How much house can I afford in HCOL area?

[forgetthebananas]

Hi all,

I'm 3.5 years out of fellowship in PP and a partner, and thinking about a house purchase in a HCOL area. I'll admit I feel very lost here and need some help.

Combined salary of wife and I: 550k, which should be consistent for the foreseeable future, but let's just say 500-575k/year.
Cash on hand for down payment: 700k
Cash in brokerage account: ~300k

0 student loans, no kids yet, but planning on it soon. We do have family support around us. Currently living in apartment costing ~3k/month.

We've been saving 200-250k per year since I finished fellowship 3.5 years ago in hopes of putting down a down payment for the home. We have been maxing out our 401k, IRAs, HSAs each year (55-65k total between the 2 of us per year) since I finished fellowship. We don't want the starter home, just a one and done home. We are pretty settled, I really enjoy my job and she enjoys hers. We don't see ourselves moving away.

We're looking at houses in the 2-3 M range which are around 2700-3500 square feet. My calculations (which may be completely off)- On a 30 year mortgage, that would MAX around 150k per year of principal/interest, property tax, homeowner insurance etc...I'm just clumping it under the "housing expense" category as 150k/year. I don't see our own personal lifestyles getting inflated, but kids will cost more as we're planning on opening 529s and such.

Can we afford the 2-3 M house? Should we shoot for lower? I also have goals of reaching FI by 50ish in 15ish years. Is the 2-3 M house recommended? Any advice appreciated, thanks so much!

[CordMcNally]

Can you be FI with those housing costs and be FI in 15 years? How much do you spend? What’s the income breakdown between you and your spouse and what if one of you wants to go part-time or stay at home?

Without knowing your expenses, my guess is that you won’t be FI in 15 years with a $2-3M house.

[Kamban]

You need to know how much you will have on hand after you subtract taxes and 20% retirement from that 550K.

Then subtract 150K house expenses from it.

Can you live on the remaining amount. Remember it has to take into account kid related expenses including daycare, day to day living, transportation and unexpected additional expenses like a car purchase or roof change or major medical expense etc. And should the spouse stop working your costs will remain high yet the income falls.

[Hatton]

Carefully track your spending. My guess is at least one of you will be working until at least 65.

[cards67]

Is there an alternative option? What's wrong with your current renting situation or cheaper homes?

Those are pretty big ranges of housing and salary and it may or may not work out with your goal of 15yr FI. Is the house mainly for the kids? What about preschool cost, public or private school, if one parent cuts back, etc.? I tend to lean towards the wait and see approach when it comes to kids. Whether you can have them, if one parent wants to stay at home with them, if grandparents can't help (or you don't want them to), house features, neighborhoods, etc.

[wideopenspaces]

I think you're vastly underestimating what kids will do to your budget. And what you'll want in a house after you have kids. I'd either get a starter home with plans to stay 5 years or wait until your first kid is 1 to buy a house.

[forgetthebananas]

You need to know how much you will have on hand after you subtract taxes and 20% retirement from that 550K.

Then subtract 150K house expenses from it.

Can you live on the remaining amount. Remember it has to take into account kid related expenses including daycare, day to day living, transportation and unexpected additional expenses like a car purchase or roof change or major medical expense etc. And should the spouse stop working your costs will remain high yet the income falls.

Thanks for the reply! After subtracting tax, and 20% of that 550k, and also subtracting 150k for the housing expense, we still have -140k left over. Forgot to mention we’re in a no income tax state. My wife is WFH as a SWE, and realistically we can’t see her income dropping below 100-120k even if she goes part time (SWE is chill…should have done it myself), though can climb to potentially 175k+. And my income won’t realistically drop below 350k, this is accounting for if I go somewhat part time or sell out of the group’s weekend call shifts. that’s why we’re thinking the low end of our combined income is 500k. If we change it from 550k to 500k, then we’ll have 110k left over.

Should add that the 20% of the 550k is AFTER tax 20%, not pre-tax 20%. If it were pre-tax, then we would have around 70-80k left over.

idk…110k seems like enough for us to live reasonably. Wife and I definitely spend within the means, are still living like residents, and I don’t see us spending more than 50k of that on ourselves + transportation/food/some travel/weird potential purchases. That leaves about 60-90k a year on 1-2 kids (hopefully lol), with a bit into their 529s and activities.

