patrick.net

just because you have money,the fundamentals dont change

A rent Vs buy calculator will help you decide

but if its lifestyle choice and u need to buy a house to live in,at that income and home prices..u can deftly buy

u have enough downpayment and property isnt worth more than 3 times your annual income

u,my friend,can afford(a la Suze Orman)

Well, the rent/buy calculator even here says that if the house was 900K and rented for 3,000 it's "ok to buy". And yes, we can afford it.

But....the fear factor really is huge.

What is your networth and why do you need a $1M house?

You've been renting, theoretically saving a ton of money on your decision to sell in '04. So why do you feel the need to get a house that is 2.5-3X your income?

If you want to make the change to the owning lifestyle, I would consider houses in the 350-500's. That is 1-1.5X your income. Much of your risk is gone, because even if the house went down another 10-20%, at your income level, and presumably your networth, you could manage that kind of loss without too much trouble. Thus reducing your risk and worry.

The only way someone making huge amounts of $$ can ever get into financial trouble is by taking on too much risk or being too leveraged. Your networth is a big factor in whether that is the case here or not.

Net worth (Liquid and long term) is ~700K (and growing) and no debt. Zero.

Why do we "need" a $1M house? Well......that gets complex.

- We don't "need" a $1M house, but in the DC metro area, 500K buys you a dump, 750K buys you a tract house. The nicer huses "start" at $1M. This is a high net worth area and $1M houses really aren't that uncommon.

My perspective (and I could be wrong) is to much rather have the more expensive house, that is in one of the topmost locations, built much better, has land (2.3 acres) and "should" retain it's value in 10-20 years (barring an apocalypse. No offense to AF here).

kapone says

Net worth (Liquid and long term) is ~700K and no debt. Zero.

Why do we "need" a $1M house? Well......that gets complex.

- We don't "need" a $1M house, but in the DC metro area, 500K buys you a dump, 750K buys you a tract house. The nicer huses "start" at $1M. This is a high net worth area and $1M houses really aren't that uncommon.

My perspective (and I could be wrong) is to much rather have the more expensive house, that is in one of the topmost locations, built much better, has land (2.3 acres) and "should" retain it's value in 10-20 years (barring an apocalypse. No offense to AF here).

How old are you?

If I were you, I would rent for about 3k or less a month or buy a 500k house, and live as frugally as possible for 5 years. At your income you should EASILY be able to save 100-150k in non retirement accounts per year while still maxing out your 401ks. 5 years of doing that and you have 500-750k plus any ROI in the bank and are in position to buy that 1M house at whatever mortgage payment you want with little to no risk associated.

Having sold in '04, and been renting since. Depending on what your income was in '04 and any debts you had, you have not been saving nearly enough, which is probably easy to do in a place like the DC area.

My personal opinion is that you shouldn't own a home that is worth more than your networth, and that is worst case scenario. Perferably it's no home worth more than your non-retirement, liquid account values. This reduces your risk incredibly.

Rent4Ever says

are in position to buy that 1M house at whatever mortgage payment you want with little to no risk associated.

And if the house is 1.5M by then? I fully expect Bernanke to hit Ctrl P again (and again) in the future. In these neighbourhoods, prices drop once every decade or so. Right now interest rates are rock bottom. Adjusting for tax implications, it's almost interest free money. I don't expect interest rates to stay this low for too long.

Rent4Ever says

How old are you?

40.

I don't think you're being too conservative. There is a huge downside to housing right now, with too much government intervention for the market to return to normal.

Think of it like this, would you put $1,000,000 investment into a company knowing that the company was insolvent, only being supported by government loans, and a small upward change in interest rates could devalue the company by 25 to 50%?

If you wouldn't do that, why would you dump that money into a housing market with all the same risk?

Goran_K says

Think of it like this, would you put $1,000,000 investment into a company knowing that the company was insolvent, only being supported by government loans, and a small upward change in interest rates could devalue the company by 25 to 50%?

See, that's the thing. While I completely agree with you, the valuation of these areas doesn't follow the typical norms. Houses in these neighborhoods STILL sold for 800K in the late 80s when interest rates were over 10%.

The land value/location is what makes it attractive as a hard asset.

kapone says

And if the house is 1.5M by then?

