Can I Afford This House?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
virginiabirdie
Posts: 42
Joined: Thu Jul 09, 2015 10:51 am

Can I Afford This House?

Post by virginiabirdie » Mon Oct 30, 2017 11:03 am

Always appreciate the SatuMedia' perspectives.

COMP 500k (all W2, not including investment income b/c it fluxes; last yr about 70k)
HOME PRICE 2.3 MM
EXPENSES TOTAL 380k (see detail below)
TAX DEDUCTIONS - Assuming zero just to be on safe (perhaps ridiculous) side because of tax reform

Given these costs, we would still save 167k/year. Here's how I got there.
  • Took my COMP minus EXPENSES, then
    + add back in 401k contribution (which I add back in because I listed it in expenses)
    + add in Mortgage Paydown Value/Forced Savings from Paying Mortgage (amounts to around 24k/year)
Even if bonuses don't pay out, we'd be saving 100k/year. And this doesn't take into account any possible tax deductions, investment income, etc because I'm trying to be very conservative. You never know what life throws at you.

ABOUT US
Late 30's
One income but extremely secure for next 5 years; pretty secure beyond that but who knows
Zero debt now, but would take 1+MM mortgage
1.5MM left in investments after down payment
2 small kids
HCOL area

Unfortunately, we live in a very, very HCOL area near New York City. The house is a little dated. The schools are so-so. Our plan is do private when kids are older in 7 years or so. Hopefully, by then, my side business will have gained traction or my husband will get a promotion. In other words, we're kicking the can down the road on this one.

What this house DOES get us is a great commute, i.e., unbeatable family life. My husband can be home for dinner and bedtime every night. There's a parking spot, which is very rare here, that also makes a huge change to our quality of life. The house is also big enough for an in-law suite. Perfect for us, as my in-laws are financially stable, but they do need a lot of help. (I would never ask them to pay rent, though, so that's not in the equation.)

However, it's a lot of house. It's a huge ball and chain. Part of me says keep renting at 6.5k/month. Another part is more equivocal...We've been frugal for so long, I think I may lack perspective on what's reasonable given our income and savings.

What say you?

Thank you all in advance.



EXPENSES detail
Fed Tax 125k
Prop Tax 36k
State Tax 35k
Mortgage 60k
Utilities 12k
Maintenace 20k
Insurance 8k
Misc Living 60k
Payroll Deductions (401k+benefits) 12k
TOTAL 380k

virginiabirdie
Posts: 42
Joined: Thu Jul 09, 2015 10:51 am

Re: Can I Afford This House?

Post by virginiabirdie » Mon Oct 30, 2017 11:06 am

I wanted to add that we have 300k saved up in 529s for the kids. We'd probably cool this down for a while since, a) they're young and b) we'd want to build up our retirement funds.

randomguy
Posts: 4890
Joined: Wed Sep 17, 2014 9:00 am

Re: Can I Afford This House?

Post by randomguy » Mon Oct 30, 2017 11:10 am

yes you can afford the house. Given you are paying 6.5k in rent, I am guessing that this house wouldn't be drastically more expensive. Now a lot of people will tell you to live a frugal life and retire in 10 years (heck or retire today by moving to a LCOL area). That is a fine choice. Going down your path and retiring in say 20 years instead is also good.

bloom2708
Posts: 2842
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Can I Afford This House?

Post by bloom2708 » Mon Oct 30, 2017 11:14 am

Have you been following/reading this current thread:

viewtopic.php?p=3595868#p3595868

Some big numbers. The one thing that would scare me is 4x of one salary. Previous thread is Boston. You are even higher COL.

This might be a "go with your gut" decision.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

User avatar
Pajamas
Posts: 2780
Joined: Sun Jun 03, 2012 6:32 pm

Re: Can I Afford This House?

Post by Pajamas » Mon Oct 30, 2017 11:15 am

Seems like you can, but I would take a very close look at the investments in the context of the new overall financial situation.

I would also be very cautious (as you seem to be) as a 30% drop in the value of a $2.3 million house is $690k, a significant amount even in the overall financial context. Work through some worst-case scenarios that include job loss and having to sell in a very weak housing market, i.e., the situation many people find themselves in during a recession. Remember that it is not a question of if, but only when we will have a recession.

fishmonger
Posts: 449
Joined: Fri Jan 31, 2014 2:20 pm

Re: Can I Afford This House?

Post by fishmonger » Mon Oct 30, 2017 11:22 am

Just curious, what makes your $500k income extremely secure for the next 5 years?

