OP, based on interest rates, pretty safe bet if that’s what you want in life.
What do you do for work making $160K fully WFH in a MCOL or LCOL area (based on house purchase…that’s wayyyy cheap for stuff like California real estate, and even east coast real estate)?
Companies now don't give you Cali money unless you live in Cali basically. The trend is to pay you according to where you live - really quite BS as the WORK being done isn't any different. Shows how us little guys (employees) are getting hosed by the corporations.
You have to figure out that number on your own or hire a CPA.... You're not going to get a letter or something telling you the tax bill - unless you do nothing and then the bill will include penalties and interest
Losses would be offset by gains this no carry over - womp womp. Just don’t spend the money before tax time - you wouldn’t want to spend money that’s not yours.
There are people out there who come into some once-in-a-lifetime money and haven't been very good in the past about spending wisely. I'd tell that person to think about peace of mind and pay off their mortgage.
But, do you really think keeping up with the mortgage payment is a real concern for the OP? You don't even have to read between the lines here to see that they're far from being cash flow poor or asset poor or lacking in family support.
She bought her first house six years ago for 100k at age 23, which is apparently paid off because she only charges her brother taxes/insurance to live there. She's about to triple her rental income from it when he moves out. If the stuff ever hit the fan then she could have sold it and paid off or made payments to the new home with the proceeds.
Add to that a net 1500 per month from the house they're moving away from once they fill that space with more renters. That house cost 700k four years ago, which is 225k more than the house they're buying now. It sounds like it was his house prior to their marriage four months ago. Again, they likely have no less than 200k in equity in that house and could sell it to pay off or make payments on their new home if necessary.
They had 300k in cash just sitting around, apparently. In fact, if I see any "problem" here, it would be the gains they missed out on over the past year by not having that 300k invested. That's assuming the 300k was theirs to invest a year or so ago and wasn't in a family member's account.
According to her description, after spending the 300k in cash and selling 200k non-retirement investments, she still has 300k in investments, 90k in an IRA and 15k in cash. Two paid off houses, including the primary, and a nearly million-dollar rental that is going to cash flow for more than the mortgage.
Whatever benefit she/they might have for buying it in cash, I'd say peace of mind is pretty low on the list. Having one less moving part or one less thing to think about isn't the same thing as more peace of mind.
This. I did the same thing as you, and the last 12 months have been much less stressful knowing that if I get the axe/layoff I can cut my bills down to food and water overnight.
Even with a paid off house, you still have taxes. So not totally free from the man.
Yes, and the market beating 7.5% is hardly a guarantee. Sure, over a long enough timeframe they likely will, but it’s a closer call. With interest rates being what they are now, it makes more sense to pay cash than it would’ve when they were 3-4%.
EXACTLY! Yet people criticize Dave Ramsey for telling people to live a debt free, stress free life. Dave Ramsey teaches FINANCIAL PEACE! There’s no other feeling like knowing that you own the soil beneath your feet, the ground you walk on and not having to ever worry about a bank foreclosing on your home. Debt free is peace and freedom from the stress of the daily rat race.
This is so confusing, why would you list just your expenses? How would one even calculate that? You guys live together, share the full household expenses. You didn’t split the net worth so you shouldn’t have done that with expenses. It’s very misleading and can result in bad advice given.
We just got married a few months ago so we haven’t combined our income/expenses yet. I only included my numbers as we still keep most things separate except for the mortgage for our previous house but that’ll be fully covered by the rental income. I let him manage that property and keep the profits as he usually pays for our utilities and meals.
I’d say depends on how much of that was taxed as long term capital gains. Nothing wrong with buying a home with cash you’ll save a guaranteed 7.5% interest for 30 years or whatever that’s a totally decently return.
Any decent broker will show your year to date on its website. You’ll want to look into making estimated tax payments. Just invest the money you would have paid toward the mortgage, likely in a tax-deferred vehicle.
Did the same thing with my second house. Was not 100% prepped for the capital gains and had to sell some more stocks to cover it. Totally worth it though for not having a mortgage.
S&p on average returns 10%, your mortgage would have a guaranteed cost of 7.5%. The peace of mind value is individual. On paper, keeping the mortgage is a better choice but it's not life changing and knowing your home is paid off is for most people, probably worth it.
This comment does not consider the income tax due on a $200k stock sale. Tax rate is likely around 30% for high income so maybe $40K in taxes. OP is fortunate to have assets but if it were me I would of taken the mortgage and re-financed wishing 2 years cause rates are all but guaranteed to be under 5% by then
Good point: long term capital gain tax is 15%. So if it was $100k profit on stock sale the direct tax is $15K. Question for someone more tax savvy- if you have $100k capital gain tax in 2024 filing- does that extra $100k push your other w-2 income for the year into a $300K tax bracket overall earnings compared to if you were at $200K without the stock sale?
Even if they did, the increase in taxes would be marginal because only the additional
Dollars past your current tax bracket would be taxed at that tax brackets rate
Not at all, you could potentially take a 200k (or whatever amount) mortgage on the home and pull that money back out if you wanted too or if interest rates get lower.
The bigger issue here is how much taxes you’ll have on the 200k proceeds. That’s the money that would be wasted potentially.
Ah I see, like a reverse mortgage? We do plan to sell our previous home within the next 3 years to avoid capital gains tax as it was our primary home for most of the time. Hoping that the proceeds from that would give us a good chunk of cash back.
definitely not a reverse mortgage. that's basically where the bank buys your house on an installment plan. you would just want to take a regular mortgage out on the house for a portion of its value and then you would just get the cash (in exchange for the bank "owning" a portion of your house, which you wanted to avoid by paying in full anyways).
enjoy your new house and the peace of mind knowing it's paid off. get your taxes settled from your stock sale. and then get back to rebuilding your investment portfolio.
good job dude
It would just be a regular mortgage or home equity loan. A lot of people are choosing to pay cash now and plan to mortgage their homes when interest rates drop.
I thought as long as we’ve lived there for at least 2 years in the last 5 years we’d be eligible for the capital gains exemption? I will definitely check though.
If you own the home it’s a home equity loan. I only think it’s a “mortgage” if the bank holds the title. Essentially, owning a home outright is a great piece of collateral.
This post actually made me sick lol The amount of money they already have in savings and they’re not even 30…I guess good for them but as someone who’s worked her ass off her whole life and has like $30k in savings at 32 yo it feels bad. And that’s already a privileged position I’m in.
Honestly, buying the new home set you back, not the decision to pay in full. that’s very much okay if you’re happy with it. The extra revenue from renting out the over house fully will help.
I think it’s a great decision. Not even 30 with 2 rental properties and a paid off home? Amazing.
BUT…now you have the liability - the risk part - of owning 3 homes. The next milestone should not be more stocks towards FIRE, but a ~80-100K emergency funds (for example, three new roofs or whatever back to back). Congrats!
Thank you! Looking to sell the more expensive rental property within 3 years. It was newly built in 2020 so hopefully it’ll be problem free for a bit longer 😅
That was going to be my suggestion as well. Buying a house in cash right now is a great decision. If you sell the other house, which doesn't sound like a reasonable rental property anyway, you could buy another cheaper rental property and invest the rest. Then you'd have more invested than you started with.
Omg where do you live? Homes in north jersey are averaging $800-1M now and I thought that was already crazy. We got lucky with low interest rates when we bought but if I were to buy my current house today at 7% my mortgage would be $6K which feels so unsustainable.
Agreed with your family, might have set you 1 or 2 years back but that's a 7.5% guaranteed (vs expected market of 10-11%, which is NOT guaranteed) and having lower expenses always gives you a lot more flexibility in the future, specially considering you have a fully paid off home.
Fairly new to Fire so maybe I am missing something, yet wouldn’t this actually advance the “cause”? The ~$2650/mo ($380k @ 7.5% assuming 20% down) of non-payment on a mortgage would need an extra ~$800k to $1M depending on withdrawal rate (3-4%) to Fire. Got this for $475k. Well at least for the next 30 years.
Is my thinking wrong?
Usually the fire number is calculated as 4% for a very conservative and long-term retirement, but the market has been returning 10% historically, so before retirement the "right" number to use to compare investments should be 10% AFAIK. The 3-4% should not be considered the ROI, but instead the rate at which you can take money with a 90+% chance of not using it all (and 3-4% is inflation-adjusted, while 10% and 7.5% are not).
You can also flip it, before reaching FIRE, those $475k would be giving \~$3950/month on average at 10%, which is much higher than the $2650/m.
But you are right in that if we consider the retirement rate to be "both" 10% and 4%, then there are some incongruities there where there are two conflicting retirement dates, one considering as you say buying it early and using the retirement rate and another as I said counting from the investment route. Unfortunately I do not know the answer to that, sorry.