50% seems a bit much, but I get your point. However, buying something out of fear that it will be too expensive in the future, is a poor financial decision.

This depends on your view of the housing market, the affect interest rates rising will have on house values, etc...

It seems to come down to what are you trying to accomplish in life? By selling in '04 and renting, you seemed to be on track to make a big networth your priority. If that is goal #1 then I'd rent or buy a cheap home and get serious about saving. If living a good lifestyle is your goal, then buy the 1M house, you can afford it and in the end you will still be "OK". If you're concerned with risk and liabilities, then buying a 1M house is not a good idea with your networth.

I personally wouldn't do it, but this looks to be a matter of philisophical views. To be frank, you are cashflow rich but not wealthy. Income and lifestyle vs. Wealth you are no different than the teacher who makes 50k a year and at age 40 has a networth of 100k. To maintain your current lifestyle you will need 8-10M at retirement. This would be my concern, and mapping out a path to make that happen, which COULD involve buying the house now. But considering your savings rate while renting, I'm hardpressed to see how it gets better with this kind of purchase.

serious answer: do not give serious consideration to any suggestions made on the internet from strangers, whose education background, qualifications, even age are suspect, or unknown at best.

kapone says

See, that's the thing. While I completely agree with you, the valuation of these areas doesn't follow the typical norms. Houses in these neighborhoods STILL sold for 800K in the late 80s when interest rates were over 10%.

The land value/location is what makes it attractive as a hard asset.

My personal view is that you are being too conservative. If you do a risk analysis, it sounds like your risk is very low. Even if prices do drop, it seems like they won't go below $800k based on your statement above. If you plan on staying in the house a long time and have a stable job, then the short term dip shouldn't really matter. Our house could drop by $300k tomorrow and it wouldn't affect things at all because we still can make our payments just fine. At some point you have to stop worrying so much about the numbers and enjoy life. If renting allows you to do that then fine, but it seems like you're in a position to own and enjoy.

Edit: Rockyroad makes a great point too!

kapone says

Well, the rent/buy calculator even here says that if the house was 900K and rented for 3,000 it's "ok to buy".

I don't see that. My calcuator with the default assumptions says do not buy a $900K house that would rent for $3,000/mo:

http://patrick.net/housing/calculator.php?uaddr=%2C+&rent=3%2C000&price=9%2C00000

In fact, it's not even close. The house value is maybe $450K. You'd be getting ripped off big time.

Unless you make some unrealistic assumption of appreciation. Which is what caused the bubble in the first place.

kapone says

My perspective (and I could be wrong) is to much rather have the more expensive house, that is in one of the topmost locations, built much better, has land (2.3 acres) and "should" retain it's value in 10-20 years (barring an apocalypse. No offense to AF here).

That's exactly right. In any case, 97% of the houses are deal breaker to you anyway so you have no choice but to pay that price.

As eman summed up, just do it. You're saving 100K annually instead of 125K the difference is really forces savings so over 15 years, you'll make it up and more. Your investment return and physical and mental health is more important than savings delta anyway as it relates to wealth. Saving a few hundred dollar a month changes nothing, being happy means everything.

Virginia and Maryland both have favorable property tax rates so land ownership is a good idea in the long term. Maryland, VA and DC is interesting in their tax scheme can be so different in an expanded market. I would choose VA too if the commute is acceptable. Please note that payroll tax is just withholding and the same as income tax. State income tax is deductable for federal so 10K is really 7K net of fed.

There are guys here who would advice you to buy a $2 mil with that kinda income. Seriously! live your life a little. You only live once. Yeah just rent that 900K beast for 3K/month - what Patrick said. You just need to stay in the place right?

E-man says

Only guys with a lack of financial understanding believe others would advice to buy a $2M house with a combined salary of $350k.

Voting yourself as having strong financial understanding doesn't automatically make others having lack of financial understanding. You think buying properties is an indication of strong financial understanding?

kapone says

Well, the rent/buy calculator even here says that if the house was 900K and rented for 3,000 it's "ok to buy".

I don't see that. My calcuator with the default assumptions says do not buy a $900K house that would rent for $3,000/mo:

http://patrick.net/housing/calculator.php?uaddr=%2C+&rent=3%2C000&price=9%2C00000

In fact, it's not even close. The house value is maybe $450K. You'd be getting ripped off big time.

