House == bank ???

[OldShooter]

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

Well to be accurate, the asset side of the balance sheet is offset by the liabilities to get net worth. Be sure to deduct the mortgage on that underwear!

On a business balance sheet, too, assets are categorized as "current assets" and "long-term assets," aka "liquid" and "illiquid." I think that's an important distinction for retirees. We would all be in a world of hurt if all our assets were illiquid like our houses are.

 

[youbet]

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

Hmmmmmm...... We'll see about that.......

My opinion is that your decision is a function of your net worth, your overall AA and the amount of life satisfaction you would derive from the nicer home. One of your earlier posts indicates your investable portfolio to be about $2.7M invested very, very conservatively. (You said $400k = 15%.) It really doesn't seem like moving $200k of that to real estate would be all that risky. Even in the event of a draconian real estate downturn in Fla resulting in, say, $100k (50%) of that incremental money vanishing, so what? And your total AA would still be quite conservative.

If the incremental life satisfaction you describe (seems like you're expecting a large improvement) is even close to accurate, how could you possibly decide not to do it? A small change in your AA (+200k to real estate) resulting in slightly more overall portfolio risk but bringing a large increase to your enjoyment of life just seems like a slam-dunk.

 

[HadEnuff]

deskpilot, if you go for the bigger house, will you be taking out mortgage or paying cash?

One thing to consider, as pointed out in The Millionaire Next Door, is that when you move into a more affluent neighborhood, you will be hanging around more affluent people, with more affluent tastes. There is a "pull" associated with that, that will challenge your more frugal sensibilities. Things like cars, clubs, dining out, home decor...on and on..

Not to say you should or shouldn't do it, just suggesting there will be some escalation in lifestyle associated with it.

Another consideration, and to me the biggest one, is what is the worst case scenario? Can you avoid, with your assets, having to sell at a housing market bottom. HOAs can be problematical in a housing crash. Fellow owners leaving, fewer wallets to feed the HOA, amenities deteriorate...these things most likely ride themselves out, but can be harrowing in the meantime. Can you afford it? Can you stomach it?

 

[NW-Bound]

The OP said he has $3.1M and no debt. The nicer home is only $100K more than his current home.

Homes are not easy to change, unlike a car or other possessions. And being homebodies when we are not traveling, we want a home we are happy with. I would get the nicer home, if I care that much about the difference over the lesser home. I would cut expenses elsewhere.

This is really something only the OP can determine. People have different priorities. Just do not think one can cash out the home equity that easily.

 

[RobbieB]

For me it would be an easy decision, go with the one you want to live in for 15 years.

Let's see 15 years with a pool (where you can really use it) and a nice view vs 15 years of sweat and staring at a wall.

 

[W2R]

I regard a house to be like any other purchase and the money put into it to be well spent yet irretrievably lost. Some/many of us will live in our home until the day we die. At least, that is my tentative plan.

I think that each of us knows what a reasonable price for a house would be, for ourselves. My opinion is that you should spend that price that you know is completely reasonable, and yet still fun and not miserly.

 

[JoeWras]

House =/= Bank

omni

omni, there's a compile error in your statement. It should be:

House != Bank



And I agree, primarily because a bank or stocks are liquid. A house isn't.

(My apologies to non tech people.)

 

[Bamaman]

Congratulation on getting where you are in life at the age you are. It is a shame that the job played out, however it is not your fault--someone else's business decision.

Many people have worked very hard in their careers and never had time to prepare themselves for retirement--much less such early retirement. You may be in that category.

As far as which home to purchase, I would go for the bigger one. You wouldn't go wrong with the cheaper house, but your wife would probably do better having a bigger canvas to decorate.

Now it is time to buy the house and coordinate the move. Getting settled will take you the better part of a year. At least you won't have to deal with state income taxes and cold weather in the future. And family will be near. Things will work out just fine for you.

 

[bobandsherry]

Interesting to see how this thread morphed, the OP's question was:

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?

 

[RunningBum]

Interesting to see how this thread morphed, the OP's question was:

How did it morph? For the most part people are still on track.

 

[deskpilot]

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 ?

I use the Flexible Retirement Planner and I plug in very detailed numbers for pre-tax vs post-tax and different one-time income/expenses that I expect over the next 20 years. the tool is the best one for me. In the tool, it assumes 6% gains for the most conservative AA with a std dev of 4.3%, but I override this and run the tool to model gains of 1-2% with inflation of 3%. So, I do a very very conservative calculation. I also add in 30K for ACA even though I would qualify for full subsidies if the law does not change.