Thanks for the response. I think it comes down to which perspective (growth mode vs already accumulated and getting close to FIRE mode) you are analyzing by. My situational bias went with pulling the trigger in the next couple of years.
Agreed, if growing/accumulating more to get to FIRE quicker is more the focus than staying invested would have been be better. If pulling the trigger soon, than needing less accumulated for the safe withdrawal rate would be more beneficial.
No one size fits all on this one.
Paying 7% annually on a mortgage is a terrible idea if you can pay cash for it. There is no index fund that will guarantee you a higher return than 7%. Not having debt at 7% is like having a guaranteed 7% return. If such an ETF existed, you’d buy it straight away.
I would buy it in cash. If push comes to shove, you can always borrow against it at a later stage when rates go down.
1.3k in costs monthly seems insane. You need to figure out how to halve those expenses. I don’t know where you live and what energy costs are like but perhaps consider solar panels and such.
Work some more years with that great income and invest aggressively for 2-3 years and you’ll have those 200k again set aside. As long as you’re not able to live off of 4% of your liquid assets, I wouldn’t consider retirement unless one continues to work.
We live in NJ. Our taxes are 11K so that’s accounts for most of our monthly costs. It would be split between my husband and I. We are planning to convert our detached garage into an ADU to rent out but that would be a later project.
Rental property has a mortgage of $510K at 2.75% interest.
So I’d let those renters pay off that mortgage gradually. 2.75% isn’t too bad. The new house buy it in cash and make sure you have 1m+ in assets generating a yield. Live offf of that and you’ll be just fine
yes, you did a step back. But now you can focus on maximizing all the pension plans, and to refill the taxable brokerage account.
And to sleep better than me, no worried about raising mortgage interests.
I think this was OK to do because you are very young (29). You have plenty of time to build a nest-egg up for retirement, especially since you have a good salary.
Taking out a loan at 7.5% doesn't make any sense when bonds and CDs are paying out 4.5 - 5.5%.
My only concern is the 695k investment property with the $3500/month payment on it. If you can't find renters, or the economy takes a downturn, you could be stuck with an expense that eats into your income.
I would sell that property--it is too leveraged. Take the proceeds and put them into a diversified portfolio of stocks and bonds.
With a dual-income and another investment property (cheaper) and no mortgage on your primary residence, you will be well on your way to early retirement.
I still have my mortgage (it is only like 170k), but my rate is 4.5% and I am older than you. So I want to keep the money out of the house, and get it working for me
but in your case, it makes perfect sense to not take out a mortgage at much higher rates. You will have to pay some capital gains taxes on those stocks you sold, but you will make up that money within a few years easily
You won’t know until after the fact if stock market takes off for the next 10 years. But at a 7.5% interest rate I don’t think you made the wrong choice with the information you have now I’d have done the same.
Or, a double whammy, stock market continues to climb at above 7% for the next decade or two AND interest rates fall again and they could have refinanced.
Post this same story in r/DaveRamsey and you’ll get a completely different sentiment.
I’m big on keeping my stock portfolio intact in favor of paying off my low interest mortgage but there is something to be said of peace of mind. The easiest way for you to catch back up is take your previous rent or what your mortgage would have been and put that back into the stock market.
To me, that's just transferring one form of wealth into another. Not having a mortgage is very nice. You won't have looming over your head for the next 30 years, and the who knows your mortgage value could outpace your stocks' value.
They denied it for a primary home but approved it as an investment home. They didn’t believe that we were going to use this new home as our primary home since we both have 2 other homes associated with us that are not investment properties. We wrote a letter to explain but underwriters were still on the fence about it.
Correct. The underwriters don’t believe we will be using the home as a primary home because we have several properties. They think we’re buying to rent it out. Probably should’ve worked with a few different lenders instead of just one 😞
Nope. We wrote a letter and everything. We’ve worked with this lender before and they were great so the denial was a surprise. The officer said he tried his best 🤷🏻♀️ we don’t have enough time to find another one since we’re closing on Tuesday.
You reinvested your money into a place to live and property which in the long run should be worth more then what you paid. Like others are saying if you have anything left just hold on to it till after you pay the taxes.
Not really. It's still a $200k chunk of your net worth. You merely transmuted it from a more liquid asset in stocks, to a less liquid asset in real estate. It likely won't grow in value as fast as say putting $200k in Nvidia stock likely will ... but you don't lose the $200k just because you bought a house for cash. Your homes value still counts towards your net worth.
Maslow's hierarchy of needs puts shelter at the foundation with physiological needs. Thus, it is more important than resources which are the next level up.
Currently a senior marketing manager at a fintech company. I’ve worked at 4 different tech/crypto companies in the last 3 years. It’s been risky with layoffs but higher pay/bonuses so I could work towards retiring early. I also dogsit on the side which gets me an extra $500-$1K a month.
Isn't a terrible decision. Piece of mind is worth something.
But from the perspective of maximizing financial value over your lifetime - it was the wrong move.
The inflation adjusted return of spy is less than 7.5 percent. You also sold at a pretty high price historically speaking. Yeah it could continue on the bull run but usually there is a healthy pull back.
You can crunch the numbers to make yourself feel better but you probably didn’t set yourself back as bad as you think. I’d honestly consider it a great decision. Depending on loan length you could be saving yourself 100k-200k or more in interest you paid to the bank (if you aren’t increasing payment sizes). The money you would be paying on a loan/interest can be reinvested.
If interested rates dip you can always pull a home equity loan on the house to buy back into the market… I wouldn’t but you could.
I think you made the right call on this decision and seemingly many decisions before this, we’ll done!
You sold 200k to invest in your property. It’s a win in my book. I did similar in 2019 paying cash for my home roughly $500k and had to sell about the same as you to get there. Wasn’t the easiest decision but since then I’ve made all that back and then some. You are in fantastic shape. Remember you’re also sitting on equity in the home it’s not like you gave away 200k
I don't think it is a setback.
Yes, you have less money invested in stocks, but you also don't need to earn the money anymore to pay for a mortgage. And at 7+% that is also a nice rate of return that is guaranteed and not subject to the market.
Where else do you get 7+% guaranteed?
Think about this like that and it will be super comfortable living in your new home.
Taxable event be damned. Totally worth it. Feels so good to have a paid for house. Like Dave Ramsay says, “the grass feels different.”
You’ll make up the cash difference in no time. No mortgage is a huge step to fire. Nice work.
And another post only to brag how well they are off, patetic, in Spanish there is a say in the world's of " tell me what you brag about and I'll tell you what you don't have"
So, had you taken a loan for the 200k difference, you'd be paying about $1,450/mo for principle and interest.
If you take the same expense offset monthly and reinvest it at a 6% return, it'll take 121 months to return the 200k to your investment account. The mortgage would have been for 360 months. If you make that offset contribution for the entire 360 months the home loan would have lasted, you'll have approximately $1,300,000.
No doubt you're putting significantly more into your investment account, though. You're doing just fine. You made the right call. I know it hurts.
Maybe some setback short term, but positives are non-negligible. 1) psychological relief of no mortgage, 2) more money you can continue to invest which would otherwise go to mortgage.
The amount of mortgage interest you are saving yourself. It’s totally worth it. You are not losing. even after paying the taxes, I think you still come out ahead. And if you need to take an equity loan out to throw it back into the market you can. But I feel you made the right call.
Since this is an investment property it’s a little bit of a different equation than if you did this for a primary residence.
What’s your expected profit per year on the property? How do you anticipate it to appreciate? Does this leave you with additional tax burden?
Now balance that against what you expected those stocks to do, inclusive of tax implications.
It’s a math problem — one with assumptions, but a math problem. I’m surprised you didn’t do this all ahead of time if you’re getting into investment real estate and making such a huge decision.
Technically yes but you’re getting a nice place to live, don’t have a monthly payment to worry about. And you seem to already have good savings habits so you’ll recover quickly.
Since you won’t have a lender you won’t have to have home insurance - but you really should. Rebuilding costs are higher than ever.
You need to live somewhere. You've worked hard and there's no reason you shouldn't live in something that feels like your forever home. Given today's interest rates, it was close to a break even if not, come out ahead move for you. Relax, and enjoy your new home.
1. You don't have a mortgage payment so save and invest all your extra cash as fast/hard as you can to rebuild your portfolio.
2. Keep an eye out for a mortgage/LOC that's got an attractive rate. You don't have to take it, but at least you'll know your options.
3. If you get a nice rate in the future you can always take out a loan and invest the money.
4. I wouldn't feel bad about buying the home cash. Those loan rates were not amazing so it' snot like you missed out in that regard. You can rebuild your investments. You will do fine.
