Author Topic: How expensive can my McMansion be?  (Read 1337 times)

pstachio

  • 5 O'Clock Shadow
  • *
  • Posts: 4
How expensive can my McMansion be?
« on: April 13, 2021, 10:52:28 AM »
Hello Mustachians!

I'm at a decision point to buy a next house and am struggling with the process to find out "how much can I afford to inflate my McMansion lifestyle without significantly compromising my goals?" For quick background, I've been mustachian-lite for the past decade and working on saving as much as I feel like I can. I've spent most of my efforts spending below my means at savings rates around 30-70% at different times, but haven't built up the skill of understanding where the actual line is that tips me from meeting my goals back into a longer time to FI. My partner and I are currently househacking a duplex and looking to move into a SFH this year while keeping the duplex fully rented. I understand all the basics, budgeting, investment order, etc - however trying to solve backwards in FI simulators has left me not feeling confident what my numbers should look like, and I'm hoping this community of badasses might have some experience that could help! I'd greatly appreciate if anyone had specific numbers or just general advice.

In Minneapolis MN, I could reasonably purchase a SFH in good condition in a neighborhood I would like to live in for $250K - $450K. My core question is: how much could I actually spend before making it hard to reach my FI goal? My current estimates point to needing about $1.25M for FIRE but I'm open to that idea being challenged!

Investments are all in broad index with about 90/10 equities/bonds, and I'm also re-evaluating that mix currently to see if I should change it as I get closer to FI date.

Stats, D20 natural, chaotic good:
- age: 34
- FI goal: FI at age 40-42, with flexibility on returning to work or side gigs if early FIRE has a bad market run
- my gross: $135K/yr
- partner's gross: (not currently working due to COVID) $35-45K/yr
- estimating $6K/yr net from the duplex once it's fully rented, and want to buy another property or two in support of FI
- average annual total expense over past 3 years according to YNAB: $37500, excluding mortgage PITI payments
- Retirement investments: $498K
- Taxable investments: $78K
- Cash and CDs: $100K (this is larger than usual due to saving for a down payment, and keeping cash reserves for 20-30K of repairs that will be needed on the duplex)

formerlydivorcedmom

  • Pencil Stache
  • ****
  • Posts: 698
  • Location: Texas
Re: How expensive can my McMansion be?
« Reply #1 on: April 13, 2021, 12:03:30 PM »
You need to take into account:

1) Property taxes
2) Insurance
3) repairs and updates over time (a house built 30 years ago will need repairs sooner than one built in the last few years)
4) general upkeep - with a larger home, are you going to be tempted to get a housekeeping service or lawn service?  Need to buy more furniture?  Put in a ridiculously sized flower garden with fountains and ponds and a custom swing (that's my weakness and where are extra dollars are currently going)?

Those things actually cost more than my mortgage at the moment.  If you get a handle on what those expenses will cost you, you'll be in better shape to make the calculation.

Freedomin5

  • Magnum Stache
  • ******
  • Posts: 3996
  • Location: China
Re: How expensive can my McMansion be?
« Reply #2 on: April 13, 2021, 12:30:51 PM »
You also need to account for increases in heating/cooling costs, and your mortgage payment.

Laura33

  • Magnum Stache
  • ******
  • Posts: 2921
  • Location: Mid-Atlantic
Re: How expensive can my McMansion be?
« Reply #3 on: April 13, 2021, 12:40:29 PM »
With an annual spend of around $40K, you will need around $1M invested to support FIRE.  You currently have almost $600K invested, which should double in around a decade (rule of 72).  Therefore, you should be able to hit your 6-8 yr goal just by continuing to invest as you have been doing + having a paid-off house by that time.

What is really going to drive your FIRE date is how much you inflate your expenses by buying a bigger/fancier house.  If you stayed in your current scenario, your $37,500 would probably still continue to be a reasonable annual spend, because that presumably already accounts for home repairs, insurance, property taxes, and the like.  But if you move to a different home, you will have both (1) a larger debt to pay off that isn't accounted for in your $37,500 annual spend, and (2) higher ongoing costs that are associated with a larger/more expensive home.  Your $6K in net income you are anticipating from renting out the other half of the duplex won't even come close to covering all of that.*

If you want to get a real handle on the impact of a particular house purchase, look into the expenses listed by @formerlydivorcedmom.  In some areas, property tax alone will swallow up your $6K net from the duplex.  Plug that additional information in to your $37,500, figure out how you plan to pay off the larger house,** and adjust accordingly.   

Bigger-picture:  your house is a consumption item -- you are looking to buy one to upgrade your lifestyle, not to provide a future income stream.  Therefore, the way to make the best choice is to stop thinking about how much house you can "afford" and focus instead on what is the least-expensive house that meets your needs. 


*This also sounds like very little net income from a fully-rented duplex.  May want to do a little more research into that aspect before doubling down on real estate.   

