Combining Households with a non-FIRE SO

[jeroly]

Greetings, y'all!

[Apologies in advance if this comes off as a humblebrag - these are definitely first-world / 1%-er problems but if you just consider it as a math problem, or as a philosophical problem, it's not a no-brainer and I'd appreciate your insights!]

I'm a 60YO "S"M.  My sweetie and I are looking to buy a house together (I rent a large two bedroom apartment and she owns a small two bedroom house, neither of which is quite large enough for our wants for a combined home [yes either would be fine in a pinch but we both want more and have the money to pay for it]). 

The S is in quotes because we're in a committed relationship and we would consider getting married if it made sense financially (free healthcare for me vs. higher tax bracket, higher eventual Medicare premiums, much more complicated taxes, etc.), but it's not a priority from religious or emotional perspectives for either of us and is not in our current plan.  We keep our finances separate - but there's a verbal agreement to take care of each other financially if necessary.

I was in a previous relationship where I bought a house with an SO, but we were both working, earning (at first) approximately the same salary, so figuring out the financial plan was relatively straightforward even though we had different levels of savings and kept our finances separate.

Now, however, there's a lot more levels of imbalance and it's tough for me to figure out what's 'fair.'

- I am FIREd and my sweetie is not.  Her current plan is to continue working indefinitely as she finds it intellectually stimulating, gets personal satisfaction from her big kahuna paycheck, has lots of financial insecurity despite not having any rational justification for it, and is fairly resistant to change. (When we first met she planned to work until 70, which is a big problem for me given that I'm 11 years older and could well be dead by then! She's now [begrudgingly] consented to considering retirement in another ten or so years.

- She has a 13 1/2 year old that will live with us half time until college and will obviously require a bedroom, plus he'll probably monopolize the basement/den/family room doing his teenage stuff.  It's also TBD whether he'll be able to transition to living on his own eventually... while he does pretty well in a very challenging school he's not exactly imbued with all the social graces and may struggle in the workplace, so who knows when that basement will be available for us to use? ;-) 
 
- I have 'income' (a tricky thing to evaluate given that most of my spending comes from post-tax money market accounts) that is perhaps one-tenth hers at best. (Our spending, though, is roughly similar; I may spend more on myself than she does on herself, she may spend more overall when you factor in her kid.)

- She plans to get a mortgage for a big chunk of her portion of the house equity and I plan to pay for mine with cash.

- I would be fairly content buying a place that would be, for the HCOL area we live in, somewhat Mustachian. She, on the other hand, has a strong preference for the super-duper-HCOL neighborhood where she now lives (not without some reason - her ex, with whom she shares 50-50 custody, lives there, her son has almost all of his friends there, it's a manageable commute, it's relatively safe and pretty).  The upshot of this is that houses there in the size we are looking for and with the features she wants are crazy expensive (I'll throw out all the relevant numbers later).

So I guess that my basic questions are:
1. What's a fair way to split the house cost?
2. What's a fair way to split the house expenses?
3a. What's the most, from a diversification of investments perspective, that would be acceptable to put in to the house?
3b. How to adjust my AA for my remaining assets? (currently approx 40/60)

Here are the important financials:

We each have betwee USD$2.5m and $3.0m (approx. $5.5m total), of which perhaps USD$4.5m is in liquid financial instruments.  That includes approx. $500k in unrealized capital gains.  but not the additional/supplemental pension benefits she is accruing in an employer-paid defined contribution account which will vest in perhaps three more years and would be worth perhaps another $500k were it vested.

I have almost no earned income (maybe $30k in interest & dividends & rental income + $10k in RMDs from an inherited IRA), she earns upwards of $400k/yr.

Currently I pay ~ $40k/yr in rent, she pays about $48k/yr in PITI on her current mortgage.  The houses we're looking at are in the $1.5m-$2.5m range, with taxes of approximately $10k-20k.  (If I were looking on my own I'd be thinking about either getting a place for $250k-$350k or just living a nomadic life in SE Asia for a few years.)

