Building a New 2MM Home... Good Idea?

**skives** · 01-23-2019, 12:30 PM

We need more information. What is your income? How much do you have saved for retirement? What are your expenses? Do you have an emergency fund?

**Justin24** · 01-23-2019, 01:45 PM

skives, thanks, thought that might be the case. I updated the original post with "information" at the bottom.

**disneysteve** · 01-23-2019, 02:57 PM

Originally posted by Justin24 View Post

I'm 33 and my wife and I want to build a house on a lot we purchased. The lot was about $300,000 and the home is 1.7MM
Information:

Current income, 2018: $1.1MM, projecting similar for 2019 or up a bit
Saved for Retirement: None specifically aside, $1.5MM in cash, another $500k in assets (real estate, land, etc.)
Expenses: Around $150k a year now with current home (mortgage + taxes $2800 a month)
Debt: 200k on current home (3.25% interest rate so haven't paid it off), 1k a month car payment. Nothing else.

I'm assuming the $1.1M figure is gross, not take home. If so, what is your actual take home pay?

Your expenses are very reasonable given your income so kudos for that.

I'm wondering why someone earning over $1M/year needed a car loan. Unless it is 0%, why didn't you pay cash for your car? You've got $1.5M in the bank.

I think a $2M home isn't unreasonable with a $1.1M income. How much will your current home sell for? Do you already own the 300K lot outright (I'm guessing that's part of the 500K you mentioned)?

You posted 6 years ago that all of your money (400K at the time) was in savings and checking accounts. Have you not invested anything yet? You also posted then that you owed 300K on the house. I'm surprised that 6 years later you still owe 200K. You've had all of your money sitting in cash accounts earning next to nothing while paying 3.25% interest which really makes no sense financially speaking. Plus you missed out on 5+ years of one of the best bull markets in history.

I'm kind of left wondering where all of your money has been going. It seems to me that you should have a paid off house and car and a lot more than $1.5M in savings at this point based on your high income and low expenses but maybe I'm missing something.

**TexasHusker** · 01-23-2019, 07:33 PM

I would do it. But be forewarned that a $2 million house is quite illiquid. Folks with that kind of jack often just build what they want. If you ever needed to sell you could be in deep dookie. The place might not fetch but half what you paid. Not likely but certainly not out of the question. That�s the nature of mansions - illiquid and extreme volatility in terms of value.

A much better idea is to go and find five $2 million homes you really like and offer $1.2. You�ll have a taker in the $1.5 range guaranteed.

**corn18** · 01-24-2019, 02:43 AM

Originally posted by disneysteve View Post

I'm assuming the $1.1M figure is gross, not take home. If so, what is your actual take home pay?

Your expenses are very reasonable given your income so kudos for that.

I'm wondering why someone earning over $1M/year needed a car loan. Unless it is 0%, why didn't you pay cash for your car? You've got $1.5M in the bank.

I think a $2M home isn't unreasonable with a $1.1M income. How much will your current home sell for? Do you already own the 300K lot outright (I'm guessing that's part of the 500K you mentioned)?

You posted 6 years ago that all of your money (400K at the time) was in savings and checking accounts. Have you not invested anything yet? You also posted then that you owed 300K on the house. I'm surprised that 6 years later you still owe 200K. You've had all of your money sitting in cash accounts earning next to nothing while paying 3.25% interest which really makes no sense financially speaking. Plus you missed out on 5+ years of one of the best bull markets in history.

I'm kind of left wondering where all of your money has been going. It seems to me that you should have a paid off house and car and a lot more than $1.5M in savings at this point based on your high income and low expenses but maybe I'm missing something.

This. You are 33 making $1.1M a year, spending $150k / year and have $1.5M of cash. Have you been in cash for the last 6 years?

My biggest concern is the security of that $1.1M income.

Why not keep your current house, save $500k / year and retire in 5 years?

**disneysteve** · 01-24-2019, 05:12 AM

Originally posted by TexasHusker View Post

A much better idea is to go and find five $2 million homes you really like and offer $1.2. You�ll have a taker in the $1.5 range guaranteed.

