High cost of living — purchasing a model home. Nice advice.

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tRacer4201
Posts: 22
Joined: Fri Jan 19, 2018 3:01 am

High cost of living — purchasing a model home. Nice advice.

Post by tRacer4201 »

I’m considering purchasing a home in a HCOL city that’s close to highly sought after employers. I have zero debt.

I currently rent for $3000/month including trash, sewer, and water for 850 sq feet. Electric is about another $60-100 depending on the season. Everything is electric — no gas.

I’m in the city center and so I can walk just about anywhere. This means I don’t have a vehicle, and I don’t have a car payment, insurance, and fuel costs. I don’t expect to move away from this city in the next 5-8 years.

The home I’m considering is just north of $1.2MM for 2100 sq feet plus a double car garage. We really could use the extra space.

I can’t move away from here to buy a much cheaper home — I honestly don’t like work from home, and anywhere within an hour commute means still paying $800-900K minimum, plus a lengthy commute and adding a car into the equation. And those homes aren’t something I’d be happy to live in.

Right now, I save all my stock compensation, which is $120-200K after tax depending on the stock value. I’m also able to max out retirement savings each month and save another $4K per month into retirement savings. In total, I save about $5600 from my salary per month on top of saving my stock compensation.

If I purchase the home, I’d like to put no more than 20% down. This will get me into the jumbo loan category, but several lenders have preapproved me for 2.7-3%, which isn’t terrible. I could put 50% down if I had to, but I don’t want to sell stocks, pay capital gains, and lock that money into a house. I think it’s doing just fine in the market, primarily invested in VTSAX and VOO (they’re pretty much the same).

This puts my mortgage payments somewhere around $5200 a month with a 30 year term, including taxes, excluding utilities. I have no idea how to estimate the cost of utilities in the new home, but I’d rather overestimate and say $400 total for electric, gas, trash, water, and sewer. I’d also guess $300 a month in home owners insurance.

In total, I’d be paying close to $6000 or double my current rent.

On one hand I’d like to keep stashing an extra $4K each month into the market. Buying a home, I’ll have my own place finally and I’ll be slowly building equity.

I’m not sure how to do this rent vs buy analysis. This home is in a highly sought after location. I do expect it to appreciate in the future, but I’m not factoring that directly into my decision. Unfortunately land is at a premium. I’m also concerned if I don’t pull the trigger, I might have to pay much more for the same home in another year or two.

I’m sorry for the long post. My mom isn’t financially savvy and couldn’t offer me advice. My dads already passed. I want the home but I don’t want to make an emotional decision. What would you do?
Goal33
Posts: 1578
Joined: Sun Apr 12, 2015 12:30 pm

Re: High cost of living — purchasing a model home. Nice advice.

Post by Goal33 »

It's a major lifestyle upgrade. So not exactly apples to apples. Sorry if I missed it, but if it's SF, seems pretty reasonable. I don't know other markets.
Marseille07
Posts: 1083
Joined: Fri Nov 06, 2020 1:41 pm

Re: High cost of living — purchasing a model home. Nice advice.

Post by Marseille07 »

There are numerous sites you can find and plug some numbers in and get recommendations.
With that said, if you're investing-minded then renting probably makes the most sense. Buying a house really ties up your capital on the house and doesn't leave much room for other financial activities.
fyre4ce
Posts: 1151
Joined: Sun Aug 06, 2017 11:29 am

Re: High cost of living — purchasing a model home. Nice advice.

Post by fyre4ce »

The Bogleheads wiki has a good page on Buying vs renting. The general consensus here (although far from unanimous) is that if you expect to stay in the same area for at least 5-7 years, buying is better than renting, provided you can do it on good terms. I tend to share this view. I don't like trying to time the housing market any more than trying to time the stock market. If you are otherwise ready to buy and you wait a year hoping prices go down, they could go up another 15%. And you've also burned a year out of your "5-7" break-even period.

As far as how much house to buy, there are a bunch of guidelines floating around, some of which are obsolete due to low interest rates. I prefer to look at it from a cash-flow perspective. Add up your cash out-flow (monthly or yearly doesn't matter) from:
  • spending on your current budget (don't count on trimming the budget coincident with a large house purchase)
  • paying your debts (aggressively if not low-interest). If you have a lot of debt, renting while you clean that up is probably a great idea.
  • paying your legally required taxes
  • maxing out all your tax-advantaged saving opportunities, and
  • expected expenses for the house purchase (PITI, utilities, maintenance, cleaning, repairs, upgrade fund)
If the total of the cash out-flow is less than 90-95% of your gross income, then the house is probably affordable. You want at least 5-10% of your income as cushion for changes in income and expenses, and also so you have some liquidity in savings outside your retirement accounts and home equity.

This doesn't mean you need to spend up to this much. Especially in lower COL areas, buying a much cheaper house can make a lot of sense. But many people (including you and me) are in areas where anything reasonable will be a huge budget stretch. I developed this guideline for my own VHCOL house purchase, and it's seemed to work well so far.

Hope that helps!
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Silly Wabbit
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Joined: Sat Mar 25, 2017 9:54 pm

Re: High cost of living — purchasing a model home. Nice advice.

Post by Silly Wabbit »

Don't forget maintenance, likely several hundred/month, averaged over the years, depending on the homes age, condo vs sfh and your willingness to diy.