I'm looking to put in cash up to about 1/3 of my assets in order to not have to withdraw funds to pay for the mortgage, thus reducing my MAGI and realizing the associated benefits (e.g. ACA subsidy, Medicare copay reductions, tax-free capital gains).  There is a risk involved in this strategy - it reduces my diversification and exposure to the stock market.

I'm going to leave my thoughts on all this out of the OP to avoid biasing the answers, but I promise to follow up on what we've tentatively come up with / what my thoughts on it all are, etc., at a later date.

Thanks in advance!!!

[Annie101]

Please make sure your legal documents are in order.  Wills. Assign each other as power of attorney.  My dad recently went through a nightmare worst case scenario, and I discovered the very important legal rights marriage provides.  I'm sure you can replicate most, but I would make sure you have.

Sorry, I didn't answer your questions

[jeroly]

Please make sure your legal documents are in order.  Wills. Assign each other as power of attorney.  My dad recently went through a nightmare worst case scenario, and I discovered the very important legal rights marriage provides.  I'm sure you can replicate most, but I would make sure you have.

Sorry, I didn't answer your questions

Thanks for bringing up these important issues.
We do need to update our wills, and we will definitely create legal documents that will outline our rights and responsibilities as regard to the property ownership.
I'll look into the power of attorney issue as well. There are also ancillary issues like living wills, advance directives for medical decisions, etc.

[jeroly]

It will be MUCH MUCH simpler if she buys the house in her name only.  Which also seems reasonable since so much about the size/location is dictated by her circumstances.  Could she carry the mortgage based on her income after cashing out her equity in the current house?  If so, then I would strongly recommend you do that, and you decide between you what a reasonable amount for you to contribute toward the carrying costs of the house would be if you are not an owner.

If she wants to ensure you can stay in the house if she pre-deceases you, she could give you a life estate with the house to ultimately go to her son once you pass.

She probably could get a mortgage for around 1.6m on her own, and has about $500k in equity in her current home, so yes, she could likely buy the house on her own.

I agree that would be simpler (and would reduce my financial burden), but why would that be better or fairer?

[Missy B]

It will be MUCH MUCH simpler if she buys the house in her name only.  Which also seems reasonable since so much about the size/location is dictated by her circumstances.  Could she carry the mortgage based on her income after cashing out her equity in the current house?  If so, then I would strongly recommend you do that, and you decide between you what a reasonable amount for you to contribute toward the carrying costs of the house would be if you are not an owner.

If she wants to ensure you can stay in the house if she pre-deceases you, she could give you a life estate with the house to ultimately go to her son once you pass.

She probably could get a mortgage for around 1.6m on her own, and has about $500k in equity in her current home, so yes, she could likely buy the house on her own.

I agree that would be simpler (and would reduce my financial burden), but why would that be better or fairer?

I'm not Ihamo, but agree with them.

Why better? Well, for starters it would mean a less spendy house. You throwing in means she'll be eyeing the fancier, bigger houses because she can.  (And I don't think that's why you're wanting to throw in. You want to be fair and proportionate in how you share costs, not just get a bigger house).
She's got good reasons for wanting to stay in that uber-HCOL, sure. But she probably has some other reasons too. People in those areas are house-proud and like to show off some. And with her income I'd imagine she's acquired a taste for the good life.
If you're paying her a flat but generous rent, and she owns and has to pay for maintenance and any upgrades she wants herself, it should eliminate any fractious conversations about how she wants to do such and such to the pool*, and you'll pay a third (or whatever you'd agreed to) and then for the carpet, and the new drapes, and the decking that is looking, well, dated, don't you think, honey?
It simplifies estates too (and though it could be arranged for you to stay in the house if she went first, would you want to?)
Anyway, it didn't sound like that is the way you wanted to go, and perhaps you've already committed to buying with her. In which case I see your contribution as 30% max. Of purchase, maintenance, taxes, utilities.

*In MissyB land, which is grossly distorted by the money-laundering of ill-gotten gains of people from far-away, 2.5 million gets you a lot with a small, shitty broken-down house on it. Weep for us.