Or, since you are contemplating building from scratch, downscale your plans. Build something a little more modest. Instead of spending $1.7M, knock it down to that $1.2M figure that TH mentioned.

**Justin24** · 01-24-2019, 06:27 AM

All, I greatly appreciate the replies.

I've been making more money in the last few years, so over the last 5 years, it was probably like 400k, 500k, 700k, 900k, 1.1M this year. That's why I don't have as much saved, I haven't been making 1.1M for the last 6 years.

I also do have value in my company, I could probably sell my portion/shares for around 5MM now. So I guess that's a bit of "saving for retirement", but company values also go up and down, so that could change for the better or worse.

In regards to why not just stay where I am and retire, that's the hard decision, right? Where we live now is nice, but we bought a dream lot and want to build our absolute dream home. We could scale it back, but we've put everything we could want into it and you only live once... right? If we buy a house like this we'll end up wanting to do a ton of renovations and maybe we'll spend less overall, but now we've spent 1.5-1.6 and it's not exactly what we wanted. That kind of sucks.

I know selling a 2MM house isn't easy, so in my mind, I'm not seeing this as an investment but realizing that if we sell it anytime soon we could take a 500k hit.

As far as where my money has been, I've never had good luck with financial planners, I've used 3, all have lost me money. So over the last 3 years, I've had 250k with a guy (highly recommended, blah blah) which is now 220k. One of the plans is to begin buying up more houses and renting them as I feel like I can control my own destiny more than throwing money in the stock market. Also, I own businesses, so while my cash has been sitting around, it's nice to have on hand to invest in ideas, etc. which has helped grow the companies and my income.

Yes, the lot of paid off. Paid cash for that. (300k of the 2MM budget)

My biggest fear is really regretting it later, but again, is it stupid to think if I have to sell it, I will. Yep, I'll take a hit, but losing 500k isn't the end of the world, right?

Then the other side of it is, if we do buy it, how much of a mortgage do we take or do we try to pay it off ASAP. That's step two of the decision. My original plan was to put $1MM down and take a $1MM mortgage.

**TexasHusker** · 01-24-2019, 07:09 AM

Originally posted by Justin24 View Post

All, I greatly appreciate the replies.

I've been making more money in the last few years, so over the last 5 years, it was probably like 400k, 500k, 700k, 900k, 1.1M this year. That's why I don't have as much saved, I haven't been making 1.1M for the last 6 years.

I also do have value in my company, I could probably sell my portion/shares for around 5MM now. So I guess that's a bit of "saving for retirement", but company values also go up and down, so that could change for the better or worse.

In regards to why not just stay where I am and retire, that's the hard decision, right? Where we live now is nice, but we bought a dream lot and want to build our absolute dream home. We could scale it back, but we've put everything we could want into it and you only live once... right? If we buy a house like this we'll end up wanting to do a ton of renovations and maybe we'll spend less overall, but now we've spent 1.5-1.6 and it's not exactly what we wanted. That kind of sucks.

I know selling a 2MM house isn't easy, so in my mind, I'm not seeing this as an investment but realizing that if we sell it anytime soon we could take a 500k hit.

As far as where my money has been, I've never had good luck with financial planners, I've used 3, all have lost me money. So over the last 3 years, I've had 250k with a guy (highly recommended, blah blah) which is now 220k. One of the plans is to begin buying up more houses and renting them as I feel like I can control my own destiny more than throwing money in the stock market. Also, I own businesses, so while my cash has been sitting around, it's nice to have on hand to invest in ideas, etc. which has helped grow the companies and my income.

Yes, the lot of paid off. Paid cash for that. (300k of the 2MM budget)

My biggest fear is really regretting it later, but again, is it stupid to think if I have to sell it, I will. Yep, I'll take a hit, but losing 500k isn't the end of the world, right?

Then the other side of it is, if we do buy it, how much of a mortgage do we take or do we try to pay it off ASAP. That's step two of the decision. My original plan was to put $1MM down and take a $1MM mortgage.

