2.5 mil house with 5 mil net worth, too much?

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tarquan
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2.5 mil house with 5 mil net worth, too much?

Post by tarquan »

Our family of 4 has outgrown our house. We are looking at getting a new place but real estate is crazy these days and we don't find anything that we like that is under 2.5 million. Our net worth, not counting the value of our current place is a little under 5 million and we are in our late 40s. With two kids yet to enter college, are we spending too much on a house? Our gross income is 700K annually.

I have heard about a rule of the value of house not exceeding 3X the gross annual income. Not sure how it applies to people at our age.
mnsportsgeek
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by mnsportsgeek »

Before everyone comes in here to tell you that this is too much house, I’ll just say this. With an income of 700k, it’s mostly about priorities. You can obviously afford to pay for this house. Just make sure it doesn’t prevent you from living the lifestyle you want for your family and doesn’t prevent you from achieving your financial goals. The question isn’t can I afford the house, but will this house make me house poor? And to answer that you need to do some thinking.

Questions to think about:

1. What is your retirement number? How much do you need to save to get there with a conservative annual return?
2. What are my annual expenses? Can I achieve my savings target with this new mortgage?
3. Do I have a plan for my kid’s education?
4. Is this new house in the right location for my family? Will my kids have to change schools? Are they ok with changing schools?
5. How secure is the 700k salary?
Last edited by mnsportsgeek on Sat Mar 27, 2021 7:13 pm, edited 4 times in total.
Doctor Rhythm
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Doctor Rhythm »

What’s the rough market price of your home, assuming you plan to sell it? Meaning, $2.5 M isn’t much if you expect to get close to $2M for your current home.
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Ben8848
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Ben8848 »

$10,000/month mortgage seems it would be less than 1/4 your post tax income, I don't see why not to get the house.
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Topic Author
tarquan
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by tarquan »

Doctor Rhythm wrote: Sat Mar 27, 2021 6:57 pm What’s the rough market price of your home, assuming you plan to sell it? Meaning, $2.5 M isn’t much if you expect to get close to $2M for your current home.
Missed adding that detail. Our current home is almost worth 1 million with about 500 K of mortgage still left.
stan1
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by stan1 »

tarquan wrote: Sat Mar 27, 2021 6:52 pm Our family of 4 has outgrown our house. We are looking at getting a new place but real estate is crazy these days and we don't find anything that we like that is under 2.5 million. Our net worth, not counting the value of our current place is a little under 5 million and we are in our late 40s. With two kids yet to enter college, are we spending too much on a house? Our gross income is 700K annually.

I have heard about a rule of the value of house not exceeding 3X the gross annual income. Not sure how it applies to people at our age.
That rule of thumb is for people who make $100K/year and have a cash down payment, it does not apply to 1-2%ers who make $700K/year and have $5M in assets. I see you added that you have $500K in equity so you'd need to come up with $2M either via a mortgage (on a $700K/year income) or by sale of other assets (or combination thereof). It is doable if you want.

So question is how many years will this house meet your lifestyle needs as the kids go to college?
Last edited by stan1 on Sat Mar 27, 2021 7:29 pm, edited 2 times in total.
Doctor Rhythm
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Doctor Rhythm »

tarquan wrote: Sat Mar 27, 2021 7:19 pm
Doctor Rhythm wrote: Sat Mar 27, 2021 6:57 pm What’s the rough market price of your home, assuming you plan to sell it? Meaning, $2.5 M isn’t much if you expect to get close to $2M for your current home.
Missed adding that detail. Our current home is almost worth 1 million with about 500 K of mortgage still left.
So $2M that needs to be mortgaged on $700K income and/or paid out of your savings of $5M. Seems doable overall unless your other expenses are commensurate with your housing costs.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Trader Joe »

tarquan wrote: Sat Mar 27, 2021 6:52 pm Our family of 4 has outgrown our house. We are looking at getting a new place but real estate is crazy these days and we don't find anything that we like that is under 2.5 million. Our net worth, not counting the value of our current place is a little under 5 million and we are in our late 40s. With two kids yet to enter college, are we spending too much on a house? Our gross income is 700K annually.

