HELP! Willpower weakening! Yearning to buy barely-affordable luxury house!

[SLC Tortfeasor]

So me and my lovely lady are looking to upgrade our house (currently in a 1200 square foot place that's great, but too small).  We've fallen in love with a place that we know we'd be content and happy in for the next 10-20 years.  Problem is, we can only barely afford it.  If we bought it, I'd only be able to save about 15% of my gross yearly salary toward retirement.  We wouldn't be living below our means in this place, we'd be living the high life.  We'd be trapped in a high-cost lifestyle, imprisoned by our mortgage.

Here are some of the ways I'm trying to rationalize it:

1. Everybody says buy as much house as you can reasonably afford.  This house is it.  It simply means we'll enjoy more appreciation than cheaper houses, and it'll give us something to grow into.

2. This will force us not to waste money on nice cars and other frivolities.  In fact, I'll sell my current nice car to help pay for it.

3. This house is actually one of the cheaper houses in the neighborhood.  They say you should buy the cheapest house on the block, right?  Well, this is close.  It just happens to be one of the most expensive neighborhoods in town. 

4. Location, location, location.  Sure, we're paying through the nose, but you can always safely bet on location.  People will always pay a premium for the best locations, so it's a good investment.

5. I'm a lawyer, and other lawyers tell me, you've got to be near money to make money.  Meaning, you want to rub shoulders to rich people if you want rich people to give you work.  I can entertain in this house.  The neighborhood oozes prestige.

6. Although I can only barely afford it now, my salary is constantly rising, and in a few years it will be a lot more manageable. 

So, everyone, please help.  If I were giving myself advice, I'd tell myself that if I can only barely afford it, it's probably too expensive.  But I sort of have "gotta-have-it-fever."  I've seen others similarly afflicted, and I know it isn't pretty.

Before you ask, no I don't live in one of the many localized real estate bubbles in this country.  I live in Utah, where the real estate appreciation has been among the lowest in the country for the past few years, and is only recently starting to accelerate.  I'm quite confident that barring a major terrorist attack or 70's-style oil shocks, we'll see steady, continued appreciation.

 

[Mr._johngalt]

So me and my lovely lady are looking to upgrade our house (currently in a 1200 square foot place that's great, but too small).  We've fallen in love with a place that we know we'd be content and happy in for the next 10-20 years.  Problem is, we can only barely afford it.  If we bought it, I'd only be able to save about 15% of my gross yearly salary toward retirement.  We wouldn't be living below our means in this place, we'd be living the high life.  We'd be trapped in a high-cost lifestyle, imprisoned by our mortgage.

Here are some of the ways I'm trying to rationalize it:

1. Everybody says buy as much house as you can reasonably afford.  This house is it.  It simply means we'll enjoy more appreciation than cheaper houses, and it'll give us something to grow into.

2. This will force us not to waste money on nice cars and other frivolities.  In fact, I'll sell my current nice car to help pay for it.

3. This house is actually one of the cheaper houses in the neighborhood.  They say you should buy the cheapest house on the block, right?  Well, this is close.  It just happens to be one of the most expensive neighborhoods in town. 

4. Location, location, location.  Sure, we're paying through the nose, but you can always safely bet on location.  People will always pay a premium for the best locations, so it's a good investment.

5. I'm a lawyer, and other lawyers tell me, you've got to be near money to make money.  Meaning, you want to rub shoulders to rich people if you want rich people to give you work.  I can entertain in this house.  The neighborhood oozes prestige.

6. Although I can only barely afford it now, my salary is constantly rising, and in a few years it will be a lot more manageable. 

So, everyone, please help.  If I were giving myself advice, I'd tell myself that if I can only barely afford it, it's probably too expensive.  But I sort of have "gotta-have-it-fever."  I've seen others similarly afflicted, and I know it isn't pretty.

Before you ask, no I don't live in one of the many localized real estate bubbles in this country.  I live in Utah, where the real estate appreciation has been among the lowest in the country for the past few years, and is only recently starting to accelerate.  I'm quite confident that barring a major terrorist attack or 70's-style oil shocks, we'll see steady, continued appreciation.

You're only 29. Go for it!

JG

 

[SLC Tortfeasor]

You're only 29.  Go for it!

JG

Are you serious?  I didn't expect that response from you.  I expected to be reprimanded for allowing myself to be dazzled by the prospect of living in luxury. 