You clearly can afford it, but I would be nervous with a mortgage of that amount with only one income. What if your comp took a 20% haircut?

virginiabirdie
Posts: 42
Joined: Thu Jul 09, 2015 10:51 am

Re: Can I Afford This House?

Post by virginiabirdie » Mon Oct 30, 2017 11:28 am

bloom2708 wrote:
Mon Oct 30, 2017 11:14 am
Have you been following/reading this current thread:

viewtopic.php?p=3595868#p3595868
Oh gosh, I have been following it. The tone feels very un-boglehead-like. :shock:

Maybe I'm not reading it correctly, but I didn't get any takeaways from it. Should I have?

It seems like there's a big divide between those in HCOL area and those who aren't. The rules of thumb for income x multiple = max home price don't seem to work for HCOL residents.

So, here's how I think of it. If my husband loses his job, we would be able to stay afloat for many years. (1.5MM in investments - 1+MM mortgage = some leftover). And eventually, he would find a new job. Maybe, worst case scenario it takes a while or pays less, but given our investment reserves, I don't think it's the end of the world.

If home prices crash, well, I think we're equipped to ride it out. I know history is no guarantee for the future, but NYC seems like a good area to bet on. And we're here for teh long-term anyway (family and job sector reasons). There's also something to be said about putting down roots. My children have moved four times already. It's tough on everyone. I'm ready to nest.

On the other hand--illness, recession, disability, unexpected natural disasters. Oh dear! Renting gives us a whole lot of flexibility to walk away/keep cash. And if the work is anything right now, it's unpredictable.

virginiabirdie
Posts: 42
Joined: Thu Jul 09, 2015 10:51 am

Re: Can I Afford This House?

Post by virginiabirdie » Mon Oct 30, 2017 11:29 am

Pajamas wrote:
Mon Oct 30, 2017 11:15 am
Seems like you can, but I would take a very close look at the investments in the context of the new overall financial situation.

I would also be very cautious (as you seem to be) as a 30% drop in the value of a $2.3 million house is $690k, a significant amount even in the overall financial context. Work through some worst-case scenarios that include job loss and having to sell in a very weak housing market, i.e., the situation many people find themselves in during a recession. Remember that it is not a question of if, but only when we will have a recession.
Hi Pajamas, pleas see my reply above. What do you think?

Also, my impression after reading the SatuMedia book list is that recessions definitely happen. But over the long run, it's growth. If we can hang on through the rough parts, which I think we can, we are likely to be okay.

virginiabirdie
Posts: 42
Joined: Thu Jul 09, 2015 10:51 am

Re: Can I Afford This House?

Post by virginiabirdie » Mon Oct 30, 2017 11:30 am

virginiabirdie wrote:
Mon Oct 30, 2017 11:29 am
Pajamas wrote:
Mon Oct 30, 2017 11:15 am
Seems like you can, but I would take a very close look at the investments in the context of the new overall financial situation.

I would also be very cautious (as you seem to be) as a 30% drop in the value of a $2.3 million house is $690k, a significant amount even in the overall financial context. Work through some worst-case scenarios that include job loss and having to sell in a very weak housing market, i.e., the situation many people find themselves in during a recession. Remember that it is not a question of if, but only when we will have a recession.
Hi Pajamas, pleas see my reply above. What do you think?

Also, my impression after reading the SatuMedia book list is that recessions definitely happen. But over the long run, it's growth. If we can hang on through the rough parts, which I think we can, we are likely to be okay. Does that sound reasonable to you?

Trying to questions my assumptions, so please fire away.

User avatar
Pajamas
Posts: 2780
Joined: Sun Jun 03, 2012 6:32 pm

Re: Can I Afford This House?

Post by Pajamas » Mon Oct 30, 2017 11:35 am

virginiabirdie wrote:
Mon Oct 30, 2017 11:29 am
Pajamas wrote:
Mon Oct 30, 2017 11:15 am
Seems like you can, but I would take a very close look at the investments in the context of the new overall financial situation.

I would also be very cautious (as you seem to be) as a 30% drop in the value of a $2.3 million house is $690k, a significant amount even in the overall financial context. Work through some worst-case scenarios that include job loss and having to sell in a very weak housing market, i.e., the situation many people find themselves in during a recession. Remember that it is not a question of if, but only when we will have a recession.
Hi Pajamas, pleas see my reply above. What do you think?