Do these calculations make sense? Maybe I’m just tying to convince myself lol…or you are correct in that I should go for a house closer to 2 M instead of 3 M. Thanks again! Any thoughts are again greatly appreciated…definitely think I’ve found a solid community to learn from here.

[forgetthebananas]

Is there an alternative option? What's wrong with your current renting situation or cheaper homes?

Those are pretty big ranges of housing and salary and it may or may not work out with your goal of 15yr FI. Is the house mainly for the kids? What about preschool cost, public or private school, if one parent cuts back, etc.? I tend to lean towards the wait and see approach when it comes to kids. Whether you can have them, if one parent wants to stay at home with them, if grandparents can't help (or you don't want them to), house features, neighborhoods, etc.

Thanks for the reply! Tbh nothing wrong with the current situation. We’re just thinking in the next year or so when we have kids we want to live in a larger home in the suburbs where it’s very expensive.

an alternative is buy a starter home of maybe 1 M and see how we are in that. Then when the kid(s) get older we move into the 2-3 M home, while continuing to live like residents and hopefully the house appreciates in value so we can move into a bigger home. Haven’t really thought out that strategy though.

I just replied to someone else about the part time situations that may come up. We really don’t see the income dropping below 500k, we both have pretty great work life balance. Maybe it will drop towards 450k, but even then with 20% for retirement on after
Tax income, minus again MAX of 150k for housing costs, and subtracting tax in a no state income tax state, it comes out to 90k left over for transportation/food/miscellaneous spending/more money for kids (529, their activities etc.).

Kids will be brought up in public school. But for college, if they can get into a good private school, we’ll try to support them 100% through. If they can’t get into a good private school, then it’s the state school for them. We aren’t paying for them to attend some random college for 60k a year…sorry kid and sorry if that offends people. In state tuition at a solid state school is what the kid’s gonna get.

Our parents will be in the area as well and they can help financially/with home stuff/help in general with the kids. Both sets are willing and able, and we want them to interact with the kids. Also- we should receive a somewhat sizable inheritance, anything less than 500k combined I would be surprised. Anything greater than 1.5 M we would also be surprised, just the other end of the spectrum.

in terms of our investments- it’s simple. 100% stocks and into SPY and QQQ. We will never change that strategy.

you’re right- maybe one/both of us will have to work until 65…it’s just idk. With my numbers if we save let’s say 80k a year…after 15ish years that will be 1.2 M. With investments growing, the total $ of those investments will be around 2 M I think. I mean with 1.5-2 M around 50 years old with a ~3 Million dollar home value…shouldn’t We be close to done? Again maybe I’m really underestimating how my expenditures may explode as the kid grows older or if we suddenly go on huge spending sprees lol.

another alternative is just live in a lower COL part of the country lol…that way can get rhe ~3k sq ft home without paying 2-3 M

[CordMcNally]

If you have $2M at age 50 and want to retire, let's say you plan on withdrawing 3% a year for a prolonged retirement. That gives you $60k/year to live off of. You're still going to have 15 years left on your mortgage and are estimating that your housing costs will be $150k/year at the most. Do the math. I guess your home equity will come in handy because you are going to have to sell the house and move.

To get your answer you need to map out your current expenses and how much you want to live off of in retirement. Paying for your kids' private school is a HUGE potential expense.

[Anne]

I just replied to someone else about the part time situations that may come up. We really don’t see the income dropping below 500k, we both have pretty great work life balance. Maybe it will drop towards 450k, but even then with 20% for retirement on after
Tax income, minus again MAX of 150k for housing costs, and subtracting tax in a no state income tax state, it comes out to 90k left over for transportation/food/miscellaneous spending/more money for kids (529, their activities etc.).

Kids will be brought up in public school. But for college, if they can get into a good private school, we’ll try to support them 100% through. If they can’t get into a good private school, then it’s the state school for them. We aren’t paying for them to attend some random college for 60k a year…sorry kid and sorry if that offends people. In state tuition at a solid state school is what the kid’s gonna get.