I will be helping train my repalcements until the end of 2018 and be covered by severance in 2019 - so "retirement" starts 2020 at age 54 to be exact. I can move at any time though.

 

[UnrealizedPotential]

A house is not a bank although some people treat it as one. To me, a house is an illiquid investment until sold. It's money that is frozen or held up. Also consider the fact that real estate values fluctuate all the time. So that being the case I wouldn't count on anything until the property is sold. One could borrow money against the property and then the value of the property takes a nose dive. What then?

Owning real estate is risky. Yes, you can make a lot of money and it can work out well, but it might not. You can't count on anything.

 

[joeea]

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?

No!

A good friend and his wife bought a home with the same thought many years back. Sure, it was a lot more than they planned, but it was a great home in a great location that their daughters would love, and their two incomes would (barely) cover it. And surely eventually, they would be able to pay back the loan from her parents for the down payment.

So they bought the beautiful house.

Then they struggled to furnish it and ran up a lot of credit card debt.
Then she got pregnant and couldn't work any longer.
Then they fell behind on the mortgage.
Then they declared bankruptcy.
Then they got divorced.
Her parents have never been paid back.
They are both living paycheck to paycheck - she with her parents and he in a small apartment.

None of this had anything to do with the Great Recession. It all started by becoming severely house poor.

It's only money in the bank if your bank is in the habit of throwing away large percentages of your money at the worst possible time (like when you "need it back").

 

[deskpilot]

How did it morph? For the most part people are still on track.

In response to people's questions, I may have hijacked my own thread by adding details about asset allocation, retirement calculators, house fever, heartless megacorps , . Sorry about that.

In general, the core of the thread is: house != bank and what amount of happiness will the 200K get me vs any risks.

I have found this discussion immensely helpful, as I knew I would.

 

[Moemg]

I would pay more for a view .I have no interest in staring onto a wall or into someone else's house . My only suggestion would be do not buy too much house because downsizing when you are older is a lot harder than you are thinking.

 

[RunningBum]

The best house to buy is usually the cheapest one in the neighborhood. The bigger houses will pull it's value up. For people who just want to get into a neighborhood, the smaller house will do well. But a lot of buyers may be put off by not having any kind of view.

If things go well in the area, all values will go up, and if they go up by the same rate, the bigger house will see a bigger $$$ gain. A great view will do a lot to attract buyers.

No way to know for sure which one will work out better. $200K is a lot extra to pay for a view. Half that seems more inline (without really knowing just how good/bad the two views are), so the house itself, and perhaps location/privacy, better be worth another $100K.

A $550K house on a $3M portfolio doesn't seem out of line to me.

About 15 years ago I had a need to live somewhere for a pretty certain 5 years, and decided to buy. I went only a bit above starter home, but it had a layout I really liked. It was about 20% the value of where I live now. It had no real view, but the only real drawback is that the neighbors were too close, with a yappy dog and two annoying kids. Give me a little more space and privacy, and I'd be perfectly fine there. I'd miss my killer view and bigger space of my current home, but I don't think it's a huge deal. That said, if I did move again, I'd try to have another good view.

 

[bobandsherry]

How did it morph? For the most part people are still on track.

There's more discussion on which house to buy, which from reading the op was not his question or concern. Or what do you read from posts above?

 

[youbet]

In general, the core of the thread is: house != bank

Dollars invested in real estate will perform differently and have a different risk/reward profile than dollars put into a bank instrument such as a savings account or CD. Is that what you're asking? (You don't seem like someone who isn't already well acquainted with that information.)

and what amount of happiness will the 200K get me vs any risks.

How can you expect us to know the answer to the very personal-to-you question: what marginal utility will your DW and you gain from owning a larger house with a nice view vs. a smaller house with a crappy view? That's a question to answer for yourself. Some of your statements have indicated you and your DW would love to have the larger home with the view, but that's really all we know about the importance of housing quality and amenities in your life. Did you really think someone here could tell you how you'd personally value the nicer view home?

All other things being equal, the purchase of the larger + view home would add a small amount of risk to your current, conservative AA. If your personal preferences are that the larger + view home would bring you a substantial amount of marginal utility in your enjoyment of life, I can't understand why you wouldn't purchase it. In the awful scenario that you lose 50% of the incremental cost due to needing to sell during a crashing real estate market, it wouldn't be a life changing event for you. OTOH, the house might appreciate nicely and you'd actually make money by owning the nicer home. You pays yer money, you take yer chances.

 

[Texas Proud]

No!

A good friend and his wife bought a home with the same thought many years back. Sure, it was a lot more than they planned, but it was a great home in a great location that their daughters would love, and their two incomes would (barely) cover it. And surely eventually, they would be able to pay back the loan from her parents for the down payment.

