I'm looking to buy a property in a MCOL city (Chicago) to owner-occupy. I've made the "mistake" of renting a pretty nice apartment with two roommates the last four years, and am realizing that in order to get a 3 or 4 flat that doesn't feel like a big step down in quality or location, I might need to spend significantly more on the down payment than I was expecting and hoping to. To be clear, there are certainly cheaper apartments out there, but I have a bunch of wants (maybe needs) that are pushing the price up.
As a specific example, I just saw a 4-flat with the following characteristics:
Listed price: $1.4M
Gross Rents: $10,500
Cap rate: 6ish percent
Deferred maintenance notes: needs new roof and furnaces soon (my real estate agent estimated these as $40K)
The conforming loan limit for a 4-flat results in a max purchase price of $1.318M, so if I understand correctly, I could only buy this property at the listed price if I do a jumbo loan – which based on the lenders I've talked to so far, means 25% down. That's $350K. My net worth right now is approaching $700K, so we're talking 50% of my assets.
On the one hand, that number feels high to me (both the dollar amount and the percentage). I came into this process hoping to spend somewhere around $100K down, but over time, I've accepted needing to spend more as I've seen how far money goes in this market. I had just gotten comfortable with the idea of spending around 30% of net worth before I saw this property, and I'm not sure it's a good idea to put another 20% in. Nearly all of my remaining assets after the down payment are in retirement accounts (though a lot of it is after-tax contributions that should be withdrawable any time).
On the other hand, it feels like this is a pretty good investment and substantial diversification might be healthy, since I'm otherwise all-in on index funds. The cash-on-cash return is worse than equity returns, but it's not insubstantial, and after adding in tax benefits, principal paydown, appreciation, etc., the ROI is pretty good, even if some of it isn't liquid.
Additionally, the big gap between my income ($230K) and spending ($30K) means that my net worth is increasing by a huge amount every year. So the down payment here probably represents a 1-2 years of working, which doesn't seem bad at all. Even if 50% allocation in real estate is scary at the beginning, it won't be 50% for very long.
But, that's assuming that I keep working, don't lose my job, etc. I don't plan to retire imminently, but I am getting to a place where FIRE is not too far away. While the 4-flat gives me a place to live, maybe I'll regret tying up so much money in the property prior to giving up my W2 job. It might force me into a OMY situation.
Financial Samurai has an article on this at
https://www.financialsamurai.com/recommended-net-worth-allocation-mix-by-age-and-work-experience/. His numbers don't go all the way to 50%, but he does have allocations at 45% for the first home purchase, so it's in the ballpark.
I'm just curious to hear others' takes on this. What percentage of your net worth was your first real estate purchase? Does this seem like it's overcommitting or does it feel reasonable?