So you're looking for a big expensive house to upgrade your life. Perhaps the pandemic has made you want to live it up a little because tomorrow is not guaranteed. You’re suffering from real estate FOMO and you're sick of putting your life on hold. I get it!
My wife and I bought a big expensive house one month into lockdown in April 2020. We figured, if we're going to stay home so much longer, we might as well have a nicer house.
Looking back, I don't regret the decision. The intrinsic value of real estate has gone way up because we're all spending much more time at home. Further, it has felt nice raising our two young children in a bigger house so they can run around more.
However, I want to provide a warning that a big expensive house can ruin your life and derail your path to financial freedom if you don't carefully do the math. It is vital to crunch the numbers and buy an affordable house based on some home buying rules I'll highlight below.
Let me share one of my experiences almost buying an expensive house back in 2018 and the numbers. Then I'll provide another experience about actually buying an even more expensive house in 4Q2023. If you don't have the appropriate income or net worth, buying a big expensive house can really weight you down.
Strategically Invest In Passive Real Estate Opportunities
If you want to achieve financial freedom, don't buy a big expensive house, invest in residential and industrial real estate that generates income and returns instead. Owning an expensive house is unproductive equity that's trapped.You can invest 100% passively in real estate through Fundrise, with an investment minimum of only $10. I’ve personally invested over $290,000 in Fundrise so far as it is my favorite private real estate platform. I've met and talked to the CEO multiple times over the years and our outlooks are aligned.
The Desire For A Big Expensive House Emerges
As a dad, I'd like my parents and in-laws to come visit more, which is why it'd be nice to have a ground floor level portion of the house dedicated just to them. This would make it more comfortable for all of us.
Given I write from home, it'd be nice to have a house large enough so that I can't hear my boy squealing with joy or crying in frustration. Trying to create while hearing him is one of my toughest challenges because once I hear him, I just want to drop everything and go to him.
Finally, I have some real estate FOMO that if I don't buy this house now in one of the best neighborhoods in San Francisco, I might never be able to get in. This is my ego talking more than anything else.
Found The Perfect Big Expensive House
In 2018, I found the perfect house in Presidio Heights, one of the most prime neighborhoods in San Francisco. I want to use this post to reflect on what could have been a disaster purchase.
It had four bedrooms, four and a half bathrooms, an awesome attic that would be used as a playroom, and a ground floor suite for my parents or in-laws. My commute to the tennis club would be cut down from 15 minutes to only five minutes a well.
Here are some pictures:
Pretty nice house right? The house was roughly roughly 3,200 square feet, or 1,300 square feet larger than our existing three bedroom, two bathroom house. Not extravagant, but nice.
Here was the problem problem. The asking price was……………. $4,495,000! Nooooooo! Isn't it funny how the perfect house tends to always have an imperfect price?
That said, believe it or not, buying a single-family home in Presidio Heights for under $5 million back then was considered reasonable. But when I do the math on how much it would cost to own a $4.5 million home, it kind of hurts my stomach.
The Cost Of Owning A Big Expensive $4.5 Million House
It's important to always do the math before making any big purchase. Here's the math to own this beautiful house with a $2 million downpayment just because I thought it might be nice to live in Presidio Heights instead of Golden Gate Heights.
If I bought this house, my all-in monthly housing expense would more than triple to $18,605 while I would no longer be able to earn any potential income or returns from $2 million currently spread out across municipal bonds, stocks, and real estate crowdfunding in lower cost areas of the country.
The Opportunity Cost Of Owning A Big Expensive House Is Large
The $2 million downpayment is guaranteed to earn $62,000 a year in state tax-free income if it was invested entirely in a 10-year government bond. Hence, one could easily argue that the total annual cost of owning this house a year is not $223,254, but actually $223,254 + $62,000 = $285,254.
Although the mortgage would eventually go away, the 1.23% property tax rate is for life. I cannot get over how egregious it is to pay $55,350 a year in property tax forever. Upgrading homes also comes with upgrading property taxes, maintenance expenses, and more. You might find out you have bad neighbors too.
You can rent a nice two bedroom, two bathroom, lightly remodeled condo in a nice part of San Francisco for $4,613 a month. Further, the property tax amount will keep on going up by about 2% a year because the city automatically assesses the value of your house up by 2% a year.
The Cost Adds Up With A Big Expensive House!