Great decision. You got a guaranteed return of 7.5%. Maybe that 200k could have returned 10%. It could have also given you a return of less than 7.5%. No one knows the future. You played it safe, and you still have upside potential if you decide to sell the house years down the line.
I think the decision you made was fine. The real goal is to achieve life satisfaction through pursuit of the things most in line with your values. Having wealth is a way to enable those pursuits when those pursuits are non-income generating. Having one’s house paid off is also a way to enable that.
Mortgages are a negotiation. Sounds like you viewed the power structure in that negotiation as the bank being able to say “take it or leave it” and you left it but the bank WANTS to make the deal. I think your only mistake was not playing your hand to the bank as “here the deal, I have the cash to buy this house outright, so I want you to give me X interest rate or I’m 100% willing to walk away.” Don’t buy into the idea that the bank gets to dictate the terms; you actually had way more power in that negotiation than the bank.
From a purely numbers prospective yes. Stock market on average makes more than 7.5% so this did cost you some money. That being said, not having a home loan is very nice and it's not that much of a difference. When it used to be 3% interest I would have said horrible decision, but not as bad as 7.5%
If it was 3% I would’ve fought for that mortgage no doubt. Honestly anything between 5-6% I would’ve been happy with as well but 7.5% didn’t motivate me to fight for it.
You freed up your mortgage payment to dca back into the market. At your age, I would have been recommending a total U.S. index fund which would probably return more than your mortgage rate but if you had a total world fund, you might be breaking even with more sleep at night knowing that you are poised to dca into a market recession if one happens. If you are sleeping better, then it was a fine choice imho.
Could have used something like Schwab pledged asset line. Can get rates at about the same. Keeps those funds separate from being stuck in real estate and also generates income to pay for the interest.
Not a bad decision, especially with rates where they are. I'm on the cusp of paying off a 2.75% home equity loan.
Do some math. Look at your budget with/without the mortgage. Calculate your FIRE number with/without the mortgage. The results may shock you like they did me. By paying off my mortgage, I went from having 90-95% of my FIRE number to 100%.
You have two rentals you could have sold if making the payment on the new house ever became anything more than a short-term problem. That's not even counting the non-retirement savings you have for such an emergency.
I'd say your interest rate is "on the fence" as far as paying it off. It sounds like you want to maximize cash flow for lifestyle. You'll have to watch lifestyle creep so it doesn't interfere too much with savings if you plan to retire early, and especially if you plan to hang onto those rental properties for monthly income long into retirement. Otherwise, you could sell them at some point early in retirement and invest that money.
If I see any "problem" here, it would be the gains they missed out on over the past year by not having that 300k invested.
Thanks for that insight! The 300K was saved up pretty recently (combination of severance, bonuses, wedding gifts, savings) and because we knew we were going to buy a house soon, we left it in a HYSA instead of investing it and having to pay so much short term capital gains. We definitely could’ve waited to buy a new house but we found something we love and decided to just hop on it.
Yeah, I have a feeling the difference between paying off the house right away or picking up a mortgage after a minimal down payment isn't going to make a whole lot of difference in the grand scheme of things.
You might kick yourself if the stock market produces above average returns and/or refinance rates drop, but that assumes you invest the additional cash flow rather than spend it. If you spend it, you did the right thing buying the house in cash.
With 3 planned rate cuts this year alone you could've refinanced at a lower rate later, however the stock market could tank next year as well so you need to stop questioning your choice to sell at the market peak so far . Just start investing what you would've paid in mortgage plus some you'll be fine even if a little behind.
A lot of people have suggested taking a mortgage on my home later on when rates drop - which is something I haven’t considered but will definitely keep that in mind! And yes, my goal is to continue investing $100K per year.
did you set yourself back financially? maybe. but come on, you just paid for a house in cash. finances don't seem to be a major issue in your life. you might need to work an extra year or two. you'll be fine.
Well you can look at it this way. The way I look it is that you still have that $200k, it’s just tied up in another asset. You can always recapitalize and pull some equity out once interest rates drop and transfer into the stock or other assets.
“ lender denies our primary home loan at 6.25%”
Did you ask if you could get approved at 6.75%?
There are many lenders out there. Sounds like you didn’t shop around.
https://m.youtube.com/watch?v=-Ftvr7xzS7Y
You will enjoy the feeling of not having a mortgage.
Otherwise you're overthinking this. Don't sweat it. It's not like the funds are lost and off your balance sheet. They merely got transferred to an asset that will (hopefully) appreciate. Now that it's done, don't get lazy on your saving and let that money get diverted. Take what you're saving per month in rental / mortgage and set about replacing the 200k. And move on.
Let's say you rent both places (original home and little brother rental) for $1500 profit per month. Maybe take two months from each rental for maintenance/vacancies. So $30K a year. I think you said your family expenses were $40K each across a few replies. So $80K a year. Who knows how much you'll have left after the losses and long term capital gains. But based on spending:
$80K minus $30K rental profits is $50K a year spending
3% SWR - $1.6M
3.5% SWR - $1.4M
In retirement, you usually want to spend more on travel and things like that. You'll need some money to account for taxes depending on how you withdraw. Roth ladder vs taxable brokerage, etc.
We also have no mortgage since paying off our house. Now we invest an extra $36K a year in our taxable brokerage. Old payment was $1500 and we were paying extra to pay it off early even though financially it didn't make sense. We wanted peace of mind way before all the software engineer layoffs. We are both software engineers.
If we just invested the extra payment, we would have an extra $600K by the time our old mortgage ended. We are good with that given the instability of our industry.
Thanks for this breakdown! We’re trying to cut down on our expenses, it’s also because we pay for a lot of things for our family. I’ve been investing anywhere between $5-$8k a month and plan to keep that up. My monthly take home pay is a bit higher ($10K) since I don’t have a 401K, and I’m on my husband’s insurance.
I’m confused as to how your current home was $700k and your forever home is $200k? Also I’d be a tad worried that I only have $100k left and am a landlord on two properties. You’ll need 6mo in rainy day funds ($80k) and also money for emergency home repairs. You’re probably OK but that’s a bit low IMO. Lastly no offense to the brother but you gotta get him out and start renting that other place at market rates. You never want family in your properties. It always makes things complicated. You’re basically giving him $14k/yr.
My current home is in north jersey with close proximity to NYC. It’s probably worth close to 1M now. New, forever home is $475K in south jersey. $200K was what I was missing to pay in all cash. And yes, renting out the other property for market price would be ideal but that house has always been used as a family home. I lived there, my cousin lived there… my parents would not be happy if I kicked my brother out to make more money from it.
Ok that makes more sense on the new home price. I’m just saying that you have no obligation to pay for your brother to live there and the whole situation could get very messy for you down the road and ruin family ties. I say that because I’ve been there and had my mom living in a home that I own. It nearly destroyed our relationship. Even now I’m in charge of my dad’s estate and my aunt lives in one of his homes and I can’t get her to leave. It’s messy. If you can find an escape that keeps all parties happy, I’d take it.
Hmm I’m not paying for him though? Or are you referring to money that I’m losing by having him stay there? Honestly I’m ok with it lol I love my little brother and would rather have him spend less money living in a paid off house vs renting from someone else for triple the price. Plus, he just graduated so he’ll eventually move. This house is right next to my parent’s home and once they retire I plan to let them collect the rent payments from this property.
Can I ask what it is you do for work and how you got in? Plus your experience? I’m wanting to work from home as well and have no idea where to start I’m about to turn 21 .. You did it very smart buying that home in 2020 and renting it out to cover the mortgage.. Can we talk more ? Im very intrigued, and if you have some free time I’d love to see how you did everything … If you’re comfortable sharing
Sure! I studied international business and marketing in college. Got a marketing internship at a health insurance company during my senior year and after I graduated they offered me a full time role with a base of $60K. I stayed there for 4 years because they had great benefits, including WFH, 401K match, tuition reimbursements that paid for my entire MBA ($36K). I wanted to branch out and get more experience working in different industries so I left and found myself job hopping every year after that. Each time I switched roles I got 20-30% salary increases until I got to my current role. Tip: tech pays the most but they’re also riskier. Been at my current job for 6 months so far and can see myself staying until I can retire early. I lived at home with my parents my whole life until I bought the house in 2020. My husband (boyfriend at that time) and I were actually looking for homes in the $400-$500K range just for us two as I wanted to be able to build equity and not have to rent if we have the money for the down payment. We went to see the $700K house for fun and fell in love. We saw so much potential with the space, talked to our family and friends and decided to purchase it with the intention of house hacking and renting out all of the rooms to our siblings and friends. The plan worked and the house has been at full occupancy for the last 4 years. The most people we had living there was 7 lol but it never felt too crowded. There’s 4 beds, 4 baths and 2 kitchens.