Unless you make some unrealistic assumption of appreciation. Which is what caused the bubble in the first place.

Patrick, my interpretation of the "assumptions" in that calculator are slightly different from your default ones.

I'm still using 0% price inflation and 1.5% rent inflation.

APOCALYPSEFUCK isFrank Sinatra says

Buy land with water access. Pull a used trailer onto it. Cash up. Plant potatoes. Run bayonet drills with the family and wait for the end.

That's an option.

Rent4Ever says

To be frank, you are cashflow rich but not wealthy. Income and lifestyle vs. Wealth you are no different than the teacher who makes 50k a year and at age 40 has a networth of 100k.

So, lemme make sure I understand. You're saying that someone making X with 2x in net worth, shouldn't look at a house priced at 3X?

E-man says

Remember that people are willing to pay a premium to live in a desirable neighborhood.

Bingo. That's reason #1 for this decision. I don't wanna pay even half and buy tract housing (which I could do all day long, with no fear factor)

kapone says

To be frank, you are cashflow rich but not wealthy. Income and lifestyle vs. Wealth you are no different than the teacher who makes 50k a year and at age 40 has a networth of 100k.

So, lemme make sure I understand. You're saying that someone making X with 2x in net worth, shouldn't look at a house priced at 3X?

Rent4ever is giving you some good advice. You said "we" in your original post, not "I". That tells me you are counting on another person for those income numbers. If you are married, there is a 50% chance that your future will see the number's for net worth, yearly income etc cut by at least half (personally I hope not for your case, but a 50-50 chance is a risky one).

My income = X ("I" also make very good money, but it's from a salary which means it's not something I can always count on). My non retirement net worth is 3X. I would not consider a home that cost more than 2X, which for me is about 6 years of savings.

Also, don't settle. I wouldn't buy a dump or something that didn't meet my needs/wants either. I live outside of Boston. It's just reached the point where a nice bank foreclosed home is 2X my salary. Up until two days ago, I was about ready to buy, then I find out my company is about to lay off 30,000 employees. I think I'll continue to save a little longer and enjoy the flexibility I have with renting (in case I need to move for a new job).
Tom

If it helps, the distribution is: I make about $250K and my wife makes about 100K. That being said, my wife is a CPA and she certainly does not intend to stop working anytime. However, our income really has shot up only in the last 4 years or so. Before that it was average for this area.

Can that change? Sure. Can I make more/less money in the future? sure. Can she make more/less money in the future? Sure. Will we be getting any younger in the future? Nope.

Where do you draw the line as far as risk is concerned?

Don't get me wrong, I'm petrified about housing at present and would much rather have the flexibility, but the flip side is that houses like that in that neighbourhood can be rented (in the approx rent range) fairly easily. Does that bring down the risk some?

kapone says

I'm petrified about housing at present and would much rather have the flexibility, but the flip side is that houses like that in that neighbourhood can be rented (in the approx rent range) fairly easily. Does that bring down the risk some?

Of course it does.

I didn't read all the responses, but I have one other observation that may not have been mentioned. That is that you are in the fortunate position of looking at upper tier homes, that is the kind that many baby boomers will be downsizing from starting fairly soon and going for a while.

Not that this will cause a crash or anything like it. But I believe that segment of the real estate market will have a harder time appreciating really well in the next 15 years than entry level homes and small condos. Then again, I know nothing about that area.

marcus says

Not that this will cause a crash or anything like it. But I believe that segment of the real estate market will have a harder time appreciating really well in the next 15 years than entry level homes and small condos. Then again, I know nothing about that area.

I'm ok with that. We intend to stay here a LONG time, hence looking at the upper tier in top locations. As long as the asset value stays consistent, that's all I'm looking for.

ptiemann says

If you are 'petrified' you should probably continue to rent for some time. While _some_ fear makes people more cautious, and that's probably better than exuberance, 'petrified' sounds like it could seriously impact your decision making.
By the way, I see no reason to be petrified.

I hear ya. The political and economic uncertainty is what causes petrification.

But as Buffet says...when there's blood on the streets.... :-)

kapone says

Are we being too scared/conservative?

