What % of Net Worth to put into 1st home purchase (36yo)?

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barnaby444
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What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

Like many, we're finding that in this housing market we'll have to spend more than we hoped to get a home we're happy with, so we're reevaluating our budget.

It seems like people often start with (a) how much of a down payment they have saved, and (b) how much of a monthly payment they can afford, to figure out their total house budget. But we've never done the mental accounting of "setting aside" a certain amount for a down payment, so our potential down payment is anything up to our liquid savings of about 900k. So the question becomes what percentage of our liquid net worth, and also of total net worth (~$1.5MM), that we're comfortable putting into a house.

What we did initially was just assume a 20% down payment, then budget out monthly income vs. expenses, and using a conservative approach of excluding my annual bonus and RSUs, found that our breakeven monthly payment amount corresponds to a house price of about $750k in our area (considering prop. taxes and insurance). We excluded bonus because it only comes annually and we've allocated it towards our savings goals.

But, we're not happy with the houses we're finding at that price. And we can clearly go higher by tapping into more savings, either by increasing our down payment or by drawing down a little bit of savings monthly (note, we'd still be net adding to savings annually through the aforementioned bonus). For now let's assume we go with the larger down payment.

Thus, the title question is what % of your net worth (and liquid net worth) would you be comfortable putting down on a first-time home purchase in our situation? Starting with baseline 20% down payment assumption and the 750k purchase price above, we would be putting in 10% and 16% of NW and LNW respectively. How much higher should we go?

Optional, more rambling:
The mental gymnastics I'm doing right now: at 36, we're older than most first-time home buyers, and because of that have relatively more savings than younger first-time buyers on similar income paths. So, we could "pretend" we bought a house, say, 5 years ago, and basically roll all the monthly payments we would've made into a larger down payment now. So, let's say we would've paid $150k over that time, so now we'll make a 20% down payment PLUS 150k, and thereby increase our home budget by 150k. Is this a logical stretch or reasonable?
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gwe67
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by gwe67 »

Not that it matters, but we paid 30% of net worth as down payment many years ago. Interest rates were MUCH higher though and the dot-com bubble was a recent memory.

Consider how this fits into your asset allocation. Home equity can be thought of as very conservatively invested money. If you're a conservative investor, then put down a lot or just pay in full. If you're an aggressive investor, put down a minimal amount and buy lots of DOGE.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

Thanks gwe67, that's a helpful data point. But I now realize I should clarify that I'm mainly asking about this from the angle of the overall purchase budget. It's not that I have a fixed purchase price in mind and I'm just deciding what % of that to put down. Rather, if I know I can afford the monthly payments for a 600k mortgage (750k house price with 20% = 150k down) then how much higher of a budget should I consider by increasing that down payment, given my current savings?
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by adamthesmythe »

Do you need to sell investments to raise the cash? If so, how much capital gains tax?
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

adamthesmythe wrote: Fri May 07, 2021 1:17 pm Do you need to sell investments to raise the cash? If so, how much capital gains tax?
200k in cash already which was sitting ready to cover down payment and closing costs. Most likely will be in 15% capital gains tax bracket. I do have 50k or so of bond funds I could sell with minimal gains.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by Olemiss540 »

Considering you are 36 with a 1.5MM dollar net worth, not sure why you would look to others for advice.

You appear to be smarter than even most BHs on the board with regards to finances. I am sure you will be perfectly fine with whatever you decide is prudent.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by RickBoglehead »

Never done that calculation. Why does it matter what your net worth is?

I look at it from several perspectives:

1) How much do you qualify for with 20% down? Taking into account all debt, plus mortgage payment, insurance, and taxes. Don't exceed 43% of monthly income, 35% if you want to be conservative.

2) How do I view my future income in the next 5-10 years, so am I willing to take on a heavy load now, knowing my income is going to increase during that period?
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by invest4 »

I don't really understand the utility of % of net worth as guidance for a home purchase.

I think the various rules of thumb in other threads asking "how much home can I afford?" still largely applies in regard to multiples of income, etc. I completely understand you may not be satisfied with the result in that it may not meet your needs and wants for a home. Only you can decide how much a home is worth to you vs other investments and the setup that is comfortable for you to manage it.

Assuming the payment is reasonable for you and given your age, I would simply put down the 20% and invest the rest. Mortgage rates are historically low and I am a believer of paying it back slowly with inflated dollars. You provide yourself with a lot of flexibility and can always change course if conditions change along the way. Of course, as debated on many threads here, people have differing views on this topic.