I have heard about a rule of the value of house not exceeding 3X the gross annual income. Not sure how it applies to people at our age.
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ExPatKiwi
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by ExPatKiwi »

Beware of lifestyle creep. Before you know it you’re in your 50’s and must keep working for the man hell or high water to keep the salary income to pay the bills. Trust me all the bills for the new home will be larger; utilities, property tax, insurance etc. It’s you money or your life (time working for the man).
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by maestro1868 »

Check out the book titled, "Your Money or Your Life".
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by watchnerd »

ExPatKiwi wrote: Sat Mar 27, 2021 7:42 pm Beware of lifestyle creep. Before you know it you’re in your 50’s and must keep working for the man hell or high water to keep the salary income to pay the bills. Trust me all the bills for the new home will be larger; utilities, property tax, insurance etc. It’s you money or your life (time working for the man).
+1

Our net worth is higher than the OP and our house is worth less. And no mortgage.

All those taxes, insurance and operational costs of an expensive house eat into your cost of living, which eats into savings, which eats into investing, etc.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Cruise »

OP: Our rule of thumb was to only as much mortgage as could be comfortably paid with one stable salary. This rule enabled us to save/invest a ton, pay off our home quickly, and have enough money to create experiences/memories that will last a lifetime. Some of our friends/relatives probably wonder why we live in such a modest home. Read "The Millionaire Next Door." Just as a benchmark, our NW is much more than yours.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by watchnerd »

Cruise wrote: Sat Mar 27, 2021 8:01 pm OP: Our rule of thumb was to only as much mortgage as could be comfortably paid with one stable salary.
Us, too.

And we no longer have a mortgage.

We bought our current house with cash.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by z3r0c00l »

You are wealthy and have earned the ability to enjoy the finer things in life. At 3.6x your annual income, this home is no big deal. This is like a person making 100K a year asking if they can afford a $300,000 home. Obviously they (you) can. Put $2 million on a mortgage if it helps give you breathing room, maybe a 15 year at 2.4%.
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sambb
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by sambb »

you can afford it, but commit to other savings (for example, toyotas instead of luxury cars) for 5-10 years
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tarquan
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by tarquan »

Thanks for the guidance. Answers to a couple of questions-

The goal is to put it on mortgage. I was thinking of paying the down payment with current house and then get a mortgage while the rates are still low.

To others who are advising about lifestyle creep, apart from the expensive house, our lifestyle is quite modest. We hope to be able to get both kids through college with our savings and still give them a modest jump start in life. (Saving 1 mil for each kid). I believe in making memories though. Let's say I chose not to buy the house, what are some of the good ways I can spend the money? I'm trying to decide between the lifestyle that comes with the house vs other fun things we can do together.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by KyleAAA »

You can VERY easily afford a $2.5mm house. Rules of thumb like 3x income don't make any sense when interest rates at 3%.
rgs92
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by rgs92 »

Look at it this way. You are not tossing away the money on something extravagant like expensive cars or vacations that depreciate quickly (or go to zero immediately like in the case of travel). You are trading money for home equity. And while it may not be as lucrative as the stock market in terms of appreciation, it is still probable that eventually the house should hold its value (and even probably keep up with inflation, even with maintenance expenses).

So if your budget allows it, I would say it's not irresponsible to go ahead an buy it. And the low interest rates are a bonus.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by dachshunddad »

mnsportsgeek wrote: Sat Mar 27, 2021 6:54 pm Before everyone comes in here to tell you that this is too much house, I’ll just say this. With an income of 700k, it’s mostly about priorities. You can obviously afford to pay for this house. Just make sure it doesn’t prevent you from living the lifestyle you want for your family and doesn’t prevent you from achieving your financial goals. The question isn’t can I afford the house, but will this house make me house poor? And to answer that you need to do some thinking.

Questions to think about:

1. What is your retirement number? How much do you need to save to get there with a conservative annual return?
2. What are my annual expenses? Can I achieve my savings target with this new mortgage?
3. Do I have a plan for my kid’s education?
4. Is this new house in the right location for my family? Will my kids have to change schools? Are they ok with changing schools?
5. How secure is the 700k salary?
+1. You can afford the house. But you can’t afford the house, retiring early, and having a large discretionary budget. You will have to choose your priority. For me, I would rather have financial independence sooner than a big house. If your job is stable and you plan on working a normal career length, then very doable.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by carguyny »

My wife and I purchased a similarly priced house about 10 years ago on similar income (which is fortunately much higher now). We only took out $1.1m mortgage though and now don't have one. It's really important to understand the upkeep of a large house/keeping it current and looking good. I would budget about $20k/year in general maintenance and a major remodel of $200k+/10 years. We're redoing our kitchen, some of our bathrooms etc and total project is going to be about $400k. It was all brand new when we purchased the house, but modern appliances (all wolf and subzero) get very expensive to maintain at that age.

