment, not the interest part.
Never purchase a home costing more than 3x income (2.5x combined income)

No need for complicated calculations. If it were me, I would pay the max I could raise in cash (I hate debt) and get on with it. HCOL areas tend to make the "investment" in home equity stand a good chance of generating a bonanza for your old age. Areas are HCOL usually because of longstanding reasons; increasing and booming local industry/population, absurdly tight local zoning laws by entrenched rearguard actors, etc. If these persist, you can smile as the years pass. If the local industry is just a temporary boom (oil/mining towns), tough.

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Re: Another Home Affordability Thread

Post by investingdad » Sun Jan 13, 2019 10:22 am

I haven't seen where you show your expenses.

My knee jerk reaction was your net seems on the low side with that income, which raises the question of expenses.

How much are you spending and what will you be spending?

As for the comment above about "you really only need a 2500 ft2 house", I find those replies eye rolling and not helpful. I think you can decide what you need.

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Cycle
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Re: Another Home Affordability Thread

Post by Cycle » Sun Jan 13, 2019 11:03 am

Note there is downside risk with housing as well, people only talk about appreciation in VHCOL areas, but a satiation of demand could occur through commoditization of housing.

The mechanism by which this would occur would be upzoning of your entire state to allow tall 6 story multifamily buildings (similar to large European city) and skyscrapers near transit centers. Oregon is looking at passing a statewide upzoning zoning law. Japan has national regulations. Minneapolis eliminated sfh zoning with their 2040 plan, and allow 30 story towers near transit and 60 story downtown.

That upzoning would allow for installation of large prefabricated apartments that are highly profitable for developers. In Minneapolis they recently built a 300 unit prefabricated condo building. Costs are further being driven down by mass timber, like the 22 story wood apartment building in Milwaukee.

Prefab today is still pretty expensive, but the factories don't even employ robotics or concrete printing to construct the units, so theres a huge opportunity to slash the costs. Toshiba and Hitachi have been making prefab homes for 30 years in Japan. For the most part the us market is untapped for prefab.

But cost really isn't even an issue using traditional steel and concrete non-prefab, it's more a height rqmts problem. If height rqmts get lifted, a 30k sqft deck can support a skyscraper. Buy the lot for 120MM, build the 60 floor tower for 240MM. 18 apartments each floor. 5k rent for a 1200 sqft 2br/2ba unit, would mean ~60MM per year in rent. A good ROI. After a decade with height limits removed, it has been shown time and again that housing prices have normalized. Add in prefab Innovation (think spacex of housing)... you've got housing commoditization.

Anyways, demand can be satiated in California / east coast. The US population isn't even growing that much. Not likely in the near term, but possible in 10 years when op would be empty nester, all depends on where zoning goes in your metropolitan area.

Also, fwiw I don't want my kids to know I'm a multimillionaire, so it's cramped housing for them in lcol neighborhoods till college. I want them to think I had to work hard to save for their college... Despite it really only taking 6 months of plugging money into a 529 from my cushy megacorp job :)

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Re: Another Home Affordability Thread

Post by randomguy » Sun Jan 13, 2019 11:22 am

investingdad wrote:
Sun Jan 13, 2019 10:22 am
I haven't seen where you show your expenses.

My knee jerk reaction was your net seems on the low side with that income, which raises the question of expenses.

How much are you spending and what will you be spending?

As for the comment above about "you really only need a 2500 ft2 house", I find those replies eye rolling and not helpful. I think you can decide what you need.
Nah they are late 30s with 2.75 million. Probably only hit this income level in the early 30s (see the tiny 401(k) balance which suggests a lot of grad/med school and a late start to the career). But yes the question is what is the current amount saved per year. Going from 200k to 150k is one thing. Going from 100k to 50k is another in terms of being able to retire at say 50 versus 70.

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Re: Another Home Affordability Thread

Post by Jags4186 » Sun Jan 13, 2019 11:33 am

4500 square feet is huge. Really take a look at what you are buying and how it will incorporate into your lifestyle. A house with 4500 square feet usually has numerous redundant rooms, or rooms with no clear use (the infamous “bonus” room). Do you need a living room, family room, tv room, bonus room, den, man cave, she shed, etc. etc. etc. If you have a huge kitchen with a dining area do you then need a seperate formal dining room?

