House == bank ???

[deskpilot]

I will be moving soon. See here: http://www.early-retirement.org/for...ement-on-the-horizon-82200-2.html#post2032259

I am looking to buy a house in a particular community in FL and have the choice of a houses from $350K to $550K. The $550K houses are quite larger with lake views and more land. My current house should sell for 450-500.

Putting an extra $200K into real-estate at the start of a probable ER scares me.

My question is: should I consider the extra $200K to be like money in the bank? If I need it back, can I just downsize later, and enjoy the better house for the next 10-15 years?

I am aware of the costs due to higher taxes and the future closing costs. That is no issue.

These houses are in a community with an HOA. The values seem pretty rock solid and I'd be downsizing in the same community.

So - is the extra equity like future money in the bank?

 

[harley]

No, it's like money in the stock market. Probably fairly safe in the long run, but no guarantees.

We built a big house in 2008, and the value is still ~30% below what we paid for it. We also own houses in other locations that are worth more than we paid. Real estate values are very localized, and FL is more volatile than many other places, due to weather and whim. If the economy takes a big hit, a lot of people might sell or default on their (second) FL homes, knocking values down. Or not. It depends.

I'm not trying to talk you out of it (unless you're coming to SWFL, in which case Don't Do It!). If it were me, I'd go for the nicer home with the better views, although more land can be a plus or minus as you get older. But be aware of what you are doing, and don't try to convince yourself it's a safe bet. The odds are with you, but it's not guaranteed.

 

[Red Badger]

What harley said...

I always consider home ownership an indulgence. Our home is nothing special, but for the burbs, it is extremely quiet and secluded with tons of shade. We love it, and enjoy the compliments we get from visitors. I'd get the views and consider it QOL investment. Good luck!

 

[MichaelB]

In my view, money in a house is money spent. The only exception to this is if the house is a rental.

 

[wmc1000]

I agree with the others, having said that does the $350K house provide all you are looking for? If not maybe there is one that does without going all the way up to $550K. Your finances from your other post would possibly suggest with a long retirement ahead for a 50 YO couple your peace of mind is the most important factor. Reducing your stash by $200K may not be the best way to go about it.

 

[bobandsherry]

Surprised to see you even ask this question. You obviously have lived through the economic boom and bust of real estate that occurred 2004 to 2010 and seen what happened to your current property value. A simple search of home values from 2004 to 2010 of the area you are looking should be the necessary data points to show what goes up can go down.

 

[deskpilot]

The location is in the West Palm Area. My mom lives in this community so the choice of location is driven by being close to family and some approaching elder care issues.
I expect to inherit my Mom's house - but I never include any inheritance in any FIRE plans. You never know what will happen if long term care is needed.

So, given the constraints on location, the choice is really about putting in an extra 200K and the ability to pull it back out if my RE plans fail for unexpected reasons (i.e. health, demise of SS, etc...)

FYI - the 550 house is sooooo much better. It looks onto a lake and has a big pool. the cheapest houses have a small patio and a view of a wall and are quite smaller.

My wife and I clearly have "house fever" and aren't thinking rationally. that's why I am seeking advice. We are going down to FL this week to look at these houses.

 

[RunningBum]

I think it's a reasonable plan. It seems ridiculous to me to say or at least imply that once you've spent your money on a house you can't get money back. A house (almost always) isn't like a car that eventually has little or no value in your lifetime. I have the same backup plan. You have to live somewhere, but it doesn't have to be a large house with a view.

I don't think it's the same as money in the bank, nor the stock market. It's a riskier investment than either, though it could do better. In my case the market went up about 70% within a few years, and I even had a life situation that would've been a good reason to sell but I didn't. It dropped back down and now I might not do much better than break even after 17 years. That's kind of a bummer, but I love where I live and enjoy my views every day.

My caution is, don't be in a situation where you have to sell quickly. If it's due to the economy, you probably will have more trouble selling your house. You may be in limbo having to sell one in a depressed market and not being able to buy another until it's sold. Of course you can rent during the transition, but you might be selling at a low, and buying back in as your housing market is picking up steam again.

 

[omni550]

What harley^^ said.

DANGER: Don't get house fever.

