Can we afford new house(360-400k)?

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Topic Author
kevin99
Posts: 22
Joined: Sun Feb 04, 2018 11:42 pm

Can we afford new house(360-400k)?

Post by kevin99 » Thu Apr 05, 2018 11:24 am

I have been on this board for many years and have learned an invaluable amount from the Boglehead community. I have been having a hard time deciding how much we should budget for our next house and am hoping to get some advice from my fellow Bogleheads.

My wife and I (and daughter) are looking to move within the next year and I have been going back an forth on how much house we can actually afford. We are currently in a terrible school district (one of the worst in the state), and would like to move before our daughter starts kindergarten in September 2019.
I know this question has been asked a many times on this board before but each family's situation tends to be slightly different. I'd love to hear any insights and feedback that you may have. I'll keep the background short and get straight to the financials and answer anything I've left out in my replies.

Age: Wife and I are 36 with a 3 year old.
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Asset allocation: 80% stocks / 20% bonds , in 4 fund portfolio at Vanguard or Fidelity (is this too aggressive??)
International stock allocation: 10% of stocks (will most likely increase this soon)

Total Portfolio: ~1.0M (I don't include home equity, cash for down payment, or emergency fund in this)

My Retirement investments:
401k: 475K
Roth: 138K
IRA:1K (will convert to Roth to simplfy back door Roth if needed)
Taxable: 160K
HSA: 17K (we don't use this for current medical expenses)
529: 52K (at Vanguard)

Wifes Investments:
403b: 68K
Roth: 33K
IRA: 87K
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Cash: ~92K High Yield Savings 1.7% APY (This is reserved for new house down payment in the next 6-12 months). Originally invested in Vanguard tax free bond funds.
Cash: 15K Checking
Cash: 8K Group Universal Life Cash Accumulation Fund (4% APY, tax deferred growth), interest from this account covers premiums for about 900K in life insurance through my work
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Other Assets:
House: ~230K market value (130K left on 15 year mortgage). Rental income potential: 1700-2000/month
Property Tax: 6K/year
Two cars: both paid off and in good condition (9 year old civic, 15 year old corolla)
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Contributions:
401k/403b: 18K +18K + ~7K employer match = 43K
HSA: ~7K/year
529: 10k/year
Roth: ~10K to15K depending on commissions
Taxable: ~10K to 30K/year depending on commissions
----------------------------------------------------------------------
Income:
Me: ~110K + commisions up to 70K (we budget as if commissions are zero), my job security is also very low, but I could probably find a similar job with a 20% bump in base pay
Wife: 55K with fairly good job security
Tax Filing Status: Married Filing Jointly
Tax Rate: ~22 to 24% Federal, 6% State
State of Residence:NY
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Expenses: ~79K/year (this does not include income taxes) in Medium COL area

Major Expenses:
Mortgage (PITI + HOA): 2200/month
Daycare: 1k/month
Food:500/month
Utilities (Water/Elec/Gas): 300/month
Misc: 2500/month travel/medical/gifts/gas/home repair/car insurance/kid stuff/restaurants/etc
------------------------------------------------------------------------------

Questions:
1. Can we comfortably afford a 360-400K house with about 11K/year in property taxes for one of the top school districts in the area, and still reach our FIRE goals? We may sell or rent out our current house, but are leaning towards selling.
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Background:
We have the cash and income for a bank to approve us but how does this look from a conservative Boglehead's perspective? We also want to FI in the next 5-10 years, but not necessarily RE. This is goal we have to reduce my constant fear of losing my job. I am in an industry where lay offs happen fairly often but it is relatively easy to find a new job.

When I bought our first house (a few years out of college) I had no idea what I was doing and the real estate agent used all the classic tricks to get me to buy a house quickly and I fell for all of them. I ended up overpaying for the house (right before 2008 crash) and also was given bad information about the water source, heating system, and other components of the house which has greatly increased my recurring house costs. I learned quite a bit from that experience (at a significant price) and I don't want to repeat the same mistakes again.

portlandia
Posts: 6
Joined: Tue Jan 10, 2017 11:11 pm

Re: Can we afford new house(360-400k)?

Post by portlandia » Thu Apr 05, 2018 11:38 pm

So with a 300K loan on a 400K house at 4.5% for 30 years (vs 15 due to job instability) your PITI payment would be ~$2478/mo. Currently you are paying $2200/month or ~$278/mo less.
Income is 165K before commissions, so payment would represent ~ 25% of take home pay. You have 160K in taxable and ~100K in current home equity to help you survive any financial storms if you were to lose our job and need to rely on wife's income for a while.
Yes, you can afford this.