In hindsight, my wife and I both would have rather stayed in a lower value property and see everything cost much else tbh. We will be downsizing when we sell this house and move to something much simpler to maintain. If we're truely honest at the moment the house owns us, we're paying for baby sitters on the weekends to go tile shopping etc - it's really just a pain. Our income right now low 7 figures per year and it just seems more like a waste of money. For us, our free time is much more valuable as the kids get older.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by geerhardusvos »

tarquan wrote: Sat Mar 27, 2021 6:52 pm Our family of 4 has outgrown our house. We are looking at getting a new place but real estate is crazy these days and we don't find anything that we like that is under 2.5 million. Our net worth, not counting the value of our current place is a little under 5 million and we are in our late 40s. With two kids yet to enter college, are we spending too much on a house? Our gross income is 700K annually.

I have heard about a rule of the value of house not exceeding 3X the gross annual income. Not sure how it applies to people at our age.
While you could probably make it work, it seems unwise. As the above poster mentions, you will likely downsize someday and you probably haven’t actually outgrown your house. It’s better to just stay in your existing house and invest aggressively and make things work. Can you do a remodel to your current house? Can you get rid of some stuff in your house? I personally don’t want more than 25% of my net worth in my house. It seems like you should stay put, or maybe sell your current house and rent a nicer/bigger house. I think you will be happy long term that you didn’t move. I echo the thoughts on the lifestyle creep and the significant maintenance and time cost to buying such an expensive house.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by mervinj7 »

tarquan wrote: Sat Mar 27, 2021 8:42 pm Thanks for the guidance. Answers to a couple of questions-

The goal is to put it on mortgage. I was thinking of paying the down payment with current house and then get a mortgage while the rates are still low.

To others who are advising about lifestyle creep, apart from the expensive house, our lifestyle is quite modest. We hope to be able to get both kids through college with our savings and still give them a modest jump start in life. (Saving 1 mil for each kid). I believe in making memories though. Let's say I chose not to buy the house, what are some of the good ways I can spend the money? I'm trying to decide between the lifestyle that comes with the house vs other fun things we can do together.
Go for it! At your income and net worth, if you can't maximize your enjoyment with your kids, what's the point.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by CurlyDave »

ExPatKiwi wrote: Sat Mar 27, 2021 7:42 pm Beware of lifestyle creep. Before you know it you’re in your 50’s and must keep working for the man hell or high water to keep the salary income to pay the bills. Trust me all the bills for the new home will be larger; utilities, property tax, insurance etc. It’s you money or your life (time working for the man).
With $700k of annual income the OP is the man that others work for.

Frequently, highly compensated jobs are enjoyable. Sometimes even lower compensated jobs are enjoyable for the boss. Even at 75 I actually enjoy owning my rental business and making decisions about strategic decisions. I use to do all of the physical labor, but now I hire people.
Last edited by CurlyDave on Sat Mar 27, 2021 10:29 pm, edited 2 times in total.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Katietsu »

We are a few years older than you. I have no idea what your jobs are or where all your income comes from. I will say that life can looked very different from the other side of fifty. Are you sure you will both want to keep up what is required to support the new house?
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tarquan
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by tarquan »

carguyny wrote: Sat Mar 27, 2021 10:05 pm My wife and I purchased a similarly priced house about 10 years ago on similar income (which is fortunately much higher now). We only took out $1.1m mortgage though and now don't have one. It's really important to understand the upkeep of a large house/keeping it current and looking good. I would budget about $20k/year in general maintenance and a major remodel of $200k+/10 years. We're redoing our kitchen, some of our bathrooms etc and total project is going to be about $400k. It was all brand new when we purchased the house, but modern appliances (all wolf and subzero) get very expensive to maintain at that age.