Also, my impression after reading the SatuMedia book list is that recessions definitely happen. But over the long run, it's growth. If we can hang on through the rough parts, which I think we can, we are likely to be okay.
It seems that you are thinking it through, and the additional non-financial information supports buying it.

bloom2708
Posts: 2842
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Can I Afford This House?

Post by bloom2708 » Mon Oct 30, 2017 11:41 am

virginiabirdie wrote:
Mon Oct 30, 2017 11:28 am

Oh gosh, I have been following it. The tone feels very un-boglehead-like. :shock:
I was just thinking that the thread and others bring to point that there is no such thing as a slam dunk decision. Especially when it involves large mortgages and high incomes in very HCOL areas.

I would probably err to the side of flexible even if you don't "save" money by renting. What could you rent to get that shorter commute and lifestyle without putting it all out there with a large mortgage? Or maybe you already have all that, but just want to own instead of rent.

You clearly are building wealth quickly, so either decision will likely be just fine.
Last edited by bloom2708 on Mon Oct 30, 2017 11:57 am, edited 1 time in total.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

student
Posts: 1333
Joined: Fri Apr 03, 2015 6:58 am

Re: Can I Afford This House?

Post by student » Mon Oct 30, 2017 11:55 am

These are big numbers that I would not encounter myself so my opinion is probably not worth anything. Given your confidence about employment in the near future, still have 1.5 mil after down payment, and your well-done analysis, I would say you should be able to afford it.

chevca
Posts: 458
Joined: Wed Jul 26, 2017 11:22 am

Re: Can I Afford This House?

Post by chevca » Mon Oct 30, 2017 12:00 pm

If you can still save over $100k plus each year, you can probably afford the house. Pretty sure you know this. Why are you asking if you can afford it?

runner540
Posts: 401
Joined: Sun Feb 26, 2017 5:43 pm

Re: Can I Afford This House?

Post by runner540 » Mon Oct 30, 2017 12:04 pm

Seems like yes.* You and spouse seem to have made the most of your high incomes by keeping a lot of it - well done!
In your previous thread (viewtopic.php?f=2&t=230629&p=3587591#p3587591), you were worried about the house value dropping. Has your thinking changed, or not worried since you plan to be there a long time?

*is your plan for private school flexible if things get tight?

HornedToad
Posts: 674
Joined: Wed May 21, 2008 12:36 am

Re: Can I Afford This House?

Post by HornedToad » Mon Oct 30, 2017 12:07 pm

virginiabirdie wrote:
Mon Oct 30, 2017 11:03 am

ABOUT US
Late 30's
One income but extremely secure for next 5 years; pretty secure beyond that but who knows
Zero debt now, but would take 1+MM mortgage
1.5MM left in investments after down payment
2 small kids
HCOL area

EXPENSES detail
Fed Tax 125k
Prop Tax 36k
State Tax 35k
Mortgage 60k
Utilities 12k
Maintenace 20k
Insurance 8k
Misc Living 60k
Payroll Deductions (401k+benefits) 12k
TOTAL 380k
You can clearly afford it and the quality of life aspects look worthwhile. I would do it. You have money for a reason, and if buying a house that gives you better commute/quality of life/family happiness is your chosen use of the money then go for it.

I think you have a sizable buffer in case anything goes wrong and you already have kids and have figured out what your expenses are with those kids for now until private school. So buy and enjoy and then reassess how your savings looks at that point in time and what your investments have grown to.

virginiabirdie
Posts: 42
Joined: Thu Jul 09, 2015 10:51 am

Re: Can I Afford This House?

Post by virginiabirdie » Mon Oct 30, 2017 12:17 pm

runner540 wrote:
Mon Oct 30, 2017 12:04 pm
Seems like yes.* You and spouse seem to have made the most of your high incomes by keeping a lot of it - well done!
In your previous thread (viewtopic.php?f=2&t=230629&p=3587591#p3587591), you were worried about the house value dropping. Has your thinking changed, or not worried since you plan to be there a long time?

*is your plan for private school flexible if things get tight?
Great questions. Yes, flexible about private.

Thank you for your thumb's up. Even if you had said thumb's down, I welcome all perspectives. Thank you for your time.

To answer your other question, I am still worried about the house value. Not only because of the tax changes that limit deductions but because of rising sea levels. NYC area is going to get hit hard. It's not a questions of if, but when. I know many people who were slammed by Sandy--as in cars totaled, homes flooded and needing new kitchens. I'm not in a flood zone, but who knows in ten years?