Our parents will be in the area as well and they can help financially/with home stuff/help in general with the kids. Both sets are willing and able, and we want them to interact with the kids. Also- we should receive a somewhat sizable inheritance, anything less than 500k combined I would be surprised. Anything greater than 1.5 M we would also be surprised, just the other end of the spectrum.

you’re right- maybe one/both of us will have to work until 65…it’s just idk. With my numbers if we save let’s say 80k a year…after 15ish years that will be 1.2 M. With investments growing, the total $ of those investments will be around 2 M I think. I mean with 1.5-2 M around 50 years old with a ~3 Million dollar home value…shouldn’t We be close to done? Again maybe I’m really underestimating how my expenditures may explode as the kid grows older or if we suddenly go on huge spending sprees M

1. 1.5-2 million when you have a 3 million dollar house and the associated maintenance/taxes is not going to be nearly enough. Not to mention you said 30 year mortgage and this is 15 years away…so will still have 15 years at that point. Unless you mean sell the house and markedly downsize at that point…which is much easier to say now than do at that point
2. Don’t underestimate the effect of living in a nice neighborhood in a nice part of a nice area of the country on your spending habits
3. Kids are going to cost more than you think
4. 80 k out of 550k is not enough unless you are Doogie Howser aged. 20% if normal doctor age, more if late start or want to RE
5. Don’t underestimate the chance that your career satisfaction/desire to do something else might change with time. Hopefully it won’t, but still a chance
6. If you are looking at a 500k to 1.5 million dollar inheritance don’t underestimate the chance that some or all of those parents may need it for long term care and you end up with much less.

You can buy this house but everything has to work in your favor, you will have less spending and life choice flexibility, and more financial stressors than someone who makes 500k+/year needs to have. I wouldn’t go higher than the 2x income rule for the mortgage which if you use that entire down payment (which personally I would rather invest some of that now) puts you around 1.8 million

[wideopenspaces]

Thanks for the reply! Tbh nothing wrong with the current situation. We’re just thinking in the next year or so when we have kids we want to live in a larger home in the suburbs where it’s very expensive.

an alternative is buy a starter home of maybe 1 M and see how we are in that. Then when the kid(s) get older we move into the 2-3 M home, while continuing to live like residents and hopefully the house appreciates in value so we can move into a bigger home. Haven’t really thought out that strategy though.

I just replied to someone else about the part time situations that may come up. We really don’t see the income dropping below 500k, we both have pretty great work life balance. Maybe it will drop towards 450k, but even then with 20% for retirement on after
Tax income, minus again MAX of 150k for housing costs, and subtracting tax in a no state income tax state, it comes out to 90k left over for transportation/food/miscellaneous spending/more money for kids (529, their activities etc.).

Kids will be brought up in public school. But for college, if they can get into a good private school, we’ll try to support them 100% through. If they can’t get into a good private school, then it’s the state school for them. We aren’t paying for them to attend some random college for 60k a year…sorry kid and sorry if that offends people. In state tuition at a solid state school is what the kid’s gonna get.

Our parents will be in the area as well and they can help financially/with home stuff/help in general with the kids. Both sets are willing and able, and we want them to interact with the kids. Also- we should receive a somewhat sizable inheritance, anything less than 500k combined I would be surprised. Anything greater than 1.5 M we would also be surprised, just the other end of the spectrum.

in terms of our investments- it’s simple. 100% stocks and into SPY and QQQ. We will never change that strategy.

you’re right- maybe one/both of us will have to work until 65…it’s just idk. With my numbers if we save let’s say 80k a year…after 15ish years that will be 1.2 M. With investments growing, the total $ of those investments will be around 2 M I think. I mean with 1.5-2 M around 50 years old with a ~3 Million dollar home value…shouldn’t We be close to done? Again maybe I’m really underestimating how my expenditures may explode as the kid grows older or if we suddenly go on huge spending sprees lol.

another alternative is just live in a lower COL part of the country lol…that way can get rhe ~3k sq ft home without paying 2-3 M

I just don't think you understand how quickly you're going to go through 90k. To give you an idea, we have 2 kids (5 and 13), doing public school and we own 1 2008 corolla. We spend 13k/ month which includes 3.5k on 2 mortgages and 3k on the nanny. So other spending comes down to 6.5k/month. And my husband and I are not out spending a lot of money on ourselves, buying luxury anything. That monthly amount does not include any vacations or summer camps or bigger home projects or even our yearly gym membership and earthquake insurance or 529 contributions. And we are in a mcol area where both mortgages together were about 700k. So you think you'll be able to cover vacations, childcare, 529 contributions, probably 2 nicer cars than we own, home maintenance/cleaning/landscaping a 2M-3M home and all day to day spending with 7.5k/month? I think you are kidding yourselves. I understand that people raise kids on less but if you're living in an area where everyone owns a several million dollar home, it's not going to be easy.