Unfortunately, we also don't get a very detailed picture of your finances / portfolio which may provide additional insights. We also don't know if you have children (what future expenses may be like, etc.), how much you would like to save for retirement or when you would like to be "retired".

Best wishes.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by KlangFool »

OP,

My answer is none of the above. It has nothing to do with my net worth. I would only buy a house if it lowered my housing expense from renting.

The PITI (20% down payment and 30 years fixed rate mortgage) has to be 20% to 30% lowered than renting before I consider buying. Or else, I rent.

How much it costs to rent a 750K house?

How much it costs to rent a 1 million house?

Why does it makes any sense for you to buy if it is cheaper to rent?

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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by anon_investor »

KlangFool wrote: Fri May 07, 2021 1:44 pm OP,

My answer is none of the above. It has nothing to do with my net worth. I would only buy a house if it lowered my housing expense from renting.

The PITI (20% down payment and 30 years fixed rate mortgage) has to be 20% to 30% lowered than renting before I consider buying. Or else, I rent.

How much it costs to rent a 750K house?

How much it costs to rent a 1 million house?

Why does it makes any sense for you to buy if it is cheaper to rent?

KlangFool
+1. That is the exact same analysis I did for my first home purchase.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by mr_brightside »

Olemiss540 wrote: Fri May 07, 2021 1:28 pm Considering you are 36 with a 1.5MM dollar net worth, not sure why you would look to others for advice.

You appear to be smarter than even most BHs on the board with regards to finances. I am sure you will be perfectly fine with whatever you decide is prudent.
agree

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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

Olemiss540 wrote: Fri May 07, 2021 1:28 pm Considering you are 36 with a 1.5MM dollar net worth, not sure why you would look to others for advice.

You appear to be smarter than even most BHs on the board with regards to finances. I am sure you will be perfectly fine with whatever you decide is prudent.
I appreciate the compliment, but I see many posters on here with far higher incomes and NWs at the same or younger age. This is my first time approaching a transaction anywhere near this size and I'm pretty anxious about it, so I'm hoping to get opinions on how to think about it from those who have gone through it.
RickBoglehead wrote: Fri May 07, 2021 1:31 pm Why does it matter what your net worth is?
But I don't understand the pushback on this point. Why focus only on monthly income and not savings when money is fungible? All else being equal, more savings means I can more comfortably increase my purchase budget by putting more down while keeping the monthly payment at the same affordable level. Why would my situation be the same if I had $100k NW, or $10MM NW?
KlangFool wrote: Fri May 07, 2021 1:44 pm I would only buy a house if it lowered my housing expense from renting.

The PITI (20% down payment and 30 years fixed rate mortgage) has to be 20% to 30% lowered than renting before I consider buying. Or else, I rent.
We're sick of renting. Have done it for 15+ years and we are tired of, among other things, having to negotiate a lease every year with little leverage except the threat of moving out. Right now we're renting a much smaller place than we'd buy. A rental similar to the house we'd buy would be rare in this area. It would also be the same or more expensive than PITI on a mortgage, though maybe not 20%-30% more. Hard to say because, like I said, a comparable rental wouldn't be common.
invest4 wrote: Fri May 07, 2021 1:40 pm Unfortunately, we also don't get a very detailed picture of your finances / portfolio which may provide additional insights. We also don't know if you have children (what future expenses may be like, etc.), how much you would like to save for retirement or when you would like to be "retired".
Good question on retirement goals, that's not something I've figured out yet. As for more financial details, I was trying to give a general picture by just stating the budget we can afford the monthly payments on. That already considers all of our income, projected expenses (including expected future child expenses), and savings goals. It's about $4500/mo, or in terms of budget, the $750k in purchase price that I said.

Our portfolio is invested 90/10.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by RickBoglehead »

Why do you want to put more than 20% down? A home is not an investment, it's not going to return 8% a year for 30 years. Buy what you qualify for with 20% down.

Your net worth us irrelevant to how much house you buy. Nearly every response tells you that.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by KlangFool »

barnaby444 wrote: Fri May 07, 2021 3:23 pm
KlangFool wrote: Fri May 07, 2021 1:44 pm I would only buy a house if it lowered my housing expense from renting.

The PITI (20% down payment and 30 years fixed rate mortgage) has to be 20% to 30% lowered than renting before I consider buying. Or else, I rent.
We're sick of renting. Have done it for 15+ years and we are tired of, among other things, having to negotiate a lease every year with little leverage except the threat of moving out. Right now we're renting a much smaller place than we'd buy. A rental similar to the house we'd buy would be rare in this area. It would also be the same or more expensive than PITI on a mortgage, though maybe not 20%-30% more. Hard to say because, like I said, a comparable rental wouldn't be common.
barnaby444,

This still does not change the question/answer:

A) Find out the comparable rental.