If I were buying a home on a tidal island in Virginia, I wouldn't do it. No way. It's almost 100% going to be awash. NYC, I don't know. I hope it's too valuable/expensive for our gov't to let go.

In short, I give up trying to predict prices. Too many variables.

User avatar
Watty
Posts: 11594
Joined: Wed Oct 10, 2007 3:55 pm

Re: Can I Afford This House?

Post by Watty » Mon Oct 30, 2017 6:07 pm

Just eyeballing it buying the house looks doable but the big question is if it is the best choice or not and that likely depends on a lot of non-financial factors and your personal preferences.

There can be other non-financial factors but at some point even with a high income living in a very high cost of living area makes it hard to make the numbers work. Between the high cost of the home, the cost of needed updating, the high property taxes, paying for private schools, and the high income taxes you could come out ahead by making a lot less in an average or even low cost of living area.

It would be good to keep an open mind about moving to a less expensive area either now or in something like five years when you have save up even more.

One thing that people often don't factor into the choice about living in a very high cost of living area is the impact it will have on their kids when they grow up. It was years ago but I once lived in the San Francisco Bay area where housing has always been expensive. One of the things I saw was that some of my older coworkers had grown up kids that were well into their 20's that were still living with them. The problem was that the kids did not have high paying jobs and could not afford an apartment there even with roommates. Being in a very expensive area may mean that they will need to move away from you when they are adults. Many kids need extra TLC(or an occasional kick in the rear) well into their 20's so moving away from you might not be a good option for them.

In contrast I am in Atlanta now where housing is still reasonable. My son is married now and doing well in his career and he and all of his college friends have been easily able to afford to buy nice homes by the time they were in their mid 20's. He and his family have a house that is about ten minutes from us and we frequently get to take care of our grandkid which is something that we enjoy doing one or two days a week.

We also have friends that have a son who has dyslexia and was barely able to graduate from high school. He ended up working at a chain muffler shop, it is a good honest job but I'm sure that it doesn't pay a lot. Even on that income he was able to live with his parents for a few years to save up a down payment then buy a modest house that is not in a terrible area. (He has since become an auto mechanic and is doing better financially.)
virginiabirdie wrote:
Mon Oct 30, 2017 11:03 am
EXPENSES detail
Fed Tax 125k
Prop Tax 36k
State Tax 35k
Mortgage 60k
Utilities 12k
Maintenace 20k
Insurance 8k
Misc Living 60k
Payroll Deductions (401k+benefits) 12k
TOTAL 380k
It would be good to add the private school costs into that since it will be needed in just a few years.
virginiabirdie wrote:
Mon Oct 30, 2017 11:03 am
Part of me says keep renting at 6.5k/month. Another part is more equivocal...We've been frugal for so long, I think I may lack perspective on what's reasonable given our income and savings.
When you also consider the lost earnings on your down payment buying the house would likely cost you a lot more each month. You could also look at renting a better place that costs more for an "apples to apples" comparison.
virginiabirdie wrote:
Mon Oct 30, 2017 11:03 am
COMP 500k (all W2, not including investment income b/c it fluxes; last yr about 70k)
Be sure to check to see of there is enough disability insurance that you would be OK. It would also be good to make sure that you have a lot of life insurance so that the mortgage could be paid off and you would still have plenty to live and retire on. If your parents will be depending on you then there should also be enough to support them too.
virginiabirdie wrote:
Mon Oct 30, 2017 11:03 am
Late 30's
If you get a 30 year mortgage it won't be paid off until you are in your late 60's. I would guess that your kids will not be through college until you are around 60.

Some high income careers like medicine will allow people to work that long but it is a lot harder for someone like an executive or Wall Street worker to plan on a decades long career. Be cautious if the high paying job is more like the later.
virginiabirdie wrote:
Mon Oct 30, 2017 11:03 am
The house is also big enough for an in-law suite.


Before you buy the house be sure to check to see if the zoning and any HOA rules will actually allow this. When you do major remodeling that can require bringing the entire property up to the current code which can be expensive.

virginiabirdie wrote:
Mon Oct 30, 2017 11:03 am
What this house DOES get us is a great commute, i.e., unbeatable family life. My husband can be home for dinner and bedtime every night. There's a parking spot, which is very rare here, that also makes a huge change to our quality of life.
One possible problem is that when you add shuttling your kids to and from private school that could make your total commute not so good.

In 99% of the country that is a very low set of criteria for an expensive house.

I have a had a job where I could drive home for lunch and many people have jobs where they can walk or ride a bike to work. In much of suburbia two cars garages are pretty standard and three car garages are not uncommon.

