If you want to achieve financial independence, you need to get your housing expenses under control. This article will provide a housing expense guideline to help you achieve financial freedom sooner, rather than later.
Although I’ve said that overpaying for a car is the #1 wealth killer for the middle class, paying ever rising rent over the long run could actually be way worse.
Inflation is an unstoppable juggernaut that will smash your retirement dreams to smithereens if you aren’t on the right side. If you can stabilize your housing expenses, you will have a much easier time creating more wealth.
Therefore, as soon as you know you’ve found a place you want to live in for at least five years, buying a primary residence instead of renting is probably a good idea. The longer you can own your home, the likely greater wealth you will build.
General Housing Expense Guideline For Financial Freedom
There’s a general guideline that says renters shouldn’t spend more than 30% of their net income on rent. The 30% recommendation comes from the Brooke Amendment passed in 1969 which determined the point where a family living in public housing was considered financially burdened by housing costs.
As for homeowners, few banks will lend beyond a 43% debt-to-gross income ratio (10% too high IMO). For example, if you pay $2,000 a month for your mortgage and another $300 a month for an auto loan and $300 a month for student loans, your monthly debt payments are $2600. If your gross monthly income is $8,000, then your debt-to-income ratio is 33 percent.
In this article, I’d like to layout a housing expense guideline to help folks reach financial independence sooner. I’ll go through my own housing expense history to reveal some nuggets of wisdom.
If you can get your housing expense equal to 10% or less of your gross income, you will be well on your way to financial freedom.
Housing Expense Guidelines And The Rent Burden
First, let’s take a look at this interesting chart that shows the rent burden for younger residents in several major cities. Rising rents are creating rising fortunes for landlords. Therefore, you probably don’t want to rent forever once you’ve identified a place you want to live for at least five years.
The influx of new people over the past two decades has far surpassed existing housing supply due to concentrated job growth in America’s major cities.
As a result, rents and housing prices have skyrocketed. We’ve reached a breaking point, which is why I’m actively investing in the heartland of America instead for the next decade.
I’ve never worked in Los Angeles, the most rent burdened city surprisingly, but I did start my career in NYC in 1999 and finished my career in San Francisco in 2012. Rent increases will likely last for a while due to high inflation and worsening housing affordability.
Here’s a timeline of my housing expense history.
A Timeline Of My Housing Expense History
The #1 housing expense guideline is to keep your living expenses to below 10% of gross income. Don’t listen to the general advice that says the limit is 30%. The general population is struggling.
Below is my housing expense history which follows my housing expense guideline. I retired in 2012 at the age of 34, partly because I kept my housing expenses low.
NYC 1999 – 2000 Housing Expenses
NYC felt just as expensive then as it does now. To cut costs and reduce commute time, I decided to share a studio at 45 Wall Street with a buddy of mine from high school. The place was just a eight minute walk to work at 1 New York Plaza. We paid $800 each for the luxury of passing out each night after a 14-hour work day.
My base salary was $40,000 a year or $3,333 a month plus an unknown bonus. Therefore, my rental expense made up 24% of my gross income. My fellow analysts at Goldman Sachs either rented a one bedroom for $1,800+/month or had their parents buy them their own place. There was a ton of Bank of Mom and Dad going around.
I could have joined my colleagues in spending ~50% of my gross income on rent, but I made a conscious decision to save more money because I was maxing out my 401k from the get go. Walking to work in the dark and walking back home in the dark was depressing. I had to save aggressively in order to one day be free!
NYC 2000 – 2001 Housing Expenses
My first roommate moved out because his parents bought him a one bedroom condo on the upper east side for $250,000 that lucky duck. It was a great buy since it’s worth ~$750,000 today. Even though his parents helped him out, 17 years later, he still lives in his one bedroom condo with his wife! Talk about living luxuriously and frugally at the same time.
The Street decided to bump up all first year starting analyst salaries to $50,000 from $40,000 in 2000. As a result, my salary went from $40,000 to $55,000 given I was now second turd on the rung. I found a new roommate and rented a studio with an alcove for $1,800 a month. Now we were living large!
I lived in the living room and he lived in the windowless room for $900 a piece. With a new gross monthly salary of $4,583, I was now paying just 19.6% of my salary in rent. Again, I could have very easily decided to get my own one bedroom apartment for $2,000 a month, but work continued to be too painful. Including my bonus, my income was over $100,000.
SF 2001 – 2002 Housing Expenses
The biggest surprise about moving to San Francisco was how much cheaper rent was compared to Manhattan. Still frugal, despite a raise and a promotion, I decided to rent a room in a two bedroom, one bathroom apartment at the edge of Chinatown for $900 a month. Going from living in a living room with no privacy to having my own room and shared common space felt like a luxury! But I knew the place was a dump (see picture).