Within your financial framework, no, losing $500K isn't the end of the world. Doubt it would happen, but at least you know you could weather it if it did. I have seen this firsthand with a couple of friends who have multi-million dollar homes. They stay on the market forever because it is only a fraction of one percent who can afford it, and they often are sold at a deep discount.

We all have things that we toss money on. I have a friend who bought a Dassault Falcon jet. He said it's probably the dumbest thing financially he has ever done, but it does allow him to be back in Texas for dinner after a morning meeting in New York. He obviously makes many $ millions a year so the jet is no real financial consequence to him.

**disneysteve** · 01-24-2019, 07:44 AM

The biggest issue I'm seeing here is your mindset about money. You're making a fortune and can definitely afford a $2M house, no question. That's not my issue here.

First, STAY AWAY from financial planners. They work for themselves, not for you. Sure, there may be a few good ones out there but they are few and far between. Any planner that has managed to lose you money throughout the longest bull market in history needs to find a new line of work. Of course, I'm sure THEY made plenty of money while you lost yours.

Second, you are young and in a position to be financially independent in just a few years IF you make smart decisions now. But if your attitude is that "what's the big deal if I lose half a million" than you're going to run into trouble at some point.

Is the 220K with the planner part of the $1.5M you mentioned or is that above and beyond that? How much money do you have in total? Even with your income rising over the past few years, it still seems you should have more than $1.5M at this point if you only spend $150,000/year (and may have spent less when you were earning less). What is your current take home?

**disneysteve** · 01-24-2019, 07:56 AM

Originally posted by Justin24 View Post

Then the other side of it is, if we do buy it, how much of a mortgage do we take or do we try to pay it off ASAP. That's step two of the decision. My original plan was to put $1MM down and take a $1MM mortgage.

I wouldn't be in too big of a rush to pay it off but it also depends on what you would do with the money instead. If you're going to leave it in savings and checking accounts, that wouldn't make sense. It would be better to get the guaranteed "return" of prepaying the mortgage. If, however, you're going to start a good investment plan, I'd put less down and direct your money toward building wealth. Take a 15-year mortgage with maybe half a mil down. You can always make extra principal payments along the way to shorten the repayment.

**Justin24** · 01-24-2019, 09:34 AM

Few notes and responses:

1) If you don't recommend using a financial planner, what do you recommend me doing? I'd definitely like to invest more, but it never works out. Money in the bank (or 2% savings account) is better than losing it.I'd love to start investing in a much better way but all I've really been successful with is being real estate and renting it (just doing that in a few small ways now, want to get bigger with it).

2) I'm not taking the possibility of losing $500k lightly, otherwise I would have just done this and not worried about it. It's not easy making that money! My mindset has always been to be conservative with spending which is why I live in a 400k home now. Believe me, I want to make smart decisions.

3) The 220k is part of the money I have with the financial planner now. Its in an LPL account and in stocks, so its liquid and with the way its performing, I should just take it out.

4) Take home is roughly 70% of what I make. Over the last few years, doing the math I've saved:

$400k salary = $280 take home, $150k spent, $130k saved
$500k salary = $350 take home, $150k spent, $200k saved
$500k salary = $350 take home, $150k spent, $200k saved
$850k salary = $560 take home, $150k spent, $410k saved
$1MM salary = $700 take home, $150k spent, $550k saved

I also purchased our lot last year for 300k and bought a condo for 100k in the last few years (I rent that).

**disneysteve** · 01-24-2019, 10:07 AM

Originally posted by Justin24 View Post

1) If you don't recommend using a financial planner, what do you recommend me doing? I'd definitely like to invest more, but it never works out. Money in the bank (or 2% savings account) is better than losing it.I'd love to start investing in a much better way but all I've really been successful with is being real estate and renting it (just doing that in a few small ways now, want to get bigger with it).

If real estate is your thing, go for it. It is certainly a time-tested way to make money. I'm not the right one to advise you there, though. TexasHusker and a couple of others here can give you far better advice in that area. I'm a mutual fund investor so if you want that sort of advice, I'd be happy to weigh in.