User avatar
bligh
Posts: 553
Joined: Wed Jul 27, 2016 9:13 pm

Re: Can I Afford This House?

Post by bligh » Mon Oct 30, 2017 6:24 pm

In my opinion, you can afford that house. Having said that, with that kind of income I would, personally, be making a beeline (like it seems you guys have been doing) for financial independence at a 2-3% withdrawal rate. But those are my values, and they may not apply to your life. My only input would be to consider the opportunity cost of the purchase before you pull the trigger on the house. If you love your life the way it is and you wish to add in a place you can call your own, then go for it. Your mortgage would be only about 2x your income. Seems very comfortable to me.

virginiabirdie
Posts: 42
Joined: Thu Jul 09, 2015 10:51 am

Re: Can I Afford This House?

Post by virginiabirdie » Mon Oct 30, 2017 6:50 pm

Watty wrote:
Mon Oct 30, 2017 6:07 pm
Just eyeballing it buying the house looks doable but the big question is if it is the best choice or not and that likely depends on a lot of non-financial factors and your personal preferences.
Thanks, Watty. All very good points. Thank you. To be sure, we do not come out ahead on this transaction. Owning is 30k more expensive annually than renting. (Mortgage cost, maintenance, tax...not even factoring in opportunity cost of money sunk into down payment.) Financially, it's not a good move. But on every other level, it would be nice to own. Still mulling it over, clearly.

virginiabirdie
Posts: 42
Joined: Thu Jul 09, 2015 10:51 am

Re: Can I Afford This House?

Post by virginiabirdie » Mon Oct 30, 2017 6:56 pm

bligh wrote:
Mon Oct 30, 2017 6:24 pm
In my opinion, you can afford that house. Having said that, with that kind of income I would, personally, be making a beeline (like it seems you guys have been doing) for financial independence at a 2-3% withdrawal rate. But those are my values, and they may not apply to your life. My only input would be to consider the opportunity cost of the purchase before you pull the trigger on the house. If you love your life the way it is and you wish to add in a place you can call your own, then go for it. Your mortgage would be only about 2x your income. Seems very comfortable to me.
Thanks, Bligh. I like your values. I thought they were mine, too, until we moved to this area. I am love with city living. My husband loves his job, and it's one of those rare ones that is pretty secure. We can't imagine leaving. So now, we must imagine paying an incredible amount (for us) for a home.

You're right. We can technically afford the home, but it may not be prudent. I'm reminded of advice I once heard in another context,"You drew a lucky hand. Don't over play it."

However, I am also the same person who sat out 1MM of market gains because I had our nest egg all in cash for almost a decade. It's a tough call, adn I appreciate everyone's nuanced, thoughtful advice.

keith6014
Posts: 164
Joined: Thu Jan 02, 2014 11:58 pm

Re: Can I Afford This House?

Post by keith6014 » Mon Oct 30, 2017 8:52 pm

fishmonger wrote:
Mon Oct 30, 2017 11:22 am
Just curious, what makes your $500k income extremely secure for the next 5 years?

You clearly can afford it, but I would be nervous with a mortgage of that amount with only one income. What if your comp took a 20% haircut?
+1.
what makes your $500k income extremely secure for the next 5 years
can't think of an occupation. even a dr.

fishmonger
Posts: 449
Joined: Fri Jan 31, 2014 2:20 pm

Re: Can I Afford This House?

Post by fishmonger » Tue Oct 31, 2017 8:56 am

keith6014 wrote:
Mon Oct 30, 2017 8:52 pm
fishmonger wrote:
Mon Oct 30, 2017 11:22 am
Just curious, what makes your $500k income extremely secure for the next 5 years?

You clearly can afford it, but I would be nervous with a mortgage of that amount with only one income. What if your comp took a 20% haircut?
+1.
what makes your $500k income extremely secure for the next 5 years
can't think of an occupation. even a dr.
Maybe a university president? Even that I wouldn't consider secure in this day and age

User avatar
Pajamas
Posts: 2780
Joined: Sun Jun 03, 2012 6:32 pm

Re: Can I Afford This House?

Post by Pajamas » Tue Oct 31, 2017 9:03 am

fishmonger wrote:
Tue Oct 31, 2017 8:56 am
Maybe a university president? Even that I wouldn't consider secure in this day and age
Gosh no. Look through a few pages of these search results:

https://google.com/search?q=univers ... d+resigned

Post Reply