Is buying a $700K first home crazy?

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Cycle
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Re: Is buying a $700K first home crazy?

Post by Cycle » Thu Jan 10, 2019 11:01 am

For what it's worth, I view housing as an expense and try to keep that expense low. Ive taken up minimalism, and now I love our space and wouldn't want anything bigger.

I bought our unit for 95k (in Minneapolis), and spent 50k gut rehabbing it myself, but I'm hindsight I view that as wasted time.

If I were u I'd stay in the tiny under market apartment, and keep that money in the 3 fund.

To put in perspective what low living expenses translates to, we make 300k, but invest/save 170k per year.

themesrob
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Re: Is buying a $700K first home crazy?

Post by themesrob » Thu Jan 10, 2019 11:41 am

My wife and I have a similar profile to you, and made a similar decision last year (bought a $600k home, PITI of $3100 after a ~$150k down payment, not including maintenance). In our case, however, our rent was much higher than yours currently is, so the psychological factor of our monthly housing expense dramatically increasing wasn't there (and we were moving from a VHCOL area to a MCOL area, albeit a very hot place to move/live right now).

My observation since the move is that I feel comfortable in our decision. We could have spent less, and possibly had more to save or spend on vacations etc, but our day to day existence is so much more pleasant in the larger space, and building equity and knowing we will probably/hopefully never move again feels good. One caution is that my wife has been affected psychologically a little bit by the mortgage, and wants to pay it off as quickly as possible, but we are very good at talking out priorities and decisions like that. Definitely discuss and maybe write down your plan for the next ten years with your wife if you make this type of move -- just having a plan set down with numbers, and being able to revisit it and say "see! we're right on course" or "here we can/need to adjust" is helpful.

Sam1
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Re: Is buying a $700K first home crazy?

Post by Sam1 » Thu Jan 10, 2019 11:44 am

You don’t live in a. VHCOL area if you can buy a decent home for 700k. This would be a studio, one bedroom or decrepit house in a HCOL area. I don’t think you could buy anything in a VHCOL area.

pejp
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Re: Is buying a $700K first home crazy?

Post by pejp » Thu Jan 10, 2019 12:39 pm

Sam1 wrote:
Thu Jan 10, 2019 11:44 am
You don’t live in a. VHCOL area if you can buy a decent home for 700k. This would be a studio, one bedroom or decrepit house in a HCOL area. I don’t think you could buy anything in a VHCOL area.
Lol, came in to say this. Where I lived in Brooklyn, $700k might get you a modern studio. An 800 sq ft 1 bed is c. $1mm.

randomguy
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Re: Is buying a $700K first home crazy?

Post by randomguy » Thu Jan 10, 2019 12:53 pm

lostdog wrote:
Thu Jan 10, 2019 10:10 am

If I had the chance to start over, I would not have bought a house and stayed renting. I would be more rich and have more freedom. It's over rated. Don't do it.

We might have an opportunity to move soon and this will be our last home.
If I had the chance to start over I would leverage myself to the hilt and buy the biggest house possible. I would be richer and have more freedom:) Granted I had no way of knowing that the house price would go up like 4x, interest rates would drop by over 50% and my income would also soar.

At a high level this is all about choices. They are saving 7k/month after tax and another 4k/month or so in pretax. They can afford to buy this house easily and things will not even be close. They just need to decide if the house spending optimizes their happiness. Is 12k/year more living in a place you like fro 350 days better than living in a cheap rental and spending 12k on a really nice 15 day vacation? Or pulling in your retirement date by a couple of years?

stoptothink
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Re: Is buying a $700K first home crazy?

Post by stoptothink » Thu Jan 10, 2019 1:20 pm

randomguy wrote:
Thu Jan 10, 2019 12:53 pm
lostdog wrote:
Thu Jan 10, 2019 10:10 am

If I had the chance to start over, I would not have bought a house and stayed renting. I would be more rich and have more freedom. It's over rated. Don't do it.

We might have an opportunity to move soon and this will be our last home.
If I had the chance to start over I would leverage myself to the hilt and buy the biggest house possible. I would be richer and have more freedom:) Granted I had no way of knowing that the house price would go up like 4x, interest rates would drop by over 50% and my income would also soar.