There's a reason pricier homes are usually nicer than those that are less pricey, it's because they offer more (are nicer, have better amenities, better location, better views, etc.). And with the volatility of the real estate market, IF you HAVE to sell, you can never be sure you'll catch the market at a high. (look back to the 2007-2012 timeframe, especially in Florida.)

House =/= Bank

omni

 

[ugeauxgirl]

Keep in mind that Millennials (who may be the ones looking to buy your house when you downsize) may not be interested in bigger houses. They are the originators of the "Tiny house" trend.

I think it depends on how tight your finances are, but also on how important a house is to you. My house is comfortable but not lavish. My sister spent $150K upgrading hers so it would be "perfect" and it was pretty nice before. I'd rather have that money in vacation funds.

If you have house fever, consider renting for a year until you don't. This is a big decision and you need to make it clear-headed.

 

[MarieIG]

I don't see the house as a piggy bank, it's a place to live. You cannot count on the value of the home being up at the time you want to sell. In your situation, with your nest egg, I'm not necessarily opposed - but get a complete handle on your total expenses including the home maintenance costs, repairs, insurance, utilities, taxes, etc. FIRST.

You mentioned that in the future you may want to work some from home. Might as well work in a nice home.

I read your first thread. Have you been doing your studying on AA?

 

[REWahoo]

The first thing I thought of when I saw this thread title was, "Is it about to be 2008 all over again?"

Lots of threads here at that time about plans to cash out on a highly appreciated home and retire to a lower COL area. Those threads disappeared in the GR but this made me wonder if we were about to repeat history so soon.

 

[MRG]

We bought a place in '06, went underwater in 08'. Sold at a loss in '16. Not a very good "bank".

Keep in mind many new homes have big expenses. Landscaping, draperies, one time upgrades. Those were the big expenses we never reclaimed.

 

[harley]

I don't think it's a matter of the house being a bank, as much as being an issue of being on the edge of a relatively secure FIRE. If the $200K will significantly move your Firecalc success percentage, there's no way I'd do it. But if it won't really put your retirement at risk, I'd definitely go for the nicer house. Quality of life is a huge factor in retirement.

In my case, I didn't want to have a ton of money tied up in home equity, because even if it was safe (it wasn't), it's not a very liquid place to keep your money. I was dealing with larger amounts, but I took out a mortgage since I was sure that my investments would always produce enough money to pay the mortgage, as well as cover the interest costs. And once you are in a home, assuming you plan to stay, who cares what Zillow says the value is? As long as you can make the payments you're golden.

 

[OldShooter]

Well, investing in a house is probably similar to investing in a bank building. Similar to a bank account?

• A bank account is liquid. A house can take months to sell, particularly if the seller is not willing to be flexible on price.
• A bank account is a reliable store of value. A house's value is driven by an unpredictable market. In a retirement market, though, it is highly likely that a steady flow of new houses will be there to compete with sellers of used houses.
• Transaction costs on a bank account are zero. Round trip transaction costs on a house are probably 15% or more.
• If you cash out a bank account, that probably doesn't affect your housing. If you cash out a house, you still have to live somewhere.

So ... To answer your question, I have to conclude that a house is not much like a bank account.

You want the house? Fine. There's nothing wrong with that. You're trying to justify this desire by arguing that it is an investment? Fine. We all try to rationalize what we want to do.

Can you afford the house? We don't know. If your NW is 8 digits, buy the house. If your NW excluding your current residence is $200K, probably not. Somewhere in between. Maybe.

 

[deskpilot]

A lot of valuable advice in this thread.

I did live through the last crash. I do remember my house value tanking, but I was still way above water on it and far from wanting to sell, so I didn't care much at the time. I certainly value advice from those that were more adversely affected.

I was laid off a few days ago after 30 years. It was a surprise mass layoff that I was not expecting for another year or 2 as my project is going to continue for many years (albeit overseas now). It was pretty rotten and was driven by activist investors and had no concern for the success of the many projects that are now devastated.

I definitely need to take a deep breath and chill out. The house fever and FIRE fever have come on suddenly and very strong as a reaction to the layoff. I've also had my fill of NJ.