**You can have it paid off, which would give you a lower monthly nut once you FIRE, but require you to come up with several hundred grand extra over the next 6-8 yrs; or you can plan to FIRE with a mortgage, which allows your current savings to continue unabated but will significantly increase that planned $37,500 spend.

nereo

  • Senior Mustachian
  • ********
  • Posts: 14930
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: How expensive can my McMansion be?
« Reply #4 on: April 13, 2021, 12:44:50 PM »
Quote
My core question is: how much could I actually spend before making it hard to reach my FI goal? My current estimates point to needing about $1.25M for FIRE but I'm open to that idea being challenged!

It seems to me you are approaching this backwards ...

Most who prioritize financial independence wouldn’t ask “how much can I spend before...” but rather “what is the lowest amount I can spend in my circumstances to optimize my quality of life and values?”

You mentioned $250k as the low range in your region. What do you gain spending more? It’s not a trick question btw- a $425k house will no doubt be nicer, but you won’t have as much money for retirement or other pursuits. Where does that benefit really taper off for you. If spending $150k more gets you a walking commute and an ideal neighborhood, that’s pretty awesome return on investment. If it just gets you a bigger yard and another guest bedroom and bathroom... does that make you happier (and more so than an extra ~4 years of retirement?)

Only you can answer, but I’d start by reversing your initial question.


ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 3225
Re: How expensive can my McMansion be?
« Reply #5 on: April 13, 2021, 01:50:59 PM »
What is really going to drive your FIRE date is how much you inflate your expenses by buying a bigger/fancier house. 

When i was young, my elders told me that if I moved to a higher-socioeconomic-class area, it would be impossible to avoid spending more money on clothes, cars, decor, toys, etc. I figured they were talking about other people, because I had willpower.

After a couple of decades on my own, now I'm the elder giving the same advice. 

Syonyk

  • Magnum Stache
  • ******
  • Posts: 4221
    • Syonyk's Project Blog
Re: How expensive can my McMansion be?
« Reply #6 on: April 13, 2021, 04:01:41 PM »
When i was young, my elders told me that if I moved to a higher-socioeconomic-class area, it would be impossible to avoid spending more money on clothes, cars, decor, toys, etc. I figured they were talking about other people, because I had willpower.

It's a thing.  I definitely couldn't drive the vehicles I had in college now, though this is admittedly because most of them wouldn't pass emissions here... junkyard specials.

We very deliberately tried to avoid that sort of thing in Seattle, and it was hard.  It takes a real effort to continue driving older stuff when everyone around thinks a 3 year old car is getting sort of old and why don't you upgrade?  I mostly rode an ebike because it was faster than driving, but I expect it would have become an issue eventually.

Out here, where we live now, nobody even looks twice at an 8 year old car (other than "Wait, that's the... Volt?  Is that the pure electric, or the one with the gas engine... or..." questions, and increasing questions about how they work and how cheap they are to run), and the other vehicles get complements on a regular basis - 24 year old truck, still in very good shape, with a barely broken in motor at 110k miles, and the Urals, which just confuse the pants off everyone, because they look like vintage motorcycles, but are actually fairly recent (we have a 2005 and a 2013, the 2005 is what I run around on most of the time).

It's way easier to spend lower than you earn when everyone around you isn't busy trying to spend twice what they earn (deep into 6 figures in many cases).

caleb

  • Bristles
  • ***
  • Posts: 445
Re: How expensive can my McMansion be?
« Reply #7 on: April 13, 2021, 04:25:15 PM »
In Minneapolis MN, I could reasonably purchase a SFH in good condition in a neighborhood I would like to live in for $250K - $450K. My core question is: how much could I actually spend before making it hard to reach my FI goal? My current estimates point to needing about $1.25M for FIRE but I'm open to that idea being challenged!

Where are you looking?

I ask because housing expenses can get inflated in a bunch of ways that go beyond the initial purchase.

In Mpls proper, assessments can and do vary by $1000/year in adjacent neighborhoods on average houses.

A bigger house is generally going to cost more to maintain than a smaller house, all else equal.

Lower density suburbs will likely cost more in transportation, but they may (or may not) have lower property taxes.

Keep in mind that mortgages get paid off eventually, but maintenance and property taxes are forever.

Last, as identified above, local community expectations have a way of driving spending, whether we want to acknowledge it or not.  Living in the Golden Crescent is very likely going to lead to more spending than living in an equivalent house in, say, Roseville.

WSUCoug1994

  • Bristles
  • ***
  • Posts: 485
  • Location: Bay Area, California
Re: How expensive can my McMansion be?
« Reply #8 on: April 15, 2021, 02:14:57 PM »
Take it from a friend - even though you can easily afford a nicer/bigger/better house it isn't worth it.  We love our house but damn it sucks up a lot of time, money and mental bandwidth.  Our last house was a dream in comparison.  Go small as you can.

pstachio

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: How expensive can my McMansion be?
« Reply #9 on: May 03, 2021, 08:24:38 AM »
Thanks for the perspectives, everyone. I've been reasonably focused on "what's the least I can spend" for my entire adult life, and I think I just needed a bit of a reminder to stay that course! Right now is a time I'm going through some challenging life changes, and it's easy to look at options that are a bit bougie-r in the housing market and imagine the ways that I'd enjoy life more there. We all know how quickly hedonic adaptation works, but the next level of fanciness always holds its allure.