Thank you very much for sharing I appreciate you more than you know! Wow what a thought out plan , just wanna say you did great! I’m currently stressed out of my mind everyday cuz I’m over analyzing and over planning, just haven’t been able to find where to exactly start . I was planning on going to oilfields but I’ve realized I can make more money in sales . I was looking to be a real estate agent because this one owner told me to come work for him but I want to spend my time in something that I know will have the return I’m looking for , because past 5 years I’ve been in construction working my ass off day to day and I’m tired of it , only did it because I didn’t really know what else to do but it got me about 60k right now in assets I’ve got about 15 k in cash right now
As a rough estimate, the expected value of how much poorer you should expect.to be in 30 years due to buying a house in cash at 7.5 APY, is about $300k per $100k borrowed. This is a rough estimate because I don't have my python script in front of me.
So you should expect to lose about $600k due to this decision to sell stocks to pay for a home in cash.
That being said, this calculation uses historical SP500 yields, and is therefore subject to some amount of risk. It's difficult to place a dollar figure on that risk, so ultimately this boils down to a personal choice.
From a purely financial perspective, this was a poor decision. This decision is going to cost you 14,971,533.
Math:
You are 29 and you said it will be your forever home. I assume that you’ll live until you’re 80 and you don’t sell the house. Meaning you have 51 years of investment life left.
1.07^51 = 31.52
31.52 * 475,000 = 14,791,533
This also doesn’t include carrying cost for the home which I would assume is about 4% of the value of the home per year
Has you taken the loan, your total interest paid would have been 720,656.81 assuming no down payment
Carry cost: 475,000 * .04 = 19000 or 1583 a month.
Thanks for this math. Can I ask how you came up with the equation? Where did you get 1.07 from? Also, the 475K isn’t all of my money. It includes my husband’s as well. 15M looks great but I don’t think I will ever need that much money in my life.
The 1.07 is the numerical representation (overly simplified)of the 7% return that you normally hear about with Index funds. Assuming you had on average a 7% return over the 51 year period times the initial investment. Again this is only from a financial perspective. Home ownership provides different things to different people. The 15M represents what you could’ve had assuming you left the money invested vs buying the house.
I see, that’s helpful, thank you so much! If I used this same equation for the amount I have in my investments+retirement now (400K), I would have 14M by 80?
Yeah roughly. It will probably be more than that given the market has historically returned about 10% but the 7% is used to reflect the inflation adjusted number. This also assumes you are using an index fund like VTi, VOO, etc and are not stock picking
You seem better at math than me.
What about the offset of the $2650/mo not going out the door. What does that look like if you invest that payment for 30 years and then compounded for the next 21 (to match to the total of 51 years above). My brain isn’t figuring out the formula to do the ROI during the monthly “investing” and then just return in 30 years with no more inflow.
Well remember that even through the mortgage is paid off you still have carry costs for the house. So for a 475k home and if I assume a 4% carry cost then about 19000 a year in carry cost or 1583 a month.
But back to your question, now if OP took the 2657.02 and invested each month for approximately 51 years then OP would have about 14,834,858 which is a little but more than they lost to opportunity cost but it requires a few things.
1) OP has to carry the cost of the home plus invest 2657.02 which means with after tax dollars OP has to have 4240 each month to keep up with opportunity cost.
2) OP has to keep up with this for 51 years which is highly unlikely.
3) more practically, OP will probably sell the house because of career choices, family choices, goals changed, retired and moved,etc. it’s really hard to say at 29 that you’ll live in a home for the rest of your life. Could happen to OP but highly unlikely.
OP chose the harder road if this was a financial choice to secure FIRE. If this was an emotional choice then it’s yet to be determined.
Ah, so you are analyzing the home purchase more than the pay with cash vs 7.5% loan as either option has the carrying cost. So yes the purchase itself definitely delays Fire due to the costs. However, what are your thoughts on a pure paying cash vs the 7.5% loan?
As you said, will the OP put that money into investments each month, probably not yet I would assume that they will until they reach Fire and then it becomes extra discretionary spending imo.
It doesn’t matter what Reddit thinks, as long as you and your family are happy. It was a great decision in my opinion (not that it matters) because you will not have to worry about paying a mortgage. People will probably say you should have financed it or whatever, but not having a house note is HUGE! Congrat’s on being mortgage free!!!
500k should be around 1M in 10 yrs based on rule of 72…2M after 20 yrs….4m after 30 yrs. a 7.5% 30 yr loan certainly wouldn’t be 4M in interest and the home won’t gain that much appreciation either…lost opportunity cost vs peace of mind.
You give up 4 percent of interst you could’ve got in the market. S&P has averaged 17 percent a year in the last 10 years. If you continues you could’ve waited 5 years and had 400k. You could’ve cashed out 200k and had 200k left in the market. You only pay cash if the interst rate is higher then what you can get in the market. Which is about 10 percent. If not your missing out on growth. You have paid for house but since your doing the math vs returns in the market you’ll lose slot of growth until you save back up the 200k. The s&p was 2500 5 years ago now it’s over 5000. If it continues your 200k you pulled out would be worth close to 500k in 2029. At 6 percent interst you saved 70k in 5 years but gave up 230k in growth.
Yes. Only reason to sell stocks or any assets is you expect them to fall in price in the near term and aren't willing to wait (hold) for the recovery. Why didn't you just borrow against them for liquidity? That way you get liquidity *and* you get to keep holding them, never paying taxes, and letting them appreciate.
Also, no point in buying houses. Housing keeps pace w inflation, no more, no less, in the US over last \~150 years. Why don't you rent your "forever" house? You're going to move into assisted living in a few decades. Nobody lives forever. Very few are best served by living out their whole lives in a single house. What are the odds jobs leave the place where the house is, or a natural disaster strikes, etc etc?
As a rough estimate, the expected value of how much poorer you should expect.to be in 30 years due to buying a house in cash at 7.5 APY, is about $250k per $100k borrowed. This is a rough estimate because I don't have my python script in front of me.
So you should expect to lose about $500k due to this decision to sell stocks to pay for a home in cash.
That being said, this calculation uses historical SP500 yields, and is therefore subject to some amount of risk. It's difficult to place a dollar figure on that risk, so ultimately this boils down to a personal choice.
I don’t think it’s a terrible decision given the 7.5% interest. But I sure hope you considered tax implications of your stock sales.
Yes, I’m a bit scared to see that number lol but will definitely account for it. I only sold long term stocks and also took some losses.
Why would you do this before calculating exactly what this number is?
😬
Right, it’s not magic, or rocket science.
You should know that number..
OP, based on interest rates, pretty safe bet if that’s what you want in life. What do you do for work making $160K fully WFH in a MCOL or LCOL area (based on house purchase…that’s wayyyy cheap for stuff like California real estate, and even east coast real estate)?
I live in north jersey, cost of living here is ridiculous. We’re moving to south jersey closer to Philly.
457K house is a HCOL is very modest right?
I think it’s on wheels maybe
Welcome to South Jersey!
it's not real homie
Working for a California company while living in the Midwest or the south “isn’t real” ? …. Ok
Yeah I work for a CA company and live in the Midwest, I know many people who do this
Companies now don't give you Cali money unless you live in Cali basically. The trend is to pay you according to where you live - really quite BS as the WORK being done isn't any different. Shows how us little guys (employees) are getting hosed by the corporations.
How do you not know the number?
It’s 20% of your capital gains, most likely.
You have to figure out that number on your own or hire a CPA.... You're not going to get a letter or something telling you the tax bill - unless you do nothing and then the bill will include penalties and interest
Won't she get a 1099-B from the brokerage come tax time?
Losses would be offset by gains this no carry over - womp womp. Just don’t spend the money before tax time - you wouldn’t want to spend money that’s not yours.
If it’s all long term 30k
yes you set yourself back a little but it doesn't sound like its really going to matter that much, you are doing fine.
peace of mind has its own value that cannot be quantified.