B) Calculate what the house's price needs to be in order for the PITI to be 20% to 30% lowered than renting.

C) When the house price drop enough, buy.

D) Or, when your net worth is high enough, move out of this area.

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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by BogleMelon »

anon_investor wrote: Fri May 07, 2021 2:07 pm
KlangFool wrote: Fri May 07, 2021 1:44 pm OP,

My answer is none of the above. It has nothing to do with my net worth. I would only buy a house if it lowered my housing expense from renting.

The PITI (20% down payment and 30 years fixed rate mortgage) has to be 20% to 30% lowered than renting before I consider buying. Or else, I rent.

How much it costs to rent a 750K house?

How much it costs to rent a 1 million house?

Why does it makes any sense for you to buy if it is cheaper to rent?

KlangFool
+1. That is the exact same analysis I did for my first home purchase.
KlangFool
anon_investor
Why do you consider 20%-30%? Why not 40%-50%? or 10%-20%?
Is there any specific study or analysis that back up those ratios?
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by wolf359 »

To me, housing is an expense. The whole concept of housing as a percent of net worth doesn't make sense to me.

What makes sense to me is:

1) What percent of your income will be going to housing expense (that's rent or mortgage)? Banks will use a number like 25-33%. That's too high if you want to be financially free. Keep it below 20%, preferably below 12%. Don't forget to include hidden home ownership costs like maintenance, insurance, etc.

2) How much investable net worth do you want to have? Once you sink it into your home, it's out of the picture until you sell your house. You have a really high investable net worth for your age now. Anything you put into your down payment is no longer in your portfolio. Will you meet your investing goals with your new level?
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by BogleMelon »

barnaby444 wrote: Fri May 07, 2021 3:23 pm
among other things, having to negotiate a lease every year with little leverage except the threat of moving out.
Then don't negotiate! Just accept the increase. If you bought you won't negotiate the increase in the property taxes as well. You may want to negotiate the maintenance cost as well as a home buyer or accept the quoted prices as is even if they become more every year. You negotiate both ways as a renter or homeowner or accept the increase both ways, as a renter or a homeowner. This shouldn't be the basis for your decision.
You may be kicked out by a landlord? Well, a forced unemployment situation and then a job opportunity 75 miles away, would kick you out too despite being a homeowner.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by KlangFool »

BogleMelon wrote: Fri May 07, 2021 3:57 pm
anon_investor wrote: Fri May 07, 2021 2:07 pm
KlangFool wrote: Fri May 07, 2021 1:44 pm OP,

My answer is none of the above. It has nothing to do with my net worth. I would only buy a house if it lowered my housing expense from renting.

The PITI (20% down payment and 30 years fixed rate mortgage) has to be 20% to 30% lowered than renting before I consider buying. Or else, I rent.

How much it costs to rent a 750K house?

How much it costs to rent a 1 million house?

Why does it makes any sense for you to buy if it is cheaper to rent?

KlangFool
+1. That is the exact same analysis I did for my first home purchase.
KlangFool
anon_investor
Why do you consider 20%-30%? Why not 40%-50%? or 10%-20%?
Is there any specific study or analysis that back up those ratios?
BogleMelon,

1) My statement is at least 20% to 30% lowered. So, it could be 40% to 50% lowered.

2) That amount accounts for additional safety margin of house maintenance and the opportunity cost of the 20% down payment.

3) This is similar to the concept of "Cash Flow Positive" that real estate investor use to determine whether to buy a house to rent out.

4) So, if you really want to go very deep into this, you should check out real estate investor's forum and books and how they choose to calculate whether a house is worthwhile to buy and rent out.

5) In this case, we are our own landlords. We use "imputed rent" to determine whether it is worthwhile to buy a house to live.

6) Under this system, we assume ZERO appreciation of the house. We do not need the house to appreciate in order for it to be a good deal.

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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by SQRT »

wolf359 wrote: Fri May 07, 2021 4:01 pm To me, housing is an expense. The whole concept of housing as a percent of net worth doesn't make sense to me.

What makes sense to me is:

1) What percent of your income will be going to housing expense (that's rent or mortgage)?
I certainly agree at least for a first time home buyer (OP).

Percent of net worth makes more sense when you are retired or approaching retirement. Because in retirement you are mostly living off your invested assets. More assets tied up in personal use real estate means less assets to generate cash flow in retirement.