In hindsight, my wife and I both would have rather stayed in a lower value property and see everything cost much else tbh. We will be downsizing when we sell this house and move to something much simpler to maintain. If we're truely honest at the moment the house owns us, we're paying for baby sitters on the weekends to go tile shopping etc - it's really just a pain. Our income right now low 7 figures per year and it just seems more like a waste of money. For us, our free time is much more valuable as the kids get older.
Really interesting perspective. Although a 2.5 mil house a few years must have been quite luxurious. The ones we'd get now, hopefully don't require that much maintenance.

I sure am worried about the house needing upkeep but torn between lifestyle upgrade and the cost we want to pay for it.
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tarquan
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by tarquan »

Katietsu wrote: Sat Mar 27, 2021 10:25 pm We are a few years older than you. I have no idea what your jobs are or where all your income comes from. I will say that life can looked very different from the other side of fifty. Are you sure you will both want to keep up what is required to support the new house?
Good point. Both our incomes come from working in software. The jobs are physically not that demanding but mentally sure are. Very likely we would want to continue doing them ...as long as we don't get aged out of the industry.

Another reason I don't want to retire early is to teach my kids strong work ethic from first hand experience. I want them to see that the comfort they are getting came from a lot of hard work from their parents and I want them to put in the same hard work to achieve their goals.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by HomerJ »

tarquan wrote: Sat Mar 27, 2021 11:43 pm
carguyny wrote: Sat Mar 27, 2021 10:05 pm My wife and I purchased a similarly priced house about 10 years ago on similar income (which is fortunately much higher now). We only took out $1.1m mortgage though and now don't have one. It's really important to understand the upkeep of a large house/keeping it current and looking good. I would budget about $20k/year in general maintenance and a major remodel of $200k+/10 years. We're redoing our kitchen, some of our bathrooms etc and total project is going to be about $400k. It was all brand new when we purchased the house, but modern appliances (all wolf and subzero) get very expensive to maintain at that age.

In hindsight, my wife and I both would have rather stayed in a lower value property and see everything cost much else tbh. We will be downsizing when we sell this house and move to something much simpler to maintain. If we're truely honest at the moment the house owns us, we're paying for baby sitters on the weekends to go tile shopping etc - it's really just a pain. Our income right now low 7 figures per year and it just seems more like a waste of money. For us, our free time is much more valuable as the kids get older.
Really interesting perspective. Although a 2.5 mil house a few years must have been quite luxurious. The ones we'd get now, hopefully don't require that much maintenance.

I sure am worried about the house needing upkeep but torn between lifestyle upgrade and the cost we want to pay for it.
1% a year in maintenance is a fair estimate... $25k a year in general, and $200k in remodels every 10 years seems correct.
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HomerJ
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by HomerJ »

tarquan wrote: Sat Mar 27, 2021 11:48 pm
Katietsu wrote: Sat Mar 27, 2021 10:25 pm We are a few years older than you. I have no idea what your jobs are or where all your income comes from. I will say that life can looked very different from the other side of fifty. Are you sure you will both want to keep up what is required to support the new house?
Good point. Both our incomes come from working in software. The jobs are physically not that demanding but mentally sure are. Very likely we would want to continue doing them ...as long as we don't get aged out of the industry.

Another reason I don't want to retire early is to teach my kids strong work ethic from first hand experience. I want them to see that the comfort they are getting came from a lot of hard work from their parents and I want them to put in the same hard work to achieve their goals.
Can't you live somewhere else and work remotely these days?
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Goal33
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Goal33 »

You can easily do it.

I did about half on about half the income. Net worth was about 1/5th of yours. But I’m also 20 years younger

I am not sure if I’d do it. Kids will go off to college. You could call it a career sooner if you don’t.

But, you can easily afford it so do whatever makes sense given your priorities.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by SnowBog »

tarquan wrote: Sat Mar 27, 2021 11:48 pm
Good point. Both our incomes come from working in software. The jobs are physically not that demanding but mentally sure are. Very likely we would want to continue doing them ...as long as we don't get aged out of the industry.
Tech is brutal for this... Take a look around at your current employer(s) for people in similar roles in their 50's (or higher). Through a combination of burnout, skill obsolescence, org dynamics (RIF), outright ageism forcing people to leave, as well as early retirement (high savings on high earnings) - I generally assume that those in tech should plan on being unemployed (in tech) after 50. That isn't to say it's not possible... Just that often things can be similar to an athlete with a high income but fewer workering years. If you plan for that, you'll do fine. But I've seen several people get blindsided being forced out of the workplace before they were financially ready.

