Looking to buy up in FIRE

[ElizabethT]

After many, many years of hemming and hawing, we are finally t h i s close to putting our home on the market and relocating to within a couple of miles of the beach.

This has been an unexpectedly agonizing decision, with my best guess being that after so many years of pre-FIRE years of LBYM, I am struggling to do something that is actually within our means.

I am guessing that I'm not the only one that struggles with this?

Here is the situation we are evaluating:

- We are looking to purchase a home that may run upward of $200,000 more than our selling price. We are in Orange County, CA, one of the most expensive regions in the country, so $200,000 is not an astronomical difference here.
- We would sell our current home first, and pay for the new home in cash.
- Our property taxes would double, but the impact to our budget would be minimal as we have a large percentage allocated as misc discretionary, and would simply assign the necessary portion from that without altering our annual WR.
- The new home would represent 16.5% of our net worth, up from about 14% currently, but still well below the percentage average as I've researched it, which seems to run closer to 30% for those age 50 and older.
- The appreciation in the new area is greater than the appreciation where we are, and I do not see this changing in that there is only so much coastal adjacent land, and what there is is quite desirable here.

Other than the purchase price of the new home, all other living expenses would be comparable, even insurance in that the new home will be slightly smaller, and with less land, which would offset the higher sale price.

I am wondering if there might be anything we've overlooked in our excitement at making change? One can definitely lose perspective on a decision like this I think.

 

[Blue Collar Guy]

well i just did my home value vs my net worth and in my case its about 23 % , so yeah its low. Sounds like you found the house, try to research the neighbors well, they can be a nightmare. As far as the taxes go, research that they arent going to be reassessed to reflect your purchase price. My mother in law bought a home they told her 4000 bucks a year, year number 2 it was 12000 plus, she got reassessed. Sounds like you are well heeled ( 8 million net worth?), but i saw you calculate things to the .5 % . A tax reassessment might ruin your day, it would absolutely ruin mine. Good luck, keep us posted.

 

[Marita40]

Two years ago, when everyone I knew was downsizing, I moved "up." After years in a condo I bought a house in the neighborhood I always wanted to live in but couldn't afford in my earlier years. I took a new mortgage, albeit a small one to cover the gap and which will be paid off in a couple of years. I redid the kitchen and now turning to landscaping. I'm still in some sticker shock about my property taxes, but the appreciation in this neighborhood is sky high right now after I bought at a relative low. I love my neighbors, I love my house, I even love mowing the lawn! Life is short and sometimes you have to take calculated risks despite what everyone else is doing. I say go for it and have a blast!

 

[ABQ2015]

Two years ago, when everyone I knew was downsizing, I moved "up." After years in a condo I bought a house in the neighborhood I always wanted to live in but couldn't afford in my earlier years. I took a new mortgage, albeit a small one to cover the gap and which will be paid off in a couple of years. I redid the kitchen and now turning to landscaping. I'm still in some sticker shock about my property taxes, but the appreciation in this neighborhood is sky high right now after I bought at a relative low. I love my neighbors, I love my house, I even love mowing the lawn! Life is short and sometimes you have to take calculated risks despite what everyone else is doing. I say go for it and have a blast!

I'm confused. I thought you sold your larger vintage home to buy a tiny condo in 2015. Did you change your mind at the last minute? Or have you already sold the condo and moved back to a single family house?

 

[PERSonalTime]

Go for it. What's the downside? You're paying cash, can afford the house and living expenses. This seems like a once in a life time opportunity and it appears that you will be ok financially. Get the house and let us know how you like it.

 

[Scuba]

I agree, sounds like you can afford it. Does the property you're interested in need any remodeling? And will you want new furniture/art? I'd include something for that as I've found when we've moved to a new place, the previous furnishings and decor often don't "fit."

Just curious why you want to tie up such a large chunk of cash in a home. Why not put down a down payment sufficient to make the monthly payment manageable for you, and invest the difference? I realize many people feel more security if they have no mortgage payments but it sounds like you have a large portfolio so am interested in your reasons for wanting to pay cash.

 

[FIRE'd@51]

I am wondering if there might be anything we've overlooked in our excitement at making change? One can definitely lose perspective on a decision like this I think.

You haven't mentioned capital gains taxes, which would be due on any gain exceeding 500K.

 

[HillCountry]

I will be in similar situation in 5/6 years. My current home is around 15% of my NW now. I will start looking for my retirement home in 5 years, as most likely I want to build new.

 

[FIREmenow]

My house is only 6% of my net worth. But I also have a boat (future retirement home) that is 13%. So I guess I'm at 19% overall.

 

[ElizabethT]

As far as the taxes go, research that they arent going to be reassessed to reflect your purchase price. A tax reassessment might ruin your day, it would absolutely ruin mine. Good luck, keep us posted.

In California they are reassessed to reflect purchase price at a rate of 1%, which we have already taken into consideration. We also have the option of avoiding a reassessment by keeping our purchase price comparable to our selling price, a one time option in some CA counties for those 55 and older. Even though we don't think we'll be doing this, hence this post, it is still out there in the event we do.