But this wasn’t the OP ‘s question.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by eigenperson »

I would suggest making sure that you're balancing your consumption across the various things you care about. It seems like you're fortunate enough to be able to afford all your needs with a lot left over. So you have to decide how you allocate the leftover, your disposable income, to your wants. If you decided to allocate 100% of the leftover to the "want" of a maximally large house in a specific location, giving up all other "wants," that's a legitimate choice, as long as you (and your family) are OK with it. On the other extreme, if you decide to buy only the house you need, and satisfy other wants instead, that's OK too. You're probably not actually interested in either extreme, so your task is to figure out where to land in the middle. It's not a question with a right or wrong answer.

To help you get in touch with your feelings, I'll point out that you said you're feeling anxiety. Buying a house should, rationally, be an anxiety-relieving event. It means you now own one of your key needs (shelter), and no longer have to rent it. If it's actually anxiety-producing instead, this is a hint that you might be spending too much on it. That is, maybe you feel anxious because you realize you are allocating too much of your disposable income to housing and not enough to your other wants. (Alternatively... maybe you're just anxiety-prone.)

I do think it's a bit silly to think about this in terms of net worth. Our net worth has doubled since we bought our house. So are we "under-housed" now? Should we perhaps go out and buy twice as much house? Of course not.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by knowledge »

Given how utilitarian most bogleheads are, you should expect the answer to be as minimal as possible which affords the location you want. That's not typically a % of net worth calculation, but it can be somewhat derived.

Typical conservative advice would say that you should buy a home that you can afford a 15-year mortgage while meeting your other financial goals. And since this is bogleheads, assume you want to retire early and that requires a safe 3% SWR. You know your current net worth, your spending goals, so you can model out the band of home prices that fit under various futures.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by anon_investor »

BogleMelon wrote: Fri May 07, 2021 3:57 pm
anon_investor wrote: Fri May 07, 2021 2:07 pm
KlangFool wrote: Fri May 07, 2021 1:44 pm OP,

My answer is none of the above. It has nothing to do with my net worth. I would only buy a house if it lowered my housing expense from renting.

The PITI (20% down payment and 30 years fixed rate mortgage) has to be 20% to 30% lowered than renting before I consider buying. Or else, I rent.

How much it costs to rent a 750K house?

How much it costs to rent a 1 million house?

Why does it makes any sense for you to buy if it is cheaper to rent?

KlangFool
+1. That is the exact same analysis I did for my first home purchase.
KlangFool
anon_investor
Why do you consider 20%-30%? Why not 40%-50%? or 10%-20%?
Is there any specific study or analysis that back up those ratios?
It is just a reasonable % to me, I am not married to those numbers. If you want to buy a house for lifestyle reasons, that is one thing, but from a purely financial standpoint, unless you're saving a good % over renting, home ownership just has a lot of extra burdens and cost beyond monthly PITI payments to your lender.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

Respectfully to all those suggesting ways to decide whether to buy or rent, that wasn't my question. I've already decided to buy. The question was about how much house I can reasonably afford.

I get that the consensus is that % of net worth is a flawed premise. So let me try to reframe the question.

My calculation of a 750k purchase price was based on what I thought I could afford based on the monthly payments, using only my base salary income coming in monthly, not my annual bonus. I didn't want to be draining my savings on a monthly basis even if I could make it up with my bonus.

However, in reality I can still meet my annual savings goals while operating at a net monthly loss in 11 out of 12 months, because my bonus is a large chunk of my total income (even in a bad year).

So maybe I should be asking, given that my savings gives me a substantial enough cushion, is there any reason not to consider my bonus in my "monthly income" used to estimate a payment I can afford?

If so, then what %/multiple of income rule-of-thumb do you all think is the most sensible?
wolf359 wrote: Fri May 07, 2021 4:01 pm 1) What percent of your income will be going to housing expense (that's rent or mortgage)? Banks will use a number like 25-33%. That's too high if you want to be financially free. Keep it below 20%, preferably below 12%. Don't forget to include hidden home ownership costs like maintenance, insurance, etc.

Is that 12% of gross or net income?
RickBoglehead wrote: Fri May 07, 2021 3:43 pm Buy what you qualify for with 20% down.
I can qualify for much more than I would actually borrow, so let's assume that's not the limiting constraint.
BogleMelon wrote: Fri May 07, 2021 4:03 pm Then don't negotiate! Just accept the increase.
Easier said than done. In the previous area I lived, the rent increase could be $800. We have moved over rent increases.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by solarcub »

I don't think there is really an answer to this. Rules like "don't spend more than 35% of your income on housing" only apply within a limited range. If I make $100,000 per year, that would say I can spend $35k on housing. But if I get a raise to $200,000 per year, and keep $60,000 of that after taxes, I could spend all $60k of that new money on housing if I really wanted to. It just depends on your comfort level.