I have cousins who have a big house. They tell me all the time that they *never* use their living room. It literally is there to look pretty. But on the flip side since they don’t use it they don’t spend a ton of money on it. So, IMO, it is basically a room with some mediocre looking hand me down furniture that never gets used and needs to get dusted every now and then.

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Re: Another Home Affordability Thread

Post by btenny » Sun Jan 13, 2019 1:16 pm

I am sorry but I think you will make a huge mistake buying that big a house right now. That is just too big a jump from your present home and lifestyle. I am an old guy who has raised kids and already downsized so I have seen the various phases of life. Yes you need more space for your kids and right now. But 4500 feet is just too big and expensive. I think 3100 square feet is a pretty big house and will fit a family of 5 nicely. Please set down and do some math on space usage and configurations. You can fit 4 big bedrooms and 3 or 4 bathrooms and a big kid family room and adult living room and a big kitchen and big dining room easily in that size. So what are you going to do with the other 1400 square feet? Besides pay to heat and cool and clean it?

And the other gotcha with a big 4500 foot home is all the upkeep and keeping up and fitting in with your really rich neighbors. And yes you will have to keep up with the neighbors a little. Please think about it a little. Are you comfortable with your kids growing up in a really rich "snobby hood"? Do you want to live like that?

So please go look for a home in the $900K to $1.3M range that is not quite so big.

Good Luck.

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dollarbillz
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Re: Another Home Affordability Thread

Post by dollarbillz » Sun Jan 13, 2019 10:16 pm

First of all, thank you all for chiming in. Reading your insights and past experiences is very helpful. Some direct responses:

NotYourAverageJones wrote:
Sun Jan 13, 2019 3:13 am
Obviously, you both have done well, only in your upper 30s to have saved this much already is a awesome job.
Thank you. Can't emphasize enough the importance of marrying someone with similar vision/goals when it comes to money. We have strived to live modestly, well below our means; to be charitable; and to invest time and money in our careers. The reward was to get to this point where the savings start to grow rapidly. Seeing the wealth accumulate adds positive reinforcement, and inspires us to continue: live in that small condo one more year; drive that older car one more year; etc, etc. Hence my consternation over this decision. On the one hand, we feel that it may be time to reap some early benefit of the last 8-10 years. On the other hand, 5-10 more years on our current path and we could be totally FIRE. We've had conversations about early retirement, and we both enjoy our jobs. We spent a long time acquiring the knowledge and skills that we have, and have only barely had an opportunity to use them. I can't see retirement for us until 55-60 at the earliest, and even then, it may just be a slow down as opposed to a full stop.

The scenarios you shared are helpful. They did not, however, include the $300k proceeds from selling the condo, which would go towards downpayment/paying down loan, which would change the math considerably.

Also, one of the main questions I had was: in addition to drawing down cash savings + proceeds from sale of condo, should we also sell stock (and incur tax), in order to pay down even more up front?
msk wrote:
Sun Jan 13, 2019 3:47 am
My rules of thumb that worked well for 4+ decades:
Save and invest 30% of after tax income.
Thank you for sharing your experience and insight.

investingdad wrote:
Sun Jan 13, 2019 10:22 am
I haven't seen where you show your expenses.
Our annual after tax expenses are currently about $120k

We do max our pretax savings. Balances are low for age, though. As someone else pointed out, we got late starts to careers due chosen professions.

We do not do Backdoor Roth but plan to start in 2019.
Cycle wrote:
Sun Jan 13, 2019 11:03 am
Also, fwiw I don't want my kids to know I'm a multimillionaire, so it's cramped housing for them in lcol neighborhoods till college.
I like this. Trying to balance, though, with actually enjoying our money a bit while we're young, healthy, and have our kids at home with us.

randomguy wrote:
Sun Jan 13, 2019 11:22 am
Nah they are late 30s with 2.75 million. Probably only hit this income level in the early 30s (see the tiny 401(k) balance which suggests a lot of grad/med school and a late start to the career). But yes the question is what is the current amount saved per year. Going from 200k to 150k is one thing. Going from 100k to 50k is another in terms of being able to retire at say 50 versus 70.
Spot on. See just above.

Jags4186 wrote:
Sun Jan 13, 2019 11:33 am
4500 square feet is huge. Really take a look at what you are buying and how it will incorporate into your lifestyle.
btenny wrote:
Sun Jan 13, 2019 1:16 pm
I am sorry but I think you will make a huge mistake buying that big a house right now.
Thank you for the words of caution. I sincerely mean it. Important for me to hear different perspectives.

