How Much Can I Afford to Spend on a House (Anywhere but Portugal)

[Eric S]

Hi!

I am 56, single, and retired. No kids.

I have $2.5M total assets (including house value). $22K in a conventional IRA. I expect only (conservative) investment income. I have minimum work credits for SS benefits (i.e. $887/month @ full retirement age).

My yearly expenditures average $30-40K/year (at current currency values).

Questions:

1. What's the most I can afford to spend on a house? I'm not thinking of it as an investment (though I do expect prices there to rise); I don't intend to move again, and my heirs are already well taken care of.

2. Should I mortgage it? I don't pay much taxes, so I guess it's mostly an inflation-related question. I do expect to beat the current 30 year rate with my investments....

thanks!

 

[ShokWaveRider]

Deja Vu? Almost

 

[MichaelB]

Eric S, why don’t you stop by and introduce yourself here https://www.early-retirement.org/forums/f26/

 

[RunningBum]

OK, with the Portugal distraction removed...

If your expenses are correct and include a contingency for taxes, major repairs and replacement for big items such as a car, take 30 times $40K for $1.2M needed for living expenses with a 3.3% WR, which seems safe. That says you can afford a $1.3M house, though a house that big might increase your property taxes and maintenance so maybe a little less. If you have to pay cap gains taxes to come up with the cash for the house, reduce it by the amount of taxes. If things turn bad for you, you could always downsize the house.

This assumes you're selling your existing house. If not, subtract the value of that from your target house.

Whether you take a mortgage or not is up to you and your risk profile. The market seems high so I probably wouldn't. There's also a cost and hassle factor in taking a new mortgage which weighs a little heavier toward no mortgage than the more traditional debate here about whether to pay off an existing mortgage. A cash offer on a house is more attractive to a seller too.

 

[ShokWaveRider]

From the other Post:

https://www.early-retirement.org/fo...nt-home-in-portugal-105947-3.html#post2496649

 

[The Cosmic Avenger]

I am within a few years and a few $100K of your situation (although I have a spouse and a child in college). At this point, I feel like I'd be OK selling the current house to fund a retirement pad, or two, and even spending more than we have in equity on it/them. But, considering I hope to live long enough to outlive a 30-year mortgage, I would opt for one, having seen how well my portfolio has over the last 30 years. Especially with rates where they are now, I feel like I'd do better in the long run taking out a mortgage instead of paying cash, even though I like the feeling of having no payments now. (We paid off our mortgage a couple of years ago.) It might be a little scary, but run the projections with the extra cash and see how that ups your WR.

 

[Eric S]

Eric S, why don’t you stop by and introduce yourself here https://www.early-retirement.org/forums/f26/

Done

 

[Eric S]

Thanks, RunningBum.

include a contingency for taxes, major repairs and replacement for big items such as a car

$30-40K/year wouldn't cover cars, but I don't buy fancy or often (and may not need one at all where I'm headed), so I figure my assets can provide for that (and for occasional unexpected <$20K expenses) without changing equations in a big way.

As for major major expenses, well, those are the eternal fear of the retiree, and one can only anticipate to a certain point before you mess up everything to mitigate every imagined potential black swans (I don't own an air raid shelter nor a six month supply of food).

But...

Since I'm not, under any circumstances, going to spend >$1m on a house (probably more like $500-600K), I am reassured by your calculations! Good that I'm not just below means, but well, well below. That's where I like to be. It's comfortable (and wealth that doesn't feel comfortable is as bad as poverty).

If you have to pay cap gains taxes to come up with the cash for the house, reduce it by the amount of taxes.

Oh, right! I certainly will take cap gains (the funds won't come from my cookie jar!), and that's a great point. Thanks! OTOH, the gains are long term, and my income's low, so it won't be a major big deal.

This assumes you're selling your existing house. If not, subtract the value of that from your target house.

Yeah, one indulgence I intend to permit myself is to not worry about sequence. If I wind up owning two houses for a while, that's not optimal but I won't miss out on buying a great place to prevent it. I guess my downside there is having most of my money out of the market, and being vulnerable to market price collapses on the first house, without many assets to help me wait for a turnaround before selling. But I'm in NYC suburbs, and it's going to be a seller's market for quite some time, due to pandemic flight.