Probably. I'm pretty conservative, and I'm in a similar situation structurally (if you scale back all of the numbers quite a bit). Someone said that the analysis doesn't change just because you make more money, and I don't really agree. You make so far in excess of what it takes to feed and clothe yourself that you can afford to make sub-optimal decisions on things like houses and cars. It's a luxury, you might lose money doing it, but you only live once...and it sounds like you have all of your other ducks in a row.

The big thing for me (in your situation) would be how confident you are in your employment over the mid term, and how big your cushion is. I wouldn't be too concerned about the DC area house prices plummeting.

I'd likely be a buyer if you can get it for $900k, especially with your tax situation. Of course a lot of other life factors matter, but it sounds like those are pretty stable (you want to stay where you are for a while, your wife has no intention of stopping working, etc).

Of course I might take a totally different approach and sock it away for another 5 years and then think about retiring early...(more likely picking a line of work that I value more, but that just doesn't pay well)

kapone says

Rent4Ever says

To be frank, you are cashflow rich but not wealthy. Income and lifestyle vs. Wealth you are no different than the teacher who makes 50k a year and at age 40 has a networth of 100k.

So, lemme make sure I understand. You're saying that someone making X with 2x in net worth, shouldn't look at a house priced at 3X?

What is the split of non retirement accounts and retirement accounts on that 700k?

I am saying that me personally, I would never put myself in that position. I believe that when you rely on PAYCHECK INCOME to support your lifestyle, you are simply living a big sham of a lifestyle. That income can change and stop all together and will likely happen sooner than you expect. It's not normal for people to continue to make good money through their planned retirement age. Most people should plan to be layed off sometime in their 50's. You are too expensive for your company and someone that is 30 will do the same job for half your salary. The amount of money you will make in your lifetime is finite.

So it comes down to your level of risk tolerance. I view $$ as power and freedom. The further away from the cashflow lifestyle I get and the less I depend on my paycheck, the closer I am to complete freedom. Buying a 1M house with a networth of 700K, much of which is in retirment accounts is more risk than I would feel comfortable with.

There is no reason you can't save/invest 1M in non retirement accounts in just a few short years if you make it a priority.

Have you looked at Vienna? I have been looking at McLean for a year and I just couldn't justify myself buying a house in McLean. It's about $100K-$200K more in McLean and I would rather buy it in Vienna near Tyson's Corner. As matter of fact, I just bought a place last month and I can't wait till move into my new place. It's time to buy ONLY if you find a house with the right price and right location. There are a ton of houses for sale out there, but good ones will go in 2 to 3 days. Believe me, I was out bid 7 times and this time I didn't take any chance!

If you are going to move, rent there for a year before deciding to permanently move. Last thing you want is to get into something you may end up regretting.

I've lived in several states in my life, you'll always end up paying in one way or another, if it's not taxes it's something else.

All I am sayin is getting stuck with 900K is not a good option until you are settled down in the area then go for it.

Rent4Ever says

You are too expensive for your company and someone that is 30 will do the same job for half your salary.

er...I never said I have a job...I have my own company. :-) But I hear ya. Yeah, hence the conundrum.

FortWayne says

If you are going to move, rent there for a year before deciding to permanently move. Last thing you want is to get into something you may end up regretting.

I've lived in several states in my life, you'll always end up paying in one way or another, if it's not taxes it's something else.

Quality Auto Repair Since 1979

The commute for both of us will actually be shorter from that location. And the tax benefits are much higher.

And I get to own guns. Can't beat that.

skipatrolman says

Have you looked at Vienna? I have been looking at McLean for a year and I just couldn't justify myself buying a house in McLean. It's about $100K-$200K more in McLean and I would rather buy it in Vienna near Tyson's Corner. As matter of fact, I just bought a place last month and I can't wait till move into my new place. It's time to buy ONLY if you find a house with the right price and right location. There are a ton of houses for sale out there, but good ones will go in 2 to 3 days. Believe me, I was out bid 7 times and this time I didn't take any chance!

Oh, been looking at Vienna really hard. That's option 2. But Vienna isn't that much cheaper. And all else being equal (at the same price), Cooper and Langley beat out Vienna schools like Madison.