After 20 years of ownership, you will likely have paid roughly $1,200,000 in property taxes alone. That is just sounds absurd.
To add insult to injury, due to the $10,000 SALT deduction cap, I can no longer deduct the entire property tax amount. The SALT deduction cap includes state income taxes as well. Therefore, I'd be losing out on at least another $10,000 in tax refunds, despite the rise in the standard deduction to $24,000 for married filers.
When you buy a home, it's important to have the appropriate income and net worth to comfortably afford a home. Below is a chart I created highlighting how much income and net worth you should have before buying a home at all price points.
If I wanted to buy the $4,500,000 home, I would need an income of between $1 – 1.67 million, which I didn't have. Or, I would need a net worth of between $1.35 – $15 million, which I do have. But I wouldn't buy a $4.5 million home if my net worth was only $1,350,000. I need at least $10 million, the ideal minimum net worth amount to retire.
Note: If you want to calculate how much capital you need at a 4% rate of return to cover your housing costs, simply add up all your housing costs, divide by 0.04% and multiply by 1.4X to account for taxes.
Never Getting Out Of The Rat Race
Buying a big expensive house would put me in massive debt. If you buy a large expensive home, you might have to work many more years. At least with us, my wife and I are already retired.
It's clear that me buying this house or this type of house is not worth it. It goes against my minimalism philosophy in early retirement.
I would need to amass almost $8,000,000 in capital just to cover my housing costs if I wanted to stay unemployed. It's hard enough to retire with only a $5 million net worth and a family.
Even after paying off the mortgage, I would still need $2,500,000 in capital returning 4% to pay for the ongoing $5,938 a month in after-tax unavoidable costs of owning such a home.
No Wonder Why Some High-Income Households Feel Trapped
I can only imagine the family who ends up buying this home will have to work for a very long time with a very high income to afford this type of lifestyle. We're talking $500,000 – $1,000,000 a year in required income to be able to afford the house and everything else that comes with raising a family. These type of jobs can be very stressful, especially if you actually need that much money to survive.
Nobody buys a house this size if they don't have at least two kids. Further, each kid will probably also be going to private school at a cost of $35,000 – $50,000 each. If a downturn ever comes, these $500K+ jobs go away quickly. Then your stress goes through the roof as an albatross hangs around your neck.
If you needed to sell in a down market, you'd not only lose money on principal value of your home, you'd also have to pay at least 5% in realtor commissions and transfer taxes = $225,000.
Related: The Best Time To Own The Nicest House You Can Afford
A Deja Vu Feeling
Me wanting to buy this house felt exactly like how I felt buying my Lake Tahoe Property in 2007. The real estate market had just started to slow, and I thought I was getting a steal buying the 2/2 condo for $718,000 since the owners bought the property for $810,000 in 2006.
I was earning the most amount of money I had ever made in my life at the time, and I erroneously extrapolated that earnings power forward for 10 years. Of course, the financial crisis hit, and my earnings power along with my property got cut by 40% – 50%.
Right now, Financial Samurai is firing on all cylinders. I haven't seen a down year since I started the site in 2009. But it's very possible that Financial Samurai and all my investments could take a beating.
What If A Recession Comes After Buying A Big Expensive House?
There's always a chance we could buy a house at the top of the market again. The subsequent two-to-three years of a typical home price down cycle may be tough to bear.
If I leveraged up to buy this Presidio Heights home and a recession comes, we would lose our lifestyle because one or both of us would have to go back to work in a hurry. All the levity we've felt having a reasonably low housing expense would go out the window.
The house would start to own us instead of the other way around.
I hope the buyers of this home are prepared for all types of scenarios. Their new house has likely trapped them into a lifetime of continuous work.
When we moved to our current house in 2014, we effectively lowered our housing cost by 40%. I originally looked at the move as just a change in scenery. We were bored of living in our old neighborhood after almost 10 years, but we weren't ready to relocate to Hawaii.
Downsizing Our House Actually Felt Great
But it turns out that the downsizing really did wonders to our FIRE lifestyle, especially after I sold our old house in 2017.
At a 3.5% rate of return, the proceeds from our house sale 100% covers our existing housing costs. This means I'm certain my wife and I will never have to go back to work again so long as we REMAIN in our current house.
