How A Big Expensive House Can Ruin Your Life And Path To Financial Freedom

So you're looking for a big expensive house to upgrade your life. Perhaps the months of lockdowns during the pandemic has made you want to live it up a little. You’re suffering from real estate FOMO. I get it!

Owning a larger, nicer house will make living through rolling lockdowns much more bearable. Further, it might appreciate faster given the demand for larger single family homes is going up. We're seeing this now in the strong housing market.

In fact, my wife and I bought a big expensive house one month into lockdown in April 2020. We figured, if we're going to stay home so much longer, we might as well have a nicer house!

Looking back, I don't regret the decision on bit. The intrinsic value of real estate has gone way up because we're all spending much more time at home.

However, I want to provide a warning that a big expensive house can ruin your life and derail you on your path to financial freedom if you don't carefully do the math. Let me share one of my experiences almost buying an expensive house back in 2018 and the numbers.

If you don't have the appropriate income or net worth, buying a big expensive house can really weight you down.

The Desire For A Big Expensive House Emerges

As a dad, I'd like my parents and in-laws to come visit more, which is why it'd be nice to have a ground floor level portion of the house dedicated just to them. This would make it more comfortable for all of us.

Given I write from home, it'd be nice to have a house large enough so that I can't hear my boy squealing with joy or crying in frustration. Trying to create while hearing him is one of my toughest challenges because once I hear him, I just want to drop everything and go to him.

Finally, I have some FOMO that if I don't buy this house now in one of the best neighborhoods in San Francisco, I might never be able to get in. This is my ego talking more than anything else. 

Found The Perfect Big Expensive House

In 2018, I found the perfect house in Presidio Heights, one of the most prime neighborhoods in San Francisco.

It had four bedrooms, four and a half bathrooms, an awesome attic that would be used as a playroom, and a ground floor suite for my parents or in-laws. My commute to the tennis club would be cut down from 15 minutes to only five minutes a well.

Here are some pictures:

In-law unity on ground floor with deck facing garden - A Big Expensive House
In-law unity on ground floor with deck facing garden
ground floor deck to yard
ground floor deck to yard
Amazing remodeled attic for man cave, play room, or teenager room
Amazing remodeled attic for man cave, play room, or teenager room
How A Big Expensive House Can Ruin Your Life And Path To Financial Freedom
Another angle of the attic with sky lights
Remodeled Master bathroom with his and her sinks
Remodeled master bathroom with his and her sinks, but no hot tub
Family room off kitchen to keep an eye out on the kids
Family room off kitchen to keep an eye out on the kids
Deck off the kitchen for brunch is one of my favorites
Deck off the kitchen for brunch is one of my favorites I had at my old house
Family room with deck
Family room with deck

Pretty nice house right? The house was roughly roughly 3,200 square feet, or 1,300 square feet larger than our existing three bedroom, two bathroom house. Not extravagant, but nice.

Here is the problem problem. The asking price was……………. $4,495,000! Nooooooo.

Believe it or not, buying a single-family home in Presidio Heights for under $5 million back then was considered reasonable. But when I do the math on how much it would cost to own a $4.5 million home, it kind of hurts my stomach.

The Cost Of Owning A Regular $4.5 Million House

It's important to always do the math before making any big purchase. Here's the math to own this beautiful house with a $2 million downpayment just because I thought it might be nice to live in Presidio Heights instead of Golden Gate Heights.

The cost to own a big expensive house could ruin your life
You must do this math before you buy a house and want to achieve FIRE

If I bought this house, my all-in monthly housing expense would more than triple to $18,605 while I would no longer be able to earn any potential income or returns from $2 million currently spread out across municipal bonds, stocks, and real estate crowdfunding in lower cost areas of the country.

The $2 million downpayment is guaranteed to earn $62,000 a year in state tax-free income if it was invested entirely in a 10-year government bond. Hence, one could easily argue that the total annual cost of owning this house a year is not $223,254, but actually $223,254 + $62,000 = $285,254.

Although the mortgage would eventually go away, the 1.23% property tax rate is for life. I cannot get over how egregious it is to pay $55,350 a year in property tax forever.

You can rent a nice two bedroom, two bathroom, lightly remodeled condo in a nice part of San Francisco for $4,613 a month. Further, the property tax amount will keep on going up by about 2% a year because the city automatically assesses the value of your house up by 2% a year.

The Cost Adds Up With A Big Expensive House!

After 20 years of ownership, you will likely have paid roughly $1,200,000 in property taxes alone. That is just absurd.