I joined my new firm as an Associate with a new salary of $80,000. My rent as a percentage of gross income fell to just 13.5%. A couple colleagues made fun of me for not living in a more posh neighborhood. But it just felt stupid to spend up when I didn’t know for sure I’d be in SF long term. I was still exploring a new city and wanted to keep living costs to a minimum. Finally, I was starting to feel rich living so modestly. What a contradiction.
SF 2002 – 2003 Housing Expenses
My roommate turned out to be a little unstable, randomly screaming his lungs out in the middle of the night. After my girlfriend stayed with me for several months in this 2/1 apartment at the edge of Chinatown, we decided to get our own one bedroom apartment in Cow Hollow, a nicer neighborhood in SF’s north side for $1,600 a month.
I paid $1,000 a month and she paid $600 a month given she was only one year into her career. My salary was now $90,000 (tends to go up $10,000 a year in finance back then), meaning that I was paying 13.3% of my gross salary to rent. However, if you account for my bonus, which can range from 50% – 200% of salary, my rent made up less than 10% of my annual gross salary.
Once I got rent down to under 10% of my annual gross salary, I started feeling like I was making massive financial progress. Rent no longer felt like a burden, even after maxing out my 401k, investing ~30% of my post 401k cash flow every month, and investing 100% of my bonus.
Oh, and the one bedroom was also kind of a dump. It was very dark and right below an alcoholic neighbor who would leave deep bass music on all night long. Drove us nuts! Every week the blue recycle bin was full of beer cans.
Related: The 30/30/3 Home Buying Rule
SF 2003 – 2005 Housing Expenses
With a good amount of cash flow at 25, I started wondering what was the point of working so hard since I was living much lower than my means compared to my peers (quarter life crisis). When you start feeling rich, you want to improve your life! At the same time, I didn’t want to pay more than $2,000 a month in rent, which was what was required to get a nicer place.
Instead of renting, I decided to buy a 2/2 condo for $580,500 with 25% down and assume a $2,100 mortgage + $230/month HOA + $500/month property tax instead. Although the total came out to $2,830 in cash outflow, the net cost after deductions was more like $1,900 a month. With a new monthly base salary of $8,333, my housing expense grew to 34% before deductions and 23% after deductions. This was an obvious violation of my housing expense guideline.
The $435,000 mortgage lit a fire under my ass to work harder. I never felt this much financial burden in my life. It was stressful knowing that if I lost my job, I may lose my condo. I’m not sure if I would have continued working in finance after age 26 if it wasn’t for debt.
Major Motivation To Pay Down Mortgage Debt
For the next 12 years, the monthly mortgage kept going down with each refinance until I paid the sucker off in 2015. Meanwhile, the median rent for a 2/2 apartment in SF went from $2,100 to $4,600! How nuts is that?
The property is currently a $4,300/month rental. I’m below the median, despite the prime location because it’s not remodeled.
While the average renter was getting crushed by inflation, the average homeowner saw his housing payments go down. There is a 40-year declining mortgage rate trend to be aware of. When I first bought my condo, my mortgage rate was 5.25%. Then I refinanced it to 3.375% for a 36% decline.
Check the latest mortgage rates online for free. The more quotes you can get, the lower the mortgage rate you will likely receive.
SF 2005 – 2014 Housing Expenses
After a couple of years in the condo, I actually regretted not buying a nicer place in 2003. The reason why is because property prices continued to grow (greed). As a result, I took on a whopping $1,220,000 mortgage at 28 and bought a $1,520,000 single family house at the end of 2004. It ended up being two bedrooms too large for my eventual wife and me. I let the sellers rent back the place for 3.5 months before we moved in 2005.
My housing expense as a percentage of gross income got as high as 60%! Once again, I was worried about my future. It also felt wasteful to own such a large house with just the two of us. As a result, I rented out the garden room to help defray expenses.
My housing expense eventually fell to 28% of my base salary after earning some raises over the next nine years. If you include my bonus, the lowest my housing expense got was ~8.3% of gross income.
SF 2014 – 2019 Housing Expenses
When I first bought my current primary residence in 2014, my gross housing expense was ~24% of my gross income, or 17% of my gross income after deductions. I purposefully bought an 18% cheaper house than my previous residence because I was earning less and wanted a smaller house. I was able to lock in a 2.5% 5/1 ARM.
Due to further income growth, my housing expense twas only ~8.2% of my average gross income before deductions and ~5.7% of my gross income after deductions. I’m now wondering whether I’m living too frugally again. The idea of buying that dream house in Honolulu one block from the beach in 2020 can’t come soon enough!