As such, I'd plan accordingly.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by SnowBog »

tarquan wrote: Sat Mar 27, 2021 11:48 pm Another reason I don't want to retire early is to teach my kids strong work ethic from first hand experience. I want them to see that the comfort they are getting came from a lot of hard work from their parents and I want them to put in the same hard work to achieve their goals.
But you also risk teaching them:
  • To value "things" and a "big/nice house" over time together
  • That "comfort" comes from something other than learning to be content with what they have
  • Unrealistic expections (what if they don't make the same kind of money and can't afford the same kind of things on their own someday)
No judgment intended. We are in a similar situation, we should be able to retire while child is still in school - but struggling with "what does that teach them." And we were just out today looking at home remodels, starting to think about expanding/remodeling our home. And I'm asking myself the same questions as above...
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by reader79 »

What does your inventor policy statement say about the upper limit of home equity as a percentage of your total net worth? Ours is 15%. I'm not saying that needs to be your number, but it is questions like these that make it clear how helpful having an investor policy can be.
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SnowBog
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by SnowBog »

reader79 wrote: Sun Mar 28, 2021 2:23 am What does your inventor policy statement say about the upper limit of home equity as a percentage of your total net worth? Ours is 15%. I'm not saying that needs to be your number, but it is questions like these that make it clear how helpful having an investor policy can be.
Wow... My IPS says nothing about how much my house, car, etc. should cost... And I'd have never thought of those as being relevant to an IPS...

Ours covers some basic principles like LBYM and save the rest, as well as to plan to be FI (with RE option) by 50. So cost of a house might be indirectly covered...

But we don't think of our home value as part of our portfolio - so to us its not an investment. But we live in a LCOL area, maybe we'd think differently in a HCOL...[/i]
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by bluebolt »

HomerJ wrote: Sun Mar 28, 2021 12:42 am 1% a year in maintenance is a fair estimate... $25k a year in general, and $200k in remodels every 10 years seems correct.
I live in a VHCOL area where the land value dominates the home value, so in my case I find the 1% rule to be a very high estimate. In my case, 1% of the home value only (excluding the land) is a more reasonable estimate.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by JWooden10 »

You can afford it and you’ve gotten some good advice above. The #1 consideration for me is the risk assumption. If you’re comfortable that your future income is adequately secure, then it becomes more of a question of if you want to do it+priorities.
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Harry Livermore
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Harry Livermore »

OP, I think you can do it, but as others have said:

You would be wise to be frugal in every other aspect of your life for many years.
You may be under severe pressure if either spouse loses a job.
You might be better off doing an addition on the existing house (I saw that asked but not answered)

For perspective, my wife and I have a net worth approaching yours, and all three of our properties (home, SFH rental, vacation rental) don't add up to $2.5MM. I understand that you are in a VHCOL area (Bay area?)
Also, a pet peeve of mine, and frequently debated on BH (though I don't know why) and certainly not picking on you, just using the opportunity to bring it up...
By definition, "net worth" includes everything you own. Cars, sneakers, and yes, equity in home (value minus mortgage debt) Frequently I will hear "well, I don't count it because I can't eat it" or something. Yes, it's not counted in "investments" or your "25x expenses" or whatever. But as you illustrated here, it figures into your decision to arrange your financial affairs. Put another way, your title should really read "2.5MM house with a 5.5MM net worth" or, alternately, "2MM house with a 5MM net worth" You have $500K in equity that needs to be included somehow, and definitely factors into this important financial decision.
I do see that you added it in a subsequent post; I'm just bringing it up because it bugs me that it sometimes gets (purposely, even dogmatically*) left out by otherwise logical BHs. And it's early on a Sunday and I have only had one cup of coffee...
Cheers

* and yes, I suppose I am also being dogmatic by insisting it be included... :)
Aged Maduro
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Aged Maduro »

It comes down to what you value more...luxury or financial independence. Based on your income you can certainly afford it, but it will be a roadblock to your financial independence and can put severe pressure on your family if one or both of you lose your job.