Can you FIRE in 10 years? Depends on what your retirement expenses will be, but with current portfolio of 1M and annual contributions of 70K, assuming 6% returns for 10 years, yields a balance of 2.8M. Appears your annual expenses are ~80K, so if maintained in retirement you would have a SWR of 2.8%. A 3.3% SWR gives you an income of 92K/year. Both of these SWR are considered essentially guaranteed (at least as close to guaranteed as anything can ever be) for you never running out of money.

80/20 is not too aggressive given your age/goals.

Good luck!

Topic Author
kevin99
Posts: 22
Joined: Sun Feb 04, 2018 11:42 pm

Re: Can we afford new house(360-400k)?

Post by kevin99 » Fri Apr 06, 2018 12:23 am

portlandia wrote:
Thu Apr 05, 2018 11:38 pm
So with a 300K loan on a 400K house at 4.5% for 30 years (vs 15 due to job instability) your PITI payment would be ~$2478/mo. Currently you are paying $2200/month or ~$278/mo less.
Income is 165K before commissions, so payment would represent ~ 25% of take home pay. You have 160K in taxable and ~100K in current home equity to help you survive any financial storms if you were to lose our job and need to rely on wife's income for a while.
Yes, you can afford this.

Can you FIRE in 10 years? Depends on what your retirement expenses will be, but with current portfolio of 1M and annual contributions of 70K, assuming 6% returns for 10 years, yields a balance of 2.8M. Appears your annual expenses are ~80K, so if maintained in retirement you would have a SWR of 2.8%. A 3.3% SWR gives you an income of 92K/year. Both of these SWR are considered essentially guaranteed (at least as close to guaranteed as anything can ever be) for you never running out of money.

80/20 is not too aggressive given your age/goals.

Good luck!
Thank you very much for the detailed analysis!

gotester2000
Posts: 620
Joined: Sun Nov 12, 2017 1:59 am

Re: Can we afford new house(360-400k)?

Post by gotester2000 » Fri Apr 06, 2018 1:21 am

I guess you are in Sales - the way you have put everything here.

You can have a benefit of doubt since it was your first house and you were inexperienced buyer plus you want to upgrade to a reasonable priced one. I would suggest buy your house now considering it your forever house in terms of price and space. So 360 - 400k looks ok - is this LCOL/MCOL and can you get lower than this?

For FI, you need about 2M(80k @ 4%) plus a paid house. So you are about 2 + 0.4 - 1 - 0.1 = 1.3M short. With your current financial condition, you need about 10 years to achieve it. Dont keep 2 houses.

onourway
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Re: Can we afford new house(360-400k)?

Post by onourway » Fri Apr 06, 2018 5:39 am

Looks good to me.

Leemiller
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Re: Can we afford new house(360-400k)?

Post by Leemiller » Fri Apr 06, 2018 7:26 am

My advice is to sell your current home and put that money into the new home. This would reduce your payments, maybe you could even go to a 15-20 year. Also, I wouldn’t add the stress of landlording and a bigger mortgage on top of job instability. Besides, why would you ever buy a single family house as an investment in a poor school district? That is effectively your plan. Then I think you’d be in great shape as others have pointed out.

KlangFool
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Re: Can we afford new house(360-400k)?

Post by KlangFool » Fri Apr 06, 2018 7:43 am

OP,

It is unusual for me to tell someone that you can afford the house. But, you do as long as you sell your current house.

KlangFool

Glockenspiel
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Joined: Thu Feb 08, 2018 1:20 pm

Re: Can we afford new house(360-400k)?

Post by Glockenspiel » Fri Apr 06, 2018 7:57 am

I'd probably sell the current house, considering it's in one of the worst school districts in the state. You can't rely on increasing rental incomes or anything like that and the hassle of being a landlord in a situation like that will be more trouble than it's worth. If you sell the current house, yes, you can easily afford it AND I'll back @portlandia's numbers and say you can be FIRE in about 10 years.

You're doing a great job and moving to a better school district will statistically improve your children's lives, which is priceless.

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Watty
Posts: 18129
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Re: Can we afford new house(360-400k)?