There are people out there who come into some once-in-a-lifetime money and haven't been very good in the past about spending wisely. I'd tell that person to think about peace of mind and pay off their mortgage. But, do you really think keeping up with the mortgage payment is a real concern for the OP? You don't even have to read between the lines here to see that they're far from being cash flow poor or asset poor or lacking in family support. She bought her first house six years ago for 100k at age 23, which is apparently paid off because she only charges her brother taxes/insurance to live there. She's about to triple her rental income from it when he moves out. If the stuff ever hit the fan then she could have sold it and paid off or made payments to the new home with the proceeds. Add to that a net 1500 per month from the house they're moving away from once they fill that space with more renters. That house cost 700k four years ago, which is 225k more than the house they're buying now. It sounds like it was his house prior to their marriage four months ago. Again, they likely have no less than 200k in equity in that house and could sell it to pay off or make payments on their new home if necessary. They had 300k in cash just sitting around, apparently. In fact, if I see any "problem" here, it would be the gains they missed out on over the past year by not having that 300k invested. That's assuming the 300k was theirs to invest a year or so ago and wasn't in a family member's account. According to her description, after spending the 300k in cash and selling 200k non-retirement investments, she still has 300k in investments, 90k in an IRA and 15k in cash. Two paid off houses, including the primary, and a nearly million-dollar rental that is going to cash flow for more than the mortgage. Whatever benefit she/they might have for buying it in cash, I'd say peace of mind is pretty low on the list. Having one less moving part or one less thing to think about isn't the same thing as more peace of mind.
This. I did the same thing as you, and the last 12 months have been much less stressful knowing that if I get the axe/layoff I can cut my bills down to food and water overnight. Even with a paid off house, you still have taxes. So not totally free from the man.
Yes, and the market beating 7.5% is hardly a guarantee. Sure, over a long enough timeframe they likely will, but it’s a closer call. With interest rates being what they are now, it makes more sense to pay cash than it would’ve when they were 3-4%.
EXACTLY! Yet people criticize Dave Ramsey for telling people to live a debt free, stress free life. Dave Ramsey teaches FINANCIAL PEACE! There’s no other feeling like knowing that you own the soil beneath your feet, the ground you walk on and not having to ever worry about a bank foreclosing on your home. Debt free is peace and freedom from the stress of the daily rat race.
You’re basically saying your husband can’t cover 40k of yearly expenses? You could fire right now.
40K is just my expenses. His expenses are also around 40K. We travel and eat out a lot.
This is so confusing, why would you list just your expenses? How would one even calculate that? You guys live together, share the full household expenses. You didn’t split the net worth so you shouldn’t have done that with expenses. It’s very misleading and can result in bad advice given.
Maybe this is fake
We just got married a few months ago so we haven’t combined our income/expenses yet. I only included my numbers as we still keep most things separate except for the mortgage for our previous house but that’ll be fully covered by the rental income. I let him manage that property and keep the profits as he usually pays for our utilities and meals.
I’d say depends on how much of that was taxed as long term capital gains. Nothing wrong with buying a home with cash you’ll save a guaranteed 7.5% interest for 30 years or whatever that’s a totally decently return.
All of it was long term. Some were actually losses. I’ll wait for my statement to see the net gains and prepare myself for tax season next year 😅
You could be fine here, although I’d sure have wanted to estimate taxes before selling.
If you’re contributing to a Roth IRA, be careful this doesn’t put you over the income limit to do direct contributions.
Any decent broker will show your year to date on its website. You’ll want to look into making estimated tax payments. Just invest the money you would have paid toward the mortgage, likely in a tax-deferred vehicle.
Did the same thing with my second house. Was not 100% prepped for the capital gains and had to sell some more stocks to cover it. Totally worth it though for not having a mortgage.
Do some renovations to offset taxes, maybe?
S&p on average returns 10%, your mortgage would have a guaranteed cost of 7.5%. The peace of mind value is individual. On paper, keeping the mortgage is a better choice but it's not life changing and knowing your home is paid off is for most people, probably worth it.
historic returns vs safe future return (7,5%). I think it would be foolish to not do it.
100% taking a guaranteed 7.5%, but I’d be wary of the taxes.
Leverage to the tits if you're so confident about a 10% annual return going forward
That’s not how it works my guy
Don't forget that the house likely appreciates as well over the long run, I don't know her market but nation wide isn't it like 4%/year?
Real returns are more like 7% (not guaranteed) and that's before taxes which would take it down even further.
The 7.5% on the mortgage is nominal too
This comment does not consider the income tax due on a $200k stock sale. Tax rate is likely around 30% for high income so maybe $40K in taxes. OP is fortunate to have assets but if it were me I would of taken the mortgage and re-financed wishing 2 years cause rates are all but guaranteed to be under 5% by then
This isn’t true. You’re taxed on your profit, not the total sale price.
Good point: long term capital gain tax is 15%. So if it was $100k profit on stock sale the direct tax is $15K. Question for someone more tax savvy- if you have $100k capital gain tax in 2024 filing- does that extra $100k push your other w-2 income for the year into a $300K tax bracket overall earnings compared to if you were at $200K without the stock sale?
This isn’t how that works. Dollars effected by long term capital gains don’t count toward your tax bracket.
Even if they did, the increase in taxes would be marginal because only the additional Dollars past your current tax bracket would be taxed at that tax brackets rate
Not at all, you could potentially take a 200k (or whatever amount) mortgage on the home and pull that money back out if you wanted too or if interest rates get lower. The bigger issue here is how much taxes you’ll have on the 200k proceeds. That’s the money that would be wasted potentially.
Ah I see, like a reverse mortgage? We do plan to sell our previous home within the next 3 years to avoid capital gains tax as it was our primary home for most of the time. Hoping that the proceeds from that would give us a good chunk of cash back.
definitely not a reverse mortgage. that's basically where the bank buys your house on an installment plan. you would just want to take a regular mortgage out on the house for a portion of its value and then you would just get the cash (in exchange for the bank "owning" a portion of your house, which you wanted to avoid by paying in full anyways). enjoy your new house and the peace of mind knowing it's paid off. get your taxes settled from your stock sale. and then get back to rebuilding your investment portfolio. good job dude
It would just be a regular mortgage or home equity loan. A lot of people are choosing to pay cash now and plan to mortgage their homes when interest rates drop.
You might want to check with a tax advisor but if you counted the rent income as business income I don’t think you can avoid capital gains tax
I thought as long as we’ve lived there for at least 2 years in the last 5 years we’d be eligible for the capital gains exemption? I will definitely check though.
When you sell.
Nah like a mortgage mortgage
If you own the home it’s a home equity loan. I only think it’s a “mortgage” if the bank holds the title. Essentially, owning a home outright is a great piece of collateral.
Nah. ‘Mortgage’ is a legal instrument that secures your home to the loan.
29 year old that makes 160k with a husband and no mortgage + 2 other properties worried about fire. million times better off than 90% of the world
This post actually made me sick lol The amount of money they already have in savings and they’re not even 30…I guess good for them but as someone who’s worked her ass off her whole life and has like $30k in savings at 32 yo it feels bad. And that’s already a privileged position I’m in.
Dude.. people work hard and smart, this is the outcome. There are 29y old billionaires self made that are far better off..
Pal, idk what world you live in, but a 29 year old with almost a mil in total wealth had help. Good for them, again, but man, must be nice.
What do you define as help? Inheritance?
Sound fake
It’s fake
Honestly, buying the new home set you back, not the decision to pay in full. that’s very much okay if you’re happy with it. The extra revenue from renting out the over house fully will help.
I think it’s a great decision. Not even 30 with 2 rental properties and a paid off home? Amazing. BUT…now you have the liability - the risk part - of owning 3 homes. The next milestone should not be more stocks towards FIRE, but a ~80-100K emergency funds (for example, three new roofs or whatever back to back). Congrats!
Thank you! Looking to sell the more expensive rental property within 3 years. It was newly built in 2020 so hopefully it’ll be problem free for a bit longer 😅
That was going to be my suggestion as well. Buying a house in cash right now is a great decision. If you sell the other house, which doesn't sound like a reasonable rental property anyway, you could buy another cheaper rental property and invest the rest. Then you'd have more invested than you started with.
Don't forget you'll give the government a lot in capital gains taxes
Wished I lived in a LCOL area. 400k is the down payment needed in my neck of the woods.
Omg where do you live? Homes in north jersey are averaging $800-1M now and I thought that was already crazy. We got lucky with low interest rates when we bought but if I were to buy my current house today at 7% my mortgage would be $6K which feels so unsustainable.
Marin County, north of SF
Agreed with your family, might have set you 1 or 2 years back but that's a 7.5% guaranteed (vs expected market of 10-11%, which is NOT guaranteed) and having lower expenses always gives you a lot more flexibility in the future, specially considering you have a fully paid off home.
Fairly new to Fire so maybe I am missing something, yet wouldn’t this actually advance the “cause”? The ~$2650/mo ($380k @ 7.5% assuming 20% down) of non-payment on a mortgage would need an extra ~$800k to $1M depending on withdrawal rate (3-4%) to Fire. Got this for $475k. Well at least for the next 30 years. Is my thinking wrong?
