How much house should I buy

[whywork]

All,

We are a single income family with 2 kids (11 and 7). I'm 40 and my wife is 38.

My income is 320k and current networth is 1.75m. We are renting at 3k / month and our non rent expenses are 3.5k / month.

I have been against home buying for a while due to FIRE reasons. Recently with the low interest rates, I'm wondering if I should enter the housing market.

How much house would you recommend buying in my situation. My job is pretty stable and I may not lose it unless I quit.

I like the idea of not buying and being able to quit whenever I want but want to buy one for wife and kids. In the area I'm in SFH go for 1.6m+ and townhouses (2BR) go for 1m+ and townhouses (3BR) go for 1.3m+ and condos go for 850k+. A commute of 1 to 1.5 hours would get SFH at 1.2m+

[meandmyfamily]

I would not add a commute to get a house.  What does your wife think?  Renting might still be the best for you depending on your long term goals.  When do you plan to FIRE?  How much time does this add to that plan?

[chicagomeg]

Which option do you have to go for to get something equivalent to the place you're renting?

[Metalcat]

Wait, why do you want to own?

How long do you plan to continue working?

Are you planning on retiring in your HCOL area?

Again, why do you want to own??

I have no idea what to recommend to you because I can't make sense of what you want to do and why. I'm not sure what helpful input you are expecting from us...other than do not pay a premium just to add a commute to your day.

[cool7hand]

Given your level of income and the amount of money you've saved, do whatever makes you happy, as long as it doesn't derail your other plans.

[former player]

Are the kids both the same sex?  If so they can share a bedroom.  If not, with the elder now 11 it's getting time for them to have separate bedrooms.

You already have two jobs: the one that pays you all that money and the one that is being a husband and father.  Commuting 2 or 3 hours a day adds another part time job on top of the two you already have: don't do it.

Buying a house is a long-term proposition.  Only buy if you will be happy to stay in it, and in a job that will pay for it, for the next 10 years, when your youngest will probably be ready to leave home.  If you want to leave you job before 10 years are up, or you want to move to the seaside in two years and become a homeworking beach bum, or your wife will want to move to a rural area and become a farmer, don't buy a house.

On the other hand, don't make yourself and the rest of your family miserable for the sake of a cheap rent.  If your current rental is unsatisfactory for good reasons, find something better to rent.

[Steeze]

Renting sounds like a hell of a deal !!

Assuming 20% down on 1.6M is around $5.5k + tax & insurance, so lets assume that is actually around $7k. Still need to keep up with maintenance and buy/replace stuff, add another $1k, so you are at 8k, not counting the opportunity cost of the down payment ~ 2k/mo.

Easily a $10k/mo. deal. - Renting is sounding better and better!!

Lets say your spend is 6.5k/mo, FI is around 2 Mil. so you are about 1 year away from FI.

If you buy the house your spend will be around 11.5k, so you will need about 3.5 Mil. You will have around 1.4 mil, so you are 2.1 Mil till FI. Lets say you are netting $200k after tax and spending 140k of that, savings is 60k/yr, growth of current investments is around 150k/yr, so $210k/yr added to net worth each year. That will make you around 10 years from FI.

Also to consider, costs about 10% to sell the place, so will need to increase in value a bit just to cover your selling costs.

On the other hand, maybe you work for another 3-5 years, gain a bunch of equity, and are way past your FI target when you downsize to a cheaper area. That is the "everything goes right" scenario.

My vote: Keep renting. Get a nicer place if it makes your wife happy. 4k/mo still sounds like a better deal. (though not very frugal).

Really though - at your income, any of those price ranges are reasonable IF you are going to keep working for another 10 years to pay for it, and you really want to stay in that area longer term (10+ years).

and HELL NO on the 1 hr. commute. Walking distance to work / school / groceries for maximum happiness.

[whywork]

Thank you all for your replies.

Why do I want to own?
- This is mainly from my wife and also since kids are growing we want to buy a place with a backyard (ideally). Yes, we could as well rent such a place and that's what I want to do. Since most people in our circle are buying and not minding working longer years, she feels we are giving up sooner. I too feel that itch to buy a pricey home and show off but I will need to work longer for it

How long do I plan on working?
- I am not sure. A 500k home in a LCOL plus a 2.5m investments would do. Ideally I want to reach that 3m and move to a LCOL and buy house and chill. Once I reach 3M though, if I continue working for 3-4 more years, I can make 5M and can afford that pricey home in my HCOL. So quitting seems a miss in that sense.