If you want to use your bonus as cushion in case something goes wrong, do that. Then, like you said, you could plan on drawing from your investments to help pay the mortgage. If you earn 5% on your $900k, that's $45k per year before taxes, which can fund quite a bit of house. You just have to figure you how comfortable you are with your retirement plan if you do that.

But as far as the down payment, I would not go over 20% at these rates. Sure, there could be a crash any day now, but over the next 10 years, you will probably do better with your money in the market.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by theplayer11 »

wolf359 wrote: Fri May 07, 2021 4:01 pm To me, housing is an expense. The whole concept of housing as a percent of net worth doesn't make sense to me.

What makes sense to me is:

1) What percent of your income will be going to housing expense (that's rent or mortgage)? Banks will use a number like 25-33%. That's too high if you want to be financially free. Keep it below 20%, preferably below 12%. Don't forget to include hidden home ownership costs like maintenance, insurance, etc.

2) How much investable net worth do you want to have? Once you sink it into your home, it's out of the picture until you sell your house. You have a really high investable net worth for your age now. Anything you put into your down payment is no longer in your portfolio. Will you meet your investing goals with your new level?
this makes very little sense to me. You only live 1 life, why shouldn't you live in a house and area that brings you joy? To be able to save more and leave more to your kids?
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by mortfree »

You have a large cash position that will allow you to determine what your monthly payment will be.

You are trying to figure out how much of that cash to deploy because you could probably put anywhere from 20% to 80% down.

I bought a 400k house. I wanted a PI payment around 1000/month. I put close to 200k down.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by angelescrest »

BogleMelon wrote: Fri May 07, 2021 4:03 pm
barnaby444 wrote: Fri May 07, 2021 3:23 pm
among other things, having to negotiate a lease every year with little leverage except the threat of moving out.
Then don't negotiate! Just accept the increase. If you bought you won't negotiate the increase in the property taxes as well.
I don’t know where you live, but in the last two states I’ve been at everyone stresses about the property tax increases and many go make appointments to negotiate it.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by JBTX »

angelescrest wrote: Fri May 07, 2021 8:14 pm
BogleMelon wrote: Fri May 07, 2021 4:03 pm
barnaby444 wrote: Fri May 07, 2021 3:23 pm
among other things, having to negotiate a lease every year with little leverage except the threat of moving out.
Then don't negotiate! Just accept the increase. If you bought you won't negotiate the increase in the property taxes as well.
I don’t know where you live, but in the last two states I’ve been at everyone stresses about the property tax increases and many go make appointments to negotiate it.
In TX lots of people negotiate it. When I've done it, maybe I save $100-$300. If I'm not working, may as well make the effort. When working, perhaps not.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by AlohaJoe »

Like others I don't see how net worth percentage is an especially helpful guide. Most people put well over 100% of their net worth into their first home purchase.

One of my friends put about 5% of his net worth into his first home purchase. Then put about 50% into his second home purchase. :sharebeer
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Nate79
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by Nate79 »

I would not consider a bonus as part of the debt to income ratio or ability to make the monthly payment. I would only consider income for which you are very certain to receive. If you are not very certain to receive the bonus it means it is high risk and I would not want that risk determining whether I could make that months house payment or run a deficit for the year. If that means being more conservative in purchase price, so be it.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by Spedward »

We were in a similar boat about 2 years ago (realizing it is a totally different market). High net worth for age driven by a combination of prudent savings and a healthy income. Had plenty of liquid assets but toyed around with numbers for 6 month. Ended up just coming to an agreement in terms of what we were comfortable with, which is honestly different for everyone.

For us it was something that still gave us the ability to simple be able to save a healthy clip (taking into account everything that comes along with home ownership), good schools, and in a community with people that shared similar values. (This is a real thing - make sure you are okay with the people - we did not want out kids growing up in a certain type of environment).

We are totally happy with where we landed - but I don’t think that would have happened if we just focused on the $$. Huge part of it - but certainly not always the most important.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by jeroly »

I purchased my first house at age 35, with a much lower NW than you have, and put in close to 50% of my LNW in to the house for down payment and closing costs. I would not recommend doing that in the current frothy real estate environment.

If I were in your position now, I would go about it in three steps...

1. As mentioned earlier, go through the usual ‘how much house can you afford?’ calculations. It sounds like you did this and found that, with a 20% down payment, you can afford a $750k house. If you’re happy with a house you find at this level, great. If not, ...