Post by Watty » Fri Apr 06, 2018 8:10 am

kevin99 wrote:
Thu Apr 05, 2018 11:24 am

We are currently in a terrible school district (one of the worst in the state)

......
Cash: ~92K High Yield Savings 1.7% APY (This is reserved for new house down payment in the next 6-12 .....
......
Other Assets:
House: ~230K market value (130K left on 15 year mortgage). Rental income potential: 1700-2000/month
In most areas home prices are up so if you rented the house for more than a couple of years you would lose the homeowners capital gains exclusion. That alone could be a reason to sell it. How much capital gains do you have in the house?

Most housing markets are pretty strong right now too which would make renting or selling a house in "terrible school district (one of the worst in the state)" not too hard. A few years from now it could be a bad housing market which could make that house hard to sell or rent. The old saying about real estate is that the three important things are, "Location, location, and location." and your current house does not have a good location in the bad school district. A bad school district could be a sign that the area is declining so try to picture what your neighborhood might look like in 20 years.

Reading way between the lines I would suspect that your job is not the type of job where it would go over well if you had to cancel a meeting with a client to deal with an emergency at a rental property. Would your wife be able to occasionally take the afternoon off work to deal with the rental property? If not you may have to hire a property management company which might make the numbers not work so good. Be sure you have a clear picture of how this will work if you keep the property as a rental.

If you keep the property as a rental then between the two houses would would have about $600K in residential housing in the same city which would be a big percentage of your net worth. Just for diversification selling it would make sense.

I would not keep it as a rental

If you did not already own the house there is pretty near zero chance that you would buy it as an investment property.

After the selling costs and with your other funds you might have something like $175K that you could use for a downpayment and buying/moving costs so you would be looking at about a $200-$240K mortgage which is only about a year of your combined income. I would be tempted to maybe get a 5 to 10 year ARM if you can get one with a lower interest rate and pay it off quickly, so yes you can afford it if you sell your current house.
kevin99 wrote:
Thu Apr 05, 2018 11:24 am
Two cars: both paid off and in good condition (9 year old civic, 15 year old corolla)
15 years is a good run for a car and you are not on a tight budget, somewhere in your plans I would replace it.

If you wait until it dies then you might have to buy a replacement car in a hurry. I have had to do that and it can be hard to find a good deal when you are in a hurry.

A few advantages;
1) You could sell your 15 year old Corolla for a reasonable amount.
2) You can take your time and shop for a great deal.
3) A new or newer car will have a lot better safety features. ESC is a good feature to have and did not become standard until 2012 so if you buy a used car you might look for one that at least has that. Your current cars may be old enough that they don't even have side airbags. Toyota has added a LOT of advanced safety features like automatic braking to all of their new cars.
4) There would be less risk of having the car break down in an unsafe location.

I may be biased but I bought a new 2018 Corolla a few months ago and a major reason was to get the new safety features. It only cost a bit over $15K plus about $2K in local taxes and registration. I plan on keeping it at least ten years so the annual cost of ownership should be pretty reasonable.

veindoc
Posts: 633
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Re: Can we afford new house(360-400k)?

Post by veindoc » Fri Apr 06, 2018 8:57 am

Not what you asked but is private school an option if your principal reason for moving is the school district?
I would recommend looking at this if you only plan to have one child.
If you have multiple children, then moving could possibly be cheaper in the long run and allow you to achieve FI.

I think you can afford the new home. I agree with previous posters who stated you should sell your current home.

Topic Author
kevin99
Posts: 22
Joined: Sun Feb 04, 2018 11:42 pm

Re: Can we afford new house(360-400k)?

Post by kevin99 » Fri Apr 06, 2018 10:22 am

Watty wrote:
Fri Apr 06, 2018 8:10 am
kevin99 wrote:
Thu Apr 05, 2018 11:24 am

We are currently in a terrible school district (one of the worst in the state)

......
Cash: ~92K High Yield Savings 1.7% APY (This is reserved for new house down payment in the next 6-12 .....
......
Other Assets:
House: ~230K market value (130K left on 15 year mortgage). Rental income potential: 1700-2000/month
In most areas home prices are up so if you rented the house for more than a couple of years you would lose the homeowners capital gains exclusion. That alone could be a reason to sell it. How much capital gains do you have in the house?

Most housing markets are pretty strong right now too which would make renting or selling a house in "terrible school district (one of the worst in the state)" not too hard. A few years from now it could be a bad housing market which could make that house hard to sell or rent. The old saying about real estate is that the three important things are, "Location, location, and location." and your current house does not have a good location in the bad school district. A bad school district could be a sign that the area is declining so try to picture what your neighborhood might look like in 20 years.