I agree, sounds like you can afford it. Does the property you're interested in need any remodeling? And will you want new furniture/art? I'd include something for that as I've found when we've moved to a new place, the previous furnishings and decor often don't "fit."

We have an annual budget line item for furnishings/improvements, however, from what I've seen so far, the homes we're targeting are even nicer on the inside than the home we're selling. People appear to have spent some serious change appointing their homes, which we will much enjoy I'm sure.

Just curious why you want to tie up such a large chunk of cash in a home. Why not put down a down payment sufficient to make the monthly payment manageable for you, and invest the difference? I realize many people feel more security if they have no mortgage payments but it sounds like you have a large portfolio so am interested in your reasons for wanting to pay cash.

That is a valid question. I think it falls under the 'sleep better at night' category for us - having a paid off house was a major goal which we achieved a good number of years before FIRE'ing. We do still have a healthy chunk of change invested in the market.

You haven't mentioned capital gains taxes, which would be due on any gain exceeding 500K.

We should be OK here, even if just. We've made a lot of capital improvements to our current home over the years, which should close any initial gaps still remaining after assessing original purchase less gain, including in prior homes. EDIT: Added 'Make an appt with tax acct' to our list to run through all the numbers with him - good reminder!

We've been at the gate with this decision at least two times in the last couple of years, but backed down each time because it didn't feel quite right. It feels like our ducks are in better order this time around.

 

[Koolau]

You haven't mentioned capital gains taxes, which would be due on any gain exceeding 500K.

I was thinking one could roll the old money into the new place and delay the over $500K tax bite. Some research on this might be in order to insure tax efficiency.

What about the interim living until the new place is found/purchased/closed? Will there be storage costs for current belongings. What about rental costs, etc. Doesn't sound like it should be a problem, but just something to think about.

 

[lemming]

I think I have waited too long to do my "buy up" house, which is in a high rise condo building with metro access. I say do what you want .
Is the housing market there in a bubble? maybe. Or maybe your investment in California real estate is the best market play you ever made. And you get a beach house.
Koolau- that rollover you are thinking of ended in 1997..20 years ago. It was replaced by the 250k/500k exemption. see IRS section 121

 

[brett]

We downsized, sold our home, and travelled for 7 months. Our intention was to return, buy a new home/condo, and retrieve our items from storage.

Two things happened. After seven months of travel our tastes in housing changed. We wanted something smaller with very open floor plan.

When we returned the housing market had soured. Bad. So we rented for four years. Just bought a new abode recently. Prices did not change for the past four years where we live. Some homes went down in price. Conversely, we have had our home equity in the market for the past four years and it has done very well.

Both were important factors for us. We almost made the mistake of simply buying a smaller version of the homes that we were accustomed to in the past.

We almost fell into the trap that owning is always better than renting. We disagree with this thinking. It really depends on the market where you happen to be buying. The first year of renting was strange for us since we had been homeowners for so long. After a time we began to enjoy it more.
I would have been happy to keep renting from a financial and from a lifestyle perspective.

 

[ElizabethT]

I was thinking one could roll the old money into the new place and delay the over $500K tax bite. Some research on this might be in order to insure tax efficiency.

What about the interim living until the new place is found/purchased/closed? Will there be storage costs for current belongings. What about rental costs, etc. Doesn't sound like it should be a problem, but just something to think about.

California no longer has the roll option. It's an 'each and every transaction' method now.

We will live in an RV park during transition if necessary, in our rig. As long as we don't need to do so in July or August, we should have no problem finding a spot in OC. Other costs are being calculated now, including possible short term storage.

I'm becoming increasingly aware that this is going to be a very stressful transition, with a long list of items needing to be check off.

 

[ElizabethT]

I think I have waited too long to do my "buy up" house, which is in a high rise condo building with metro access. I say do what you want .
Is the housing market there in a bubble? maybe. Or maybe your investment in California real estate is the best market play you ever made. And you get a beach house.

We may well be in a bit of a small bubble, however not sure what I would do about it if we were/are? We'd take a hit here if it burst, a slightly bigger hit there if it burst, but since I can't foresee the future I can't foresee the future (if you know what I mean). I can say that prices are not yet back to the crazy post-2008/2009 recession highs, so I think there is still room to grow. And in the long run I can't see the coast ever taking a long term dive given the great weather, strong job economy, limited land, and overall desirability of S. OC.

It's a tough, big decision for sure, but one we can afford, which is what I have to keep knocking myself on the head with.

 

[Fedup]

I was thinking one could roll the old money into the new place and delay the over $500K tax bite. Some research on this might be in order to insure tax efficiency.

What about the interim living until the new place is found/purchased/closed? Will there be storage costs for current belongings. What about rental costs, etc. Doesn't sound like it should be a problem, but just something to think about.

You are thinking of the old law. The new law doesn't allow rolling the money. I think if there is a capital gain over $500K, there will be taxed.