2. Calculate how much house you can afford if you put in a bigger down payment. So let’s say you want a $1mm house. You can’t just up the down payment by $250k because of higher property taxes, homeowners insurance, and possibly maintenance costs. So let’s say for a $1mm house you need to put in an extra $260k, making your down payment $410k.

3. Consider whether your reduced NW, combined with your future savings, will be enough to meet your retirement and other savings goals (e.g., college funds)

(When doing this calculation, be very conservative in your assumptions about eventual market value of the house; assume the price just keeps pace with inflation, or at best increases say 2%/annum in real terms.You REALLY don’t want your home purchase to screw up your retirement planning.)

- If it is, great! Go ahead and put the $410k down.

- If not, reduce the maximum down payment and calculate the most house you can get with that which fits your budget.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by neverpanic »

invest4 wrote: Fri May 07, 2021 1:40 pm I don't really understand the utility of % of net worth as guidance for a home purchase.
Agreed, and likewise, I don't understand worrying about "NW" in your mid-30s.

OP - If the house you want is affordable, buy the house, build a home. If it's 80% of your "NW", who cares? You're 36. Worry about NW when you're 50-60.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by reader79 »

OP,

Our policy is to never have our home equity above 15% of our net worth. So, we wouldn't put more than $225k down in your situation. Houses are often great places to sleep but terrible investments. We try to sleep well and grow wealth. This guardrail helps us do both.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by bgf »

We are your age and keep track of our net worth. I count our portfolio, cash, vehicles, home equity (based on purchase price, so this is a conservative measure), mortgage and other debt.

It's really only 'helpful' in giving a snapshot and showing directionally whether you're going where you want to or not. I'm not aware of anyone who recommends you have a target allocation in the manner you'd allocate stocks and bonds in your portfolio.

Right now for us, debt is low and decreasing, cash/bonds are sufficient, vehicles are a small portion of the pie, and the majority of our net worth is in stocks. This is what we want, but that's about all I take from it.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

AlohaJoe wrote: Fri May 07, 2021 9:14 pm Like others I don't see how net worth percentage is an especially helpful guide. Most people put well over 100% of their net worth into their first home purchase.
neverpanic wrote: Sat May 08, 2021 3:34 am OP - If the house you want is affordable, buy the house, build a home. If it's 80% of your "NW", who cares?
In my original post, the % I meant was (initial down payment)/NW, not (total home price)/NW. But I think I understand now that this is a flawed premise. My understanding of why is:

- Even if I have plenty of savings available to put more down and get a more expensive house for the same monthly payment, this is suboptimal from a portfolio perspective because I'd have more money in the house than necessary;
- Therefore it would always be better just to pay the higher monthly payment instead of putting more $ down;
- However, if this higher monthly payment means I'm in the red each month, then I'm not saving at all;
- And if you assumed (correctly) that I am not already at my retirement savings goal, then it doesn't make sense to do this. And if it doesn't make sense to make the higher monthly payment, then it's even worse to put the equivalent present value of that higher payment amount down.

Is this right?

All that said, my initially estimated budget of 750k was nowhere close to actually putting me in the red. Going higher would just potentially lower my monthly savings rate. I wasn't including my bonus/RSUs (which are essentially guaranteed to be within 50%-100% of a target) in the calculation of an affordable monthly payment; I was setting them aside because I planned to save all of it. I'm okay reducing that goal, ultimately I just need to figure out what minimum savings rate I'm comfortable with. This thread at least helped me wrap my mind around what I need to do.

Thanks all.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

Another question came to mind though. If the recommendation is to only put 20% down even if I can afford more, does it follow that I should always take a cash out refinance when my equity goes significantly above 20%, and invest in the market with the loan proceeds?
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by mortfree »

I think 20% is strictly to avoid paying PMI.

And to minimize going underwater on the home.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by stan1 »

I'd plan a down payment of minimum 20%, however if the neighborhood you want to buy into is very competitive you might need to sweeten up to 50% to make your offer look more competitive against other offers.