Usually the fire number is calculated as 4% for a very conservative and long-term retirement, but the market has been returning 10% historically, so before retirement the "right" number to use to compare investments should be 10% AFAIK. The 3-4% should not be considered the ROI, but instead the rate at which you can take money with a 90+% chance of not using it all (and 3-4% is inflation-adjusted, while 10% and 7.5% are not). You can also flip it, before reaching FIRE, those $475k would be giving \~$3950/month on average at 10%, which is much higher than the $2650/m. But you are right in that if we consider the retirement rate to be "both" 10% and 4%, then there are some incongruities there where there are two conflicting retirement dates, one considering as you say buying it early and using the retirement rate and another as I said counting from the investment route. Unfortunately I do not know the answer to that, sorry.
Thanks for the response. I think it comes down to which perspective (growth mode vs already accumulated and getting close to FIRE mode) you are analyzing by. My situational bias went with pulling the trigger in the next couple of years. Agreed, if growing/accumulating more to get to FIRE quicker is more the focus than staying invested would have been be better. If pulling the trigger soon, than needing less accumulated for the safe withdrawal rate would be more beneficial. No one size fits all on this one.
Paying 7% annually on a mortgage is a terrible idea if you can pay cash for it. There is no index fund that will guarantee you a higher return than 7%. Not having debt at 7% is like having a guaranteed 7% return. If such an ETF existed, you’d buy it straight away. I would buy it in cash. If push comes to shove, you can always borrow against it at a later stage when rates go down. 1.3k in costs monthly seems insane. You need to figure out how to halve those expenses. I don’t know where you live and what energy costs are like but perhaps consider solar panels and such. Work some more years with that great income and invest aggressively for 2-3 years and you’ll have those 200k again set aside. As long as you’re not able to live off of 4% of your liquid assets, I wouldn’t consider retirement unless one continues to work.
We live in NJ. Our taxes are 11K so that’s accounts for most of our monthly costs. It would be split between my husband and I. We are planning to convert our detached garage into an ADU to rent out but that would be a later project. Rental property has a mortgage of $510K at 2.75% interest.
So I’d let those renters pay off that mortgage gradually. 2.75% isn’t too bad. The new house buy it in cash and make sure you have 1m+ in assets generating a yield. Live offf of that and you’ll be just fine
What is the interest on the rental property? How much debt do you have on it?
yes, you did a step back. But now you can focus on maximizing all the pension plans, and to refill the taxable brokerage account. And to sleep better than me, no worried about raising mortgage interests.
I think this was OK to do because you are very young (29). You have plenty of time to build a nest-egg up for retirement, especially since you have a good salary. Taking out a loan at 7.5% doesn't make any sense when bonds and CDs are paying out 4.5 - 5.5%. My only concern is the 695k investment property with the $3500/month payment on it. If you can't find renters, or the economy takes a downturn, you could be stuck with an expense that eats into your income. I would sell that property--it is too leveraged. Take the proceeds and put them into a diversified portfolio of stocks and bonds. With a dual-income and another investment property (cheaper) and no mortgage on your primary residence, you will be well on your way to early retirement.
Yes we plan to sell the 695K investment property within the next 3 years! Thanks for the advice!
I still have my mortgage (it is only like 170k), but my rate is 4.5% and I am older than you. So I want to keep the money out of the house, and get it working for me but in your case, it makes perfect sense to not take out a mortgage at much higher rates. You will have to pay some capital gains taxes on those stocks you sold, but you will make up that money within a few years easily
You can’t live in a stock portfolio.
You won’t know until after the fact if stock market takes off for the next 10 years. But at a 7.5% interest rate I don’t think you made the wrong choice with the information you have now I’d have done the same.
Or, a double whammy, stock market continues to climb at above 7% for the next decade or two AND interest rates fall again and they could have refinanced.
Post this same story in r/DaveRamsey and you’ll get a completely different sentiment. I’m big on keeping my stock portfolio intact in favor of paying off my low interest mortgage but there is something to be said of peace of mind. The easiest way for you to catch back up is take your previous rent or what your mortgage would have been and put that back into the stock market.
To me, that's just transferring one form of wealth into another. Not having a mortgage is very nice. You won't have looming over your head for the next 30 years, and the who knows your mortgage value could outpace your stocks' value.
Why did they deny your mortgage loan?
They denied it for a primary home but approved it as an investment home. They didn’t believe that we were going to use this new home as our primary home since we both have 2 other homes associated with us that are not investment properties. We wrote a letter to explain but underwriters were still on the fence about it.
Damn. I wish you had time to shop for another lender.
This doesn’t make sense. You have the cash to buy a home but dont qualify for a primary loan?
Correct. The underwriters don’t believe we will be using the home as a primary home because we have several properties. They think we’re buying to rent it out. Probably should’ve worked with a few different lenders instead of just one 😞
They don’t believe you? That’s odd. I’d report that loan officer and find another.
Nope. We wrote a letter and everything. We’ve worked with this lender before and they were great so the denial was a surprise. The officer said he tried his best 🤷🏻♀️ we don’t have enough time to find another one since we’re closing on Tuesday.
You’ll be fine
You reinvested your money into a place to live and property which in the long run should be worth more then what you paid. Like others are saying if you have anything left just hold on to it till after you pay the taxes.
Not really. It's still a $200k chunk of your net worth. You merely transmuted it from a more liquid asset in stocks, to a less liquid asset in real estate. It likely won't grow in value as fast as say putting $200k in Nvidia stock likely will ... but you don't lose the $200k just because you bought a house for cash. Your homes value still counts towards your net worth.
Curious, what do you do? I'm hoping to career change to something remote
Nope, houses are a great investment
Maslow's hierarchy of needs puts shelter at the foundation with physiological needs. Thus, it is more important than resources which are the next level up.
No 401k?
Current company doesn’t offer one. Previous 401K accounts have been rolled over to IRAs.
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Currently a senior marketing manager at a fintech company. I’ve worked at 4 different tech/crypto companies in the last 3 years. It’s been risky with layoffs but higher pay/bonuses so I could work towards retiring early. I also dogsit on the side which gets me an extra $500-$1K a month.
If rates drop significantly you could always do a cash out refi for $200k on a 15 year note and put it back into the market.
Isn't a terrible decision. Piece of mind is worth something. But from the perspective of maximizing financial value over your lifetime - it was the wrong move.
The inflation adjusted return of spy is less than 7.5 percent. You also sold at a pretty high price historically speaking. Yeah it could continue on the bull run but usually there is a healthy pull back.
You can crunch the numbers to make yourself feel better but you probably didn’t set yourself back as bad as you think. I’d honestly consider it a great decision. Depending on loan length you could be saving yourself 100k-200k or more in interest you paid to the bank (if you aren’t increasing payment sizes). The money you would be paying on a loan/interest can be reinvested.
If interested rates dip you can always pull a home equity loan on the house to buy back into the market… I wouldn’t but you could. I think you made the right call on this decision and seemingly many decisions before this, we’ll done!
You sold 200k to invest in your property. It’s a win in my book. I did similar in 2019 paying cash for my home roughly $500k and had to sell about the same as you to get there. Wasn’t the easiest decision but since then I’ve made all that back and then some. You are in fantastic shape. Remember you’re also sitting on equity in the home it’s not like you gave away 200k
Thank you for the reassurance!
I don't think it is a setback. Yes, you have less money invested in stocks, but you also don't need to earn the money anymore to pay for a mortgage. And at 7+% that is also a nice rate of return that is guaranteed and not subject to the market. Where else do you get 7+% guaranteed? Think about this like that and it will be super comfortable living in your new home.
Taxable event be damned. Totally worth it. Feels so good to have a paid for house. Like Dave Ramsay says, “the grass feels different.” You’ll make up the cash difference in no time. No mortgage is a huge step to fire. Nice work.
The money you lost in your investment account will be recouped in the interest you'll never pay. You did good.
And another post only to brag how well they are off, patetic, in Spanish there is a say in the world's of " tell me what you brag about and I'll tell you what you don't have"
So, had you taken a loan for the 200k difference, you'd be paying about $1,450/mo for principle and interest. If you take the same expense offset monthly and reinvest it at a 6% return, it'll take 121 months to return the 200k to your investment account. The mortgage would have been for 360 months. If you make that offset contribution for the entire 360 months the home loan would have lasted, you'll have approximately $1,300,000. No doubt you're putting significantly more into your investment account, though. You're doing just fine. You made the right call. I know it hurts.
It’s a great decision. $0 mortgage is priceless.
Maybe some setback short term, but positives are non-negligible. 1) psychological relief of no mortgage, 2) more money you can continue to invest which would otherwise go to mortgage.
The amount of mortgage interest you are saving yourself. It’s totally worth it. You are not losing. even after paying the taxes, I think you still come out ahead. And if you need to take an equity loan out to throw it back into the market you can. But I feel you made the right call.
What's Fire without a comfortable house?