FoolMeOnce
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Re: Another Home Affordability Thread

Post by FoolMeOnce » Sun Jan 13, 2019 11:41 pm

You can put 50% down (from cash and condo sale) and still have about $200k cash emergency fund and about $2m invested. You make ~$600k/yr, probably averaging more. After taxes, more like $375-400k or more. You can take the 10 year ARM on the $925k balance and pay it down in those 10 years, which requires paying about $110k/yr. Even if you save nothing, your $2m may grow to $3m (modestly) or closer to $4m (historically) in ten years. You will be in your late 40s with 3-4 million invested and a paid off home.

But that's not all! After paying $110k/yr on your mortgage, you are left with $265-$290k/year for the rest of your expenses, which you pegged around $120,000. Those will go up with a big house, especially the taxes you mentioned, so let's say $150-160k. That leaves somewhere north of $100k/year in additional savings in tax preferred and taxable accounts. You'll be in your late 40s with more like $4-5.5 million invested and a paid off, valuable house.

Also, that's based on $600k income, which you expect to exceed more often than not. And incomes may rise over the years, but the cost of this mortgage will not rise for those ten years.

I think you'll be fine, even if you want to retire early. The thing that stands out to me is that the taxes are so high, your housing expenses will remain fairly high even after the mortgage is paid, which could make retiring in place more difficult. But you should have the funds to afford it if you want, especially if you keep working another decade like you suggested. Or you can downsize once the kids are out of the house.

.............
Standard caveats about unpredictable market returns, job stability, etc.

somekevinguy
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Re: Another Home Affordability Thread

Post by somekevinguy » Mon Jan 14, 2019 12:34 am

Hi, we're also dual income (roughly similar) with later starts due to chosen profession, kids (2 for us) and just bought a house in an even higher col area (ie 2.5M for a 4/2 2000 sq foot home). I think from a can you afford it standpoint, definitely you can. I will say though that I do agree with some of the folks saying to look into a slightly smaller place. We bought a 2100sq ft place (and moved from 1700 and 2100 sq ft places before) and it really is plenty of room for 2 adults and 2 kids. It is definitely up to you but I suspect 2500 or 3000sq ft is going to feel massive and like plenty of room to stretch based on the place you're currently in. At the same time, it is that much cheaper, that much less mortgage/interest/property tax/maintenance with what I would think might even be an improvement in quality of life over a 4500 sq ft place.

Given your risk averse nature with large cash position, I'd sell the condo, buy a 1.5M 2500-3000 sq ft nice place with a great commute, use a 30 yr fixed and then decide what to do with your sig cash flow after that. You can always prepay the mortgage, vs save up aggressively for FIRE or any othe rgoals etc. Buys you lots of options with little downside in my opinion. Just my 2 cents.

investingdad
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Re: Another Home Affordability Thread

Post by investingdad » Mon Jan 14, 2019 6:49 am

So 120k expenses...what will they be with the new home and taxes?

Sounds like it should be ok.

bltn
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Re: Another Home Affordability Thread

Post by bltn » Mon Jan 14, 2019 11:27 am

Dollarbillz
Congratulations on your careers and your accumulation of assets.
As I do with a number of posts, l ll give you my feelings based on my past history.
I worked at modestly paid jobs until I finished my education at age 30. I then began a career job which allowed me to increase my earnings significantly over the next few years. At age 30 my wife and I bought a house that greatly excited us. 3300sf with a swimming pool (like the rich people have!). Close to work in a nice neighborhood. I had to moonlight for a couple of years to make ends meet.
Despite some investment decisions early on that can best be characterized as learning experiences, we began to accumulate assets. Instead of trying to upgrade our house in our late 30 s as you re considering, we waited until our mid 40 s. The extra years of savings helped us buy our next house without a mortgage. About 6500sf, with a living room, dining room and den that we rarely use. And another swimming pool! We kept the first house for a couple of years because of its convenience to my work, as I was still working 80-90 hours a week at that time.