I don't think you've told us your income, but a ballpark might be down payment +3*annual income = home purchase price. Would that buy a home your family would enjoy for years to come? Could you spend less and get similar enjoyment? Would a house at that price point be something your family would "outgrow" within a few years and you need to spend more? This is along the lines of looking at a home purchase as an expense and a choice in your family's lifestyle. Yes, the house may appreciate but that's tertiary to being able to afford the other priorities in life as well as living a lifestyle you enjoy with your family. A house is a home after all.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by theplayer11 »

reader79 wrote: Sat May 08, 2021 3:49 am OP,

Our policy is to never have our home equity above 15% of our net worth. So, we wouldn't put more than $225k down in your situation. Houses are often great places to sleep but terrible investments. We try to sleep well and grow wealth. This guardrail helps us do both.
some people enjoy living in better homes because they spend a majority of their lives there. Growing wealth is great, but for what purpose? You only live once.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

stan1 wrote: Sat May 08, 2021 8:25 pm I don't think you've told us your income, but a ballpark might be down payment +3*annual income = home purchase price. Would that buy a home your family would enjoy for years to come?
Income is about 250 base, annual 50k RSU (but 3 year vesting schedule means I won't be vesting 50k per year until 2023), and annual bonus between 70k and 125k (generally expect to be on higher end of that).

So measuring my current income conservatively at 250k + 16k RSU vesting next year + 70k = 336k, your suggestion put's me at a $1MM mortgage and $250k down = $1.25M home. I do think that seems like a reasonable upper bound. I will work to refine this based on my savings goals but I'd guess I'll probably end up closer to 900-950k.

Thanks!
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by Californiastate »

We dropped 80% of our taxable accounts on the down payment of our first home. We had emergency funds and family backup. It was decades ago and my only regret is that I didn't buy more real estate. I wouldn't expect the same results everywhere.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by stan1 »

barnaby444 wrote: Sun May 09, 2021 11:04 am
stan1 wrote: Sat May 08, 2021 8:25 pm I don't think you've told us your income, but a ballpark might be down payment +3*annual income = home purchase price. Would that buy a home your family would enjoy for years to come?
Income is about 250 base, annual 50k RSU (but 3 year vesting schedule means I won't be vesting 50k per year until 2023), and annual bonus between 70k and 125k (generally expect to be on higher end of that).

So measuring my current income conservatively at 250k + 16k RSU vesting next year + 70k = 336k, your suggestion put's me at a $1MM mortgage and $250k down = $1.25M home. I do think that seems like a reasonable upper bound. I will work to refine this based on my savings goals but I'd guess I'll probably end up closer to 900-950k.

Thanks!
Good, glad that helps. Now you have to look at what's available between $950K and $1.25M to see if it is something you'd want. Commute time? Public schools? Proximity to family and friends? Updating and maintenance costs? There's no way I'd put myself into a 60+ minute commute even if my employer had a hybrid model of on-site and telework a few days per week.

What you want could be a slice of that rare element in the periodic table called "unobtanium" in which case you'd have to make some decisions about priorities with your spouse. If its any help back in 2009/2010 well located properties did decline in value but tended to hold up much better and recover faster than properties that were more distant or otherwise less desirable. This is an extreme statement, but I can't imagine a scenario where people would prefer living in Tracy over Cupertino; Corona over Irvine; Palmdale over Pasadena; or Temecula over Scripps Ranch to cover your bases the VHCOL parts of CA. Yes there's a middle ground but hopefully my point about location and desirability comes through.

If I was you and you really wanted to balance your priorities I'd do it by managing square footage and look very carefully at a family friendly townhouse or detached but dense style development which should come in at a lower price point than a larger single family home with a pool sized yard for example.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by Monsterflockster »

barnaby444 wrote: Fri May 07, 2021 12:56 pm Like many, we're finding that in this housing market we'll have to spend more than we hoped to get a home we're happy with, so we're reevaluating our budget.

It seems like people often start with (a) how much of a down payment they have saved, and (b) how much of a monthly payment they can afford, to figure out their total house budget. But we've never done the mental accounting of "setting aside" a certain amount for a down payment, so our potential down payment is anything up to our liquid savings of about 900k. So the question becomes what percentage of our liquid net worth, and also of total net worth (~$1.5MM), that we're comfortable putting into a house.

What we did initially was just assume a 20% down payment, then budget out monthly income vs. expenses, and using a conservative approach of excluding my annual bonus and RSUs, found that our breakeven monthly payment amount corresponds to a house price of about $750k in our area (considering prop. taxes and insurance). We excluded bonus because it only comes annually and we've allocated it towards our savings goals.

But, we're not happy with the houses we're finding at that price. And we can clearly go higher by tapping into more savings, either by increasing our down payment or by drawing down a little bit of savings monthly (note, we'd still be net adding to savings annually through the aforementioned bonus). For now let's assume we go with the larger down payment.

Thus, the title question is what % of your net worth (and liquid net worth) would you be comfortable putting down on a first-time home purchase in our situation? Starting with baseline 20% down payment assumption and the 750k purchase price above, we would be putting in 10% and 16% of NW and LNW respectively. How much higher should we go?

