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Can I afford a 3M+ house

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  • Can I afford a 3M+ house

    I have posted a couple of times before in this forum. I guess I am looking for advice or a reality check as I am about to bid on a $3.3M home. My family situation has changed a little from the last time I posted. We have been renting for over 12 years now since we got married, currently renting a $4.5k 3BHK house in a nice neighborhood with decent commute, son goes to private kindergarden, daughter stays at home with our nanny.

    Our combined income is $1.1 this year and will reach $1.2M next year and will stay pretty flat from that point I anticipate. We have $5M NW, about 1.5M in retirement, $300k in college funds, and $3M in index funds+bonds, $200k in cash. Because of FOMO and emotional/stability reasons, we are looking at the housing market in the bay area. We have been looking for the last 7 years at the rate of every 18 months or so and every time we keep backing out thinking the market is crazy and that it will cool down. Our income and NW has gone up in that timeframe, but the housing prices have gone up even more than our income can keep up. Now, we are looking at a $3.2M house that needs substantial remodeling (house with original owners for the last 60 years with no updates). It's in Palo Alto in excellent school district and close to everything, enough room for our family and more. But, we have to overbid (say $3.3M) and then spend $200-300k to at least update kitchen, all bathrooms, carpet to hardwood floor, windows etc., So, out of pocket expense will be $3.5M. We plan to make 20% downpayment and take a 30 year mortgage. We aren't planning to retire anytime soon.

    We are looking at disclosures now and my husband is interested, but I am having cold feet. We will have to send our kids to public school and prob not have a housekeeper if we buy. We will be paying $15k in mortage+interest for this property if we buy. At our current savings, we will still save $10k per month after maxing our retirement savings. Are we crazy to even entertain this thought?

    PS> Please don't judge people who live in the bay area or comment about how expensive it is here. Please don't tell me to move to another place, we have family here and we are going to stay here. I am simply looking for advice based on our income/NW whether we can afford to buy a $3.5M property.

  • #2
    The hard part that's really a stressor is the remodel. My sister did it twice over during their years in the bay.

    Doing that with dual career and high pressure cooker schools. Up to you.

    If Palo alto, why continue private? Can understand if other districts but you're paying a bit of premium to be in that spot vs moving over a little Burlingame, San Mateo for a lot more options.

    Labor is a bear right now


    • #3
      Sounds like renting is the better deal. Look at a rent vs. buy calculator, my guess is it is not even close.
      I vote keep renting.


      • #4
        I understand where you’re coming from. With your income you can do it. Though I’d reconsider it if you can’t send kids to public schools and still have to pay for private school and the upgrades. If that’s the case then maybe pass. Monopoly money in the Bay…good luck on your bid!!


        • #5
          Originally posted by kdeva View Post
          We aren't planning to retire anytime soon.
          That's good because you aren't going to have a choice.

          Keep renting.


          • #6
            You can probably afford it but it could be tight, run the numbers. Don’t end up house poor. Definitely plan to keep working for a good while.


            • #7
              That’s so much more money that I make and spent on a house I can’t have an intelligent conversation about it. My mind can’t fathom that price on a house - not saying you shouldn’t spend that much, just wild.

              Regardless, I’m just chiming in to say that you can actually afford to live in CA. It’s nice to not see a post where someone says they are an employed pediatrician or rheumatologist making 175k with a stay at home spouse but can’t imagine not living in the Bay Area or NYC and will clutch their pearls at the thought of sending their kids to public school.


              • #8
                Originally posted by VentAlarm View Post
                Regardless, I’m just chiming in to say that you can actually afford to live in CA. It’s nice to not see a post where someone says they are an employed pediatrician or rheumatologist making 175k with a stay at home spouse but can’t imagine not living in the Bay Area or NYC and will clutch their pearls at the thought of sending their kids to public school.
                They can afford to do it but like we talked about in the other thread, people tend to make it much harder on themselves.


                • #9
                  With your nw and yearly income, I don't see why not. Retirement is set, college is paid for. And with 10k leftover I'd keep a housecleaner. This is assuming you really plan to keep working though. Of course if you change your mind you can just sell.


                  • #10
                    I think this is in part, will depend on what your goals are with regard to retirement.

                    You have 4.7 mil for nest egg -700k for down payment - 300k. That leaves you 3.7 mil at minimum. In today's dollar, if you were to stop now, you'd have safe withdrawal of $150K month. If you don't tap into that now, and let it compound 13 yrs when your kids are on college and you decide to retire, would it be enough then?

                    If this bare minimum is good enough, then you have ~600k net/yr that you can spend on housing, private school, life for your working years. And if you spend less than 600k/yr, then that would be a nice bonus/addition to your growing retirement account.

                    At least that's how I'd look at it.

                    Also, I wouldn't look at your house as some black hole. True, it's not the best investment on average and it doesn't count if you don't sale it, but it's not like it's burning money. You get to live in it, and chances are, you'll probably at least break even in Cali if you decide to go back to renting at some point.


                    • #11
                      A couple things. First, you can afford it, if you so choose.

                      But with that high dollar figure attached, I personally would not want to be spending another few hundred thousand to remodel, let alone deal with the associated hassle. That would be a deal-breaker for me. Not the price, but the principle.

                      Also--and in your case it's a minor detail but a detail nonetheless--don't count $300k in college funds as part of your NW. Unless you also want to count it years from now when it inevitably (as intended) goes flying out the door. But I'm sure you can see how that's a bit silly.


                      • #12
                        How are the property taxes on this property? We live on the opposite coast in a VHCOL area. Our mortgage is paid off, but the property tax bill is $4,350/month. You can certainly buy this house if this is your top priority. You will have to be somewhat prudent with other spending, but if the house is your number one priority, you can do it.

                        There are other risks when you buy something this expensive. One risk is the stability of the income. If there is disability or a change in employment, you could be forced to sell the house. The other risk is if the public schools don't end up being a good fit for one or more children, the private school tuition is a burden when your housing expense is so high.

                        If you think you will live in this house for a long time, as in 20 years, if the public schools are fairly certain to be very good for your children, and if the high income is likely to be stable for the long run, then go for it. If inflation goes up significantly, owning real estate is much better than paying rent.

                        On the other hand, renting for now and for many years going forward is likely much cheaper in terms of the monthly expense, for at least the next decade, and renting gives you a lot of flexibility should your housing needs or school needs change. This is a very personal decision, and buying an expensive home requires a huge leap of faith. I can understand and relate to your hesitation having been in the same position in the past.


                        • #13
                          I agree on principal. A 3 million dollar fixer upper just doesn’t seem right since I don’t live in one of these areas. Can you spend a bit more to get a move in ready home?


                          • #14
                            Tough choice. But I agree with TXDoc21: is there a chance you’d be willing to look a little harder for home that is (near) move-in ready?

                            As far as the math, it pencils okay, if a little on the tight side.


                            • #15
                              Yes, you can afford it. Can't really get much better than Palo Alto, aside from maybe Atherton.