In retrospect, I would have resisted the temptation to have a really expensive home instead of a moderate upgrade that required less maintenance cost and allowed us to save more money. And that was after I had saved for 7-8 years longer than your current age. House maintenance expense is directly related to the price and size of the house and surprisingly has little to do with the current condition of the property unless it s a real fixer upper. I should have kept in mind that savings and accumulation is based on money spent as well as money earned. Sometimes easy for me to forget.
Looking back, my wife and I were just as happy in that first home as the second. The second is more impressive but I believe I paid too much for that questionable benefit. And our cost of living is now set at a much higher level, as my wife will never move.
Like any other aspect of lifestyle creep. Once you get used to it, it s hard to go back.
Best of luck.

Dottie57
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Re: Another Home Affordability Thread

Post by Dottie57 » Mon Jan 14, 2019 12:22 pm

bltn wrote:
Mon Jan 14, 2019 11:27 am
Dollarbillz
Congratulations on your careers and your accumulation of assets.
As I do with a number of posts, l ll give you my feelings based on my past history.
I worked at modestly paid jobs until I finished my education at age 30. I then began a career job which allowed me to increase my earnings significantly over the next few years. At age 30 my wife and I bought a house that greatly excited us. 3300sf with a swimming pool (like the rich people have!). Close to work in a nice neighborhood. I had to moonlight for a couple of years to make ends meet.
Despite some investment decisions early on that can best be characterized as learning experiences, we began to accumulate assets. Instead of trying to upgrade our house in our late 30 s as you re considering, we waited until our mid 40 s. The extra years of savings helped us buy our next house without a mortgage. About 6500sf, with a living room, dining room and den that we rarely use. And another swimming pool! We kept the first house for a couple of years because of its convenience to my work, as I was still working 80-90 hours a week at that time.

In retrospect, I would have resisted the temptation to have a really expensive home instead of a moderate upgrade that required less maintenance cost and allowed us to save more money. And that was after I had saved for 7-8 years longer than your current age. House maintenance expense is directly related to the price and size of the house and surprisingly has little to do with the current condition of the property unless it s a real fixer upper. I should have kept in mind that savings and accumulation is based on money spent as well as money earned. Sometimes easy for me to forget.
Looking back, my wife and I were just as happy in that first home as the second. The second is more impressive but I believe I paid too much for that questionable benefit. And our cost of living is now set at a much higher level, as my wife will never move.
Like any other aspect of lifestyle creep. Once you get used to it, it s hard to go back.
Best of luck.
Great post.

Isabelle77
Posts: 392
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Re: Another Home Affordability Thread

Post by Isabelle77 » Mon Jan 14, 2019 1:04 pm

bltn wrote:
Mon Jan 14, 2019 11:27 am
Dollarbillz
Congratulations on your careers and your accumulation of assets.
As I do with a number of posts, l ll give you my feelings based on my past history.
I worked at modestly paid jobs until I finished my education at age 30. I then began a career job which allowed me to increase my earnings significantly over the next few years. At age 30 my wife and I bought a house that greatly excited us. 3300sf with a swimming pool (like the rich people have!). Close to work in a nice neighborhood. I had to moonlight for a couple of years to make ends meet.
Despite some investment decisions early on that can best be characterized as learning experiences, we began to accumulate assets. Instead of trying to upgrade our house in our late 30 s as you re considering, we waited until our mid 40 s. The extra years of savings helped us buy our next house without a mortgage. About 6500sf, with a living room, dining room and den that we rarely use. And another swimming pool! We kept the first house for a couple of years because of its convenience to my work, as I was still working 80-90 hours a week at that time.

In retrospect, I would have resisted the temptation to have a really expensive home instead of a moderate upgrade that required less maintenance cost and allowed us to save more money. And that was after I had saved for 7-8 years longer than your current age. House maintenance expense is directly related to the price and size of the house and surprisingly has little to do with the current condition of the property unless it s a real fixer upper. I should have kept in mind that savings and accumulation is based on money spent as well as money earned. Sometimes easy for me to forget.
Looking back, my wife and I were just as happy in that first home as the second. The second is more impressive but I believe I paid too much for that questionable benefit. And our cost of living is now set at a much higher level, as my wife will never move.
Like any other aspect of lifestyle creep. Once you get used to it, it s hard to go back.
Best of luck.
This is a great post. My husband (I SAH) only makes about half of your household income so our numbers are different but I strongly agree with the above post. We bought a house 2600 sqft, 4 bedrooms, great school district, for 395K (MCOL-Portland) 11yrs ago when our HHI was something like $120K and we were in our very early 30s. The very best financial decision that we have made is not to upgrade our home. A few years ago, we were itching for something larger, something more modern with updates and maybe a view, there are probably old posts on here asking how much more we could afford. And then one day, seriously just one day, we looked around and didn't care about any of that. Maybe it was my FIL dying early, or our kids getting older, I'm not sure but it doesn't matter anymore.

