Is this a reasonable home purchase?

[Atlcpa]

39 y/o, net worth about $400,000, annual income of about $350k, but going up due to equity ownership in partnership 1/1/17. Partner at a CPA firm, 45 year old firm, avg partner comp over $1mil. I believe my 2017 comp will be over $400k. I'm also betting on the future a little bit in that my income is likely to continue to go up and not stay where it is now. One thing to subtract is two kids in private school which costs about $56k before tax income.

Looking at building a house that will be in the $850,000 range. Will be able to put down 20%, but that will leave me with only about ~$75k in cash reserves before buying furniture, etc. Taxes, insurance, mortgage will be around $5k a month.

It's a big jump from our current house valued at around $450k. I max out my 401k (about $250k in there now), but don't have many other investments.

My plan would be to have the mortgage paid off in 10 years or less, which I will be able to do if my income grows anywhere near our overage partner comp.

The house would not be ready until late 2017, early 2018.

Am I betting too much on the future? Do most people buying a $850k house make more money or have way more to put down?

I know it's not the most conservative thing to do, but is it reckless?

[Atlcpa]

Couple other important facts. I have a mandatory retirement age of 62. Would be great to retire before than, but private school and big houses aren't helping that. At retirement, I get average comp over the previous 5 years, times 2, paid out over 5 years. That's the deal now, but could obviously change.

One other note, $850k house in this particular area isn't anything ridiculous. 4,300 sq ft with an unfinished basement we could finish later.

[disneysteve]

I think an 850K house on a 350K income is not unreasonable at all. Rule of thumb is to not spend more than 3 times income, so you're fine there.

Just be really careful about counting on income that you don't actually have yet. You need to buy based on what you earn now, not what you think you will earn next year or the year after that.

[Singuy]

As Steve said, the house purchase matches your income.

However we don't know how long you have been making such income. Your net worth seems a little low for such a high income.

Just remember, you double your mortgage and property tax with the new purchase. Borrowing 700k is triple the mortgage if you say, dumping the same 20% (of 850k) down into your 450k house.

[Atlcpa]

my income has gone up significantly over the last several years. In my profession, you make a decent income, but when you make partner, it jumps significantly.

My income the last 6 years has been something like $165k, $185k, $200k, $265k, $310k, $350k. I made partner the $265k year.

I feel like I'm getting a little ahead of myself. I'm an accountant and conservative so it feels like a bigger stretch than maybe it really is. I may be good at my profession, but that doesn't make me great with money.

Thanks for the thoughts.

[disneysteve]

Your net worth seems a little low for such a high income.

I was thinking that too.

If you're willing, posting your budget would be helpful. I think the home purchase is fine but there might be other areas that need attention.

[rennigade]

My income the last 6 years has been something like $165k, $185k, $200k, $265k, $310k, $350k. I made partner the $265k year.

Net worth of $400k with that salary over the years isnt good at all. Your expenses must be through the roof. Just to put it into perspective im 33 and make around $63k/year...and I have more saved than you.. I do not have kids yet though. (not bragging...just letting you know that your salary makes mine look like a joke yet I managed to save more.)

IMO its not a good idea for you to pull the trigger on a house that expensive. Just because you make more doesnt mean you need to spend more. Start living below your means. Save more money then re evaluate in a year or two.

[disneysteve]

Net worth of $400k with that salary over the years isnt good at all. Your expenses must be through the roof.

It would be really interesting to look at what your expenses are currently earning 350K vs what they were a few years ago when you earned 165K. Had you kept them pretty much the same, you'd have a lot more savings by now.

You need to look and see where you've inflated your spending the most just because you had a higher income and start working on trimming back those things.

[scfr]

What is wrong with the house you live in now?

[Atlcpa]

It would be really interesting to look at what your expenses are currently earning 350K vs what they were a few years ago when you earned 165K. Had you kept them pretty much the same, you'd have a lot more savings by now.

You need to look and see where you've inflated your spending the most just because you had a higher income and start working on trimming back those things.

There's no question our expenses have increased a good amount, mainly private school and a country club membership.