Does the fact that I'm 29 make failing to live below my means less bad?

 

[Martha]

I'm a lawyer, and other lawyers tell me, you've got to be near money to make money. Meaning, you want to rub shoulders to rich people if you want rich people to give you work. I can entertain in this house. The neighborhood oozes prestige.

I think entertaining in your home to get clients is much more rare then it used to be. Join what your clients join and rub shoulders with them there. Frankly, returning phone calls the same day you get them and doing timely competent work will result in far more clients than having a place to entertain.

 

[REWahoo]

I don't think there is anything outside of prison that is more confining than being "house poor".   A close friend fell in love with a mansion years ago and moved heaven and earth to buy it.  Don't think he got a good nights sleep for two years afterward.  His house payment was like an albatross around his neck.

But you only live once...just depends on how you define "living"

 

[tryan]

we'd be content and happy in for the next 10-20 years.

If you're planning to work for the next 20+ years .... go for it. Home appreciation in that time span will make you happy. If not, your taking a huge risk.

 

[Howard]

That is exactly what I did, although I made very good money, the payments on the House were like forced savings.

Quality Real Estate in the right neighbourhood will hold its' value, plus your kids get to grow up with kids from other ambitious families.

The idea is that when you retire, you release the equity and downsize, not always true as we are now empty nesters in the biggest house we owned, but we are enjoying it.

Go for it, is she is on board, that's all that matters.

 

[Mr._johngalt]

Are you serious?  I didn't expect that response from you.  I expected to be reprimanded for allowing myself to be dazzled by the prospect of living in luxury. 

Does the fact that I'm 29 make failing to live below my means less bad?

Look, I (we?) spent more than we made for decades.  Certainly, at 29
(or 39) I never gave this ER thing a thought.  And, we made "The Joneses"
look frugal.  Anyway, if you buy it right the real estate will bail you out.
Besides, at 29 you can bob and weave and start over if necessary.
I don't have those advantages any more.  You should be spending more
time getting laid.

The answer to your question is.........yes!

JG

 

[JPatrick]

Well you are saying you will still be able to save 15% of your pay for retirement. That's pretty good.
Sounds like a great house --location --price-- appreciation potential.
So you can't buy the luxo car--that's good too!
I'd say review your research to insure it is as good as you say--then if it is, go for it!

 

[laurence]

I second that thought, if you can still put away 15% that doesn't sound too house poor to me. Have you already saved up a bit in retirement savings? It's compounding that's really going to be working for you, since your only 29. As long as the payment isn't going to keep you awake, you do need to balance the dreams of today with the dreams of tomorrow.

Caveat: Are children in your future? Thoughts of going from two income to one income? For that matter, can you make the mortgage if one of you loses your job?

 

[cute fuzzy bunny]

I think if you can afford it, and its what you want, give it a go. I think if I'd never lived in a really, really nice house I would have wished later in life that I had. It was nice. I dont need it anymore.

Other than that, almost everything you said comes from two sources:

- realtors selling points
- a smart managers selling points. First thing I did when I hired a new sales rep was to convince them to a) get married to a spend crazy spouse; b) buy a huge house; and c) buy a mercedes or equiv.

With the latter fully in place, all motivation to sell as much as they humanly could to keep the bills paid came completely from external sources. All I had to do was show up to close deals and submit my forecasts.

Your boss and your realtor will be thrilled!

 

[Targeting40]

Just be sure to get an accurate assesment of what the new property tax rate will be. Many people under estimate property taxes but since your not in a rapidly appreciating market this may not apply. Also, if you haven't figured in the mortgage interest deduction it will help greatly come tax time.

I say go for it. From reading this forum, real estate has been a major player in achieving FIRE for a great many. Just don't get too hooked on the house because when you reach your 500K in tax-free capital gains it will become tempting to cash out and move on to the next one! We are in our mid 30's and 60% of our wealth has come from tax free capital gains on previous homes so that is why I am inclined to say "go for it". The risk can be very rewarding and unlike the stock market you get to enjoy it each and every day.

 

[Cut-Throat]

Give us some numbers. What's your current house worth? The New House worth? - If you can still save 15% today after purchase, I'd say go for it - especially if you think it's the place you'd like to live for a long time/

 

[justin]

maintenance, periodic remodeling, periodic capital improvements (new roof/carpets/flooring/paint), cleaning, landscaping, insurance, heating/cooling bills, taxes. All increase in proportion to house size and/or cost.

