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"Budgeting" for House Build
Old 09-30-2018, 10:34 AM   #1
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"Budgeting" for House Build

Good Sunday Morning Everyone!!!

Well, as the title implies, I am looking for thoughts on budgeting for a house build. Long story short, DW and I am moving out to "fly over" country in a few short days. Selling our Atlanta house and getting ready to move has been a whirlwind, as you can imagine. We are *very* fortunate (in more ways than one!) that the house we have sold is being sold for quite a bit more than we paid for it in 2012...we most certainly "bought at the low end, sell at the high end" and am very happy/lucky with this.

Anyway, we are moving to a house that SIL recently moved from and is converting to a rental. We are getting a fantastic "friends and family rate" and will not be tied to a lease. We have been house hunting over the last several months and just cannot find anything that will tickle our fancy, so it looks like we will be building a home. My DW has built a custom home before (as has my SIL), so we are very aware of the fact that "budgeting" for a build is really a fallacy and so I am not looking for that kind of budget. Specifically, what was the maximum you were comfortable with as a percentage of your total NW? As some of you already know, I am retired military and my COLA protected pension covers all normal expenses (health care, too) and then some. We also have a sizable nest egg that has appreciated a significant amount in that it would provide enough income to live as we do now if that pension went away. Yes, I feel very, VERY fortunate.

At any rate, we have been discussing how much $$$ we would like to set aside for a possible build (cash, no mortgage). As it stands, we are looking at a MAXIMUM of about 22% of the total NW, which seems reasonable. I have looked online for similar numbers but most of the stuff find is the "maximum monthly payment" kind of opinion pieces that really doesn't answer the question.

So, if you are still reading my rambling (SORRY!!!), if you purchased/built a home and paid CASH for it, what total % of your NW were you comfortable budgeting for? Did that work out OK for you and would you do it again?
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Old 10-01-2018, 07:04 PM   #2
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For me, the real question is not what % of total NW is acceptable, but instead:
After I build my house (Current Net Worth - House Cost), will the desired withdrawal rate (say, 4%) from your remaining invested assets meet your new budget needs with the new house, including property taxes, after including pension and/or SS?

Example: Your NW is $4M. You spend $2M on the house. That leaves $2M in invested assets. 4% of $2M is $80K annually. Does $80K, plus whatever other income you have, meet your income needs? If so, you haven't spent too much on the house.

Comment #2: If you buy too much house, you may be limiting your ability to do other things such as travel.

Not that it matters, but in my case, the home value is 15% of NW. Due to my projected income requirements, I could take that up to 20% but no higher. This is based on a budget with owning a house (rather than the condo I own now; each has different expenses).
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Old 10-01-2018, 07:10 PM   #3
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I never thought of buying or building as a % of net worth... more how much I had to spend to get the functionality that we wanted or needed.

That said, our main home is ~14-15% of NW and our second home is 6-7% of our NW.... so 20-22% for both properties.
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Old 10-01-2018, 07:34 PM   #4
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Originally Posted by ExFlyBoy5 View Post
So, if you are still reading my rambling (SORRY!!!), if you purchased/built a home and paid CASH for it, what total % of your NW were you comfortable budgeting for? Did that work out OK for you and would you do it again?
I purchased my home in cash back in 2015.

(1) I would have spent up to 40% of my NW on it if necessary and then pinched pennies for the rest of my life, probably. But,

(2) Much to my glee, it cost only 13.7% of my NW.

I admit it; I was just plain lucky to find my Dream Home at a dream price. I jumped on it. Market gains plus the sale of my old home made up for the cost completely within a few months.
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Old 10-01-2018, 07:40 PM   #5
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Quote:
Originally Posted by HNL Bill View Post
For me, the real question is not what % of total NW is acceptable, but instead:
After I build my house (Current Net Worth - House Cost), will the desired withdrawal rate (say, 4%) from your remaining invested assets meet your new budget needs with the new house, including property taxes, after including pension and/or SS?