2) I'm not taking the possibility of losing $500k lightly, otherwise I would have just done this and not worried about it. It's not easy making that money! My mindset has always been to be conservative with spending which is why I live in a 400k home now. Believe me, I want to make smart decisions.

Very good to hear that.

3) The 220k is part of the money I have with the financial planner now. Its in an LPL account and in stocks, so its liquid and with the way its performing, I should just take it out.

How is that money invested? And how much of a cut does the planner take? You could absolutely do better on your own with some low cost index mutual funds or ETFs.

4) Take home is roughly 70% of what I make. Over the last few years, doing the math I've saved:

$400k salary = $280 take home, $150k spent, $130k saved
$500k salary = $350 take home, $150k spent, $200k saved
$500k salary = $350 take home, $150k spent, $200k saved
$850k salary = $560 take home, $150k spent, $410k saved
$1MM salary = $700 take home, $150k spent, $550k saved

I also purchased our lot last year for 300k and bought a condo for 100k in the last few years (I rent that).

Okay, that all makes sense. Great job not elevating your spending as your income went up! So not only did you save $1.5M, you also bought and paid for a 300K lot and a 100K condo (no mortgage on that, right?). So really more like $2 million saved.

What's the deal with the car, though? Why do you still have a car loan, or is it a lease?

If you can continue to save 500K/year, you will be in amazing shape. You only need about $4M in savings to hit the point where your portfolio would generate enough income to cover your expenses. You can be there in 4 years assuming your income and spending stays about the same. And if you decided to hang it up and retire, you could sell off your share of the business and be set for life. That may not be what you want to do at 37 or 38 years old but knowing that option exists is pretty sweet.

So getting back to the original question, if I was taking home 700K, living on 150K and banking 500K, sure, I'd buy a $2 million house if that's what I really wanted. I'd be maintaining a 6-8 month savings cushion, so about $1 million. I'd be investing probably at least 25% of my income, so 250K/year. And I'd be using the rest to pay down any debt - car, house, etc. Once the debt was gone, I'd boost the savings percentage and probably start loosening up the spending a little too to be honest. Maybe spend more like 200K and invest the rest. I think you're in great shape.

Do you have any idea how your expenses would change with the new house between taxes, utilities, maintenance, etc? Just remember to factor that in to everything.

**corn18** · 01-24-2019, 10:57 AM

You have a business, that helps. I agree with DS that you can definitely afford the house @ $2M. Some thoughts:

1. Real estate investing is a great path to wealth if you do your homework and treat it as a business and not just a hobby or side hustle. But I think you should look at leverage vs. paying cash. TexasHusker is a good source on how to do this right.

2. Investing is easy. Visit bogleheads.org and learn about index investing with a 3 fund portfolio. It works at $50k and $5M. You are guaranteed average returns, but it sounds like that is better than what your advisors have done (and 80% of active managers). Plus it's low cost.

3. Is your business the type that investing more in it will result in growth? If so, invest in yourself/business and make even more money.

4. I would not spend $2M on a house, ever. We can afford a $2M house, but we chose a $725k house. I want to be financially independent retire early (FIRE) ASAP and dumping that much of my assets into a house is not congruent with FIRE. Your goals may be different, but you asked for our inputs, and that is mine.

You're doing great, BTW. You have options that 99% of the world does not. Keep making good financial decisions and the world is yours.

**disneysteve** · 01-24-2019, 11:09 AM

Originally posted by corn18 View Post

4. I would not spend $2M on a house, ever.

I wouldn't either but having a big fancy house isn't something that is important to me. We bought our first and only house in 1994 for 142K. We could comfortably afford to upgrade but I have no interest in doing so.

Same goes for cars. My limit for buying a car is 20-25K. I see no reason to spend more and would get no more enjoyment out of a more expensive car. My current car was 16K. I bought it in 2012 and paid it off in 2013 (and it was 6 years old when I got it).

But if the big house is something you value and you can afford it, I've got no problem with that. I'm sure I spend money on things that others wouldn't. It's all about priorities.

Building a New 2MM Home... Good Idea?