Reading way between the lines I would suspect that your job is not the type of job where it would go over well if you had to cancel a meeting with a client to deal with an emergency at a rental property. Would your wife be able to occasionally take the afternoon off work to deal with the rental property? If not you may have to hire a property management company which might make the numbers not work so good. Be sure you have a clear picture of how this will work if you keep the property as a rental.

If you keep the property as a rental then between the two houses would would have about $600K in residential housing in the same city which would be a big percentage of your net worth. Just for diversification selling it would make sense.

I would not keep it as a rental

If you did not already own the house there is pretty near zero chance that you would buy it as an investment property.

After the selling costs and with your other funds you might have something like $175K that you could use for a downpayment and buying/moving costs so you would be looking at about a $200-$240K mortgage which is only about a year of your combined income. I would be tempted to maybe get a 5 to 10 year ARM if you can get one with a lower interest rate and pay it off quickly, so yes you can afford it if you sell your current house.
kevin99 wrote:
Thu Apr 05, 2018 11:24 am
Two cars: both paid off and in good condition (9 year old civic, 15 year old corolla)
15 years is a good run for a car and you are not on a tight budget, somewhere in your plans I would replace it.

If you wait until it dies then you might have to buy a replacement car in a hurry. I have had to do that and it can be hard to find a good deal when you are in a hurry.

A few advantages;
1) You could sell your 15 year old Corolla for a reasonable amount.
2) You can take your time and shop for a great deal.
3) A new or newer car will have a lot better safety features. ESC is a good feature to have and did not become standard until 2012 so if you buy a used car you might look for one that at least has that. Your current cars may be old enough that they don't even have side airbags. Toyota has added a LOT of advanced safety features like automatic braking to all of their new cars.
4) There would be less risk of having the car break down in an unsafe location.

I may be biased but I bought a new 2018 Corolla a few months ago and a major reason was to get the new safety features. It only cost a bit over $15K plus about $2K in local taxes and registration. I plan on keeping it at least ten years so the annual cost of ownership should be pretty reasonable.
Thank you. Lots of good points here.

The more we look at it, renting out our current house seems like a risky idea. And you're right about my job, having to worry about rental property emergencies while meeting with clients is not something I want to deal with.

Replacing our older car has also been something that is on our budget road map. I agree the new safety features are definitely worth upgrading. I didn't realize that new Corolla's were so reasonably priced.

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Watty
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Re: Can we afford new house(360-400k)?

Post by Watty » Fri Apr 06, 2018 10:50 am

kevin99 wrote:
Fri Apr 06, 2018 10:22 am
I didn't realize that new Corolla's were so reasonably priced.
I didn't either or all the safety features it has until I saw it mentioned on another thread.

I like to think I got it at a pretty good price so if you look at one you may need to shop at bit to get it at that price. Here is the thread where I recaped my shopping experience.

viewtopic.php?f=11&t=239526&p=3746230&h ... a#p3746230

portlandia1
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Joined: Wed Feb 07, 2018 1:29 pm

Re: Can we afford new house(360-400k)?

Post by portlandia1 » Fri Apr 06, 2018 11:07 am

Sorry if my previous post incorrectly implied that I was suggesting you rent out your current home upon buying the new home. Sell the current home and either use the equity and current savings for a downpayment or withold a portion for a rainy day fund given your volatile industry.

Topic Author
kevin99
Posts: 22
Joined: Sun Feb 04, 2018 11:42 pm

Re: Can we afford new house(360-400k)?

Post by kevin99 » Fri Apr 06, 2018 12:10 pm

portlandia1 wrote:
Fri Apr 06, 2018 11:07 am
Sorry if my previous post incorrectly implied that I was suggesting you rent out your current home upon buying the new home. Sell the current home and either use the equity and current savings for a downpayment or withold a portion for a rainy day fund given your volatile industry.
Thanks for the clarification. So far everyone I talk to and even my own logic/math tells me I should sell our current home. My only real (weak) reason for wanting to keep the property is to avoid the high transaction costs of selling the house (~6% commissions, bank fees,legal fees..etc) .

For some reason I have this delusion of a rental property being an important part of a FIRE portfolio. When I work out the numbers I would have a slightly negative cash flow for about 10 years, and even if I owned the home outright I would only be getting about a 2-3% return on equity along with the headaches of being a landlord. Clearly, keeping this property is a bad idea, and the comments on this thread reinforce that. I just need to get my act together and get the place ready to sell.

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