[EH]

I have no idea how the math works if you think you are going to spend 150k on housing for 30 years but reach FI at 15, while paying for college costs after that point. This seems wildly optimistic. You could pretty reasonably plan on spending 2m (with your 700k down) will be much less than 150k housing. Still more than many here would spend, but certainly what you'd be spending in my vhcol area for significantly less than 3500 sf. Even with that I am highly doubtful you will be FI in 15 years. I'd plan on saving 20% gross income for now as you are behind on retirement. I also agree you are grossly underestimating kids costs and lifestyle inflation in an area with 3m houses. with 2 kids most people near me will pay 40-50k/yr for the double preschool years. After care and camps are pricy (camps are 2k/month here). Then there are the unanticipated costs - I planned on public school, yet here I am due to kid specific factors spending 30k/yr on private school - before kids I would have told you there was absolutely not a chance in the world I would do that. Add in activities, sports (crazy if they are doing the travel thing), tutoring, etc. It's easy to say you won't do any of that now, harder when you are in an expensive area where all of their friends are doing it. Vacation costs go up unless you like going to bed at 8pm with your kid (if I'm not camping I'm usually in a 2br airbnb). Food goes up or eating out does because you need convenience. You want a safer or bigger car for those kids perhaps. Someone decides they need to reduce hours to help keep up with all the kid work so income goes down. That 2-3m house needs a renovation to make it just right, or just the maintenance on it is going to be steep. If you buy that 3m dollar house you are going to be doing so at the expense of other things you may want - early retirement, travel, kids activities, less work, not having to penny pinch, etc. And unless you are planning on moving out of that 3m house in 15 years to go to a 500k condo in a lcol area I'm not sure how living in it helps you - it's not going to pay your expenses in early retirement. It's not even going to be paid off for 15 more years.

[Bellescamp]

Yeah not to pile on but I think you are underestimating the costs of raising kids in a neighborhood with multi-million dollar homes. Stuff adds up quick. There is no longer “living like a resident” in that scenario

[StarTrekDoc]

You can make the cashflow work, yes. FI/Retire 50s? That's a really hard one based on your given parameters. If you're looking at 2-3M homes; the kids simply are going to cost even in the most public school budget oriented mentality.

[White.Beard.Doc]

The cost of running the house will increase with inflation over the years. In 15 years, the cost of property taxes, utilities, and maintenance could double if there is inflation of 5% per year. I know that has not been the case in recent decades, but inflation has been more than 5% for services like home maintenance in the last couple of years. Wages are currently going through major inflation, as there is a severe shortage of workers in the US at the moment. We don't know what direction that will go, but wage inflation is going to be quite high for a while at least, and wages affect things like child care and home maintenance significantly.

We live in a house that is in your target price range. We are mortgage free and we spend around 100k per year on property taxes, lawn/snow/home maintenance, utilities, and cleaning. I think of the net worth needed to support the house in retirement like an endowment specifically for the house. 3M in retirement savings is what we consider to be the house endowment fund that supports only the cost of the house in retirement, with no mortgage to pay. Yes, we are in a high property tax county in a high property tax state, so we have to take that into consideration. Your situation may be different.

For me, with your income, a target price of 1.5M would be doable, maybe slightly more if you can keep your mortgage around 1M with a large down payment. Anything more than 2M, I would expect to be house poor, with the house reducing options for changes when kids come along and prolonging the years it will take to get to FI.

What if one of you wants to cut way back on work with kids? You don't really know what having kids is like until you actually have them. Reading about it and living it are two very different things. My spouse was a high powered lawyer, she worked full time after kid #1, and debated and debated after kid #2, but ended up as a SAH parent, not working, for more than a decade. Yes, this was before work from home was an option, but we still had a nanny and the expense that goes along with that.

Good luck with your decision. In your shoes, I might keep saving, stay put until kids come along, or buy a house that is more modest in price so that you are not a slave to the house.