Our net worth is about $3,000,000 and we live in a modest $260,000 house. Every time i think about upgrading to a McMansion i remind myself how good it feels that at any time, and for whatever reason i can walk away from my working life without a care in the world.
ExPatKiwi
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by ExPatKiwi »

Aged Maduro wrote: Sun Mar 28, 2021 5:52 am It comes down to what you value more...luxury or financial independence. Based on your income you can certainly afford it, but it will be a roadblock to your financial independence and can put severe pressure on your family if one or both of you lose your job.

Our net worth is about $3,000,000 and we live in a modest $260,000 house. Every time i think about upgrading to a McMansion i remind myself how good it feels that at any time, and for whatever reason i can walk away from my working life without a care in the world.
+1
Counting down to retirement.
SQRT
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by SQRT »

You can afford it. If that’s what you want, go for it. Don’t let the numbers scare you. We have about 18% of our net worth tied up personal use in real estate, along with a very high net worth. Net worth probably around yours when your age but now 70 retired 15 years.
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JonnyDVM
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by JonnyDVM »

KyleAAA wrote: Sat Mar 27, 2021 8:56 pm You can VERY easily afford a $2.5mm house. Rules of thumb like 3x income don't make any sense when interest rates at 3%.
And when someone has 700k income AND 5 million in savings. Yes. Clearly you can afford this. I’m surprised, but not really surprised people are telling you no. Is it really the case where nothing south of 2.5 million is acceptable to you though? That’s a lot of house. But if that’s absolutely what you want, sure. Go for it.
I’d trade it all for a little more | -C Montgomery Burns
59Gibson
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by 59Gibson »

I'd only consider buying something at that # in VHCOL area. It can become a white elephant elsewhere and may be extremely difficult to unload in a different type of RE market.
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JonnyDVM
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by JonnyDVM »

Wait....this is the Bay Area again? Now I’m surprised your target is only 2.5 million. What’s that buy? A 2000 sq feet fixer upper ?
I’d trade it all for a little more | -C Montgomery Burns
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scorcher31
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by scorcher31 »

Based on your assets and assuming you sell your current home and put it on your mortgage, you can definitely afford the home. This is assuming you wont need to dump a ton of money working on the 2.5 mil home. I personally wouldn't unless I knew I was going to be staying there 10 years plus and it was my forever home. It also has the potential to significantly slow down your retirement.

Not that I expect you would do this but just think about the concept: With 5 mil in the bank you can probably retire now, move somewhere with a lower/middle cost of living, get a mansion for the price of the current home you live in, and live off the 5 mil at a 3%rate of $150,000 a year. In a low cost of living area with a paid off house, that's a pretty affluent lifestyle. This is not counting SS and assuming you and your spouse never work again.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by bltn »

Another couple of considerations.
As mentioned earlier, the bigger the house, the more ongoing expense to maintain. Besides the obvious increases in taxes and insurance premiums.
How long until your children go off to college? A roomy house for the two kids will be a lot of unused space shortly after the youngest enters college. With our children gone, my wife and I use less than half of our house now. If I was making a mortgage payment now, we would downsize. We probably should anyway.
As far as the financing, do you think it s wise to take on a 30 year mortgage in your late 40 s ? I d look at the payments on a 15 year mortgage.
In your position, I d find a house for 2 million, and put a million down at the purchase, with a 15 year note. And, I d prepay the mortgage to be done with it in 12 years. And that payoff would be my current goal for my time to retire.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by jjblue »

There is an assumption in many of these answers that 2.5M is somehow a luxurious house, because it sounds like it should be. I live in a VHCOL area and 2.5M is the entry point for a nice 3 bedroom on a 6000sq-ft lot(if you want a 2-car garage you have to pay more though)

Being in a similar situation, the biggest thing you are going to find is that this house purchase(and the taxes that go with it perhaps) limits your future options. Do either of you want to switch to less intensive careers or join a small startup? Or volunteer more?

That being said, if 2.5M is a modest house in this situation I would go for it. Clearly the numbers work as others have mentioned. It is just hard to remove sticker shock from what otherwise is a quantitative analysis. So maybe imagine if you divided by 10 all numbers and re-asked this question:

Are you crazy for buying a 250k house on a 70k salary with 550k assets?
Last edited by jjblue on Sun Mar 28, 2021 7:57 am, edited 3 times in total.
bltn
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by bltn »

jjblue wrote: Sun Mar 28, 2021 7:42 am There is an assumption in many of these answers that 2.5M is somehow a luxurious house, because it sounds like it should be. I live in a VHCOL area and 2.5M is the entry point for a nice 3 bedroom on a 6000sq-ft lot(if you want a 2-car garage you have to pay more though)

Being in a similar situation, the biggest thing you are going to find is that this house purchase(and the taxes that go with it perhaps) limits your future options. Do either of you want to switch to less intensive careers or join a small startup? Or volunteer more?