Now, you obviously need to move. You can afford this house you're considering. Just give a thought as to what you really want going forward and if this house really matters or if you can accomplish the same goals with a little less. Also, what kind of home you want your children to grow up in, what kind of neighborhood. Just things to think about and our experience.

hightower
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Re: Another Home Affordability Thread

Post by hightower » Mon Jan 14, 2019 1:28 pm

Couple of thoughts...

Can you afford to buy a house in the 1.5-1.7 m range on your income? Yes, with the proper down payment, you can afford to have a mortgage as big as 1.1 m. I use the 2X income rule for determining the size of a mortgage. However, SHOULD you do this is another question.

How big of a house are you looking at? If you're paying that much, I'd assume it's a fairly large place, but if it's in a HCOL area, it might not be that big. The reason I ask, is because the larger the square footage the higher the upkeep and I believe that is an exponential relationship. You two sound like modestly frugal people, so are you sure you'd be happy with a large place that requires large repair/maintenance/utilities costs? I like to remind people that a mortgage is the MINIMUM payment you'll be paying each month to own your house. There are often many other hidden costs each month that people forget to factor in. Then, there's the cost of simply furnishing a larger house. Can really add up and takes a lot longer to do than you may realize at first. Every repair will be larger and more expensive than anticipated. Utilities will of course be a lot more expensive. Is it an older home? I love historic homes and I currently own a large brick house built in the 1880s. We love our house, but it has "special needs" and can be quite expensive to own. Then there's the whole keeping up with the Joneses argument that you may feel pressured to keep up certain appearances in a neighborhood like that. Harder to prove, but I think it happens for sure.

It sounds like you really need to move and that's fine. I would just question your decision to live in the HCOL neighborhood you're considering. 550k a year is a good salary, but 1.1 million of debt is a big pill to swallow and considering it will come with owning a larger home with many unexpected costs, you might not feel like it's so affordable once you get in there.

Final thoughts...IF you decide that you must live in that neighborhood, I would absolutely put up a much larger down payment than 500k. Use your whole 750k at least and if you don't feel comfortable leaving little liquid resources...save more first.

Best of luck!

Topic Author
dollarbillz
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Re: Another Home Affordability Thread

Post by dollarbillz » Mon Jan 14, 2019 8:05 pm

Thanks, to all of you. We appreciate all this information, and will consider it as we work towards a decision.

Will update this post as needed. Feel free to continue to chime in.

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NotYourAverageJones
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Re: Another Home Affordability Thread

Post by NotYourAverageJones » Thu Jan 17, 2019 1:47 am

You seem to have received some good advice and some of it I am filing away for my own reference. That said, I am sure you both will figure it out and do what is best for you and your family. And YES! Can't agree more that having a good partner is paramount to success. My husband and I both came off destructive divorces in early 2000s and it washed us out mentally and financially. We basically started from scratch in 2008 (great year) with combined $50k and have managed to accumulate $3mil in savings with zero debt to boot. We are on track to retire comfortably in 2.5 years. We don't take it for grated that we have been blessed along the way. But we also couldn’t have done it without making tough choices and sticking to the plan together. :wink:
The scenarios you shared are helpful. They did not, however, include the $300k proceeds from selling the condo, which would go towards down payment/paying down loan, which would change the math considerably.
Just to clarify my point. I didn’t include the extra $300K from the sales of the condo in the total math scenarios I showed, only because I recalled in your OP you said:
With regards to a downpayment, we both prefer to stay relatively liquid (as you will see from our relatively large cash position). Maximum $500,000 down, as this will leave us with enough cash to make minor renovations/furnish the home and maintain a reasonable emergency fund.
I misunderstood the proceeds from the sale of the condo would be in addition to those funds. So of course, putting another $300k down will change the PI payment quite a bit. :moneybag But in the end, it’s up to you to invest it where it makes the most sense for your situation.

Best of luck to you and your family!

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