I am so tempted to try to convince the doubters here...like a house just came up has a really motivated seller, is very well priced for what it is, my mom will chip in, if I don't act now I'll miss out, etc... but that's just the fever. If you haven't gone house hunting and been wow'ed by dream houses, then you probably wouldn't understand.

 

[deskpilot]

Can you afford the house? We don't know. If your NW is 8 digits, buy the house. If your NW excluding your current residence is $200K, probably not. Somewhere in between. Maybe.

My situation is described in my other thread. NW without my current house is 3.1M. No debt, pensions or health benefits. Calculators say 100% if I earn only 1-2% return overall. I'd say that I'm fine assuming ACA and SS, otherwise, not.
There is a potential inheritance that is not being considered in any calculation that would solve any problems.

The main takeaway is clearly to chill out and think rationally - and that house != bank.

 

[MichaelB]

I am so tempted to try to convince the doubters here...like a house just came up has a really motivated seller, is very well priced for what it is, my mom will chip in, if I don't act now I'll miss out, etc... but that's just the fever. If you haven't gone house hunting and been wow'ed by dream houses, then you probably wouldn't understand.

The main takeaway is clearly to chill out and think rationally - and that house != bank.

Sounds like your mind is already made up.

 

[OldShooter]

... I definitely need to take a deep breath and chill out. ...

Wise. In the old days, when a pilot was being trained and discussion of in-flight emergencies was the topic, the advice was "In an emergency, wind the clock." The argument was that if the emergency was so serious that there was no time to wind the clock, then it probably couldn't be mitigated anyway. The clock-winding time, it was argued, gave the pilot a little time to think and plan.

These days we have electric clocks, but I think the concept is still sound.

Edit: Another point: Houses are like buses. If you miss this one there will be another one along soon.

 

[deskpilot]

I read your first thread. Have you been doing your studying on AA?

I've concluded that a very conservative portfolio of some vanguard funds is adequate. Some folks here put money into wellesley or wellington and don't overthink it.

As of today, I have only 15% in stocks, which equates to over 400K. for me it's hard not to think of it as 400K being gambled in a casino. However, I expect that my retirement allocation will be more aggressive than that, but nothing tremendous.

 

[Human]

I’m FIRE and will probably end up buying a new, more expensive house and carrying a mortgage. So my thinking may be a little different than others.

I plug the additional down payment (additional amount above current home equity) and additional yearly expenses (above current mortgage, property tax...) into a retirement calculator. Then I can gauge the effect on success rates and withdrawal amounts.

Given I’ll have so much equity in the home, I’m comfortable treating it as a safety net - for if/when I need to move on (and not too worried about any down housing value cycles).

 

[deskpilot]

Sounds like your mind is already made up.

I've made up my mind to chill out. DW's mind is set on her new house. She is talking about "her new library" (the darn house has a beautiful library).

My next visit to FL is on Tuesday and my Mom has set up some showings (the realtors are all her friends).

This thread will help me resist the pressure and make rational decisions.

 

[97guns]

If you really think about it, everything you own including the underwear your wearing right now is net worth. Everything is a savings/bank account, everything contributes or deducts to or from your bottom line. Net worth is a business

 

[Sunset]

OP - from reading this thread, you see to have retired early, so you have a long time to fund. Nice that you have $3.1 M probably is enough.
Yet you said you only have 15% in stocks, that is extremely low, and I think you will lose money (purchasing power) due to inflation, so your big pile of money will buy less over it's 40+ year retirement.
Did you adjust the retirement calculators to account for your low stock holdings ?

As to the house, that is a big extra $200K , but honestly that is the small part. The large part is the extra you will pay in upkeep/repairs/insurance/property taxes/water/sewer/ every year for the next 20 years, and you never get that back when you sell.

Plus you will have the pressure of keeping up with the Joneses living around you with their own $500K - $600K homes.

 

[Texas Proud]

Did not read all the posts as my cat is bothering me....

But, the question I would ask if would the $200K make a difference in your total portfolio? IOW, would it stretch your finances for the next 20 years?

If not, then I would want to have the lake views... being at a location where you cannot see the lake from your house means you are the same as I am... I cannot see the lake (but I am more than 20 mile away)....

If you only said a bigger and nicer house I would have a different answer...

BTW, I think the lake view will go up in value faster than the interior....