While your house appreciates, you are paying all if the expenses listed above. Remember that in the lux houses, you can't go el cheapo on stuff if you want to keep up the house value. Got to buy a new kitchen appliance? Better be stainless steel (those aren't cheap). Time to replace carpet? Forget that $0.79 per s.f. stuff, you're getting the upgraded $4/s.f. carpet. Everyone else on the block upgrading to solid granite countertops (or whatever the latest fad is)? Better reserve a few thousand more bucks for that.

Point is, a lot of the luxury neighborhoods go up in value because the owners improve their property (and spend plenty of money doing this).

As to entertaining clients, think about the added expenses. Gotta furnish that house with the nicest in furniture, linens, pots, pans, decorations, electronics, etc. Not gonna be cheap. You'll have to buy twice as much stuff to fill up a house twice as large. What is the expected marginal increase in your profitability as a lawyer due to your huge marginal increase in housing and entertaining-related expenses?

But if living in the nicest neighborhood in town is important, do it. Remember that the Joneses in that neighborhood are going to be much wealthier than in your old neighborhood. They'll be a lot harder to keep up with.

I almost got suckered in to the nice house/nice car/nice clothes deal when I almost became an attorney. Decided that lifestyle and career weren't as profitable as I thought.

But hey, it's your money. And I do need somebody to hang in there and fund my SS in a few decades.

 

[Nords]

We wouldn't be living below our means in this place, we'd be living the high life.  We'd be trapped in a high-cost lifestyle, imprisoned by our mortgage.

Here are some of the ways I'm trying to rationalize it:

Geez, SLC, how many alarm bells need to be ringing before you'll leave a burning building?!?

Advantage: You'll have a high-life house.

Disadvantage:
- You won't be LBYM.
- You'll feel trapped in a high-cost lifestyle.
- You'll feel imprisoned by your mortgage.
- This deal sucks so badly that you have to fantasize rationalize it to make the math work.

Listen to yourself, man. You're not happy. You're setting yourself up for the buyer-remorse hangover of all time...

What are the options for adding an extension or a second story to your current house?

 

[mb]

SLC,

A strategy that I have heard of to help people curb their spending inpulses is to figure out how many hours of work you need to put in to pay for something.

Why don't you do somethink like that. Sit down with FIRECALC and do the "trades." Look at comparable scenarios and calculate how many years the new house will delay FIRE. Then list the advantages of the house and sit down and determine what you value more.

I'll echo some comments from others that I think are important:

(1) I don't know if you have kids but assuming that that may be a possibility. Where would you want your kids to grow up? Is there any difference?

(2) I have the impression that you are doing this on one income. I would be much more concerned if you needed two incomes to do it.

Personally I don't think that buying a "dream house" at age 29 and still being able save 15% is a bad thing if that house will help make you and your family happy for the next 10-30 years.

Let us know what happens,

MB

 

[Helen]

SLC,

I think you should re-read, "The Millionaire Next Door" before you decide.

As someone else said it's not just the mortgage price, it's the furniture, property taxes, nice car in the driveway to fit the house.

OTOH, you do have to enjoy life while attaining your goals. It's that balancing act (at least for me) that is difficult.

Let us know what you decide.

Best of luck,

-helen

 

[template]

.. We've fallen in love with a place that we know we'd be content and happy in for the next 10-20 years. Problem is, we can only barely afford it. ... We wouldn't be living below our means in this place, we'd be living the high life. We'd be trapped in a high-cost lifestyle, imprisoned by our mortgage..

Recommend you buy a more affordable house.

 

[SLC Tortfeasor]

Give us some numbers. What's your current house worth?  The New House worth?  - If you can still save 15% today after purchase, I'd say go for it - especially if you think it's the place you'd like to live for a long time/

As always, great advice from everyone.  

Here are some numbers:
Current house = $220K - $260K
New house = listed at $725K, we could probably get it down to $700K

I'd have to take out about $600K mortgage (this number is so big it just about makes my head spin)

The absolute bare minimum I'd save toward retirement would be 13%, but probably more like 15% of my gross salary.

I'm estimating the massive mortgage interest payments would result in about an $8k - $10k tax refund every year for the first few years.  Or, considered another way, the effective interest rate on the mortgage, if adjusted for the tax benefits, would be about 4.5%, which is not a bad price for getting more invested in what I believe will be a strong real estate market.