Investing $550,000 of the proceeds in private real estate with platforms like Fundrise have helped boost our net worth. It feels wonderful to diversify our investments and earn more 100% passive income. As we get older, we longer for more simplicity.
However, if we buy this $4.5M house, we open ourselves up to massive lifestyle risk. This happened before when I bought my Lake Tahoe vacation property in 2007.
I had just made the most money I had ever made in my life. Because I extrapolated my record earnings into the future, I thought buying a $718,000 Lake Tahoe property after purchasing a $1,520,000 single family home a couple years earlier would be no big thing.
Of course, I ended up making a poor financial decision as the global financial crisis ensued. Extrapolating your earnings into the future with continuous growth is the second biggest financial mistake you can make.
Low Housing Cost Is The Key To Financial Freedom
Instead of owning a big expensive house, own something cheaper and more affordable. At least follow my 30/30/3 rule of home buying so you never feel like your house is a burden.
I highly recommend you keep your annual total housing expense to less than 20% of your annual gross income. Over time, you should be able to get your housing expense down to 10% of gross income thanks to largely fixed ownership costs and growing income. Once you do, achieving financial independence becomes much easier.
Go ahead and fantasize about living in a nicer, more expensive property from time to time. After all, visiting open houses is free. Maybe even spend a pretty penny renting a nice place for vacation once a year to get it out of your system.
Then come back to earth once you've done the math and realized how much you'll need to sacrifice in order to own such a property. Once you do, I'm sure you'll appreciate that what you have is already pretty good.
Renting Luxury Makes More Economic Sense
This $4.5M house in Presidio Heights is the perfect example of Buy Utility, Rent Luxury (BURL). It's a much better value to rent this house for $12,000 – $14,000 a month, given cap rates in San Francisco are around 2.5%, than to buy the property at current levels and pay all the continued maintenance, taxes, and mortgage interest if there is one.
My cozy home is currently being battle tested with my parents in town. Four adults and a toddler is quite a crowd. But my house is holding up like a champ. No matter how big or how small our house, we tend to get used to the size.
Therefore, I'll be shelving my dream property plans for now until the next stock market correction hits. At least I was able to experience what it was like to live in an $18 million mega-mansion. And now that I know, I'm not itching as much.
How It Feels Not Buying A Big Expensive House 6 Years Later
By not owning a big expensive house during the March 2020 meltdown, we were able to invest several hundred thousands dollars into the stock market. I wrote a prediction in March 2020 that we'd soon hit the bottom. We also felt less stressed because we had purchased a single family home with cash a year earlier.
On the other hand, owning a nice home during a pandemic was more valuable than ever before. We're spending so much time at home now that our home's intrinsic value has shot way up. The single-family home market is booming, and this property is likely up 15% – 25% in value since.
More than six years after writing this post, I will admit my wife and I would have enjoyed living in the 2018 big expensive house, especially now that we have two kids. The attic and outdoors would be nice play areas for our children. And an au pair or guests could live in the room on the ground floor.
Alas, the positive is we saved a lot of money, grew our net worth more, and learned to enjoy life with less. And we still bought a great house in 2020 to enjoy until 4Q2023.
Finally Bought A Big Expensive House In 4Q 2023
The house we bought in October 2023 is even more expensive and larger than the one we bought in 2020. The cost of our current house is even more expensive than the house I was salivating over in 2018. But since 2018, our net worth has grown by over 50%, so we feel more comfortable. Waiting five years to really go all out and pay cash for a dream home made affording this big expensive house much easier.
This is our true forever home where I want to raise our children until they graduate high school. Unfortunately, buying this expensive house meant blowing up our passive income by $150,000.
In addition, I was 46, or five years older than when I first saw the other house. So my time left is becoming more valuable since there's less of it. The best time to own the nicest house you can afford is when you have kids at home. As a result, I decided to go all in.
Here's a recap one year later after purchasing a house we didn't need. Overall, I think it was worth it, although the first 3-6 months were extremely stressfully, due to my lack of liquidity.
The Consequence Of Buying A Big Expensive House
Technically, we are no longer financially independent because we have a ~$85,000 passive income shortfall to cover our expenses. As a result, I'm trying to generate more online income and do more part-time consulting.
That said, I was able to get a great deal on the home, paying 14% below asking a year and a half after it was first listed in May 2022. This time not only enabled my stock portfolio to recover, but it also enabled us to enjoy our old home for 18 months longer and save more money. With our kids 3 and 6 at the time of purchase, we are maximizing the value of this expensive home.
