Should I buy the $1.5M home in cash?

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Topic Author
Banstick86
Posts: 16
Joined: Tue Jul 09, 2024 1:25 am

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

Post by Banstick86 »

PowderDay9 wrote: Tue Jul 09, 2024 4:43 pm
muffins14 wrote: Tue Jul 09, 2024 7:35 am
PowderDay9 wrote: Tue Jul 09, 2024 7:27 am I don't think you're crazy. Imagine a scenario where stocks and housing both drop 30-50%. Run your financials with both scenarios and compare the results.

Leverage always adds more risk to seek more return. Do you need more return to hit your financial goals? Is paying 7% interest worth the potential for more return?
In that scenario, likely mortgage rates also fall and they can refinance. I’d rather have 2M-> 1M portfolio than have 250k portfolio and an illiquid house at the bottom of the housing market.
What will your mortgage balance be and the value of the house be in this scenario?
If I understood correctly and, to keep it simple, let's pretend I sold everything and reported the gains, so I've raised $1.7M net in my taxable account.

For a 1.5 million home, I'd end up with:
$1M portfolio (cost basis $1M )
800k balance
$1.5M home
momopi
Posts: 182
Joined: Wed Dec 12, 2007 4:59 pm

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

Post by momopi »

Banstick86 wrote: Tue Jul 09, 2024 1:57 am I'm in southern California. Our household earns about $300k and we're in our early 40s with two kids under 2. We're looking for a bigger home, safer neighborhood, and better schooling. It has to be close to my employer. I plan to live here at least 18 years (when kids leave the house). Maybe after that we'd consider moving back to the current home we're in since it's cheaper.
Irvine?
muffins14
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Joined: Wed Oct 26, 2016 4:14 am
Location: New York

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

Post by muffins14 »

Banstick86 wrote: Wed Jul 10, 2024 1:54 am
PowderDay9 wrote: Tue Jul 09, 2024 4:43 pm
muffins14 wrote: Tue Jul 09, 2024 7:35 am
PowderDay9 wrote: Tue Jul 09, 2024 7:27 am I don't think you're crazy. Imagine a scenario where stocks and housing both drop 30-50%. Run your financials with both scenarios and compare the results.

Leverage always adds more risk to seek more return. Do you need more return to hit your financial goals? Is paying 7% interest worth the potential for more return?
In that scenario, likely mortgage rates also fall and they can refinance. I’d rather have 2M-> 1M portfolio than have 250k portfolio and an illiquid house at the bottom of the housing market.
What will your mortgage balance be and the value of the house be in this scenario?
If I understood correctly and, to keep it simple, let's pretend I sold everything and reported the gains, so I've raised $1.7M net in my taxable account.

For a 1.5 million home, I'd end up with:
$1M portfolio (cost basis $1M )
800k balance
$1.5M home

If your portfolio is about 3M now since you have to liquidate the existing stocks, wouldn’t you then have:

0.5 * (3-1.5) = 750k portfolio, with the taxable portion 100k
1.5M home * 0.5 = 750k home?

The part I would not like is only having 100k liquid in the taxable account
Crom laughs at your Four Winds
michaeljc70
Posts: 11029
Joined: Thu Oct 15, 2015 3:53 pm

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

Post by michaeljc70 »

the_wiki wrote: Tue Jul 09, 2024 1:15 pm If you do the math, leaving your money invested comes out a bit ahead over the long run. But with your income, there is no way you can afford a mortgage on a house like that unless you put at least 50% down.
What is the rate of appreciation on the house and what is the return on investments in this "math"? What are future interest rates in the "math"?
the_wiki
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Joined: Thu Jul 28, 2022 11:14 am

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

Post by the_wiki »

michaeljc70 wrote: Wed Jul 10, 2024 7:15 am
the_wiki wrote: Tue Jul 09, 2024 1:15 pm If you do the math, leaving your money invested comes out a bit ahead over the long run. But with your income, there is no way you can afford a mortgage on a house like that unless you put at least 50% down.
What is the rate of appreciation on the house and what is the return on investments in this "math"? What are future interest rates in the "math"?
House appreciates the same whether you pay cash or take a loan, so it is irrelevant.

