So You Want to Buy a House : RichPeoplePF

So You Want to Buy a House : RichPeoplePF

Loans & Affordability

Before looking at houses, get yourself a budget. Ideally, as a rich person, you can afford whatever you want, but depending on your tastes, location, and level of wealth, this may not be true. The best way to verify your budget is to get pre-approved for a loan. A 30 year fixed is good. The interest rate will be higher, but rates are at historic lows at the moment, so it makes sense to lock them in for the long haul. You will probably need a significant (20%+) down payment if the loan is of large size.

Standard loans typically require standard income, in which (Principle + Interest + Taxes + Insurance) / Income < ~36% of gross income.

In addition (Principle + Interest + Taxes + Insurance + Other Debt Payments) / Income < ~42% of income. Other debt payments include current residence, car payments, credit card payments (you don’t have any of those, do you?), etc.

Note that these percentages are approximate, and depend on many factors (credit score, months of reserve, down payment, loan size, etc.) To get an exact number, you will need to talk to one or more loan brokers.

Rental real-estate debt is not included in “Other Debt Payments”. Rental income is generally included as 0.75*rent – expenses, where debt payments are just one of the expenses.

If your income is irregular you can qualify with two years of history.

If you have no or minimal income, but significant assets you can qualify for an asset depletion mortgage.

If you have a business, but your income is low because you leave the business profits with the business, you can borrow against your business. It is recommended to do this through a bank (who independently values the business and considers it as collateral), and not directly, so as to avoid annoying the IRS.

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You can take a margin loan from a stock account.

Or you can pay cash. However, in the current low interest rate environment, not getting a loan is a suboptimal choice.

Depending on how complicated your situation is, you may need to ask several loan brokers before you can find one who can do the job.

The mortgage interest deduction is currently capped at a loan size of $750k. Therefore, it is preferable, if you want to borrow more than that, to borrow the extra in some other way than against the property you are buying. Other possibilities include a margin loan or a rental property mortgage. However, be careful about exactly how you do this to make sure that you will be able to deduct the interest on your other loan. This only applies if you itemize your taxes. Most rich people do, and buying a house makes you more likely to itemize, but with the tax law changes in 2018, itemizing is less common than it used to be.

The Search

High end houses tend to be unique and less common. Cookie cutter homes tend to cap out at 2500 square feet. This means that if you are in the market for a larger home (or a smaller home with very high-end features) significant patience can be required. Be in the habit of looking on Redfin and/or Zillow every week, on Thursday or Friday, and visit or get tours of the houses that you are interested in. Lately, Redfin has rolled out some very nice virtual tour features that make it less necessary to visit every house. Look especially for the 3D walk through. Then, once you do see the house you want, as long as it is not over-priced, be ready to jump on it.

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Ideally, find a house that is close to what you want, rather than one that is far off and requires major remodelling.

When you are thinking about what you want, don’t focus on “Is this what a rich person would have?” Focus on “Is this a feature that I will use?” Plan your life in the new house. The more stuff you have, the more time, money, and energy you have to spend taking care of it. Even if you hire people to take care of it, you have to spend time, money, and energy hiring and managing those people. It needs to feel worth it, and not just like a drag.

On the other hand, you are rich, so don’t be afraid of getting that which is valuable to you. Speaking of features, here is a thread for some of the possibilities out there: https://www.reddit.com/r/fatFIRE/comments/dc7a8s/people_who_built_their_own_homes_what_features/.

If you haven’t found what you want after a year or two, it might be time to loosen your requirements. And no house will be exactly right. A good methodology to decide when to stop is the Secretary Problem. Simplified, reject all houses for a year, and then buy the next house that is better than any of the houses that you have previously seen.

Pricing

Traditionally, people relied on realtors to find comparables to price homes. That is no longer necessary. By going through the last 90 days of Redfin sales (not unsold homes) in the community in question, it is straightforward to find comparables on your own. Filter out multi-families and condos (unless that is what you are interested in). You can plot square footage on the x-axis and sale price on the y-axis. You’ll get something that looks like this.

This gives the range in prices at a given square footage. After you’ve looked at enough houses, you can get a feel for how much of a premium to pay at a given square footage. Generally, it is best to offer what the house is worth, not what the seller is asking, if you are in a competitive market. If the asking price is way too high, it is best to wait for it to come down. If it sells for more than you were expecting, then your expectations were questionable.

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Renting vs Buying

Generally, if you will be there a long time (10+ years) and the market is not silly with respect to rent vs price, buying will lead to greater net worth. Here is a detailed calculator. Again, taking a big, low-interest loan is a preferred.

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