You get a lot more value the higher up the price curve you go since you have fewer competition. Conversely, if you buy a median-priced home in your city, you end up competing with the most number of people. As a result, the price per square foot of these homes are actually higher.
Better To Buy A Home You Can Comfortably Afford
Bottom line, it's better to comfortably afford your home immediately instead of expecting your wealth to grow larger enough to allow you to comfortably afford your home in the future. Being house rich cash poor is an uncomfortable feeling that may stress you out.
Our wealth has increased since the time I first laid eyes on this $4.5 million house. But instead of spending $4.5 million, we spent about 40% less for a lovely house with panoramic ocean views on all three levels in Golden Gate Heights. During the pandemic, buying less than we could afford was the right move due to all the uncertainty.
During this time, we were able to save and invest more money to finally grow into our current home. Real estate FOMO is hard to beat back, but you must do so if you want to gain financial independence!
Real Estate Investment Alternatives
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Fundrise manages over $3.2 billion in assets and has over 380,000 investors. Fundrise primarily invests in residential and industrial real estate in the Sunbelt, where valuations are lower and yields are higher. Sign up and take a look at all the various funds Fundrise has to offer.
If you are an accredited investor and bullish on the demographic shift towards lower-cost and less densely populated areas of the country, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities.
The global pandemic has accelerated the work from home trend. I see positive demographic migration trends to the heartland for decades to come. CrowdStreet is also free to sign up and explore. The value of real estate has gone way up because interest rates have come way down.
I've personally invested $954,000 in real estate crowdfunding so far to earn income passively. It's been nice to diversify my real estate holdings in lower-cost areas of the country. As a father of two young children now, I don't have much bandwidth left to deal with tenants and maintenance issues.
Both platforms are sponsors of Financial Samurai and Financial Samurai has invested over $290,000 in Fundrise funds. Our outlook and philosophy on real estate are closely aligned.
Hi Sam,
Thank you once again for another nice real estate article !
I always wonder during net worth calculation, how to determine Property values.
Do you have a special equation to calculate the price of the house ? or do you just use Zillow or Redfin ?
Kindly let me know your thoughts on this.
Best Regards
Hasan
I either keep it at purchase price or I wait for a year and look at comparables and discount it by 10%. The reality is, my plan is to just buy and hold for decades if not forever so it doesn’t really matter too much. What matters more is the cash flow from the rental property portfolio I slowly plan to buildover time.
I can’t imagine how much property prices and rent will cost in 15 to 20 years. So I figure I might as well invest for them given they cannot.
Thank you very much for your quick response.
I like your idea of keeping them at purchase price.
I will also keep them at purchase price instead of using Zillow or Redfin during my calculations.
Thanks for sharing your thoughts.
Take Care.
Hasan
I have such mixed feelings about this. I have been house poor for 35 years and really struggled as a single mom. I kept my married home. 6500 square feet. And 17 years later I have 1.5 million in equity. I have raised my kids and lived in a beautiful home. But, haven’t had a lot of fun. I’m always house poor. Now it’s time to retire. I want to pay cash for a small place. Up to a million. And invest the 500k. But, I’m scared I will live a long time. And not have enough money. I know this place is a gold mine. So, it’s hard. So hard to let go. Owning a big expensive home is all I know!!!
Fascinating! Wouldn’t selling the home, downsizing to a $1 million cash home, and then having $500K in liquidity improve your financial situation?
I feel you on being house rich cash poor. I just bought a dream house in 4Q 2023 and now I’m cash poor. It’s a disconcerting feeling.
Aha you have succumbed to housepoor status as well! Yes, I’m probably going to move. I’m just afraid if my money isn’t stuck in my home… I will fritter it away. Congrats on your new home!!
No wonder why millennials aren’t buying homes. Only the rich will be able to afford homes at this point.
The numbers of owning a home, paying property taxes, etc. freighted me. Nobody I know even makes that amount. The average joe only make $40k salary.
Now the average home is costing around $200k where I live. This is insane. No one I know has $200k in the bank, & this is for your average home owner. I remember back in the early 2000’s when $200k you could afford a McMansion.