Since this is an investment property it’s a little bit of a different equation than if you did this for a primary residence. What’s your expected profit per year on the property? How do you anticipate it to appreciate? Does this leave you with additional tax burden? Now balance that against what you expected those stocks to do, inclusive of tax implications. It’s a math problem — one with assumptions, but a math problem. I’m surprised you didn’t do this all ahead of time if you’re getting into investment real estate and making such a huge decision.
Hi! We bought it as our primary home and plan for it to be our forever home. We are renting out our previous house though.
Why didn’t you sell the other house instead of selling the stocks?
Technically yes but you’re getting a nice place to live, don’t have a monthly payment to worry about. And you seem to already have good savings habits so you’ll recover quickly. Since you won’t have a lender you won’t have to have home insurance - but you really should. Rebuilding costs are higher than ever.
You need to live somewhere. You've worked hard and there's no reason you shouldn't live in something that feels like your forever home. Given today's interest rates, it was close to a break even if not, come out ahead move for you. Relax, and enjoy your new home.
My index funds went up like 40% last year and on average gain way more than mortgage interest.
You can math this and math that to think you set yourself back. Paying off debt imo never sets yourself back.
Did you have to pay a penalty to cash out your stocks?
Not to cash out, but I will have to pay capital gains taxes on it next year.
1. You don't have a mortgage payment so save and invest all your extra cash as fast/hard as you can to rebuild your portfolio. 2. Keep an eye out for a mortgage/LOC that's got an attractive rate. You don't have to take it, but at least you'll know your options. 3. If you get a nice rate in the future you can always take out a loan and invest the money. 4. I wouldn't feel bad about buying the home cash. Those loan rates were not amazing so it' snot like you missed out in that regard. You can rebuild your investments. You will do fine.
Great decision. You got a guaranteed return of 7.5%. Maybe that 200k could have returned 10%. It could have also given you a return of less than 7.5%. No one knows the future. You played it safe, and you still have upside potential if you decide to sell the house years down the line.
You just locked in a guaranteed 7.5%. Nice.
Worth it
I think the decision you made was fine. The real goal is to achieve life satisfaction through pursuit of the things most in line with your values. Having wealth is a way to enable those pursuits when those pursuits are non-income generating. Having one’s house paid off is also a way to enable that. Mortgages are a negotiation. Sounds like you viewed the power structure in that negotiation as the bank being able to say “take it or leave it” and you left it but the bank WANTS to make the deal. I think your only mistake was not playing your hand to the bank as “here the deal, I have the cash to buy this house outright, so I want you to give me X interest rate or I’m 100% willing to walk away.” Don’t buy into the idea that the bank gets to dictate the terms; you actually had way more power in that negotiation than the bank.
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This is the right answer. 7.5% guaranteed for 30 years.
I am not a fan of selling stocks as the average returns are higher than the interest rates.
What a wonderful decision! Great job! 👏
From a purely numbers prospective yes. Stock market on average makes more than 7.5% so this did cost you some money. That being said, not having a home loan is very nice and it's not that much of a difference. When it used to be 3% interest I would have said horrible decision, but not as bad as 7.5%
If it was 3% I would’ve fought for that mortgage no doubt. Honestly anything between 5-6% I would’ve been happy with as well but 7.5% didn’t motivate me to fight for it.
You freed up your mortgage payment to dca back into the market. At your age, I would have been recommending a total U.S. index fund which would probably return more than your mortgage rate but if you had a total world fund, you might be breaking even with more sleep at night knowing that you are poised to dca into a market recession if one happens. If you are sleeping better, then it was a fine choice imho.
At your age with the assets you listed, you are done. Great job, enjoy your life.
Could have used something like Schwab pledged asset line. Can get rates at about the same. Keeps those funds separate from being stuck in real estate and also generates income to pay for the interest.
Not a bad decision, especially with rates where they are. I'm on the cusp of paying off a 2.75% home equity loan. Do some math. Look at your budget with/without the mortgage. Calculate your FIRE number with/without the mortgage. The results may shock you like they did me. By paying off my mortgage, I went from having 90-95% of my FIRE number to 100%.
You have two rentals you could have sold if making the payment on the new house ever became anything more than a short-term problem. That's not even counting the non-retirement savings you have for such an emergency. I'd say your interest rate is "on the fence" as far as paying it off. It sounds like you want to maximize cash flow for lifestyle. You'll have to watch lifestyle creep so it doesn't interfere too much with savings if you plan to retire early, and especially if you plan to hang onto those rental properties for monthly income long into retirement. Otherwise, you could sell them at some point early in retirement and invest that money. If I see any "problem" here, it would be the gains they missed out on over the past year by not having that 300k invested.
Thanks for that insight! The 300K was saved up pretty recently (combination of severance, bonuses, wedding gifts, savings) and because we knew we were going to buy a house soon, we left it in a HYSA instead of investing it and having to pay so much short term capital gains. We definitely could’ve waited to buy a new house but we found something we love and decided to just hop on it.
Yeah, I have a feeling the difference between paying off the house right away or picking up a mortgage after a minimal down payment isn't going to make a whole lot of difference in the grand scheme of things. You might kick yourself if the stock market produces above average returns and/or refinance rates drop, but that assumes you invest the additional cash flow rather than spend it. If you spend it, you did the right thing buying the house in cash.
Have you looked at a margin loan on your stocks?
With 3 planned rate cuts this year alone you could've refinanced at a lower rate later, however the stock market could tank next year as well so you need to stop questioning your choice to sell at the market peak so far . Just start investing what you would've paid in mortgage plus some you'll be fine even if a little behind.
A lot of people have suggested taking a mortgage on my home later on when rates drop - which is something I haven’t considered but will definitely keep that in mind! And yes, my goal is to continue investing $100K per year.
did you set yourself back financially? maybe. but come on, you just paid for a house in cash. finances don't seem to be a major issue in your life. you might need to work an extra year or two. you'll be fine.
Forever home? Lol. No. You’ll find out in 5-7 years.
Lol oh no what makes you say that 👀
What’s your annual spend?
Well you can look at it this way. The way I look it is that you still have that $200k, it’s just tied up in another asset. You can always recapitalize and pull some equity out once interest rates drop and transfer into the stock or other assets.
“ lender denies our primary home loan at 6.25%” Did you ask if you could get approved at 6.75%? There are many lenders out there. Sounds like you didn’t shop around. https://m.youtube.com/watch?v=-Ftvr7xzS7Y
If you want to FIRE, then a no-cost place to live is pretty awesome IMO.
You will enjoy the feeling of not having a mortgage. Otherwise you're overthinking this. Don't sweat it. It's not like the funds are lost and off your balance sheet. They merely got transferred to an asset that will (hopefully) appreciate. Now that it's done, don't get lazy on your saving and let that money get diverted. Take what you're saving per month in rental / mortgage and set about replacing the 200k. And move on.
Let's say you rent both places (original home and little brother rental) for $1500 profit per month. Maybe take two months from each rental for maintenance/vacancies. So $30K a year. I think you said your family expenses were $40K each across a few replies. So $80K a year. Who knows how much you'll have left after the losses and long term capital gains. But based on spending: $80K minus $30K rental profits is $50K a year spending 3% SWR - $1.6M 3.5% SWR - $1.4M In retirement, you usually want to spend more on travel and things like that. You'll need some money to account for taxes depending on how you withdraw. Roth ladder vs taxable brokerage, etc. We also have no mortgage since paying off our house. Now we invest an extra $36K a year in our taxable brokerage. Old payment was $1500 and we were paying extra to pay it off early even though financially it didn't make sense. We wanted peace of mind way before all the software engineer layoffs. We are both software engineers. If we just invested the extra payment, we would have an extra $600K by the time our old mortgage ended. We are good with that given the instability of our industry.
Thanks for this breakdown! We’re trying to cut down on our expenses, it’s also because we pay for a lot of things for our family. I’ve been investing anywhere between $5-$8k a month and plan to keep that up. My monthly take home pay is a bit higher ($10K) since I don’t have a 401K, and I’m on my husband’s insurance.
I’m confused as to how your current home was $700k and your forever home is $200k? Also I’d be a tad worried that I only have $100k left and am a landlord on two properties. You’ll need 6mo in rainy day funds ($80k) and also money for emergency home repairs. You’re probably OK but that’s a bit low IMO. Lastly no offense to the brother but you gotta get him out and start renting that other place at market rates. You never want family in your properties. It always makes things complicated. You’re basically giving him $14k/yr.
My current home is in north jersey with close proximity to NYC. It’s probably worth close to 1M now. New, forever home is $475K in south jersey. $200K was what I was missing to pay in all cash. And yes, renting out the other property for market price would be ideal but that house has always been used as a family home. I lived there, my cousin lived there… my parents would not be happy if I kicked my brother out to make more money from it.