[former player]

Two thoughts -

1.  Please don't write off the 13 year old's social skills.  He's probably exerting them mightily to do all right in a challenging school during the school week and either doesn't have much left over for family at other times or doesn't see the need - that's very 13.  On what you've said so far (totally agree that you probably shouldn't say any more about someone else's kid on the net) the 5 more years he's got in which to get his act together enough to get to college, at which he has 4 more years to get his act even better together, could well be plenty to get him launched.

2. If there is to be a mortgage on the property and you are a co-owner the lender is probably going to want you to be a party to the mortgage.  That suggests to me a good reason for you not to be a co-owner: you don't have earned income to cover the mortgage payments.  I would say that either you are co-owners of a house you own outright or your SO is sole owner of a house with a mortgage.  Of course you should agree that running costs other than principal and interest are shared equally between the two of you whichever arrangement you come to.

[Captain FIRE]

There's no one right answer.  You need to discuss and decide what works best for both of you.

Equitable Options/Possibilities:
1. Status quo: You each maintain separate residences of the size/expense you wish.
2. 50/50: You each decide how much money you can put towards a residence.  You buy a place equal to or less than 2x the lowest figure (sounds likely yours), and each own 50%.  You discuss in advance whether you want the other to inherit the house in full, a life estate, or nothing (and likely need to leave upon death of the other if they couldn't afford to buy out the heir(s)) and set the paperwork up accordingly.
3. Proportionate: You each decide how  much money you can put towards a residence.  You each own a proportionate amount of the house.  All house expenses (e.g. new roof, repairing heating system) are similarly paid by this proportionate amount.  You discuss in advance whether you want the other to inherit the house in full, a life estate, or nothing (and likely need to leave upon death of the other if they couldn't afford to buy out the heir(s)) and set the paperwork up accordingly.
4. Sole ownership: One of you buys the residence that they want and the other moves in and pays an agreed upon rent.  The other pays for all house related items (e.g. new roof, repairing heating system) and makes all decisions regarding those items.  Questions of how to handle things such as furniture would be settled in advance (e.g. 50/50, owner decides and buys - ideally with input from other).

What I do not see working/equitable is if you both spend at the level of the spouse with the higher budget.  You might not be able to afford the mortgage, might feel pressed to go back to work, etc.

One tricky element I see is that she's tied to a certain area based on custody, because that's a reasonable constraint and might be good cause for you to pony up a little more budget than you'd ideally like.  Are there any houses in that area that you can afford half of, or is the issue truly that she wants nice features that make the houses unaffordable for you?  Are there areas near it she could live that are more reasonable?  If this can't be worked out, you might consider option 1 until the kid is out of high school.

In terms of splitting house maintenance expenses, you could consider splitting up the items, and then each of you is responsible for getting it done.  This might mean doing it yourself or outsourcing, whether mowing the lawn or cleaning.

[jeroly]

There's no one right answer.  You need to discuss and decide what works best for both of you.

Equitable Options/Possibilities:
1. Status quo: You each maintain separate residences of the size/expense you wish.
2. 50/50: You each decide how much money you can put towards a residence.  You buy a place equal to or less than 2x the lowest figure (sounds likely yours), and each own 50%.  You discuss in advance whether you want the other to inherit the house in full, a life estate, or nothing (and likely need to leave upon death of the other if they couldn't afford to buy out the heir(s)) and set the paperwork up accordingly.
3. Proportionate: You each decide how  much money you can put towards a residence.  You each own a proportionate amount of the house.  All house expenses (e.g. new roof, repairing heating system) are similarly paid by this proportionate amount.  You discuss in advance whether you want the other to inherit the house in full, a life estate, or nothing (and likely need to leave upon death of the other if they couldn't afford to buy out the heir(s)) and set the paperwork up accordingly.
4. Sole ownership: One of you buys the residence that they want and the other moves in and pays an agreed upon rent.  The other pays for all house related items (e.g. new roof, repairing heating system) and makes all decisions regarding those items.  Questions of how to handle things such as furniture would be settled in advance (e.g. 50/50, owner decides and buys - ideally with input from other).