Boomers are selling their homes at such high prices & they don’t seem to have a problem with it. They think the average buyer has $200k in the bank. I hate boomer generation like you wouldn’t imagine. They are literal worst generation ever.
Interest/Usury is the real reason homes are unaffordable. They are literal money pits. Can we please expel the Jews who run the banks & ban interest already? I am sick of living in a mouse utopia experiment. I hate this clown world. Also f boomers! They too are responsible for this too.
You’re an idiot!!!!!!!!!!!!!!!! So you want us to give you our house for nothing. Then what do we use to buy the replacement. Boomers should have never brought this generation into this world!!!!!!!!!!!!!!!!!!!!!!!!
You’re both idiots. Boomers didn’t cause all these problems directly, so stop blaming them for everything. You would’ve done exactly the same in their shoes so OC needs to calm down.
And x, shut up. Nobody is asking for a free house. The world isn’t the same as it was in the 50s and will never be that way again. Stop expecting millennials to do things the same way you did, because it’s much more difficult to buy a house and start a family today.
Y’all need to consider each other’s perspectives.
Hi Financial Samurai- I have the ability to build a $1.6M house on the water in Florida (new development that is very unique) with a down payment of $160k vs. buying a $675k house (17 year old home in nice neighborhood) with a down payment of $40k. Family gross income is $700k and we have zero debt (sold our home a year ago, own our vehicles outright and have no other debt). Not really any comparable new homes on market but older homes sell for about $1.9-2.0 million and we have gone through a series of negotiations with the builder that has resulted in such a good price. We plan to move from either home in 6-8 years after move-in. My thinking is that with such a large discount on the new home, it might be a similar outcome financially whether some of our money goes to the more expensive home vs. investments. What are your thoughts?
Well, here’s a big part of the problem when people rant and rave about property taxes, (I live in Illinois where that’s all they talk about!) You cant’t have your cake and so on and so on. The trend is is bigger and better and I don’t care how much it cost, i’m Going to have it. Then they sit around and moan about taxes. You buy a million dollar house…..what do you think your taxes should be? Sick of hearing this song and dance about property taxes. Are you griping about the $80000 SUV you bought? Probably not.
My wife and I’s mortgage payment is about $3.5k per month. In order to have that 10-20% housing expense/income ratio, we’d need $200-400k salaries. Sadly, we don’t have that. I’m a stay at home spouse that’s thinking about giving blogging a second chance. Any tips would be welcome!
just keep it simple for yourself and blog on facebook for free.
Move to Syracuse, NY! My house is twice as big and cost $270,000. Plus I have a 5 acre yard.
But the winter weather….
This is true lol….
Great article!
I purchased a similar size home with similar amenities on a brand new home in a CLT suburb just over the state line for less than $400k last year with 2.3k/yr in property tax. No kids and no plans for kids, but the extra space vs the base price was only another $30k for 800 more sq ft. Figured it was worth the $30k for resale. It’s very easy to over buy on your house.
Not bad. What do you do with all your space?
This year I’ve had family live with us off and on all year but long term the extra space will be used for family and friends that come to visit (4br/4ba). Half of the extra space also makes for a great media man cave area. Mortgage + taxes + insurance + hoa is 7% of my pre-tax annual income so extremely affordable for us.
Looking at those numbers makes me feel nauseous, I bought my 2,200 sq ft home (and that doesn’t include the unfinished attic or the basement) for under $70k a few years ago. It blows my mind what some people are willing to pay in expensive cities. For 4.5 million you could buy several blocks of homes in my town!
Yoinks! $1400 sq/ft. Makes my home seem like an absolute bargain!
I love SF – well, to visit SF – way too many people for me to live there. Come visit us in Asheville, NC – where for a lot less (as in a LOT less) you can live next to the old Vanderbilt estate (The Biltmore) or in the nearby mountains with great views, clean air and a slower paced lifestyle. Invest the other 3.5m+ and vacation anywhere in the world.
As a 16 year old, I am able to save 100% of my income (May it be small), and am in the midst of building a stock portfolio. When do you think the optimal time is to invest in real estate? ASAP, out of high school, out of college, during a correction, or later?
As soon as you have the down payment to buy a property that has positive cash flow.
How optimistic are Americans, do you all think the world in thirty years will be anything like it is today?
