What advice would you give?
This week I met with a client who asked me for advice on whether or not to buy a house. You might have offered him different advice than me. Here are the facts of this unique circumstance.
He is 52 years old, has no children, and isn’t currently married. He had received a nice inheritance and grew the portfolio over the last 10 years to around $1.3 million. At the moment, he doesn’t work, and he is living off the monthly income of the portfolio. What’s most important to him is that he doesn’t have to work. He has always wanted to own a home, but tends to move around often. His portfolio is generating around 2.5% and the income of $32,500 a year maintains his lifestyle. His budget is below $30,000 because he rents an apartment for $800 a month and owns his car outright. He would like to move to Florida and wanted advice on whether or not he should purchase a home for around $250,000.
Do you think he should? :
A) Use $250,000 of the $1.3 million to buy the house with cash
B) Take out a mortgage for around $200,000 and use $50,000 as the down payment?
C) Continue to rent
In most cases, I normally go with answer (B), taking out a mortgage, but in his circumstance, I said that he should continue to rent. I believe that he falls into the minority of people categorized as, “homeownership is not for everyone.” Living off his nest egg is most important, so it’s best not to disturb it. He has been able to reach $1.3mm because he doesn’t own a home. He doesn’t pay taxes, there are no interest expenses, insurance, and maintenance. He became a millionaire because his rent was low and he had no large bills. Investments is key for him.
I also believe that buying a home could become an emotional decision for him. He may come to regret his decision and he might be overestimating his happiness from home ownership. He could become depressed because he is finally spending money and dropping an anchor in Florida. To this point, renting has been stress-free and his assets have remained liquid.
As soon as he buys this home, there would be a slight chance that he might have to go back to work. I didn’t chose answer “A”, because even though he can pay cash, the purchase would drop his portfolio to around $1,000,000, and his income would fall at the same time his expenses were exploding.
This was the first time that I ever told someone not to buy a house. The American dream for most people is to own a home. For most homebuyers success will depend on timing and the price they pay. Millennial’s right now are having a difficult time paying for these sky high home prices, while at the same time, paying off college loans and raising a family. The person that I met with falls into the minority of people who’s only goal in life was saving and investing. I’m leaving the final decision up to him on this one because it’s more of a personal decision on whether he is comfortable possibly going back to work part-time. Would you have reached a different conclusion?
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