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  • Max home purchase?

    Ok, I have a friend looking at houses and he and his wife asked. What is the max you would pay for a home?

    He lives in north east (I know, inverse geographic arbitrage)

    Currently rents, has zero debt, he didn't want to say the exact amount but has between 5-6 million net worth, mostly in stocks/bonds (owns no realestate).

    No children. Combined household income is between 500-700 (some fluctuation due to commissions). Pretty simple lifestyle and great savers.

    They have 500-600k for down payment in savings and money market funds.

    He is considering a house for about 2 million vs condos for around 1-1.5 million.

    I have no idea. Seems like an absurd amount of money for a house but I grew up and lived most of my life in low cost of living areas, so I thought I would ask. I told him a better choice would be to move to south or midwest and live like royalty vs RE vs BOTH! His wife doesn't like that Idea, so.......thoughts?

    Thanks

  • #2
    It really depends on the area.  I live in the northeast and 2 million would be a mansion on the lake.

    Move one town over and you could have the same house for half as much.

    This is a luxury purchase and it is like asking how much would you spend on a vacation.  Depends on what it is worth to them.  I would not spend that much right now but it sure looks like they can afford it and maybe they would.

    Do they have any desire to retire?  This could delay that.

    Comment


    • #3
      With the marginal loss of mortgage deductibility if they borrow over $750k and the insane nondeductible property taxes they'll likely pay on a house that expensive in the northeast, it's certainly not the wisest of financial choices. But, given their earnings and assets, it's one they can afford to make if they so desire.

      Comment


      • #4


        He lives in north east
        Click to expand...


        what does this mean?

        Comment


        • #5
          A good rule of thumb is to limit mortgage payment to approximately 25% if income. So, a $2M home with a $600,000 down payment would result in a 15-year fixed mortgage payment, at 4.25% interest rate, of $13,181. That puts the annual mortgage payment right around 25% of income, assuming the midpoint of the income range you mentioned.

          That said, without knowledge about other cash flow demands, I am by no means endorsing such a purchase.

          Comment


          • #6




            Ok, I have a friend looking at houses and he and his wife asked. What is the max you would pay for a home?

            He lives in north east (I know, inverse geographic arbitrage)

            Currently rents, has zero debt, he didn’t want to say the exact amount but has between 5-6 million net worth, mostly in stocks/bonds (owns no realestate).

            No children. Combined household income is between 500-700 (some fluctuation due to commissions). Pretty simple lifestyle and great savers.

            They have 500-600k for down payment in savings and money market funds.

            He is considering a house for about 2 million vs condos for around 1-1.5 million.

            I have no idea. Seems like an absurd amount of money for a house but I grew up and lived most of my life in low cost of living areas, so I thought I would ask. I told him a better choice would be to move to south or midwest and live like royalty vs RE vs BOTH! His wife doesn’t like that Idea, so…….thoughts?

            Thanks
            Click to expand...


            My 2X rule suggests that this couple could buy a house of $600K*2 + $600K = $1.8M and be okay. So I guess I'd go for the house if I were them unless they really want an early FIRE and were willing to live in a condo to get it. Or they can move to Indiana and be the richest folks in town very quickly.
            Helping those who wear the white coat get a fair shake on Wall Street since 2011

            Comment


            • #7
              Make sure they understand the big chunk of money taken by property taxes in their locale. With rates of 2-3% in many NE municipalities you are talking 40-60k/yr in nondeductible property taxes ?

              Comment


              • #8
                With no kids and that much income, they can do whatever they want if they plan to keep working for a bit.

                Comment


                • #9





                  He lives in north east 
                  Click to expand…


                  what does this mean?
                  Click to expand...


                  Maybe this???

                  https://en.wikipedia.org/wiki/North_East,_Pennsylvania

                  I never understood the name for this town since it is in north west Pennsylvania.

                  Comment


                  • #10
                    As others said, this is too tied up in personal goals for a group of internet strangers to answer.

                    Personally, I'd never spend more than $750K in 2019 dollars on a home, but that's a fairly arbitrary number that I've settled on, though it also happens to be 2x my income.

                    Comment


                    • #11
                      my comment is what are the going to do with all their money (no kids both working).  i would buy what will make them happy.  a 2 million dollar house comes with the equivalent 2million dollar house problems and taxes.

                      Comment


                      • #12





                        He lives in north east 
                        Click to expand…


                        what does this mea


                        New York

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                        • #13




                          my comment is what are the going to do with all their money (no kids both working).  i would buy what will make them happy.  a 2 million dollar house comes with the equivalent 2million dollar house problems and taxes.
                          Click to expand...


                          This is the perfect quote for my friend to show his wife. I totally agree. If they want it, get it, BUT get it knowing it will be a money sink, and will could slow time to retirement.

                          I think he wants to work for about 5-10 years more then retire. He is in his mid 50s and he has earned it. I just don't want him to buy a house and then hate himself, but it is his life and I am trying to answer his question (How financially stupid is this?) without telling him what to do. I like the WCI idea of moving to the midwest and being the richest people around, but he will need to figure that out. My advice is to keep renting unless he sees the "perfect" house or condo. Just as there are no called strikes in investing there are no called strikes in home purchases. There is literally a house on every corner and with the cash they have and no kids they have every option imaginable.

                          Thanks for all the input.

                          Comment


                          • #14
                            What is it about $2M houses that they want? Is it the space, amenities, something else? If it isn't the space, I would try to find a smaller home and then they could always upgrade to whatever amenities they desire.

                            Comment


                            • #15







                              Ok, I have a friend looking at houses and he and his wife asked. What is the max you would pay for a home?

                              He lives in north east (I know, inverse geographic arbitrage)

                              Currently rents, has zero debt, he didn’t want to say the exact amount but has between 5-6 million net worth, mostly in stocks/bonds (owns no realestate).

                              No children. Combined household income is between 500-700 (some fluctuation due to commissions). Pretty simple lifestyle and great savers.

                              They have 500-600k for down payment in savings and money market funds.

                              He is considering a house for about 2 million vs condos for around 1-1.5 million.

                              I have no idea. Seems like an absurd amount of money for a house but I grew up and lived most of my life in low cost of living areas, so I thought I would ask. I told him a better choice would be to move to south or midwest and live like royalty vs RE vs BOTH! His wife doesn’t like that Idea, so…….thoughts?

                              Thanks
                              Click to expand…


                              My 2X rule suggests that this couple could buy a house of $600K*2 + $600K = $1.8M and be okay. So I guess I’d go for the house if I were them unless they really want an early FIRE and were willing to live in a condo to get it. Or they can move to Indiana and be the richest folks in town very quickly.
                              Click to expand...


                              I agree with this.  1.8M seems reasonable.  If their net worth is 5-6M not including any real estate with consistent income of 500k+ then buying a 1.8M house should not be an issue.  A good goal would be to hit 10M+ over the next 10 years.  At that point FIRE should be no problem and they can always downsize if needed.

                              Comment

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