At a high level this is all about choices. They are saving 7k/month after tax and another 4k/month or so in pretax. They can afford to buy this house easily and things will not even be close. They just need to decide if the house spending optimizes their happiness. Is 12k/year more living in a place you like fro 350 days better than living in a cheap rental and spending 12k on a really nice 15 day vacation? Or pulling in your retirement date by a couple of years?
From a financial perspective, I probably would have too. Since we bought our home 3yrs ago our income has nearly doubled and our home has appreciated nearly 25%. We'll have it paid off in 6yrs, without stretching at all with extra payments. But, I think living in that larger home would have actually decreased my overall quality of life.

Starfish
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Re: Is buying a $700K first home crazy?

Post by Starfish » Thu Jan 10, 2019 1:31 pm

randomguy wrote:
Thu Jan 10, 2019 12:53 pm
lostdog wrote:
Thu Jan 10, 2019 10:10 am

If I had the chance to start over, I would not have bought a house and stayed renting. I would be more rich and have more freedom. It's over rated. Don't do it.

We might have an opportunity to move soon and this will be our last home.
If I had the chance to start over I would leverage myself to the hilt and buy the biggest house possible. I would be richer and have more freedom:) Granted I had no way of knowing that the house price would go up like 4x, interest rates would drop by over 50% and my income would also soar.
I have the same view. It was a mistake to buy a house we love but is a little too small. What we need is a 3bdr house, around 2000sqft but we were too risk adverse.
Meanwhile the house prices increased by 50% and the property tax would be 5k more if I buy that house now vs 5 years ago.
It is very area dependent though.

lostdog
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Re: Is buying a $700K first home crazy?

Post by lostdog » Thu Jan 10, 2019 8:52 pm

Cycle wrote:
Thu Jan 10, 2019 11:01 am
For what it's worth, I view housing as an expense and try to keep that expense low. Ive taken up minimalism, and now I love our space and wouldn't want anything bigger.

I bought our unit for 95k (in Minneapolis), and spent 50k gut rehabbing it myself, but I'm hindsight I view that as wasted time.

If I were u I'd stay in the tiny under market apartment, and keep that money in the 3 fund.

To put in perspective what low living expenses translates to, we make 300k, but invest/save 170k per year.
+1
Current portfolio: 54% ITOT, VTSAX / 46% VTIAX

Flyer24
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Re: Is buying a $700K first home crazy?

Post by Flyer24 » Thu Jan 10, 2019 10:27 pm

Ouch. $700K for a tiny house. Seems like a waste. It is crazy how different housing prices can be in other areas. That price would easily get you a 5000 sq ft home in my area. I wouldn’t spend that kind of money on a little house but maybe that is just me. Keep renting.

Nuestroro
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Re: Is buying a $700K first home crazy?

Post by Nuestroro » Thu Jan 10, 2019 11:17 pm

You might be my twin based on how similar we are, at least financially. Only difference is we’ve already bought the ($800k) house. I think you can make it work. But I’d advise against moving until you decide whether to have kids. This is a huge variable.

1. You’ll want to factor in child care to your budget. In VHCOL areas, child care is scarce and therefore expensive. A nanny is $5000/mo. You can do a nanny share for half that or try to get into a day care, which is $2000/mo. Plan on paying for child care until age 5, when kids are guaranteed to get into public school.

2. A huge fraction of a house's price depends on the local schools. If you’re not going to have kids, you can live in a bad school district for cheaper. Conversely, if you want to have kids, you’ll want the good schools—or budget for private schools.

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White Coat Investor
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Re: Is buying a $700K first home crazy?

Post by White Coat Investor » Thu Jan 10, 2019 11:47 pm

Kedar wrote:
Wed Jan 09, 2019 11:29 am
My spouse and I are long-time renters looking to purchase our first home within the next year. The rub is that we would like to skip buying a starter home and move into something that has more of our wants. However, we live in a VHCOL of area, so mid-range homes are generally around $700K.

We’ve saved carefully over the years (achieved partially through living in tiny apartments) and part of my strategy to offset a more expensive home is through a higher down payment. That said, I am concerned about tying up so much of our money into a house (down payment or not) and whether we can make the payments work.

Any thoughts or guidance welcome. Thank you in advance.

Details:
  • Combined gross income: $300K.
  • House: $700K
  • PITI: $3,985 (includes a rough estimate for maintenance). Current rent is $1,500.
  • Down payment: $240K (we have an emergency fund and about $300K in retirement funds).
  • Monthly non-retirement savings (some of which would be dedicated to the higher monthly housing costs): $7K
  • Ages: 33/33
Yes, that's okay with that income and down payment.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Kedar
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Re: Is buying a $700K first home crazy?