Answering another question: I couldn't afford it on one salary.  Our combined salary right now is $140K.  It will go up to at least $195 in a year and a half, when my lady returns to her other job (right now she's in a relatively low-paying government job to get interesting experience, but her old firm is holding her position for her and she's definitley going back).

So, in a year and a half, we'd be able to afford it just fine.  But for the next year and a half, it would be tight.

Nords:  You're right, alarm bells are going off.  That's why I'm writing to you guys.  But I just can't bring myself to run out of the building . . .

 

[brewer12345]

As always, great advice from everyone.  

Here are some numbers:
Current house = $220K - $260K
New house = listed at $725K, we could probably get it down to $700K

I'd have to take out about $600K mortgage
Answering another question: I couldn't afford it on one salary.  Our combined salary right now is $140K.  It will go up to at least $195 in a year and a half, when my lady returns to her other job (right now she's in a relatively low-paying government job to get interesting experience, but her old firm is holding her position for her and she's definitley going back).

So, in a year and a half, we'd be able to afford it just fine.  But for the next year and a half, it would be tight.

First, put the crack pipe down. Second, look at what I left up there in the quote. If you buy this house, you will be screwed if things don't turn out exactly perfectly. Is that really a gamble you want to make? I think this is nuts.

What if:

- you have kids and DW stays home? Screwed.
- One or both of you are out of work for some reason? Screwed.
- The higher paying job for DW doesn't come through? Screwed.
- The real estate market crashes when you need/want to move? Screwed.

Do yourself a favor: have fun with the fantasy and then set it aside. You can't comfortably afford this house.

 

[cute fuzzy bunny]

cute fuzzy bunny thinks brewer needs a nice margarita!

but he's right in that you have to think of everything...

 

[just_hatched]

New house = listed at $725K, we could probably get it down to $700K

I'd have to take out about $600K mortgage (this number is so big it just about makes my head spin)

Answering another question: I couldn't afford it on one salary. Our combined salary right now is $140K. It will go up to at least $195 in a year and a half

I've only bought one house so far, so I don't have the experience of many others on the board, but what ever happened to using a salary versus mortgage comparison?

Personally, we have two incomes but no kids yet. But when we bought the house, we figured to be able to afford it on one income if needed.
We also were looking for a mortgage around 2x that one income.

Granted, our peers that bought bigger homes have gotten a much larger appreciation out of them where as my money is tied up in mutual funds instead.
But in your case, you're looking at 600k which is 3x the 200k from both incomes.

That's fine as long as you are happy putting your money there in place of other options.

Also I agree to beware the "Wow! Look at all of this space! Now we need window treatments, new furniture, etc." as others have already said.

Your salary may continue to skyrocket and you'll be just fine, but for me I'll stick with my modest little house (and "little" mortgage) (and old furniture) for now.

 

[TromboneAl]

Set up the shrink appointments now for when your buyer's remorse sets in.

That house will suck your life blood.

 

[maddythebeagle]

New house = listed at $725K, we could probably get it down to $700K

Well, that 25k discount should help out a lot

I'm estimating the massive mortgage interest payments would result in about an $8k - $10k tax refund every year for the first few years.  Or, considered another way, the effective interest rate on the mortgage, if adjusted for the tax benefits, would be about 4.5%, which is not a bad price for getting more invested in what I believe will be a strong real estate market.

Have you looked at estimating your future mortgage interest deduction with the AMT. Also, if the AMT is changed, one of the probable items on the chopping block is the mortgage interest deduction for someone with such a huge mortgage.


http://money.cnn.com/2005/11/10/pf/taxes/deduction_fear/?section=money_latest

 

[laurence]

Sounds like a stretch. IMHO, only if you are absolutely sure you really want this house should you do it. If you are planning on having kids, or even thinking it's a possibility at all, don't do it. That is really a stretch.

Have you thought about the things you like about that house? Are their tangible things that made you fall in love with it, or is it just the thought of being able to be on MTV's "cribs"? If there are tangible things, you can add them to your existing house, or find a house that's less expensive with some of those features. It just seems like a stretch. Our household income was $166k for 2005, and our mortgage is for ~$300k, and while we aren't in trouble, the payments are plenty big enough! Kids can complicate things more than you may realize, even when you plan for them. We didn't exactly budget for cardiologists, pulminologists, physical therapy etc. so we are glad for the breathing room. Bottom line, kids in the future = run from this house.