My daughters private school is $18k a year (3 years) and in June 2017, I will have to write two checks for my other daughter starting. It's a Christian school and worth it to us even if we sacrifice other things. We budget $1,750 a month for our club bill. Sometimes actual is lower, sometimes it's higher. Just bought a new Lexus that's about $850 a month.

We spend a chit load of money, thus why this is even a question. My base is $225k and we can save maybe $10-15k from that. We spend most of it.

One other thing to factor in though is cost of living, etc. Atlanta isn't super expensive, but state income taxes, property taxes, etc aren't cheap and daycare was almost $14,000 a year before my wife started staying home in 2013.

At $400k, I can max my 401k and save probably $75k at least if I had a ~$700k mortgage. That's not great based on what I think my income will be in 2017.

I told my wife if we can't have the house paid off in 10 years, we're not doing it. I think my income will rise significantly, but if it doesn't, my plan won't work.

[Atlcpa]

What is wrong with the house you live in now?

It's about a 20min drive from school and a little too small to have friends over. We'd like to move closer to school (there's no bus) and trying to decide how much of an upgrade to make.

[scfr]

It's about a 20min drive from school and a little too small to have friends over. We'd like to move closer to school (there's no bus) and trying to decide how much of an upgrade to make.

Will they stay at that school and be driven by your or your wife until the youngest graduates high school? If so, then moving to be closer to the school seems like a reasonable thing.

What about a house of the same size as what you have currently but closer to the school and with a more entertainment-friendly floor plan? Would the cost be about the same as your current home? Before you know it the kids will be grown and off to college (have you started saving for that?) and you'll be thinking about downsizing!

You've already made pretty significant lifestyle upgrades (private school, CC, car). Why add the stress of a house you won't be able to afford if your income doesn't increase as you hope/expect?

[disneysteve]

My base is $225k and we can save maybe $10-15k from that. We spend most of it.

That's pretty lousy actually. You should be able to save at least 15 and preferably 20% which would be 45K. If you can only manage to save 10-15K out of 225K, you're living beyond your means. An $850 car payment certainly wasn't a wise move.

Just to put it in perspective, we earn about $140,000 and save about 23% of gross.

[Atlcpa]

Will they stay at that school and be driven by your or your wife until the youngest graduates high school? If so, then moving to be closer to the school seems like a reasonable thing.

What about a house of the same size as what you have currently but closer to the school and with a more entertainment-friendly floor plan? Would the cost be about the same as your current home? Before you know it the kids will be grown and off to college (have you started saving for that?) and you'll be thinking about downsizing!

You've already made pretty significant lifestyle upgrades (private school, CC, car). Why add the stress of a house you won't be able to afford if your income doesn't increase as you hope/expect?

Yes, that's an option. Something between $450,000 (current house) and $850,000 is out there.

I think my original question comes down to how confident I am or aren't in the future. Maybe I should hang tight for another year or so.

If I'm confident my house will be fully paid for by the time I'm 50, then I will buy the house.

[corn18]

I am really liking the recommendation to take a look at your spending before buying the house. I make a base salary around yours and manage to save 18% gross of that. Then I make a boatload on top of that in bonuses and a military pension. I used to spend all of it. Now I live off less than the base salary. If I never get another bonus, I can afford to live comfortably and save enough to retire at 60 (I'm 50 now).

By not planning on the bonus and saving all of my military retirement, I am living way below my means. But at bonus time, I have a lot of options. This year, I decided to overfund my taxable retirement account by $84k. I also replaced my 8 year old truck with an Acura TLX and paid cash. I also fully funded my daughter's college and beefed up my EF. I did splurge and funded a month in Europe for my wife and daughter before she starts college. But none of this impacted the base plan.

This approach has proven to be very liberating. While it is unlikely I will stop getting a bonus, it sure is fun to have $200k in an account with no real purpose each year.

So what does all this diatribe mean? Even with my high income, I would not buy an $850k house. My current mortgage is $3k / month and that fits my budget just fine. I could afford a million dollar house, but then I would be house poor and would not be able to retire early.

So, I wouldn't buy that house if I were you. Not until you get your expenses under control.

Tom