Hey Sam,
As someone that lives in Austin and is about to start looking for a home, I struggle with the age old question of looking for a place that would keep my D to I low (which is less than 10% currently) or bump it up into the 30%+ and purchase a house that would probably see substantial appreciation over the next decade or so… (not a given by any means, I know but this market is one of a few that I think could weather a mild to moderate recession in the near future). Either way, I will be going the way of house hacking and looking for duplexes/multifamily units. As such, it would be conceivable that I’d only be fitting around half (or less) of the total monthly note. Would love to hear your thoughts on this strategy if you haven’t already written about it somewhere else. Thanks!
Given the announcement from RealtyShares that they are going out of business, would you have insight on what investors can expect? Unfortunately, similar to you, I also own investments through RS.
Yes, I wrote about it in the real estate crowdfunding section of the FS Forum. I’m sad and surprised by the news.
You should move to Southern California. Get a similar house for just half the cost! :-)
I spent all of last year remodeling a crack house so I could benefit from prop 13.
Okay, it wasn’t really a crack house, but the inhabitants were definitely selling drugs out of it. The original owner passed away at 107, and about ten years ago extended family moved in to “take care of her”.
The house was in shambles, with decades of deferred maintenance and probably a few steps away from being condemned.
The size and configuration was similar to the house you mentioned in the post, it’s in a very nice neighborhood with a school district that’s usually ranked number 10 in the state.
I paid “only” $1.3m, spent under $500k repairing/remodeling the whole thing top to bottom (from the roof down to the sewer line). It’s now valued about $2.3m (based on an appraisal in February) but my property taxes are still based on the purchase price saving me over $12k/year.
There’s no way I would consider buying a house with property taxes in the range of $2,400/month.
As your post says, you really need to do the math on home purchases.
I enjoyed the 5,500 sqft. house where I grew up as a kid, since I wasn’t paying the bills.
Mom practically went bankrupt trying to keep it up after the divorce.
I now live happily in the same LCOL area in a 2,500 sqft. 3BR/3BA townhouse which you can buy here all day long for under $200,000, with city/county combined property taxes only ~1.25%.
In 2007, before the financial crisis, a coworker/friend used his IPO windfall to buy a big house in one of the prime neighborhoods in Silicon Valley for $3M. The house is now worth $5-6M and both him and his wife are still working. I calculate had he not sold all his shares in 2007 to buy his house, he’d have at least $10-15M by now. He complained his property tax alone is $50K a year and it’s very expensive to upkeep a 4500 sq ft home.
In contrast, we bought the smallest home we could afford under $1M, in 2009. Since then our assets has grown from $1.5M to $9M, and we’re looking to retire in 3 years when it hit $10M (the Suze Orman number:)
People forget the home you live in is not an income-generating investment, and its real worth is the memory and joy of your family living there. If the mortgage you take on requires two income for 30 years, then you’re just 1 layoff away from bankruptcy every 10 years. By 20202-2022 many 5/1 and 7/1 2.5% jumbo ARM will come due and refi can be 5% or more, and we’ll see who’s been swimming without their pants.
Sam-
This was another great read! Thank you for your thoughtful insights and thorough analysis as always. I have learned a lot here.
I’m curious if you have a house-to-net worth ratio rule for those that have already achieved financial freedom? You’re worth what, 3-4 millon? And your current house is worth 1.8? Would love to know your thoughts on how much house to safely buy once you’ve created a pretty sizable nest egg.
I am stuck on this decision. I have a house in sydney in an expensive suburb.
It’s needs rebuilding which will double my mortgage. It will have a separate flat to provide income but it will double my mortgage.
What do I do? No ongoing tax here.
Once you are done paying off the mortgage you get the privilege of paying $55k+ in annual rent to the city…
You would think that with the next recession these high tax cities would implode, but they havent…..yet…
Hi Sam,
Regular reader. Love the way you write a fun to read article that has spot on number crunching to prove the point. I have learned a lot. Wondering if you can tell me I put too much of my portfolio in my house.
House- After 23 years in Boulder moved to Carbondale and built my dream house (https://www.houzz.com/projects/2111438/buildco-home-cr21) that is bigger than I need. I built attached rental over garage but my wife only allowed me to have nanny trade for rent until my twins reached 4-now it sits. Working on wife to let me rent for $2K/month as it would get us to retirement sooner but cant get her to give up privacy now even though I built it to have separate entrance.