Post by Kedar » Fri Jan 11, 2019 12:07 am

OP here. Just wanted to thank everyone for their time and thoughts. You've given me some good observations about our situation and buying in general that will greatly help the decision making process.

Cheers!

JGoneRiding
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Re: Is buying a $700K first home crazy?

Post by JGoneRiding » Fri Jan 11, 2019 10:17 am

Real estate has huge transaction costs. So it actually does make better sense to skip the starter and just buy a nice family home. This is why you see so few starter homes being built this does make it hard for people that need want small houses.

You can afford this type of home but if you aren't planning children I would simply find a bigger place to rent

KyleAAA
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Re: Is buying a $700K first home crazy?

Post by KyleAAA » Fri Jan 11, 2019 9:10 pm

You can easily afford that house without breaking a sweat. $700k isn’t even that bad for a VHCOL area.

viz
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Re: Is buying a $700K first home crazy?

Post by viz » Fri Jan 11, 2019 9:29 pm

Based on the data you provided, you will be fine either ways. I assume you are getting much bigger space than what you have right now. Financially, you would be better off renting as the rent is quite low.

When I bought the house, the difference between renting and buying was about 200$ after I took tax incentives into account. Of course, with new tax law I lost some of those incentives. On the other hand, the home appreciated about 25%.

As others have pointed out that if you can rent for $1500 and buy a house for $700k you are not in VHCOL area. Sure, it might feel like it but I doubt it. In SF Bay Area where I live, near major employers, $700k will buy you a 800 or less sq ft condo or maybe a old townhome. An hour commute, you would get a newer townhouse or 2bed house unless you go for the worst of the areas.

BogleBoogie
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Re: Is buying a $700K first home crazy?

Post by BogleBoogie » Sat Jan 12, 2019 7:19 pm

KlangFool wrote:
Wed Jan 09, 2019 9:49 pm
TropikThunder wrote:
Wed Jan 09, 2019 9:33 pm
KlangFool wrote:
Wed Jan 09, 2019 12:16 pm
I do not see what do you get out of buying a house. You could spend the money elsewhere with a lot more fun
That's not for you to say.
TropikThunder,

I am entitled to my own opinion. It is up to OP to decide whether it is worthwhile.

KlangFool
Yep.

fasteddie911
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Re: Is buying a $700K first home crazy?

Post by fasteddie911 » Sun Jan 13, 2019 7:47 am

I'm in a similar situation as you, and I think it's totally affordable. I never understood a starter home, I'd skip it and get what you want the first time around. However, the question of whether you should be buying and/or whether to buy a house/condo/townhouse is a different question. For that, I think you need to decide whether kids are in your future and consider that wherever you buy it's for the long term, your jobs seem stable enough to consider it. It would be annoying to buy something now only to have it not work out with a kid in a few years. If you're still not sure, I don't think renting for a little more would be terrible idea, you've done well delaying gratification and maybe you could upgrade your rental for at least a little while.

Magikmike
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Re: Is buying a $700K first home crazy?

Post by Magikmike » Sun Jan 13, 2019 1:17 pm

My wife and I were in a very similar situation to yours at about the same age (33/36) also in government and healthcare making $350k gross. That is when we upgraded from a starter apartment to our current 2-bedroom condo and paid about a million more than you are looking to spend. Our monthly home expenses are now close to $10k. Besides getting married and having a child, it was the best decision of our lives.

Something I noticed nobody has mentioned yet that may seem absurdly obvious but is probably the single most important consideration when making a real estate decision: location! There are probably a handful of neighborhoods in the US I would choose the make the same decision.

Some considerations to keep in mind that have not been previously mentioned:
  • If you sell, the first 500k in gains for a couple is triple tax free. Not to mention you get to write off the interest (up to $750k) on your 5x leverage (at 20% down payment). This makes the primary residence the sole most tax efficient investment vehicle in the country.
  • If you sell to upgrade and you’re over the $500k threshold, 1031 exchange to defer your taxable event.
  • If you decide not to sell and need an additional income stream in retirement, get a reverse mortgage. Your home can be your pension.
  • If you decide not to sell, convert your home to a rental property. You keep your cheaper residential interest rate; sit back and watch as rents increase while your fixed mortgage payment are deflated away over the next 30 years with inflation.
Again, to realize most of these advantages you get back to the most important consideration in real estate: location. As you probably guessed by now, I am a wholesale believer that real estate, in just the right market, is the best path to financial independence and wealth appreciation.

z91
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Re: Is buying a $700K first home crazy?

