Yes, You Can Afford It. But Do You Want To?
#stayrich #liverichly A happy life is going to be full of things you are happy to replace, and full of people you aren’t. Don’t stretch to buy things, and you won’t stress about owning them.
Mrs. Solving Wealth and I just got back from a vacation in Martha’s Vineyard a bit ago. I’m a big real estate nerd,1 so I like to pull up a real estate app when I pass a for sale sign, and that usually leads to going down a rabbit hole of local mansions for sale. I definitely don’t want to own a house outside my hometown,2 but hey, there are some nice properties here that I totally have enough assets to purchase!
$7M will buy you a really nice beach home on Martha’s Vineyard, and at least this week, while 90+ degree temperatures3 are sweeping much of the nation, I’m enjoying sunny days with a light breeze and highs in the mid 70s.4 I’m not big into heat, so this is super attractive to me! If I had my own place here, I could customize it how I want, come visit any time it was too hot at home, etc. On the other hand, I have a bunch of projects going on right now. Is it worth my time? Is it going to stress me out to afford this place? Let’s do some math!
Under normal circumstances, different parts of your home will last different amounts of time, but you will generally end up putting enough money into maintenance to rebuild it from scratch every 30 years or so. However, the salt air corrodes everything, the nor'easters blast your roof and your landscaping, and flooding is increasingly a thing on those desirable beachfront lots. So let’s use 20 years instead.
It’s hard to separate the cost of the lot from the cost of the house, but I’m guessing that a $7M beachfront home is probably $2M of lot and another $5M of house, so let’s use that. That works out to $20,833/month of maintenance, on average. SERIOUSLY?! Wow. OK. Well, what about insurance, taxes, and utilities? My real estate app estimates $1,039/month for tax, and another $1,822 for insurance. I’m guessing it’ll probably run another $500/month for utilities, since I won’t be there that often and I’ll probably put in solar. So that covers electric, water, sewer, trash, landscaping/plowing, and we’ll skip the gas/oil since I’ll put in low temp heat pumps.
My principal and interest would be $37,106 at current rates with 20% down, apparently.5 According to FireCalc, starting with $5.6M in a 100% stock portfolio and withdrawing $37,106 monthly for 30 years results in a wildly negative balance on average, so I’ll pay $7M cash instead of taking out a loan. I can always refinance later if rates get low enough. That means I just have to make up for the money I failed to make in the stock market, which works out to about $32K/month. On the other hand, the house will probably make about that in appreciation, so we’ll call it a wash and not worry about opportunity cost.
So all in, my house costs me about $24K out the door each month, and then we need to throw another few K in for a property manager. Call it $27K with a good one. Ouch!6
You know that friend who bought a brand new car, and always parks it diagonally across two lanes at the back of the lot, and freaks out about whether your shoes are completely dry and free of sand before you get in the vehicle? And then when they inevitably got a tiny little ding the in parking lot of the grocery store, they wouldn’t shut up about it for a month? Yeah, they bought too much car.
In theory, you might be able to afford the thing, but do you want to? $27K/month buys an awful lot of international business class tickets. It will buy a short private jet flight every month. It will buy a week every month at some of the most expensive hotels on Earth. It buys art, mansion rental, boat charters, and a really nice vehicle several times a year!
So, yes, you can afford it, but do you want to? If you keep your personal-use real estate to under 10% of your net worth, that leaves plenty of other money to support a great lifestyle. If you keep it under 15%, then you’ll probably have a good time. Since I don’t have $70M7 yet, I think I’ll hold off on the house on Martha’s Vineyard.
A happy life is going to be full of things you are happy to replace, and full of people you aren’t. Don’t stretch to buy things, and you won’t stress about owning them.
Yes, ok, I can hear you. I’m a big nerd in basically all ways. Very funny.
We’ve been down that road, and it leads to trees falling on gas meters, and then trying to get the gas shut off and repaired from a thousand miles away.
Yes, degrees F. I measure my beer in hogsheads also. That’s 32+ C for the rest of the world.
23ish C.
I miss those days of 2.5% mortgages with 15% down!
I can hear some of you screaming at the screen, “What about AirBnBing it out?!” Turning your expenses into businesses is a great technique, but it has its own set of peculiar costs. Don’t worry! We’ll go over that in a future post! There’s always a creative solution, but sometimes they’re not worth it either. On the other hand, for the right people, in the right circumstances, they definitely are!
And 7 * 10 = 70 is assuming that I didn’t own my primary residence!