Whether you take a mortgage or not is up to you and your risk profile. The market seems high so I probably wouldn't.

Can you fill in your thinking on both points? I've never had a mortgage (my present home was bought for cash), so I'm a bit naive. Again, I'm not concerned with investment value, for me or my heirs. Though I do acknowledge I might one day need to sell for reasons I can't currently anticipate. If so, I'd imagine it'd be 95% likely I'd be heading to assisted living or such.

There's also a cost and hassle factor in taking a new mortgage which weighs a little heavier toward no mortgage than the more traditional debate here about whether to pay off an existing mortgage. A cash offer on a house is more attractive to a seller too.

Yes, I enjoyed both advantages when I bought current home for cash.

 

[Eric S]

From the other Post:

https://www.early-retirement.org/fo...nt-home-in-portugal-105947-3.html#post2496649

...and here was my reply to that other post:

https://www.early-retirement.org/fo...nt-home-in-portugal-105947-3.html#post2496650

 

[Eric S]

having seen how well my portfolio has over the last 30 years.

Not to get into an extended investment digression (which is off-topic and I'm not really such an expert), but just as an aside, beware that the remarkable and unprecedented 30 year bull run (everyone feels like an investment genius during a bull market!) has been largely made possible by the sugar high of quantitative easing, and that bill may come due.

Run the projections with the extra cash and see how that ups your WR.

Sorry, what's WR?

I'm pretty solid re: the issue of "tie-up-money-in-house" versus "pay-bank-to-remain-liquid". In fact, that's the one facet of mortgages I fully understand. It's tax ramifications, market liquidity, and unforeseen contingencies that leave me feeling blurry and worried. Also, any special issues for mortgages abroad.

For one thing, if I buy a house abroad, and do wind up needing to move, I may not be able to get my money out for a very long time, because housing markets outside USA function differently. I'm also not perfectly clear on how a mortgage would affect such a situation.

 

[The Cosmic Avenger]

Sorry, what's WR?

Withdrawal rate, for those who will withdraw or aim to withdraw a set percentage of their total portfolio every year.

 

[RunningBum]

Thanks, RunningBum.

Whether you take a mortgage or not is up to you and your risk profile. The market seems high so I probably wouldn't.

Can you fill in your thinking on both points? I've never had a mortgage (my present home was bought for cash), so I'm a bit naive. Again, I'm not concerned with investment value, for me or my heirs. Though I do acknowledge I might one day need to sell for reasons I can't currently anticipate. If so, I'd imagine it'd be 95% likely I'd be heading to assisted living or such.

Suppose your mortgage rate is 3%. You would want to get a return better than 3% on your investment of that money. You can certainly do that, but there is some risk. Paying cash for the house is the equivalent of a totally safe 3% return on your money. That ignores taxes. If you aren't deducting mortgage interest on your taxes, you need a better than 3% return. You cannot do that without risk. So the question is, are you ok with taking more risk to beat the 3% return?

The second part is the stock market these days has a lot of signs that it's overpriced. I'm not a market timer so I don't worry too much about it since I'm not taking action. But given a choice of keeping all money in the market or paying cash for a new house, I'd probably pay cash. On the other hand, in the long term you would probably come out ahead with a mortgage and investing the money.

A middle ground could be to pay cash for the house, but go heavier in equities now, or later if you want to do some market timing. The justification being that you don't have a mortgage adding to your monthly expenses so you can take a little more risk with your investments. The key is to not have to sell when the market is low.

 

[Eric S]

Paying cash for the house is the equivalent of a totally safe 3% return on your money.

Ah, ok. Risk from that angle. Got it. Thanks. The rest doesn't seem to apply to my situation.

 

[ShokWaveRider]

...and here was my reply to that other post:

https://www.early-retirement.org/fo...nt-home-in-portugal-105947-3.html#post2496650

I guess the point I am trying to make is:

For some spending <$250k on a home in retirement, gives them the location that they are comfortable with, with a lifestyle they would enjoy for the remaining of their days.