That being said, if 2.5M is a modest house in this situation I would go for it. Clearly the numbers work as others have mentioned. It is just hard to remove sticker shock from what otherwise is a quantitative analysis. So maybe imagine if you divided by 10 all numbers and re-asked this question:

Are you crazy for buying a 250k house on a 70k salary with 550k assets?
Those numbers don t work for me. But I ve always been financially conservative.
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JonnyDVM
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by JonnyDVM »

jjblue wrote: Sun Mar 28, 2021 7:42 am There is an assumption in many of these answers that 2.5M is somehow a luxurious house, because it sounds like it should be. I live in a VHCOL area and 2.5M is the entry point for a nice 3 bedroom on a 6000sq-ft lot(if you want a 2-car garage you have to pay more though)

Being in a similar situation, the biggest thing you are going to find is that this house purchase(and the taxes that go with it perhaps) limits your future options. Do either of you want to switch to less intensive careers or join a small startup? Or volunteer more?

That being said, if 2.5M is a modest house in this situation I would go for it. Clearly the numbers work as others have mentioned. It is just hard to remove sticker shock from what otherwise is a quantitative analysis. So maybe imagine if you divided by 10 all numbers and re-asked this question:

Are you crazy for buying a 250k house on a 70k salary with 550k assets?
I would still say it’s fine but I don’t think those numbers scale well. When you have a high income you have a lot more discretionary spending dollars. You can only spend so much on dinners out, clothes, etc. So if you want to use those extra dollars to pay more for a house then say a $200,000 car you can do that.
I’d trade it all for a little more | -C Montgomery Burns
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by chazas »

Just go in with your eyes open.

I built a $2.3M house on a $700K salary just before the financial crisis. I kept my job but at the lowest ebb my comp was down to about $350K. It was very, very uncomfortable. Then I took an ill-advised job transfer to flyover country, meaning we sold at break even (would have made out like a bandit if I still owned it). There I bought an $900K house that would have cost over $1.5M to replicate. We put $100K into fix ups, but that job went under quickly and it took two years to sell for $800K.

I’ve made a ton of money on other houses in my life. But people who haven’t been through it think you can’t lose in real estate. You can and it’s not uncommon. Life circumstances change, and if you have a house that’s dependent on a job that proves less steady than you think you can be forced to make negative financial decisions.
Aged Maduro
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by Aged Maduro »

jjblue wrote: Sun Mar 28, 2021 7:42 am There is an assumption in many of these answers that 2.5M is somehow a luxurious house, because it sounds like it should be. I live in a VHCOL area and 2.5M is the entry point for a nice 3 bedroom on a 6000sq-ft lot(if you want a 2-car garage you have to pay more though)

Being in a similar situation, the biggest thing you are going to find is that this house purchase(and the taxes that go with it perhaps) limits your future options. Do either of you want to switch to less intensive careers or join a small startup? Or volunteer more?

That being said, if 2.5M is a modest house in this situation I would go for it. Clearly the numbers work as others have mentioned. It is just hard to remove sticker shock from what otherwise is a quantitative analysis. So maybe imagine if you divided by 10 all numbers and re-asked this question:

Are you crazy for buying a 250k house on a 70k salary with 550k assets?
If one is paying $2,500,000 for a house they better be paying for some type of luxury, whether it is the amenities of a fabulous home or all the accoutrements of a high cost of living area. It is luxury all the same.
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Re: 2.5 mil house with 5 mil net worth, too much?

Post by BogleBerry »

I am honestly surprised that so many people are advising you against buying the house.

* The house is at least in a significant part an investment you can sell down the line
* Your income and NW mean you can *comfortably* afford it

There is being financially smart and responsible, and then there is being frugal to the point of being miserable. Part of investment strategy must be to have a (reasonably) good life till you get to your sixties - not suffer through the first sixty years and miss out on everything hoping that you will live long enough and be healthy enough to live like a king in your seventies. Don't be irresponsible, but don't suffer needlessly..
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