-$135,000- cost of 2.3 acres on river with mtn view
-$1,200,000- new construction house- 3800 sq ft house 4600ft with garage. $250 sq ft cost to construct
– $4200 (monthly house)/$25833 (monthly gross income)=16% ratio
-Guessing the house could sell for $1.4-$2M.
With high income I did what you said to do to max write offs and secured 7yr mortgage 3.6%. I paid a big chunk down and have $641K left to pay. This makes up roughly half my net worth I estimate at 1.9M. I am 49 but had twins late. $756K of this is 60/40 stocks/bond mix, $150K is a carbondale VRBO rental equity, and I estimated $300 inheritance to be conservative.
Now the question- I have anxiety that I put too much of my portfolio in my main house that is too large but its my dream house and I love it. Given my situation and real estate at top of the curve- I wonder if I should stay in house another 5 years then try to rent-it and rotate to work in Europe to give the kids the experience. I work remote on IoT security for Intel so can really work anywhere. Also- I will sell that rental so I want to throw $150K at mortgage to bring down debt and monthly- just feels safer. Or as you are doing do I take cash and invest in equities right now after Oct drop?
Thoughts? By the way if your looking for what I think is best town in America check out Carbondale. 4 world class ski mtns, Moab 2 hrs away, 3 hrs to Denver or fly out of Grand Junction/Aspen. Aspen pulls all kinds of festivals and the roaring fork valley has 4 great small towns. I cringe when I drive back to Boulder or Denver as crowds suck.
Yes, I think way too much is in the house. Wouldn’t be quite as bad if you were getting rent from the nanny unit. You won’t be able to retire for quite a while with this asset mix but that is okay if you are cool working for a while.
I wouldn’t count any potential inheritance in my net worth btw.
Todd, you’ve got great taste man. That’s a very nice house on a beautiful lot. I’m currently stuck in Irvine, Ca and can’t wait to move somewhere like Carbondale
Todd,
Congratulations, you have a stunning home and view and wonderful place to raise your kids and let them run wild. I have recently had 2 close friends pass away from cancer, lung cancer, never smokers and extremely fit and did not drink and in early 50’s. Miss them both. Yes, it’s nice to see the big numbers in the big columns to help you sleep at night but you cannot take it with you. If you get stuck later you can sell and if you didn’t get the biggest number for it so what. You can’t put a price on time and that place would definitely help me sleep better at night instead of columns.
Enjoy!
Todd,
Beautiful home and a fellow Carbondale guy here. If you’re still in the area when the twins get to high school I recommend sending them to CRMS. Beautiful school amazing staff and low teacher to student ratio. Went there myself and couldn’t have asked for better.
While I obviously don’t disagree with the facts of your post, I do think the personal finance/FIRE community sometimes go over board with fetishisation of frugality, particuarly for housing. For someone worth maybe $20m, spending $5-8m on an amazing house for them and their family is probably the best thing they can do to maximise utlity. You can only have so many big TVs, Lambos etc.
To be clear I have no argument with the facts in your post (big houses are expensive!). And I’m not advocating over stretching / over leveraging oneself.
I live in a large home for the first time in my life, and I definitely think it is too much space, but my spouse wanted a lot of space, so I guess it is an expensive compromise. One extra cost that hit us hard the first year was the cost to furnish and decorate it. The heating cost in the winter is also really high. On the other hand, our property taxes are way lower than they would be for a much smaller home in CA or other places in the country where we have lived (we have a different, higher rate for second home owners, but primary homeowners pay very little in taxes, and yet our public schools are excellent thanks to tourism). Also, I really value the garage storage space and though it may sound ridiculous to some, couldn’t get by anymore with less than a 3-car garage – we live a really full and adventurous life outdoors in a ski town and each have a mountain bike, road bike, downhill skis, skate skis, xcountry skis, snow shoes, hiking gear, running gear, backpacking gear, kid gear, baby gear – just lots of gear. I don’t think of our house as an investment at all – I don’t include include the equity in my net worth calculations. I think of it as one of our largest expenses. Some days I think we should sell it and pay cash for a smaller house; then I could retire in my 30s and ski all winter long and bike all summer long and spend a ton of time with my kids, but other days I think we’re just fine and it’s enough to know that the option is always there to downsize and retire (if I can convince my spouse), but it makes sense to keep plugging away at work (which I don’t hate) and enjoy the big house for what it is.