At the end of 2019, we finally moved into a bigger house down the block we bought for cash in 2019. It took about six months to model as it was also very old.
We bought the new house with cash after selling about $1 million of stock in 2019. This was a fortuitous event because stocks began to correct in 1Q2020 due to the coronavirus pandemic.
Our housing cost is now about 2% of our annual gross income. Paying all cash is one of the key reasons why I felt much better during this bear market compared to the one in 2008 – 2009.
San Francisco Housing Expenses 2023+
Real estate performed well during the pandemic given the record-low mortgage rates and increased desire to live in a nicer home. If you are going to spend more time in your home, you will want to pay more money for a nicer one.
We followed my housing expense guideline and limited our housing expense to between 5% – 10% of our annual gross income. We’ve built up a lot of wealth over the years and want to live a better life.
Personally, I bought a forever home during the worst of the pandemic in 2020. I’m also bullish on the housing market for the next several years as the economy continues to rebound.
Our overall housing expenses account for less than 10% of our monthly gross income. This is the way it should be as we try and build more passive income to stay away from work. We have two young children and we want to spend as much time with them as possible.
If you want to build wealth, it’s hard to beat owning rental property in a strong environment. The ability to benefit from rising rents and rising property values is a powerful combination.
The Housing Expense Guideline To Follow
My #1 housing expense guideline to follow is to keep housing expenses to no more than 10% of your annual gross income.
Although the general rule is to keep housing expenses to no more than 30% of your gross income, you will NOT feel like you’re getting ahead at 30%. Instead, you’ll feel like you’re running in place.
Only after I got my housing costs to below 10% of my gross income did I start making massive financial progress.
For those of you who live in expensive cities, you might think that spending less than 30% is next to impossible. But that’s exactly what some people are doing.
They do so by sharing a bedroom, sharing a studio, living with five roommates, or even living in a van like one Google employee is doing. Decide on a housing expense limit and adjust accordingly, not the other way around.
When you’re in your 20s, who cares about living in a nice place? I was making over $100,000 and living in a living room! My guests didn’t mind. If you’re chilling at home, you’re not at work, which is exactly where you should be most of the time.
If you’re bullish about your career, only then should you consider buying a property and spending ~30% of your gross income on housing.
Aggressively saving money on housing for 10 years will pay off. Keeping your housing expense to <10% means you can easily save and invest 50%+ of your income each month.
Eventually, you may want to live in a nicer place if you find a partner or start a family. But from ages 18 – 34, living like a pauper is great for financial independence seekers!
Income And Net Worth Required To Buy A Home
Here’s also a chart that highlights the income and net worth required to buy a home at any price point. The Ideal Income and Ideal Net Worth columns correspond well with my housing expense guideline for financial freedom.
Once you’ve gotten neutral real estate buy owning your primary residence, it’s time to finally go long real estate by investing in more real estate.
Invest In Real Estate More Strategically
Real estate is my favorite way to achieving financial freedom. Real estate is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
The combination of rising rents and rising real estate prices builds tremendous wealth over the long term. Meanwhile, there are more ways to invest in areas of the country where valuations are lower and net rental yields are higher thanks to crowdfunding. I highly recommend investors follow my Buy Utility, Rent Luxury real estate investment strategy.
The Best Real Estate Investing Platforms
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. The real estate platform has over 400,000 investors and manages over $3.5 billion.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. They potentially have higher growth as well.
Both platforms are free to sign up.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects. It’s been great to diversify and earn more passive income from the heartland. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Alice Carroll says
You made a good point that gross income should be directly related to housing expenses. I’m planning to look for student rental houses soon because I’m considering to get a second college degree in year or two. Maybe sharing the house with someone else would help in saving money on rent.
Don’t normally comment but had to say thank you for the great read.
Nordic Fire says
Now this was very detailed article! Thank you for this! :)
Chris Chapman says
I need some advice. I am moving to Charlotte to start my first career job (just finished college, 22 years old). I am living at a nice apartment complex very close to work. I have yet to decide what apartment to get and would love some advice. Apartment A1 (681 sq. ft) has an amazing layout and is very practical.. However, is 45% of my income Apartment A3 (627 sq. ft) is a bad layout and is not very practical at all and is 35% of my income. I really do not know which to do choose as I will be living there for 15 months and having my girlfriend move in the last 3 months of the lease. Any comments would be awesome.
We’re at 15%! I found your site thanks to Simple Money Man. I’m learning so much…this is now my favorite blog!
Great article and discussion! Our problem is that we have no house and a lot of savings… almost $3m. We are stationed overseas and so we don’t need to buy property. My question is- we could make housing 0% of our monthly expenses by paying for it in all in cash. What are the general considerations on whether to use savings to put down more and lower monthly expenses?