Current mortgage rates are known

Average 30 year portfolio rates of return can be estimated.
Topic Author
Banstick86
Posts: 16
Joined: Tue Jul 09, 2024 1:25 am

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

Post by Banstick86 »

muffins14 wrote: Wed Jul 10, 2024 6:36 am
Banstick86 wrote: Wed Jul 10, 2024 1:54 am
PowderDay9 wrote: Tue Jul 09, 2024 4:43 pm
muffins14 wrote: Tue Jul 09, 2024 7:35 am
PowderDay9 wrote: Tue Jul 09, 2024 7:27 am I don't think you're crazy. Imagine a scenario where stocks and housing both drop 30-50%. Run your financials with both scenarios and compare the results.

Leverage always adds more risk to seek more return. Do you need more return to hit your financial goals? Is paying 7% interest worth the potential for more return?
In that scenario, likely mortgage rates also fall and they can refinance. I’d rather have 2M-> 1M portfolio than have 250k portfolio and an illiquid house at the bottom of the housing market.
What will your mortgage balance be and the value of the house be in this scenario?
If I understood correctly and, to keep it simple, let's pretend I sold everything and reported the gains, so I've raised $1.7M net in my taxable account.

For a 1.5 million home, I'd end up with:
$1M portfolio (cost basis $1M )
800k balance
$1.5M home

If your portfolio is about 3M now since you have to liquidate the existing stocks, wouldn’t you then have:

0.5 * (3-1.5) = 750k portfolio, with the taxable portion 100k
1.5M home * 0.5 = 750k home?

The part I would not like is only having 100k liquid in the taxable account
Your calculations are about right for my situation. Yeah 100k would hurt to see after what I currently have.
Topic Author
Banstick86
Posts: 16
Joined: Tue Jul 09, 2024 1:25 am

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

Post by Banstick86 »

momopi wrote: Wed Jul 10, 2024 2:05 am
Banstick86 wrote: Tue Jul 09, 2024 1:57 am I'm in southern California. Our household earns about $300k and we're in our early 40s with two kids under 2. We're looking for a bigger home, safer neighborhood, and better schooling. It has to be close to my employer. I plan to live here at least 18 years (when kids leave the house). Maybe after that we'd consider moving back to the current home we're in since it's cheaper.
Irvine?
I'm in LA county and, yes, Irvine is our number one target this moment. We're also considering other cities and weighing options.
momopi
Posts: 182
Joined: Wed Dec 12, 2007 4:59 pm

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

Post by momopi »

Banstick86 wrote: Wed Jul 10, 2024 10:58 am I'm in LA county and, yes, Irvine is our number one target this moment. We're also considering other cities and weighing options.
There's a local housing blog in Irvine, I'd suggest visiting if you haven't done so already.
https://www.talkirvine.com/forums/irvine-real-estate.5/

Buying a house with all cash is not always the best way to use your money, but in very competitive markets it helps to win bids.

I am very curious where your current home is located? You mentioned Southern California but the home is only valued at $250 to $300k?
WhitePuma
Posts: 1251
Joined: Fri May 05, 2023 6:34 pm

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

Post by WhitePuma »

You could buy in cash and then, when rates are more favorable, do a cash-out refi.
michaeljc70
Posts: 11029
Joined: Thu Oct 15, 2015 3:53 pm

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

Post by michaeljc70 »

WhitePuma wrote: Wed Jul 10, 2024 12:23 pm You could buy in cash and then, when rates are more favorable, do a cash-out refi.
What I'd be worried about is when rates drop and you get the money the market is 50% higher. Of course, it could also be 50% lower. But I think we all know the long term trend is upward.

I'd take the mortgage and refi if/when rates go down. Due to his situation (has to sell all) he is also selling more than he needs to for the house and has to pay tax on it.
Topic Author
Banstick86
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Joined: Tue Jul 09, 2024 1:25 am

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

Post by Banstick86 »

momopi wrote: Wed Jul 10, 2024 11:25 am
Banstick86 wrote: Wed Jul 10, 2024 10:58 am I'm in LA county and, yes, Irvine is our number one target this moment. We're also considering other cities and weighing options.
There's a local housing blog in Irvine, I'd suggest visiting if you haven't done so already.
https://www.talkirvine.com/forums/irvine-real-estate.5/

Buying a house with all cash is not always the best way to use your money, but in very competitive markets it helps to win bids.

I am very curious where your current home is located? You mentioned Southern California but the home is only valued at $250 to $300k?
I meant that's the amount I would get back if I were to sell the house (selling price minus loan balance). Located near Pasadena.
vinhodoporto
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Re: Should I buy the $1.5M home in cash?

Post by vinhodoporto »

Sell the current house and take the equity. You don’t want to be a landlord in CA, it sounds like you’d be cash flow negative or at best neutral, and keeping it concentrates too much of your net worth in LA area real estate.