What I do not see working/equitable is if you both spend at the level of the spouse with the higher budget.  You might not be able to afford the mortgage, might feel pressed to go back to work, etc.

One tricky element I see is that she's tied to a certain area based on custody, because that's a reasonable constraint and might be good cause for you to pony up a little more budget than you'd ideally like.  Are there any houses in that area that you can afford half of, or is the issue truly that she wants nice features that make the houses unaffordable for you?  Are there areas near it she could live that are more reasonable?  If this can't be worked out, you might consider option 1 until the kid is out of high school.

In terms of splitting house maintenance expenses, you could consider splitting up the items, and then each of you is responsible for getting it done.  This might mean doing it yourself or outsourcing, whether mowing the lawn or cleaning.

Thank you for your thoughtful response.
We've been thinking along the lines of proportional ownership (her ponying up more due to housing the kid, desire for the pricy neighborhood, and expected higher average level of assets over the course of shared ownership), and proportional payment of expenses, but on a different formula given that expenses are in some way more connected to income/spending level than asset level.
Coming up with those formulas in a fair way, though, is a challenge, at least to me, and I was a math major...

[ericrugiero]

It will be MUCH MUCH simpler if she buys the house in her name only.  Which also seems reasonable since so much about the size/location is dictated by her circumstances.  Could she carry the mortgage based on her income after cashing out her equity in the current house?  If so, then I would strongly recommend you do that, and you decide between you what a reasonable amount for you to contribute toward the carrying costs of the house would be if you are not an owner.

If she wants to ensure you can stay in the house if she pre-deceases you, she could give you a life estate with the house to ultimately go to her son once you pass.

This was my suggestion also. Since you plan to have separate finances and because she has a kid she may wish to pass her wealth (and house equity) to if she dies it makes more sense to just have her buy a place and carry a mortgage while you pay her rent. You retain the bulk of your assets to do as you wish while she can finance the fancy pants house with all the bells and whistles and pass it on if she wants and avoid legal entanglements.

 Also if you've never lived together before or your relationship is not very lengthy I suggest living together in her place before making any irreversible changes to both your lives. There are often issues that can crop up when in a relationship where one person is FIRE and not working and the other isnt and works full time.

This seems simpler, more fair, and a more easily ended option.  The one caution I would have for her is to not buy more house than she can afford on her own.  That way if things go sour between you she isn't struggling to make payments. 

Buying a house with someone who you aren't married to seems complicated.  It would be a real challenge to make things "fair" and there is a mess if you break up. 

[former player]

I'm pretty sure that no reputable lender in the USA will agree to lend money on a property without all of the co-owners signing up to joint liability for the debt - which means that both of them are liable for the whole amount of the mortgage. The idea that OP pays cash and their SO borrows against the property without OP also being responsible for the debt is a non-starter, and OP and SO would be wise to establish that before wasting any more time on the idea.

[Linea_Norway]

It will be MUCH MUCH simpler if she buys the house in her name only.  Which also seems reasonable since so much about the size/location is dictated by her circumstances.  Could she carry the mortgage based on her income after cashing out her equity in the current house?  If so, then I would strongly recommend you do that, and you decide between you what a reasonable amount for you to contribute toward the carrying costs of the house would be if you are not an owner.

If she wants to ensure you can stay in the house if she pre-deceases you, she could give you a life estate with the house to ultimately go to her son once you pass.

This was my suggestion also. Since you plan to have separate finances and because she has a kid she may wish to pass her wealth (and house equity) to if she dies it makes more sense to just have her buy a place and carry a mortgage while you pay her rent. You retain the bulk of your assets to do as you wish while she can finance the fancy pants house with all the bells and whistles and pass it on if she wants and avoid legal entanglements.

 Also if you've never lived together before or your relationship is not very lengthy I suggest living together in her place before making any irreversible changes to both your lives. There are often issues that can crop up when in a relationship where one person is FIRE and not working and the other isnt and works full time.

This seems simpler, more fair, and a more easily ended option.  The one caution I would have for her is to not buy more house than she can afford on her own.  That way if things go sour between you she isn't struggling to make payments. 