Optional, more rambling:
The mental gymnastics I'm doing right now: at 36, we're older than most first-time home buyers, and because of that have relatively more savings than younger first-time buyers on similar income paths. So, we could "pretend" we bought a house, say, 5 years ago, and basically roll all the monthly payments we would've made into a larger down payment now. So, let's say we would've paid $150k over that time, so now we'll make a 20% down payment PLUS 150k, and thereby increase our home budget by 150k. Is this a logical stretch or reasonable?
You are overthinking it. Keep it simple.

Find a home you want to live in long term. Find a home you can afford if one person is laid off. Live in home & ignore the housing market.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

Monsterflockster wrote: Sun May 09, 2021 11:43 am You are overthinking it. Keep it simple.

Find a home you want to live in long term. Find a home you can afford if one person is laid off. Live in home & ignore the housing market.
Appreciate the sentiment, but actually I think I was underthinking it! I was trying to figure out the affordability piece based on simple % of net worth rather than actually considering projected spending and savings goals. After spending a bunch of time this weekend figuring those things out I think I have a much better picture.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by rich126 »

I'm sure I had very little, if any net worth when I bought my first place in my mid 20s. Probably cost close to $100K, I put down as little as possible since I only had been working a few years. Probably the only place I didn't make a good amount on (probably was lucky to break even) because I didn't follow the location, location, location real estate rule.

If you are young and don't have a family pushing the limits isn't really bad IMO. If you have family responsibilities and get older I'd be more careful.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by HootingSloth »

Barnaby,

I would not go higher than infinity% of net worth in purchasing a home. Consider a doctor who completed residency a couple of years ago and has a stable job paying $400k per year. The doctor has $100k saved in retirement accounts, a $50k emergency fund, $100k for a down payment, and $250k of student debt. As a result, the doctor has a net worth of zero. The doctor finds the perfect house to live in for $500k. Can the doctor afford the house? Yes.

Find something where you would be comfortable with the payment if you put 20% down. Otherwise, you won't be living within your means. Regardless of how much you put down, you are consuming the same amount of imputed rent each month.

If you would be happy with the payment if you put 20% down, and then decide you still don't like the larger mortgage relative to investing, then you can consider a larger down payment. There are lots and lots of threads with advice on that question.
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barnaby444
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by barnaby444 »

R
HootingSloth wrote: Sun May 09, 2021 7:29 pm Barnaby,

I would not go higher than infinity% of net worth in purchasing a home. Consider a doctor who completed residency a couple of years ago and has a stable job paying $400k per year. The doctor has $100k saved in retirement accounts, a $50k emergency fund, $100k for a down payment, and $250k of student debt. As a result, the doctor has a net worth of zero. The doctor finds the perfect house to live in for $500k. Can the doctor afford the house? Yes.

Find something where you would be comfortable with the payment if you put 20% down. Otherwise, you won't be living within your means. Regardless of how much you put down, you are consuming the same amount of imputed rent each month.

If you would be happy with the payment if you put 20% down, and then decide you still don't like the larger mortgage relative to investing, then you can consider a larger down payment. There are lots and lots of threads with advice on that question.
Right. I probably should’ve said savings instead of net worth. I meant, for someone my age and no debt, what percentage of savings should I be comfortable drawing down in order to buy a house for $X more than I would’ve bought based on monthly payment affordability alone. But I think I have the consensus answer to that now too: 0%.
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by dan7800 »

I am in a similar situation age/net worth. Here are my 2 cents:

- Go for the neighborhood
- Do you have kids? Most homes you buy will be time and money black holes so with children this becomes much more of a concern.
- Look for "value", eg the home in a great neighborhood, school district etc.... I bought a 650-750 K home for 300k since it needs about 150-200k in updates. I don't making the updates since I will end up ahead $$ wise, I will get to choose what the updates look like (and make sure that they are done right and not a quick patch over to flip the home quickly), and I will be paying taxes on a 300k home, and not a 650k home (which is quite a bit in my area).

I fretted over the home buying decision, costs, etc... quite a bit. I think that a fear that we have is that since we've been doing this "right" all of our financial lives (eg getting 1.5 m at 36), then we don't want to go down the wrong path and start undoing all the solid decisions and hard work that we've already done. I will let more knowledgeable/experienced folks chime in with this.
Scotttheking
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Re: What % of Net Worth to put into 1st home purchase (36yo)?

Post by Scotttheking »

Somewhere between 0 and 100%. I wouldn’t take money out of tax advantaged.
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