Post by z91 » Sun Jan 13, 2019 2:21 pm

I'm sorry but 700k is not VHCOL. In my area you might be able to bid on a studio, but with multiple bidders and still get knocked out.

bojangles
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Re: Is buying a $700K first home crazy?

Post by bojangles » Mon Jan 14, 2019 10:57 am

hi there! I have been contemplating the question of whether to rent or buy myself recently and came across two excellent blog posts which helped me to quantify the impact financially of the two paths. Basically you compare the opportunity cost of putting that money instead into investments vs a mortgage.
https://jlcollinsnh.com/2012/02/23/rent ... e-numbers/
and
https://affordanything.com/is-renting-b ... nt-or-buy/

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gunn_show
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Re: Is buying a $700K first home crazy?

Post by gunn_show » Mon Jan 14, 2019 2:14 pm

Nuestroro wrote:
Thu Jan 10, 2019 11:17 pm
You might be my twin based on how similar we are, at least financially. Only difference is we’ve already bought the ($800k) house. I think you can make it work. But I’d advise against moving until you decide whether to have kids. This is a huge variable.

1. You’ll want to factor in child care to your budget. In VHCOL areas, child care is scarce and therefore expensive. A nanny is $5000/mo. You can do a nanny share for half that or try to get into a day care, which is $2000/mo. Plan on paying for child care until age 5, when kids are guaranteed to get into public school.

2. A huge fraction of a house's price depends on the local schools. If you’re not going to have kids, you can live in a bad school district for cheaper. Conversely, if you want to have kids, you’ll want the good schools—or budget for private schools.
Lot of great comments already. Clearly you can afford it without even thinking twice, and you know that 100%. Cost and affordability are irrelevant at your income and these numbers. As mentioned, this is not VHCOL, barely HCOL. I think $1500 rent gets a large cardboard box here in SoCal. You've basically stated you make more than you know what to do with, and that is great, surely a good problem to have. You don't care about retiring early, so that is good to know. And despite Watty's constant attempts to get everyone and anyone to move to the suburbs of ATL, you don't want to do that either. You just need a better place to live where you are, and based on your comments, I agree.

No concerns over skipping starter house, as others pointed out, RE transaction costs suck, so try to make these decisions as few times as possible in life. As someone that has bought 3 and sold 2 homes in the last 5 years, I would not hesitate to buy a little more now vs. having to redo it again in a couple years. Buying/selling fees, moving SUCKS!!!!, hassles, buyer falling out of escrow, everything associated with the process is just a plain time suck on your life. We just moved into our forever home a few months ago, at a higher cost to yours, at roughly the same income. Could not be happier. But that was after selling what we thought was our forever home, after flipping the one before it into that home.

So I really recommend you sit down with the wife, per Nuestroro's post above, and think about children first. The difference in answers could be tremendous. The mistake we made in buying the last home, that we thought was "the forever home" was not realizing that it was not kid friendly. Or grandma friendly. Too many stairs. Too many levels. Detached garage (real fun after Costco trips or carrying kid in car seat). Kid's bedroom shared a wall with living room and kitchen (real fun at night after kid goes to sleep at 8pm). You get the picture. What was great when we were just two of us, turned out to be terrible once a baby came into the picture. And we had never thought about that stuff before, which most non-parents don't. Now you look at literally everything in your life through a different lens. I didn't even touch on the location and schools part, because my kid is only 1yo, and we bought in the same neighborhood we were in so nothing changed for us, already in great school 'hood. I can see the elementary school from my front door, and all the kids walking by in the morning. Those years will be cake for us in that regard.

If there is any consideration to children in the future, I would figure that out before buying anything, IMO. If you cannot firmly decide on that soon, just go rent something bigger and better in the meantime. Absolutely NO harm in that. Someone else posted the links to JL Collins page, go read all his stuff, I love it. His book is awesome, I read it in a weekend it was so fast and easy. No foul in renting for a while or forever. At your income you will be stacking mad chips for as long as you can stay at such a low cost of living. Then when the time comes to strike on that forever home, you will have a ton of cash to drop. Patience really is key in buying RE. You are in an enviable tremendous position, don't rush.
"The best life hack of all is to just put the work in and never give up." Bas Rutten

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