You mentioned a recent spike upward in your income – up to 250K. Taking a long term average of your earnings over the past ten years may provide a better estimate of your true income. How stable are your clients or customers? Is your income vulnerable to political or economic changes?
How much retirement and liquid emergency savings do you have? How much will you be saving for retirement if you buy this 900K home? Will you still be on track for retirement goals?
The ideal: pay all cash for a house – or 20% down, 15 year mortgage, paid off as soon as possible while living below your means (on one income just to be safe). All the while, putting aside ample reserves for the day you are too old and/or disabled to work.

A little tangential, but a 1 million dollar house and a tract house are all built the same. The building code does not vary by price point. The only difference is the size and possibly the price point of some of the appliances (and remember, the appliance with the most complications usually breaks first). And the granite might be off the 'D' list instead of the 'A' list. A 1 million dollar house in a VA suburb of DC is going to be 5000 sf +/- while the 500,000 dollar house is going to be 2500 sf +/-.

"My perspective (and I could be wrong) is to much rather have the more expensive house"

Are you sure that's YOUR perspective? It sounds more like a spouse who's making 100k's perspective or a Realtor who is gong to make 6%'s perspective.

You're the one with the most skin in the game. Are you sure the voice that's saying, "buy now or forever be priced out of the market," is your own?

"If you are married, there is a 50% chance that your future will see the number's for net worth, yearly income etc cut by at least half (personally I hope not for your case, but a 50-50 chance is a risky one)."

Divorce? NEVER! We're in L O V E ! And who would ever leave a 1M nest... :)

kapone says

Rent4Ever says

You are too expensive for your company and someone that is 30 will do the same job for half your salary.

er...I never said I have a job...I have my own company. :-) But I hear ya. Yeah, hence the conundrum.

I had a feeling that was the case. So you could continue working as long as you want, but it's your revenues that you need to be concerned about. Only you know the chances of that $$ being sustainable over a long period of time.

kapone says

4. There is this house that we have been eyeing that is sitting at just the $1M mark. They probably would accept a 900-925K offer. It's been on the market for over a year.

If it's been on the market that long, they'll take less than $900K. I'd say it's a great time to make a lowball offer. All they can say is no and you can always come back a month from now with a slightly higher offer. There's always a chance that someone else will get the house, but they will have paid too much.

In this market, keep an eye out for properties that have been sitting and make lowball offers.

Not sure if this was mentioned -- but have you considered doing a 10 or 15 year loan? My rule of thumb is if you don't feel comfortable at a 10 year loan after putting 20-30% down -- you're in a risky zone. Go with your gut (assuming you've run the numbers which it sounds like you have). Anyone following this and putting 20-30% down on a 10 year loan who bought in 2006 would have been in OK shape right now. I'm making this claim assuming you're buying a house to live there long term, absolutely through the life of the loan -- not as an investment.

In addition, doing some quick research on Zillow -- it appears there are a number of solid lots for sale in Great Falls. Have you considered buying the land in cash and building the house over the next several years in cash? This would keep you debt free.

bgamall4 says

If you want to rent a house out for 4200 per month by a 400k house in Palm Springs. Just sayin.

I know you want to buy, but it seems like the top of the market is weak.

Gary Anderson strategicdefaultbooks.com

Well, there are no jobs or business in Palm Springs. The additional cost of buying a helicopter to commute to DC everyday might negate some of the differences.

GUAB says

Not sure if this was mentioned -- but have you considered doing a 10 or 15 year loan? My rule of thumb is if you don't feel comfortable at a 10 year loan after putting 20-30% down -- you're in a risky zone. Go with your gut (assuming you've run the numbers which it sounds like you have). Anyone following this and putting 20-30% down on a 10 year loan who bought in 2006 would have been in OK shape right now. I'm making this claim assuming you're buying a house to live there long term, absolutely through the life of the loan -- not as an investment.

In addition, doing some quick research on Zillow -- it appears there are a number of solid lots for sale in Great Falls. Have you considered buying the land in cash and building the house over the next several years in cash? This would keep you debt free.

I have considered it and we might even be able pull that off. However, the price of the house doesn't change whether you're doing 10 year or 30 year loans. And with the cost of money for 30 yr loans this low, why would I not take that?