So they bought the beautiful house.

Then they struggled to furnish it and ran up a lot of credit card debt.
Then she got pregnant and couldn't work any longer.
Then they fell behind on the mortgage.
Then they declared bankruptcy.
Then they got divorced.
Her parents have never been paid back.
They are both living paycheck to paycheck - she with her parents and he in a small apartment.

None of this had anything to do with the Great Recession. It all started by becoming severely house poor.

It's only money in the bank if your bank is in the habit of throwing away large percentages of your money at the worst possible time (like when you "need it back").

This has zero to do with OP as he has the money.... your example seemed a disaster from the start as they borrowed money to even pay for the house.... and more for etc. etc.... kinda stupid, but lots of people do it...

 

[pb4uski]

Late to the party. I would reframe the question a bit.

Why not buy the $550k house with the great view that you want and finance the excess over the proceeds from the sale of your current home? If your current home sells for the low end of the range of $450k then you'll have, say, a $150k mortgage with closing costs, etc. Your payments will be less than $1k a month and you don't have to "use" any of your retirement stash.

The mortgage payments will be a premium that you pay to enjoy that bigger, nicer home with a great view and you'll get your money back if/when you later downsize... perhaps even with some appreciation gain. The reality is that things will probably turn out better than you think and you'll never ever need or want to downsize.

 

[freedomatlast]

200K difference on a 3.1M portfolio is nothing more than a market fluctuation in magnitude.

After years of hard work and saving, go ahead and buy the nicer house if that's what you want.

 

[RobbieB]

Yup. Ditch the frugality and get the house with a view. Geeze.

You got 3 mill, what's a couple hundred grand to not have to stare at a wall?

 

[FI_RElater]

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.

You’ve already said that there may be issues with long term care...and I suspect that the house she lives in is the backup plan for care... so you REALLY CANNOT PLAN ON THAT vis-a-vis inheriting it.
My FIL lived over a decade after stroke as did the MIL... long term can be LONG term


AFA housing, you’ve now mentioned being RIF’d at 50- something with a 3.1 mil sans current house:

so estimated 350 less ten percent (for negotiations and realtor fee) then left with just shy of 320. for a 550 house you need to bring 230 to the table (any higher fees for the 550 vs 350? ) This leaves you with ~2.8 mil, which then it’s important to know what is in taxable versus tax-deferred. If most is in tax-deferred then you might find it tighter, very likely do-able but tighter. if a mix of about 50/50 between the two, it may be easier as the tax has already been paid so you can go ahead but beware of upgrading lifestyles. BUT, speaking of taxes- the more expensive house WILL have much higher ONGOING property taxes: have you accounted for those? (the good news is that the millage for FL houses is almost guaranteed to be lower than “Jersey”)

When we looked at retirement houses, we also had similar decisions- found a house that was ~200 k over what we eventually bought. We were glad that we kept looking: we found a place that met virtually all our criteria and it has appreciated MORE, as it wasn’t priced at the top. BTW, the other house languished for over a year and a half...

BTW, did you at least apply for unemployment bennies? Also, doing things in haste often results in suboptimal results... take your time to evaluate

 

[bmcgonig]

200K difference on a 3.1M portfolio is nothing more than a market fluctuation in magnitude.

After years of hard work and saving, go ahead and buy the nicer house if that's what you want.

In response to people's questions, I may have hijacked my own thread by adding details about asset allocation, retirement calculators, house fever, heartless megacorps , . Sorry about that.

In general, the core of the thread is: house != bank and what amount of happiness will the 200K get me vs any risks.

I have found this discussion immensely helpful, as I knew I would.

Agreed.

The 200k is not money in the bank but I'd say half of it is. So if the housing market went south Im sure you'd get half of it back. And if that's the case the stock market probably isn't doing too well either. So worse case you're down 100k. That's only 3% of your portfolio

Go enjoy yourself. That 200k will most likely never be needed and will probably end up as your estate. Won't you be pissed off if you don't buy this house and you end up leaving someone a few million?

 

[pb4uski]

.....so estimated 350 less ten percent (for negotiations and realtor fee) then left with just shy of 320. for a 550 house you need to bring 230 to the table (any higher fees for the 550 vs 350? ) ....

Where is the $350k coming from? In the OP the OP said he expects to get $450-500k from the sale of his current house.

Less ~10% for negotiations and selling costs that would be $400-450k of net proceeds so a mortgage of $100-150k and payments of less than $1k/month if the OP buys the nicer house and finances the difference.