 

[W2R]

Two years ago, after 6 years of retirement, I moved to a more expensive home just 3 miles away. It was $40K more expensive, rather than $200K more expensive, and I bought it in cash (my old house was paid off). I didn't put my old house on the market until after the move.

Overall, the move, closing costs, repairs to sell the old house, fixing up the old house a little to sell it, fixing up the new house a lot so it was the way I wanted it, the cost of maintaining the old house until it sold, plus the $40K price difference, and so on, added up to $92K total cost for all my expenses related to the move.

It was the best decision EVER. I am so happy in my new-to-me home! Every day I wake up, look around, and feel so happy to be living here. The amazing thing is that the market increases in the past two years have nearly made up for it.

One expense that I didn't count in the $92K, is the increase in Medicare Part B for this year due to my income supposedly being higher in 2015. That was because of selling funds to buy the house. Anyway, I am paying about $1K in higher Medicare this year but my understanding is that it will go back down after this.

If I had it to do again, I'd move into an extended stay place and tell the movers to pack everything as well as move it. Your idea of an RV park is very smart. I don't know your age, but I think that letting the movers do the packing would be good advice to anyone pushing 70 or older. It's easy to overdo (and I did).

 

[Fedup]

We may well be in a bit of a small bubble, however not sure what I would do about it if we were/are? We'd take a hit here if it burst, a slightly bigger hit there if it burst, but since I can't foresee the future I can't foresee the future (if you know what I mean). I can say that prices are not yet back to the crazy post-2008/2009 recession highs, so I think there is still room to grow. And in the long run I can't see the coast ever taking a long term dive given the great weather, strong job economy, limited land, and overall desirability of S. OC.

It's a tough, big decision for sure, but one we can afford, which is what I have to keep knocking myself on the head with.

I would just buy it and enjoy your new home. I'm glad I did purchase a new home pre-retirement. You can't think everything through. I was thinking of buying something recently with upto $1 Million more than what we can sell for our house. I like real estate, my house is my castle kind of thinking, but backed down because I realized it's too big of a house for 2 persons. 5000-6000 sqft. It's almost Texas size for this neighborhood. I already have 3000 sqft, but I have small yard. Still fantasize about having bigger yard though.

 

[Marita40]

I'm confused. I thought you sold your larger vintage home to buy a tiny condo in 2015. Did you change your mind at the last minute? Or have you already sold the condo and moved back to a single family house?

Thanks for asking ABQ! Yes, I had a couple machinations along the way, with offers I couldn't refuse, then ended up in the house described above. It was an adventure and I'm so happy it all worked out the way it did. As mentioned, sometimes it pays to take a calculated risk!

 

[Blue Collar Guy]

I think I have waited too long to do my "buy up" house, which is in a high rise condo building with metro access. I say do what you want .
Is the housing market there in a bubble? maybe. Or maybe your investment in California real estate is the best market play you ever made. And you get a beach house.
Koolau- that rollover you are thinking of ended in 1997..20 years ago. It was replaced by the 250k/500k exemption. see IRS section 121

+1

 

[Blue Collar Guy]

One expense that I didn't count in the $92K, is the increase in Medicare Part B for this year due to my income supposedly being higher in 2015. That was because of selling funds to buy the house. Anyway, I am paying about $1K in higher Medicare this year but my understanding is that it will go back down after this.

it does go down, they go by the following years tax returns, it happened to my at the time 86 year old mother, when she sold her house of 57 years.

 

[Blue Collar Guy]

.

I am wondering if there might be anything we've overlooked in our excitement at making change? One can definitely lose perspective on a decision like this I think.

I appreciate the updates you posted to our questions, i think you guys have not over looked anything. Enjoy the new home.

 

[W2R]

it does go down, they go by the following years tax returns, it happened to my at the time 86 year old mother, when she sold her house of 57 years.

That's wonderful! I am looking forward to it going back down. The income on my tax returns was nice and low in 2016, after being so high in 2015.

 

[daylatedollarshort]

ElizabethT, I think once before you mentioned in a previous post wanting a nicer patio area. We have a nice backyard with lots of trees, flowers and wildlife, and sitting outside chatting with coffee or the occasional beer, sometimes just watching the hummingbirds, is a part of almost every day we really enjoy. If it were me I'd probably move for the patio area. Part of the reason we have not downsized has been not being able to find a smaller place with as nice a backyard as we have now.

 

[ElizabethT]

ElizabethT, I think once before you mentioned in a previous post wanting a nicer patio area. We have a nice backyard with lots of trees, flowers and wildlife, and sitting outside chatting with coffee or the occasional beer, sometimes just watching the hummingbirds, is a part of almost every day we really enjoy. If it were me I'd probably move for the patio area. Part of the reason we have not downsized has been not being able to find a smaller place with as nice a backyard as we have now.

Yes, I definitely did, and that is still our top priority in any replacement home. Years of RV'ing have left us with a permanent longing for open space to look at. I'm fact, the first thing I look at online are the outdoor space photos. I can change everything else about a house, but I can't change that.