Example: Your NW is $4M. You spend $2M on the house. That leaves $2M in invested assets. 4% of $2M is $80K annually. Does $80K, plus whatever other income you have, meet your income needs? If so, you haven't spent too much on the house.

Comment #2: If you buy too much house, you may be limiting your ability to do other things such as travel.

Not that it matters, but in my case, the home value is 15% of NW. Due to my projected income requirements, I could take that up to 20% but no higher. This is based on a budget with owning a house (rather than the condo I own now; each has different expenses).
If I bought a new house that was quite a bit more expensive than our current house, that additional money would be pulled from our retirement assets most likely, unless we got a mortgage.

So that would reduce our annual income.

To me it would mostly be a matter of impact to our retirement income, plus how much the more expensive home might raise our cost of living.

But no way would I be willing to put 1/2 my retirement assets in a new house. 10%? Probably. 20%? - that might start feeling a bit tight. I probably wouldn't be willing to go above 15%.

Edited to add: if most or all of my expenses were covered by pension plus SS, I might be willing to put in a larger % of my net worth. But I would also have an easier time qualifying for a mortgage!
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Old 10-01-2018, 08:50 PM   #6
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22% seems really high. We’re building our retirement home and paying cash. It will be 14% of our NW. I thought that was even pushing it.
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Old 10-01-2018, 09:23 PM   #7
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Wow. I never thought of the price of the house I am building as part of my net worth. I just do whatever needs to be done in the building process. I am spending about twice what I expected in retirement, but that is within my available income. I have been working on my house about 5 years which means the house can come out of yearly expenses. Currently I am not tracking costs against net worth or anything like that. It is just current annual expenses. When the house is complete, I will have a sudden increase in net worth. Your situation will be a lot different that mine. Good Luck!
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Old 10-02-2018, 03:30 AM   #8
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I don't think house value as a % of NW is really the critical in itself. However if the house increases the expenses thru taxes, maintenance or what ever. Assuming selling the house is not the plan (you want to live there), then you RE numbers have to add up.
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Old 10-02-2018, 05:08 AM   #9
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To me it would mostly be a matter of impact to our retirement income, plus how much the more expensive home might raise our cost of living.

But no way would I be willing to put 1/2 my retirement assets in a new house. 10%? Probably. 20%? - that might start feeling a bit tight. I probably wouldn't be willing to go above 15%.
+1 for me. Never built a house. Our current one is worth 7.5% of our investments.
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Old 10-02-2018, 07:08 AM   #10
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My house is worth about 10% of my net worth. 22% seems like a lot but as others have said, I’ve never looked at it that way. How much more are you planning to spend over what you cleared from the sale of your current home? To me, that seems more relevant - figuring out how much more you need to go into your investments for to get the house built.
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Old 10-02-2018, 10:09 AM   #11
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Originally Posted by HNL Bill View Post
For me, the real question is not what % of total NW is acceptable, but instead:

After I build my house (Current Net Worth - House Cost), will the desired withdrawal rate (say, 4%) from your remaining invested assets meet your new budget needs with the new house, including property taxes, after including pension and/or SS? ....
Exactly. OP is looking at it all wrong. The real question is what does your situation look like if you spend X on a home (or anything else for that matter). Not what someone else did or did not spend.

I swear, I'm going to scream if I read another post that says something like this:

' what ... were you comfortable budgeting for? Did that work out OK for you and would you do it again? '

It makes no freaking difference what someone else did or felt comfortable doing. They are not you! Their circumstances/situations are not the same as you.
I need to go back to this linked post below, and the one it references to calm down and restore my faith in humanity!

Saving money by moving to a "HCOL" area?

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Old 10-02-2018, 10:35 AM   #12
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I too bailed out of Atlanta area due to debilitating traffic--at the top of the market. Gwinnett County home prices since dropped 20% due to diversification--foreigners moving in. We moved to an ultra LCOL area and bought a slightly smaller house which we stayed in 10 years.