To add insult to injury, due to the $10,000 SALT deduction cap, I can no longer deduct the entire property tax amount. The SALT deduction cap includes state income taxes as well. Therefore, I'd be losing out on at least another $10,000 in tax refunds, despite the rise in the standard deduction to $24,000 for married filers.

When you buy a home, it's important to have the appropriate income and net worth to comfortably afford a home. Below is a chart I created highlighting how much income and net worth you should have before buying a home at all price points.

If I wanted to buy the $4,500,000 home, I would need an income of between $1 – 1.67 million, which I didn't have. Or, I would need a net worth of between $1.35 – $15 million, which I do have. But I wouldn't buy a $4.5 million home if my net worth was only $1,350,000. I needed at least $10 million, the ideal minimum net worth amount to retire.

how much income and net worth you should have before buying a home at all price points

Note: If you want to calculate how much capital you need at a 4% rate of return to cover your housing costs, simply add up all your housing costs, divide by 0.04% and multiply by 1.4X to account for taxes.

Never Getting Out Of The Rat Race

Buying a big expensive house would put me in massive debt.

It's clear to me that for me, buying this house or this type of house is not worth it. It goes against my minimalism philosophy in early retirement.

I would need to amass almost $8,000,000 in capital just to cover my housing costs if I wanted to stay unemployed. It's hard enough to retire with only a $5 million net worth and a family.

Even after paying off the mortgage, I would still need $2,500,000 in capital returning 4% to pay for the ongoing $5,938 a month in after-tax unavoidable costs of owning such a home.

I can only imagine the family who ends up buying this home will have to work for a very long time with a very high income to afford this type of lifestyle. We're talking $500,000 – $1,000,000 a year in required income to be able to afford the house and everything else that comes with raising a family. These type of jobs can be very stressful, especially if you actually need that much money to survive.

Nobody buys a house this size if they don't have at least two kids. Further, each kid will probably also be going to private school at a cost of $35,000 – $50,000 each. If a downturn ever comes, these $500K+ jobs go away quickly. Then your stress goes through the roof as an albatross hangs around your neck.

If you needed to sell in a down market, you'd not only lose money on principal value of your home, you'd also have to pay at least 5% in realtor commissions and transfer taxes = $225,000.

Related: The Best Time To Own The Nicest House You Can Afford

A Deja Vu Feeling

Me wanting to buy this house felt exactly like how I felt buying my Lake Tahoe Property in 2007. The real estate market had just started to slow, and I thought I was getting a steal buying the 2/2 condo for $718,000 since the owners bought the property for $810,000 in 2006.

I was earning the most amount of money I had ever made in my life at the time, and I erroneously extrapolated that earnings power forward for 10 years. Of course, the financial crisis hit, and my earnings power along with my property got cut by 40% – 50%.

Right now, Financial Samurai is firing on all cylinders. I haven't seen a down year since I started the site in 2009. But it's very possible that Financial Samurai and all my investments could take a beating next year. October's stock market rout could be a harbinger for slower growth ahead.

Big expensive house size

What If A Recession Comes After Buying A Big Expensive House?

If I leveraged up to buy this Presidio Heights home and a recession comes, we would lose our lifestyle because one or both of us would have to go back to work in a hurry. All the levity we've felt having a reasonably low housing expense would go out the window. The house would start to own us instead of the other way around.

I hope the buyers of this home are prepared for all types of scenarios. Their new house has likely trapped them into a lifetime of continuous work.

When we moved to our current house in 2014, we effectively lowered our housing cost by 40%. I originally looked at the move as just a change in scenery. We were bored of living in our old neighborhood after almost 10 years, but we weren't ready to relocate to Hawaii.

But it turns out that the downsizing really did wonders to our FIRE lifestyle, especially after I sold our old house in 2017.

At a 3.5% rate of return, the proceeds from our house sale 100% covers our existing housing costs. This means I'm certain my wife and I will never have to go back to work again so long as we REMAIN in our current house.

However, if we buy this $4.4M house, we open ourselves up to massive lifestyle risk. This happened before when I bought my Lake Tahoe vacation property in 2007.

I had just made the most money I had ever made in my life. Because I extrapolated my record earnings into the future, I thought buying a $718,000 Lake Tahoe property after purchasing a $1,520,000 single family home a couple years earlier would be no big thing.

Of course, I ended up making a poor financial decision as the global financial crisis ensued.

Low Housing Cost Is The Key To Financial Freedom

Instead of owning a big expensive house, own something cheaper and more affordable. At least follow my 30/30/3 rule of home buying so you never feel like your house is a burden. If you l

Housing Expense Guideline For Financial Independence

I highly recommend you keep your annual total housing expense to less than 20% of your annual gross income. Over time, you should be able to get your housing expense down to 10% of gross income thanks to largely fixed ownership costs and growing income. Once you do, achieving financial independence becomes much easier.

