The All-You-Can-Eat Mortgage

8

This past 4th of July, Matt Stonie set a new world record. Not any kind of record, but one that we can easily imagine how impossible the feat is and you might have even casually tried it before.

Matt holds a record for eating 62 hotdogs under 10 minutes. Wow. Now I think we can all agree that this requires some practice and that Matt pushed the limit of what the human body can take. Check it out here, it’s insane. The guy is only a few hotdogs away from a food coma.

And this is interesting, because instinctively we realize how crazy this is. I’d personally don’t need that much. I’d be full with just 10% of that.

Ironically, mortgages aren’t so different.

The All-You-Can-Eat Mortgage

My wife and I are currently looking for a house to buy in Houston. Our company relocated our jobs to a much farther location and what was previously an awesome 10 min commute turned into 40min. In addition, our current super cheap downtown lease expires the 31st of December, with the option to be renewed for a much higher price. It’s time for us to look for an alternative.

We went to our credit union to check how much “house we can afford” and got pre-approved for the 400k$ we asked for. But apparently if we wanted to, we could ask for up to 1.2M$. For those not living in Houston, a 1M$ house mansion looks like this:

Million dollar house

Million dollar house

That’s 7300 sqft of craziness (with a pool and jacuzzi that, I admit, look totally awesome).

But wouldn’t that be like eating 62 hotdogs in 10 minutes?

Such an investment would kill our FI plans. Our Savings Rate would drop to ~5%, we would have to stop investing and becoming Financially Independent any time before we turn 65 would be completely unrealistic.

We would also be house poor.

Entree Only – No Dessert

What we are looking for is an investment that won’t cost us more than our current rent. We’re not hungry for 62 hotdogs, we just want 2 or 3.

We are not trying to live below our means, we are trying to not live above our needs.

If we can buy ‘just enough’ house and keep our monthly payments similar to what our rent costs us, then buying will actually lower our costs.

The difference with our current rent will be the house equity, which in that case is a nice side effect (like when you get miles for buying things you need anyway).

It doesn’t really matter how much this equity generate. As long as it’s positive, it will be a better return than our rent.

Let’s put this in a magnificently hand-drawn bar graph:

buyvsrent
We are aiming for a purchase that won’t cost more than an equivalent rent

If, however, we invest more than our current rent, we would be overweighting our investments in favor of real-estate. If it generates similar returns to our current investments, that’s great (eg. 6-8%). But if it generates much lower returns (eg. 1%), then that would be an opportunity cost.

buyvsrent2
Buying too much house would eat up our other investments

Our goal is to play it safe and make an investment that serves our goal to reach Financial Independence, not our egos or what the bank or all these online home affordability calculators think we can afford.

There are several opportunities that we have identified already that look promising. I can predict a lot of spreadsheet analysis in the coming weeks. Hopefully we’ll be moving out before Christmas.

Would anyone have tips for buying real-estate in <60 days? What yields do you typically expect from real-estate investments? Have you ever purchased the maximum amount of house you could afford?

-Nick

Get Free Email Updates!

Enjoyed this article? Join our Financial Independence newsletter.

I will never give away, trade or sell your email address. You can unsubscribe at any time.

8 COMMENTS

  1. But eating 62 hotdogs in 10 minutes sounds like a much better option that a reasonably-sized delicious dinner! I like the analogy. We didn’t even get pre-approved for a loan. We decided what payment we would feel comfortable with and bought the only house on the market that fit our number of bedrooms desired in our price range. (Alaska has a housing shortage.) Good luck!

    • Thanks Maggie! I think Houston might actually have an oversupply of housing at the moment, so hopefully we’ll find something quickly. If we do, I’ll celebrate with a hotdog or two.

    • Hi Steve, I had a conversation with a colleague today who recently bought a house. She can’t save anything and currently has less than 5000$ in her emergency fund. She probably did overbuy and that’s a situation I’d like to avoid. FI is more important!

  2. I love how you put it — living within your needs, not just living within your means. Those huge houses are not just a financial disaster, but an environmental one as well. I love that you guys are thinking about a home that’s much more right-sized, and won’t waste a ton of energy to heat and cool (okay, probably mostly cool in your case).

    • You’re right about the cooling, this would definitely be a huge waste.
      From experience, putting our ‘Needs’ before our ‘Wants’ and our ‘Can’ has always proven to be a good, future proof decision
      As a side note, we do turn on the heat sometimes between end of dec and early feb 🙂

  3. First, I need to move to Houston! Where I live, $1M buys you a small condo.

    In all seriousness, you are smart to only buy what you need vs. what you can “afford.” We did the same thing and are so glad we did. One thing we thought about was whether we could rent out our place if/when we move. We looked at rents in our neighborhood and the trends over the years to make sure we could cover our mortgage (and gigantic property taxes). This also buys us some piece of mind that if we ever do have to move suddenly and can’t sell our place quickly, we can at least cover our expenses without dipping into savings!

    • You know what they say: “Everything is bigger in Texas” 🙂
      Similarly to you, we are also looking at houses that can easily be rented, for which the rent would cover the mortgage + associated costs. I also see this is as a good check that the price is right.
      I’m glad to see this approach worked for you, it makes me more confident with ours!

Leave a Reply