SunnyDays

  • Handlebar Stache
  • *****
  • Posts: 2014
Re: How expensive can my McMansion be?
« Reply #10 on: May 03, 2021, 09:21:10 AM »
Definitely, but the next level of fanciness comes with costs (financial and otherwise) that you might not be willing to pay.

GoCubsGo

  • Bristles
  • ***
  • Posts: 384
Re: How expensive can my McMansion be?
« Reply #11 on: May 03, 2021, 10:19:27 AM »
If it helps, I bought my 1,800 sqft "starter" house when I was in my mid twenties.  It's in a very affluent area and I was at the lower end of the price range for the town.  Over the years as we earned more, we started looking at much larger homes which we could afford without a problem.  I just couldn't justify spending an extra $250K + just to get more space that I didn't absolutely need.  To top it off, taxes in my area started a steady climb (which I wouldn't have known at the time). 

Fortunately, younger me decided to punt on buying the bigger house.  The taxes on the house we almost bought is now $21K a year! Now I'm in my late forties with a paid off house and the ability to pivot to whatever I want job-wise and FIRE-wise.  Why? Because I invested that difference and it changed my life.  I've never been at your Mustachian levels of spending but I still have come out way ahead by limiting that ONE huge purchase.

I'd probably buy the low end of a nice area and call it day.  Be warned that kids might alter your decision making process so take that into account.

Mrs. Sloth

  • Stubble
  • **
  • Posts: 129
Re: How expensive can my McMansion be?
« Reply #12 on: May 03, 2021, 12:45:31 PM »
Great responses as expected. We recently bought a house in the area we wanted (good schools) and it was one with the number of bedrooms we need and there aren't too many deferred maintenance coming up with the house. We had to compromise on the backyard because it was one of VERY few (in the hot RE market)  that met our desired monthly budget accounting for property tax and insurance. So what do you want to spend a month on housing for a house that fits your needs in the area you want to live?

I will be honest in that I get backyard envy of others but I am also in the 2021 FIRE cohort and hot damn, I feel so good about my freedom and future.

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 3225
Re: How expensive can my McMansion be?
« Reply #13 on: May 03, 2021, 01:01:45 PM »
@GoCubsGo great story! It's amazing how much people pay for unused bedrooms in their houses, unused seats in their SUVs, unused truck beds, unused 4WD, and unused yard space. It's hard to play croquet with the family on Saturdays when one has to work 80 hours a week.

I will be honest in that I get backyard envy of others but I am also in the 2021 FIRE cohort and hot damn, I feel so good about my freedom and future.

I hereby grant you permission to mow my quarter-acre any day you want this summer. I'm curing backyard envy one heatstroke at a time, but not getting many takers.

Malcat

  • Walrus Stache
  • *******
  • Posts: 7015
Re: How expensive can my McMansion be?
« Reply #14 on: May 03, 2021, 01:41:40 PM »
There is no rule of thumb as to how much you can spend on housing.

There are only your goals and your priorities and the financial decisions that best serve both of those.

Figure out what kind of house you want to prioritize, then figure out how much it would cost to get it. Factor in all of the ongoing expenses that others have said. Then from there look at the trade offs you would have to make to get it.

-How much strain would it put on your cash flow?
-How much more pressure does it put on your to maintain your income in the event that something makes your job unpleasant?
-How much sooner could you retire if you spent less?
-How much more will your retirement expenses be as a result, and does this affect your flexibility in terms of things like withdrawal rate?

Think of all of those things, and then decide if the benefits are worth the trade offs.

For some people, their dream home is worth some pretty brutal trade offs, for others it isn't.

Only you can decide what sacrifices are worth having a more expensive home.

Mrs. Sloth

  • Stubble
  • **
  • Posts: 129
Re: How expensive can my McMansion be?
« Reply #15 on: May 03, 2021, 01:46:40 PM »
Quote from: ChpBstrd link=topic=121796.msg2835072#msg2835072 date=1620
[quote author=Mrs. Sloth link=topic=121796.msg2835067#msg2835067 date=1620067531
I will be honest in that I get backyard envy of others but I am also in the 2021 FIRE cohort and hot damn, I feel so good about my freedom and future.

I hereby grant you permission to mow my quarter-acre any day you want this summer. I'm curing backyard envy one heatstroke at a time, but not getting many takers.
[/quote]

@ChpBstrd, thanks for the generous offer 😆 and reminder that it is good to have a small yard sometimes 🙂.