In any case, you should do it if it'll make you happy. You didn't mention what your cash comp was like, but it sounds like you can afford it.
an00j
Posts: 28
Joined: Thu Jan 31, 2019 8:29 pm

Re: High cost of living — purchasing a model home. Nice advice.

Post by an00j »

Also in a VHCOL area. We made the decision to buy last year when we had a kid. Within the first gear we spent around $50K in upgrades on the home that were purely optional, but improved the aesthetic, maintainability, desirability, and energy efficiency of the home...our utility bills will be negative and we save money on cleaning services.

We also need to replace the HVAC and water heater soon, which is another $15K. I also had to buy tons of tools, storage racks, pest control products, etc. Since I’m cheap and like to think I am handy.

Buying a home is not a good economic decision. It just isn’t and likely will never be.

It is really an expensive lifestyle/consumption decision and I really enjoy the boring suburban lifestyle compared to our previous urban lifestyle. It has worked out for us, so I am poorer in wallet, but richer in spirit. Honestly, I would spend any amount of money to guarantee the safety and comfort of my family. It sounds so contrived, but really there are serious trade-offs to renting and urban family life that eventually become burdensome for many people.

I also didn’t want to live in a place where the economic opportunity and cultural activities were so sparse. So I was willing to pay a premium. I think real estate in cities and their suburbs will continue to be scarce resources, especially in California. If you can make a reasonable argument that your area will be desirable, then you can assume that someone who is 10 years younger than you is also willing to pay a premium for the same scarce resource.

Though home ownership does create a lot of cognitive burden... please remember, buying a home is not a permanent decision. Marriage and children are a far more permanent and important investment which require a far more scarce and valuable resource. Time.

P.S I know you likely came here for an objective mechanical answer based on your inputs (income, interest rates, savings, etc). I am sure others can provide that, and tell you whether your home will make you poorer. I hope this gives you an alternative perspective on this topic.
Lexx
Posts: 138
Joined: Mon Dec 21, 2020 6:21 pm

Re: High cost of living — purchasing a model home. Nice advice.

Post by Lexx »

In your situation I'd continue to rent. No reason to buy at the top of the housing market. What's the upside on house prices? Do you think they're going to continue to zoom up, or will they level off or maybe fall?
fyre4ce
Posts: 1151
Joined: Sun Aug 06, 2017 11:29 am

Re: High cost of living — purchasing a model home. Nice advice.

Post by fyre4ce »

One more general comment. The Rent vs Buy decision often gets clouded because rentals are more commonly smaller/cheaper properties than purchases. For instance, if you had other financial priorities like debt that needed cleaning up, most people (including me) would recommend renting the smallest apartment that met your basic needs while you did that. Then you can look at buying. But most of the savings isn't coming from renting, it's coming from consuming cheaper housing. And in that context, renting makes more sense, because (a) you only want the smaller place temporarily, so the transaction costs of buying and selling it would be too large, and (b) you're not tying any money up in home equity that could be better put toward high-interest debt. But once the debt is cleaned up, then you can save 20% for a down payment and buy a longer-term home.

I faced an almost perfect rent vs buy decision last year. Two single-family homes, very similar sqft, # bedrooms, same neighborhood. The rental was $6,000/mo, and the purchase was $5,000/mo in interest and property taxes (not including principal, maintenance, etc.). I chose to purchase, and so far it seems like the right call.
kaudrey
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Joined: Fri Nov 22, 2013 2:40 pm

Re: High cost of living — purchasing a model home. Nice advice.

Post by kaudrey »

It is a lifestyle upgrade that it seems you can afford. You say "we" could use the extra space. Spouse? Kids? Future kids?

We bought a bigger house this fall, selling a townhouse. I don't regret it for a minute. 850 sq ft vs 2100 sq ft....I'd do it.
gavinman
Posts: 124
Joined: Thu Oct 09, 2008 7:43 pm

Re: High cost of living — purchasing a model home. Nice advice.

Post by gavinman »

You say this is a model home so I’m assuming it’s new. How much will you have to spend to furnish any part of it? Will it need blinds and other furnishings?
Some of those costs add up.
Vanguard Fan 1367
Posts: 1883
Joined: Wed Feb 08, 2017 3:09 pm

Re: High cost of living — purchasing a model home. Nice advice.

Post by Vanguard Fan 1367 »

The wife and I enjoy our model home. I agree with others that you should look at the numbers. If you feel ok about them that you should consider home ownership.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."
decapod10
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Joined: Thu Dec 28, 2017 6:46 pm

Re: High cost of living — purchasing a model home. Nice advice.

Post by decapod10 »

It seems like you can probably do it, though missing a bit of your income information.

You are saving $120-$200k per year PLUS maxing out retirement PLUS $48k per year ($4k per month) in taxable?

Your rent goes from $3k per month to $6k per month in housing costs, then you're adding an extra $36k per year in housing costs. That doesn't seem too bad.

But it would help a little if we knew your total expenses I suppose.

To calculate your utilities, I think I would just take your current electricity/gas bill and maybe double it. Are you in California? My guess would be around $50 per month each for garbage, sewer, water. Your homeowner's insurance seems a bit high to me, I'm guessing around $2k per year or less, but of course all these things heavily depend on where you live.

Though overall at first glance doesn't seem unreasonable.
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