Financial Samurai says
If you have $3 million in savings, I would comfortably by our house for cash for $2 million or less and then reinvest the remaining. But I guess it depends on what your expenses are and your cash for generation.
Ron Warkentein says
I currently have house buying fever for a house I saw for $800,000 and this would put us at 50% of our take home income. It’s a beautiful home with the potential for increasing in value. What should I do?
We are at 14% on the Peninsula just calculating PITI/Gross Income. Did you include maintenance and utilities in your numbers, Sam? Do gardeners and cleaning services count? Regardless, we’re definitely under 20% total, and our first child is due next month so it looks like we’re in a great place. :)
Financial Samurai says
Not bad! I did not include the secrect gifts provided to the maintenance boys. That’s on your own!
Congratulations on your child. May you have a smooth and joyful delivery!
Good question Sarah as there can be many added costs to the home as I found out when I bought a house with a long drive way and very large yard :)
So the question is what do you count if you have no mortgage? Just the taxes and insurance? So if you are mortgage free, but spending $27,000/year on Taxes + Insurance, but making $300k gross you are in the sweet spot? Other expenses are more “discretionary” I guess although they feel necessary – landscaper, cleaner, maintenance, etc
I live in the NW (Portland) where housing costs show little sign of slowing……and I have that voice in my head that I’m going to get priced out of a larger home as affordability continues to tumble….BUT….. I’m comfortably under the 10% mortgage to gross income though.
So I’m torn between the fear of losing to affordability or investing 20% of my post 401 max out.
PS this quickly became my favorite financial advice site. Well done!
Sam, great to hear your perspective and experience. I have been at both extremes. I was lucky enough when I worked at a bank in NY to sit next to a guy who lived in The Bronx for many years and helped keep me grounded in terms of my lifestyle and spending habits while everyone else was blowing all their money on rent and alcohol.
I started in NY sharing an apartment with a girlfriend in Queens for $1500, split equally (about 16% of my salary). We broke up and I moved closer to the city into a studio for $950 (after a raise, still about 16% of my salary). In my my 2nd year at the bank I became an associate and he convinced me to buy a small studio in the North Bronx for $55,000. The same year I received a significant pay bump as our market started to do well and I was then paying 7% of my salary for housing and 4% of my gross income for housing. In addition, that year Obama had created a housing incentive as part of the stimulus package after the crisis. The deal was you received $8,000 for the purchase of a home or 10% of its value below $80,000. Since I paid 20% down, I received 10% back. So if you include closing costs and my down payment, I paid about $8500 to reduce my housing costs by 50%!
I had never felt so rich in my life! I was aggressively investing 50% of my salary and all of my bonus just as you did. However the party did not last forever.
A few years ago, I got a serious girlfriend and we recently got married and had a child. Work and my commute was getting to me so I rented an outrageous 2 bedroom 2 bath close to work in Midtown to be able to see my family. Now I am back paying about 32% of my salary in rent. However my money did not go to waste. The money I saved went towards buying a commercial rental property in California in 2013 and last year I bought my second one. I am still waiting for the income from the second commercial property to kick in and finally cover my rent but when I do, I can’t wait to get that feeling of saving and investing back again!
As for that Bronx apartment, I currently have it rented out.
ZJ Thorne says
I’m at 8.5% ignoring my overtime income since that is not guaranteed. I have 3 roommates, but I can walk to one of my jobs and I’m close to public transportation for the other. The real downside is how long a walk the grocery store is, but this is not my forever home. I’ll hopefully move cities to be with my girlfriend. I’m not sure if we’ll split her current rent in half. If we do, my rent goes up by $250. I imagine it would depend on what sort of job I can get in her city. She’s holding down her place just fine without help. Sugarmomma?
great great article (again) Sam. When I got my first job I bought a townhouse and rented it out to between 2 and 3 room mates. So my housing cost on a net basis was less than 10% and sometimes I was making money on it. This is my recommendation to all singles. Buy a house and rent out rooms. Housing is a COST not an investment. It doesn’t become an investment until much later only when you become a legitimate real estate investor. I enjoyed reading about your experiences.
This is my first time on your website and this is truly a great article – much more in-depth than al to of stuff you see online. This is a very motivating article and it’s made even better by you illustrating your own experiences.
What you’re saying about saving money is true but very hard to do. Most people seem to not be willing to make the sacrifice in the short term to get the long-term reward. They’re continent to spend too much and live too luxuriously even though they are not building any finical base or finical future for themselves.
My wife and I moved into my $1,000 a month rental in NYC. So we are doing well and are saving for a home, hopefully in the next 12-18 months.