Buying a house with someone who you aren't married to seems complicated.  It would be a real challenge to make things "fair" and there is a mess if you break up.

+1

She is requiring a bigger home because of her son. And a bigger, more fancy home because of her spendy preferences. She has en extremely high income and therefore possibly feels motivated to buy a nice home, because she can afford it, like most normal people would think. If you were making the choice for a home for the 3 of you, you would have bought a home that would have cost half or less. I don't see a good reason for you to buy in to such an overpriced asset. You should make up your mind of what you think would be reasonable to contribute to living expenses and offer paying that in rent to her. Then she can decide how much additional home she wants to finance.

[SimpleLifer]

You mentioned that the other parent lives in the proposed neighborhood.  It's a wise decision to have both parents live in the same neighborhood until the kid is grown.  I'm going through this at the moment, and I'm making the same decision (so some bias there!)

Since you're not married, regardless of what is "fair", you may consider working with an estate planner or attorney to make sure each party's investment and stake in the property is documented and understood by all.  You could also lay out terms of the agreement there based on percentage ownership by each party, and document expectations in the event that one party wants to move/leave.  One instrument is called "Tenancy In Common". 

Cuz what's really unfair, is if things go south, and one party is less cooperative than the other about selling.  I don't even want to think about what would be involved in getting my money out of a house in that situation.  (!!!)

Something to consider regarding asset allocation...based on my own experience...I have 50% of my net worth tied up in home equity, and 50% of my net worth is invested in the stock market.  I wish I had less home equity and more stock market exposure.  Even though homes in my HCOL appreciate at a healthy rate, it's nothing compared to having the same dollar amount invested in stocks.

Good luck with everything.  Sounds exciting to be creating a life with someone you care about.  :-)

[jeroly]

You mentioned that the other parent lives in the proposed neighborhood.  It's a wise decision to have both parents live in the same neighborhood until the kid is grown.  I'm going through this at the moment, and I'm making the same decision (so some bias there!)

Since you're not married, regardless of what is "fair", you may consider working with an estate planner or attorney to make sure each party's investment and stake in the property is documented and understood by all.  You could also lay out terms of the agreement there based on percentage ownership by each party, and document expectations in the event that one party wants to move/leave.  One instrument is called "Tenancy In Common". 

Cuz what's really unfair, is if things go south, and one party is less cooperative than the other about selling.  I don't even want to think about what would be involved in getting my money out of a house in that situation.  (!!!)

Something to consider regarding asset allocation...based on my own experience...I have 50% of my net worth tied up in home equity, and 50% of my net worth is invested in the stock market.  I wish I had less home equity and more stock market exposure.  Even though homes in my HCOL appreciate at a healthy rate, it's nothing compared to having the same dollar amount invested in stocks.

Good luck with everything.  Sounds exciting to be creating a life with someone you care about.  :-)

Thank you for this thoughtful and empathetic reply.

In my previous home purchase with my (non-married) ex, we did the tenancy in common thing as well as drawing up a document specifying:

- ownership percentages
- obligations for who paid what for house expenses like the mortgage, upkeep, etc. (we split it based on the ratio of our incomes - which we modified when I FIREd, as my income was almost zero, so that I was considered to have an income of at least $50k for use in those calculations)
- a specification for our exit plan if we broke up (either could trigger a breakup clause at any time, and once triggered, an appraisal would be paid for by the triggering party.  Then the non-clause-invoking person would get the option to buy the house for the appraised value, and if they didn't exercise the option it would then become an option for the invoker; if they didn't exercise the house would be put up for sale).

My sweetie and I are now planning to get married for financial reasons - I can get free health insurance (saving me perhaps $8k/year) and she will save $15k/year in Federal taxes - so some of this issue now goes away, but not all as we will continue to maintain separate accounts.

[soccerluvof4]

For me , I would encourage her to buy a house she can afford with or without you and you simply pay for the first year or two rent to her. Then re-evaluate all aspects of your relationship and re-evaluate the financial arrangement then. Keep it simple for now.