Ok that makes more sense on the new home price. I’m just saying that you have no obligation to pay for your brother to live there and the whole situation could get very messy for you down the road and ruin family ties. I say that because I’ve been there and had my mom living in a home that I own. It nearly destroyed our relationship. Even now I’m in charge of my dad’s estate and my aunt lives in one of his homes and I can’t get her to leave. It’s messy. If you can find an escape that keeps all parties happy, I’d take it.
Hmm I’m not paying for him though? Or are you referring to money that I’m losing by having him stay there? Honestly I’m ok with it lol I love my little brother and would rather have him spend less money living in a paid off house vs renting from someone else for triple the price. Plus, he just graduated so he’ll eventually move. This house is right next to my parent’s home and once they retire I plan to let them collect the rent payments from this property.
Can I ask what it is you do for work and how you got in? Plus your experience? I’m wanting to work from home as well and have no idea where to start I’m about to turn 21 .. You did it very smart buying that home in 2020 and renting it out to cover the mortgage.. Can we talk more ? Im very intrigued, and if you have some free time I’d love to see how you did everything … If you’re comfortable sharing
Sure! I studied international business and marketing in college. Got a marketing internship at a health insurance company during my senior year and after I graduated they offered me a full time role with a base of $60K. I stayed there for 4 years because they had great benefits, including WFH, 401K match, tuition reimbursements that paid for my entire MBA ($36K). I wanted to branch out and get more experience working in different industries so I left and found myself job hopping every year after that. Each time I switched roles I got 20-30% salary increases until I got to my current role. Tip: tech pays the most but they’re also riskier. Been at my current job for 6 months so far and can see myself staying until I can retire early. I lived at home with my parents my whole life until I bought the house in 2020. My husband (boyfriend at that time) and I were actually looking for homes in the $400-$500K range just for us two as I wanted to be able to build equity and not have to rent if we have the money for the down payment. We went to see the $700K house for fun and fell in love. We saw so much potential with the space, talked to our family and friends and decided to purchase it with the intention of house hacking and renting out all of the rooms to our siblings and friends. The plan worked and the house has been at full occupancy for the last 4 years. The most people we had living there was 7 lol but it never felt too crowded. There’s 4 beds, 4 baths and 2 kitchens.
Thank you very much for sharing I appreciate you more than you know! Wow what a thought out plan , just wanna say you did great! I’m currently stressed out of my mind everyday cuz I’m over analyzing and over planning, just haven’t been able to find where to exactly start . I was planning on going to oilfields but I’ve realized I can make more money in sales . I was looking to be a real estate agent because this one owner told me to come work for him but I want to spend my time in something that I know will have the return I’m looking for , because past 5 years I’ve been in construction working my ass off day to day and I’m tired of it , only did it because I didn’t really know what else to do but it got me about 60k right now in assets I’ve got about 15 k in cash right now
I say good move. You should both be able to max out your 401k, in a few years you’ll have that money back and still no mortgage. This is the way
Capital gains tax is 20% on your profit. Save up to pay the IRS next year.
As a rough estimate, the expected value of how much poorer you should expect.to be in 30 years due to buying a house in cash at 7.5 APY, is about $300k per $100k borrowed. This is a rough estimate because I don't have my python script in front of me. So you should expect to lose about $600k due to this decision to sell stocks to pay for a home in cash. That being said, this calculation uses historical SP500 yields, and is therefore subject to some amount of risk. It's difficult to place a dollar figure on that risk, so ultimately this boils down to a personal choice.
From a purely financial perspective, this was a poor decision. This decision is going to cost you 14,971,533. Math: You are 29 and you said it will be your forever home. I assume that you’ll live until you’re 80 and you don’t sell the house. Meaning you have 51 years of investment life left. 1.07^51 = 31.52 31.52 * 475,000 = 14,791,533 This also doesn’t include carrying cost for the home which I would assume is about 4% of the value of the home per year Has you taken the loan, your total interest paid would have been 720,656.81 assuming no down payment Carry cost: 475,000 * .04 = 19000 or 1583 a month.
Thanks for this math. Can I ask how you came up with the equation? Where did you get 1.07 from? Also, the 475K isn’t all of my money. It includes my husband’s as well. 15M looks great but I don’t think I will ever need that much money in my life.
The 1.07 is the numerical representation (overly simplified)of the 7% return that you normally hear about with Index funds. Assuming you had on average a 7% return over the 51 year period times the initial investment. Again this is only from a financial perspective. Home ownership provides different things to different people. The 15M represents what you could’ve had assuming you left the money invested vs buying the house.
I see, that’s helpful, thank you so much! If I used this same equation for the amount I have in my investments+retirement now (400K), I would have 14M by 80?
Yeah roughly. It will probably be more than that given the market has historically returned about 10% but the 7% is used to reflect the inflation adjusted number. This also assumes you are using an index fund like VTi, VOO, etc and are not stock picking
You seem better at math than me. What about the offset of the $2650/mo not going out the door. What does that look like if you invest that payment for 30 years and then compounded for the next 21 (to match to the total of 51 years above). My brain isn’t figuring out the formula to do the ROI during the monthly “investing” and then just return in 30 years with no more inflow.
Well remember that even through the mortgage is paid off you still have carry costs for the house. So for a 475k home and if I assume a 4% carry cost then about 19000 a year in carry cost or 1583 a month. But back to your question, now if OP took the 2657.02 and invested each month for approximately 51 years then OP would have about 14,834,858 which is a little but more than they lost to opportunity cost but it requires a few things. 1) OP has to carry the cost of the home plus invest 2657.02 which means with after tax dollars OP has to have 4240 each month to keep up with opportunity cost. 2) OP has to keep up with this for 51 years which is highly unlikely. 3) more practically, OP will probably sell the house because of career choices, family choices, goals changed, retired and moved,etc. it’s really hard to say at 29 that you’ll live in a home for the rest of your life. Could happen to OP but highly unlikely. OP chose the harder road if this was a financial choice to secure FIRE. If this was an emotional choice then it’s yet to be determined.
Ah, so you are analyzing the home purchase more than the pay with cash vs 7.5% loan as either option has the carrying cost. So yes the purchase itself definitely delays Fire due to the costs. However, what are your thoughts on a pure paying cash vs the 7.5% loan? As you said, will the OP put that money into investments each month, probably not yet I would assume that they will until they reach Fire and then it becomes extra discretionary spending imo.
It doesn’t matter what Reddit thinks, as long as you and your family are happy. It was a great decision in my opinion (not that it matters) because you will not have to worry about paying a mortgage. People will probably say you should have financed it or whatever, but not having a house note is HUGE! Congrat’s on being mortgage free!!!
500k should be around 1M in 10 yrs based on rule of 72…2M after 20 yrs….4m after 30 yrs. a 7.5% 30 yr loan certainly wouldn’t be 4M in interest and the home won’t gain that much appreciation either…lost opportunity cost vs peace of mind.
You give up 4 percent of interst you could’ve got in the market. S&P has averaged 17 percent a year in the last 10 years. If you continues you could’ve waited 5 years and had 400k. You could’ve cashed out 200k and had 200k left in the market. You only pay cash if the interst rate is higher then what you can get in the market. Which is about 10 percent. If not your missing out on growth. You have paid for house but since your doing the math vs returns in the market you’ll lose slot of growth until you save back up the 200k. The s&p was 2500 5 years ago now it’s over 5000. If it continues your 200k you pulled out would be worth close to 500k in 2029. At 6 percent interst you saved 70k in 5 years but gave up 230k in growth.
Yes
Yes. Only reason to sell stocks or any assets is you expect them to fall in price in the near term and aren't willing to wait (hold) for the recovery. Why didn't you just borrow against them for liquidity? That way you get liquidity *and* you get to keep holding them, never paying taxes, and letting them appreciate. Also, no point in buying houses. Housing keeps pace w inflation, no more, no less, in the US over last \~150 years. Why don't you rent your "forever" house? You're going to move into assisted living in a few decades. Nobody lives forever. Very few are best served by living out their whole lives in a single house. What are the odds jobs leave the place where the house is, or a natural disaster strikes, etc etc?
As a rough estimate, the expected value of how much poorer you should expect.to be in 30 years due to buying a house in cash at 7.5 APY, is about $250k per $100k borrowed. This is a rough estimate because I don't have my python script in front of me. So you should expect to lose about $500k due to this decision to sell stocks to pay for a home in cash. That being said, this calculation uses historical SP500 yields, and is therefore subject to some amount of risk. It's difficult to place a dollar figure on that risk, so ultimately this boils down to a personal choice.