Get a mortgage on the new place that you’re comfortable you can afford. Without any other info I’d go with $750k since that maxes out the tax benefit and is likely affordable on your income. What you’re actually comfortable with could be higher or lower depending on your other expenses so you need to run the numbers yourself.

A few other things to consider:
1. How secure are both your incomes - is there risk of a long period of unemployment or lower pay for one or both of you? The less secure your income is the more conservative I’d be with the house purchase.
2. On the flip side how much upside potential is there in your income? If there’s a solid path to higher income I’d be more comfortable taking a little more risk.
3. What do your other expenses look like? For example if you have a lot of other debt like student loans, big car payments, or other obligations (legal or personal) such as helping an aging parent or relative, I’d advise being more conservative.
4. Kids will get more expensive as they get older.
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btq96r
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Re: Should I buy the $1.5M home in cash?

Post by btq96r »

How much are you paying in mortgage now that you can redirect to taxable savings/investments? Are you otherwise debt free? I'm guessing you max out your retirement accounts. If not, that's step 2, with Step 1 being knocking out any other debt. Buying a house in cash should be if you have a pile of accessible money sans debts.

It's a big hit you're contemplating. If you take that mortgage and lifestyle creep with it right away, that's not a great answer. But if you use it to rebuild the taxable savings and investments you drew from to buy the house, it's good.

I don't think paying cash for a home is a bad decision if you're doing it for peace of mind, reducing risk, and non value based reasons. I don't ever think people should look at a primary residence as an investment. A mortgage is all well and good, but I always see it as a tool, to secure a residence, not a money maker/saver. I'm sure I'm in the minority on this.

I would just sell the current house, even if it occurs after you move into a new one. Being a landlord, even through an agency isn't something you should do unless you want to commit to it.
Topic Author
Banstick86
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Joined: Tue Jul 09, 2024 1:25 am

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

Post by Banstick86 »

btq96r wrote: Thu Jul 11, 2024 10:11 am How much are you paying in mortgage now that you can redirect to taxable savings/investments? Are you otherwise debt free? I'm guessing you max out your retirement accounts. If not, that's step 2, with Step 1 being knocking out any other debt. Buying a house in cash should be if you have a pile of accessible money sans debts.

It's a big hit you're contemplating. If you take that mortgage and lifestyle creep with it right away, that's not a great answer. But if you use it to rebuild the taxable savings and investments you drew from to buy the house, it's good.

I don't think paying cash for a home is a bad decision if you're doing it for peace of mind, reducing risk, and non value based reasons. I don't ever think people should look at a primary residence as an investment. A mortgage is all well and good, but I always see it as a tool, to secure a residence, not a money maker/saver. I'm sure I'm in the minority on this.

I would just sell the current house, even if it occurs after you move into a new one. Being a landlord, even through an agency isn't something you should do unless you want to commit to it.
Mortgage is 3700. Yes, we're debt free (aside from home loan) and max out 401k and roths.

If I pay off the new home, I think property tax and insurance comes out to about $2k a month, leaving a good chunk of paycheck left for everything else.

This group is definitely making me waver on renting my place out. It does have a great deal of landscaping/brush to handle and the home is over 70 years old.
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btq96r
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Re: Should I buy the $1.5M home in cash?

Post by btq96r »

Banstick86 wrote: Thu Jul 11, 2024 3:57 pm Mortgage is 3700. Yes, we're debt free (aside from home loan) and max out 401k and roths.

If I pay off the new home, I think property tax and insurance comes out to about $2k a month, leaving a good chunk of paycheck left for everything else.

This group is definitely making me waver on renting my place out. It does have a great deal of landscaping/brush to handle and the home is over 70 years old.
As long as you keep your emergency fund, and guard against the lifestyle creep while getting your taxable investments back up, you'll be fine. The math won't be in your favor, but having a paid off primary residence is a helluva hedge against risk, not a math move. I don't really see you moving back to the old place if you rent it out. Which means you'll have to do the upkeep on a 70yr old home (plus the associated yard work) and deal with a management company or directly with renters (which isn't ideal unless you're committed to it).

The order of moves is something to work out if you're going to do this. When to cash out the stocks, list your current home, buy the old one...different orders could be right to varying degrees. But right now you also have the luxury of time to think it over.

All said, as much as I'm in line with buying outright being better than a mortgage if you have the money, be ready to do this with enthusiasm, not just like the idea of it. If you're still doubting, it might not be the best move.
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