[whywork]

Which option do you have to go for to get something equivalent to the place you're renting?

This is a good point. We been considering getting a condo for 1m or so to keep the costs low

[whywork]

Are the kids both the same sex?  If so they can share a bedroom.  If not, with the elder now 11 it's getting time for them to have separate bedrooms.

You already have two jobs: the one that pays you all that money and the one that is being a husband and father.  Commuting 2 or 3 hours a day adds another part time job on top of the two you already have: don't do it.

Buying a house is a long-term proposition.  Only buy if you will be happy to stay in it, and in a job that will pay for it, for the next 10 years, when your youngest will probably be ready to leave home.  If you want to leave you job before 10 years are up, or you want to move to the seaside in two years and become a homeworking beach bum, or your wife will want to move to a rural area and become a farmer, don't buy a house.

On the other hand, don't make yourself and the rest of your family miserable for the sake of a cheap rent.  If your current rental is unsatisfactory for good reasons, find something better to rent.

Thanks I will avoid the commute. Renting gives great flexibility as you said. Renting a house with backyard instead of our current apartment might be better. It is just a tad FOMO if the home prices start going up

[Metalcat]

Which option do you have to go for to get something equivalent to the place you're renting?

This is a good point. We been considering getting a condo for 1m or so to keep the costs low

I don't know about your market, but where I live, condos don't appreciate nearly as well as detached homes and townhouses. Plus condo fees can get out of hand depending on condo management, which can seriously affect resale value in the future.

There are several condos near my current place where condo fees are over $1000/mo for small two bedrooms.

Also, I still don't understand why you would spend that much to own if you are able to keep renting at your current price.

[whywork]

Renting sounds like a hell of a deal !!

Assuming 20% down on 1.6M is around $5.5k + tax & insurance, so lets assume that is actually around $7k. Still need to keep up with maintenance and buy/replace stuff, add another $1k, so you are at 8k, not counting the opportunity cost of the down payment ~ 2k/mo.

Easily a $10k/mo. deal. - Renting is sounding better and better!!

Lets say your spend is 6.5k/mo, FI is around 2 Mil. so you are about 1 year away from FI.

If you buy the house your spend will be around 11.5k, so you will need about 3.5 Mil. You will have around 1.4 mil, so you are 2.1 Mil till FI. Lets say you are netting $200k after tax and spending 140k of that, savings is 60k/yr, growth of current investments is around 150k/yr, so $210k/yr added to net worth each year. That will make you around 10 years from FI.

Also to consider, costs about 10% to sell the place, so will need to increase in value a bit just to cover your selling costs.

On the other hand, maybe you work for another 3-5 years, gain a bunch of equity, and are way past your FI target when you downsize to a cheaper area. That is the "everything goes right" scenario.

My vote: Keep renting. Get a nicer place if it makes your wife happy. 4k/mo still sounds like a better deal. (though not very frugal).

Really though - at your income, any of those price ranges are reasonable IF you are going to keep working for another 10 years to pay for it, and you really want to stay in that area longer term (10+ years).

and HELL NO on the 1 hr. commute. Walking distance to work / school / groceries for maximum happiness.

Renting is a much better deal and a cheaper option but we are missing the home appreciation here. If the house price appreciates a lot in the next few years, we might feel like missing out. Since the market is high, I think it may not grow more than 3% / year. The pandemic and low interest rates have caused a huge spike.

[whywork]

Also one discrepancy in our views could be return rate on investments. I invested in tech stocks and etfs and see much higher (18%) average return than total stock market (10%).

If anyway I have to reach 3m to FIRE (for a 500k house), a pricey home (1.5m) would take me another 2 years of working. So it feels why not buy that pricey home.

Maybe to avoid the stress of potential 10 years of working (if market doesn't turn good), I could delay buying by 2 more years? Not sure if I am thinking this right

Also if things go south and I want to FIRE, I can sell the house and lose that 10% transaction cost and say 10% price drop (if market drops) for a total of 300k and hit the FIRE button

[Zamboni]

MMM wrote a nice blog post about renting being a way better deal than buying in Toronto as a case study. I suspect many HCOL cities are this way. If you haven't read that post already, then I think you should read it and share it with your wife.