I would think 15-20% would be a normal value vs. NW amount. But there are many other factors.

We sold our house mentioned above and bought a foreclosure for $100K less than replacement value. The cost of wood has skyrocketed in the last 3-4 years, and I almost have a heart attack every time I have to buy building supplies. And building a home from scratch is tough on marriages.
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Old 10-02-2018, 01:05 PM   #13
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Agree with others,- house as a % of assets not necessarily key in the decision making process. Our current home is 10% of our net worth, FWIW.

DW and I have built 4 homes, a hobby of sorts. We're about to build one final time. What may be more important than the concern for net worth % is that you and your spouse be well-aligned as you move forward with your build. Not only on home style, but also with regard to upgrades and finishes. Spread sheeting across all construction decisions; kitchen, appliances, flooring, electrical etc is a must, IMHO, if you intend to stick to a budget...within reason.

The friends we know who were at odds with their spouse beginning the process had a terrible experience and over shot their budget considerably. Basically, none of them would build again for all the $ in the world. I would plan for overages in the range of 20% or more if this represents your scenario.

Conversely, if you align your needs prior to agreeing to a home plan/size/and trim level you might be surprised how wonderful the experience can be. I'd also work hard to identify a true custom builder if either you or your spouse consider yourselves particular. Cookie cutter builders can be a real bear the moment you start to 'customize' your new home. Upcharge galore.

We love the building process and have always been able to stay within our budget, but it takes a bit of effort...

Good luck!
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Old 10-02-2018, 01:10 PM   #14
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Wow. I never thought of the price of the house I am building as part of my net worth. I just do whatever needs to be done in the building process.
I think there's a disconnect in people's thoughts here between people building/buying houses in low cost of living areas, versus high. When you're looking at $550K starter houses, cost as a % of your assets really matters. If you're looking at a $150K starter house, not so much.
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Old 10-02-2018, 03:42 PM   #15
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We've built several homes ourselves. We have always been into them for about 35% of what they would cost to buy but still had our labor. We moved into our last (yea right) new home last Thanksgiving..ish. House material cost have skyrocketed right beside labor. As much as I despise renovating, even I would seriously try to find something close to make into what would work. Most of our problem is we live a tad remote so there's very little to chose from. I'd have to have an endless supply of $, which I do not to have a custom home built in this economy.
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Old 10-02-2018, 04:39 PM   #16
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The cost of building supplies is not our local problem. Contractors are building homes in the $300-$400 price range like there's no tomorrow.

Our problem is finding carpenters that want to work hard for a fair salary. Young adults are simply not going into the trades. That shortage of labor can put 60-90 days extra on any building project of normal size even.

They build a new house down my street. The framer did more of the carpentry than normal, but he spent 1 month there. And the brick masons with one crew took a month to finish. I think the house ended up $150 a square foot in cost.
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Old 10-02-2018, 05:05 PM   #17
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I think the house ended up $150 a square foot in cost.
That's less than half the going rate in Hawaii!
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Old 10-02-2018, 07:49 PM   #18
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I wouldn't feel comfortable with more than 25%...would sleep better around 20% and really well around 15% knowing I could do more the less I spent.

Try not to fall in love with the new car smell. That I would imagine in 20 years will wear off, and you may sit back on the porch and think, hmm maybe we should've done something different.

I think you will make the right choice. I would subscribe to minimizing construction costs one way or another...even if it meant subbing out some finish work, lanscape, etc...or doing some work myself.

However, it seems the retired military guys sometimes tend to put a pretty penny into their homes...maybe because they have healthcare and military pension reducing the burdens?
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Old 10-02-2018, 08:25 PM   #19
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That big housing debacle took a lot of people out of skilled trades. CA needs 750,000 tradesmen. I called an electrical contractor to do about 4 grand of work on my house and he didn't have the time.
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