For Us it is $1m. In an area that is very close to a nice beach, with great local healthcare services and good access to other services that we need on a regular basis. In a neighborhood that is well maintained with homes that show a pride of ownership and folks who are socially similar.

YMMV

 

[RunningBum]

I guess the point I am trying to make is:

For some spending <$250k on a home in retirement, gives them the location that they are comfortable with, with a lifestyle they would enjoy for the remaining of their days.

For Us it is $1m. In an area that is very close to a nice beach, with great local healthcare services and good access to other services that we need on a regular basis. In a neighborhood that is well maintained with homes that show a pride of ownership and folks who are socially similar.

YMMV

What if, for the OP, that number is $2M? Which they can't afford.

 

[ShokWaveRider]

What if, for the OP, that number is $2M? Which they can't afford.

Only the OP can make that decision. Rule of thumb is no more than 25% - 32% of income should be spent on housing. Extrapolating that "could" translate to 30% of one's stash or net worth. If assets are $2.5m then 30% is $750k. That is how I would estimate it and make adjustments accordingly with respect to a personal comfort zone. You can ONLY do what you can do and afford.

We would like to move to an area where homes start at $3m, but we cannot, so it is moot for us.

Then I would list other criteria and look for an area in the country which conformed as close as possible, then rent there for a year.

 

[RunningBum]

Only the OP can make that decision. Rule of thumb is no more than 25% - 32% of income should be spent on housing. Extrapolating that "could" translate to 30% of one's stash or net worth. If assets are $2.5m then 30% is $750k. That is how I would estimate it and make adjustments accordingly with respect to a personal comfort zone. You can ONLY do what you can do and afford.

We would like to move to an area where homes start at $3m, but we cannot, so it is moot for us.

Then I would list other criteria and look for an area in the country which conformed as close as possible, then rent there for a year.

Then why didn't you answer that to begin with rather than "Answer to OP. I would advise to spend as much as you need to in order to be in the location you want and will be happy for the foreseeable future." ?

 

[ShokWaveRider]

Then why didn't you answer that to begin with rather than "Answer to OP. I would advise to spend as much as you need to in order to be in the location you want and will be happy for the foreseeable future." ?

It is the same thing, at least for us. All our criteria are different, as is our tolerance for financial comfort. No one can tell anyone else where their comfort zone is, only they can.

 

[Eric S]

It is the same thing, at least for us. All our criteria are different, as is our tolerance for financial comfort. No one can tell anyone else where their comfort zone is, only they can.

That's a perfectly reasonable stance. I don't happen to share it; I think people can offer perspective. But it works for you. Cool!

But then what are you doing here in a discussion explicitly seeking such help? Do you go around to every thread posting "That's for YOU to decide?", imagining that you're being wise, clever, and helpful?

I can assure you that I am quite well aware that I'm free to make decisions about my life. I had that coming in, even before you informed me of my self-volition. But I thank you for trying to help in your distinctive way.

 

[cyber888]

700K - 800K house would still be fine with a 2.5 million net worth. It depends if you like the ocean or the mountains.

 

[Eric S]

I am genuinely alarmed for the well-being of a retiree community that widely assumes that spending limits are determined by lifestyle preferences.

 

[RunningBum]

I am genuinely alarmed for the well-being of a retiree community that widely assumes that spending limits are determined by lifestyle preferences.

Yep.

 

[calmloki]

Gal is shooting me down on high speed internet/cell coverage and distance to Costco, so I'll offer this, which can greatly reduce one's state taxes, wipe out state inheritance taxes, and comes with darn little property tax. Plenty of sunshine and at 6-7000' elevation it has comfortable daytime temps and delightfully cool evenings in the 15 degree range. Thoughtfully located on it's lot as far as windows/views go, overlooking the famous loneliest highway and near the lovely town of Eureka. Enter into Google maps and street view to cruise around, Zillow has it mis-located. Needs a little sprucing up, but hey - whatcha gonna do all day?

https://www.coldwellbanker.com/property/122-2ND-ST-AUSTIN-NV-89310/78223503/detail?src=list

 

[Eric S]

Thank you?