Since you are open to buying a home eventually in a LCOL area eventually, I think for now you should keep renting and try to find a home with a backyard to rent that is a very short commute for you.

Don't let the FOMO and keeping up with the Joneses by buying a home when it doesn't make sense derail you . . . there's no guarantee the market will continue to spike up, and you could just as well end up underwater if you buy, especially if you might move again in the next few years. Jim Collins wrote a nice blog post about that:
https://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

[Metalcat]

Also the NYT rent vs Buy calculator is a great resource.

[Abe]

Renting is a much better deal and a cheaper option but we are missing the home appreciation here. If the house price appreciates a lot in the next few years, we might feel like missing out. Since the market is high, I think it may not grow more than 3% / year. The pandemic and low interest rates have caused a huge spike.

Missing out on what, exactly? You have a mine generating money. You may get some extra small dump-truck of cash, or not. How much do you expect a house to increase in value in say, 10 years in you area? What has been the median % increase in value in the last 10-15 years, for houses in your price range? Is it a greater % than your stock return in that time period?
Some basic calculations:
If your $1.5m house appreciates 10% in that time, you now have $150k extra
Subtract: 5-7% * (1.65m) = 82-115k commission to sell.
Subtract: 1% * (average of 1.5m & 1.65m, assuming linear growth in value) property tax * 10 years = 157k in taxes - (taxes you're paying for your landlord via rent)
You're at high risk of taking a loss (115k commission + anything over 35k extra in property taxes)

If your $1.5m house appreciates 20%, now you have $300k extra
5-7% * (1.8m) = 90-125k
1% * (average of 1.5 & 1.8m) * 10 = 165K - (amount paid via rent)

Here you may have a few thousand profit. But now think of all that extra mortgage money that could've been in the stock market.

Point being, as others noted below, anticipated real estate appreciation should not be a motivating factor for buying a non-rental house.

[whywork]

Point being, as others noted below, anticipated real estate appreciation should not be a motivating factor for buying a non-rental house.

Bro, I made the same mistake (of discounting appreciation) like you all these years and kept saying renting is better. Please use the https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html and put your numbers in there. Homes in my area have appreciated 6% on average historically and 100% in past 10 years (due to the crash).

Once you put in the 6% appreciation and 2.6% current interest rate, the investment return has to be 15%+ historically for renting to match home buying. That is doable with a riskier portfolio of tech stocks etc.. but not with vtsax alone. So don't see a reason not to put some of your assets in house as well (even if renting may be better). What will you do anyway with the additional money saved by renting once your NW crosses a few million mark? With buying you atleast have an asset that you are living in

Then why don't I buy? The only risk is housing market is already high and the next 10 year returns may not be 6% but only 3%. In the next 10 years renting may be beneficial. But again I'm already nearing 2M and my portfolio will grow quickly from this point. Should I worry about rent savings vs pride of owing a place?

[chicagomeg]

Also the NYT rent vs Buy calculator is a great resource.

Unfortunately, I don't think the NYT calculator is updated w/the 2017 tax law changes which do change some of the numbers pretty drastically. Particularly, the SALT cap of $10k and the mortgage interest deduction cap of $750k principle would likely both hit OP's family.

However, what you can really learn from the calculator is basically what you said in your last post OP: the right answer depends heavily on future housing price appreciation, which is unknown. I think at some point in your wealth accumulation it's reasonable to diversify by owning real estate. However, it's a personal decision about when the right time to pull the trigger is. Since you seem to have a grasp on the potential up and down sides of each option, you and your partner are probably the only people who can really say what the right decision is at this point.

[legalstache]

From a purely financial perspective, buying a house doesn't sound like a good idea in your situation. But, most people don't buy houses for purely financial reasons. I think you have to decide (with your family) whether the likely financial downsides of homeownership are outweighed by the possible upsides (e.g., nice neighborhood, backyard, good schools, etc.)

Since so many factors go into the decision of whether to buy a house, where to buy, how much to spend, etc., it's kind of hard to offer you advice there. It sounds like you're trying to justify buying a house purely from a financial perspective, but as others have pointed out, it's hard to make the math work there. I view a house as a consumption item--if you want to pay more than renting to have that item, you have the means to do so, but financially it doesn't seem to add up.