Go ahead and fantasize about living in a nicer, more expensive property from time to time. After all, visiting open houses is free. Maybe even spend a pretty penny renting a nice place for vacation once a year to get it out of your system.

Then come back to earth once you've done the math and realized how much you'll need to sacrifice in order to own such a property. Once you do, I'm sure you'll appreciate that what you have is already pretty good.

This $4.5M house in Presidio Heights is the perfect example of Buy Utility, Rent Luxury (BURL). It's a much better value to rent this house for $12,000 – $14,000 a month, given cap rates in San Francisco are around 2.5%, than to buy the property at current levels and pay all the continued maintenance, taxes, and mortgage interest if there is one.

My cozy home is currently being battle tested with my parents in town. Four adults and a toddler is quite a crowd. But my house is holding up like a champ. No matter how big or how small our house, we tend to get used to the size.

Therefore, I'll be shelving my dream property plans for now until the next stock market correction hits. At least I was able to experience what it was like to live in an $18 million mega-mansion. And now that I know, I'm not itching as much.

Big Expensive House Update

I originally wrote this post on November 1, 2018. Now it's three years later and we're in the middle of a pandemic. I'm sure my wife and I would have enjoyed living in this big expensive house, especially now that we have two kids. The attic and outdoors would be nice play areas for our children. And an au pair or guests could live in the room on the ground floor.

On the other hand, putting down $2 million and taking out a $2.5 million mortgage would feel like a lot. In my chart, I used a 4.5% mortgage rate that would result in a $12,500/month mortgage.

I could probably refinance today to 2.5% using Credible and bring the monthly payment down to $9,900 a month. Mortgage rates are down near all-time lows, so please take advantage.

By not owning a big expensive house during the March 2020 meltdown, we were able to invest several hundred thousands dollars into the stock market. I wrote a prediction in March 2020 that we'd soon hit the bottom. We also felt less stressed because we had purchased a single family home with cash a year earlier.

On the other hand, owning a nice home during a pandemic is more valuable than ever before. We're spending so much time at home now that our home's intrinsic value has shot way up. The single-family home market is booming, and this property is likely up 15%.

Bottom line, it's better to comfortably afford your home immediately instead of expect your wealth to grow larger enough to allow you to comfortably afford your home in the future.

Our wealth has increased since the time I first laid eyes on this $4.5 million house. But instead of spending $4.5 million, we spent about 40% less for a lovely house with panoramic ocean views on all three levels in Golden Gate Heights.

Real Estate Investment Alternatives

If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.

Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns.

Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look. In an inflationary environment, real estate is my favorite investment.

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

If you are an accredited investor and bullish on the demographic shift towards lower-cost and less densely populated areas of the country, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities.

The global pandemic has accelerated the work from home trend. I see positive demographic migration trends to the heartland for decades to come. CrowdStreet is also free to sign up and explore. The value of real estate has gone way up because interest rates have come way down.

I've personally invested $810,000 in real estate crowdfunding so far to earn income passively. It's been nice to diversify my real estate holdings in lower-cost areas of the country. As a father of two young children now, I don't have much bandwidth left to deal with tenants and maintenance issues.

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126 thoughts on “How A Big Expensive House Can Ruin Your Life And Path To Financial Freedom”

  1. The numbers of owning a home, paying property taxes, etc. freighted me. Nobody I know even makes that amount. The average joe only make $40k salary.

    Now the average home is costing around $200k where I live. This is insane. No one I know has $200k in the bank, & this is for your average home owner. I remember back in the early 2000’s when $200k you could afford a McMansion.

    Boomers are selling their homes at such high prices & they don’t seem to have a problem with it. They think the average buyer has $200k in the bank. I hate boomer generation like you wouldn’t imagine. They are literal worst generation ever.

    Interest/Usury is the real reason homes are unaffordable. They are literal money pits. Can we please expel the Jews who run the banks & ban interest already? I am sick of living in a mouse utopia experiment. I hate this clown world. Also f boomers! They too are responsible for this too.

    1. You’re an idiot!!!!!!!!!!!!!!!! So you want us to give you our house for nothing. Then what do we use to buy the replacement. Boomers should have never brought this generation into this world!!!!!!!!!!!!!!!!!!!!!!!!

      1. You’re both idiots. Boomers didn’t cause all these problems directly, so stop blaming them for everything. You would’ve done exactly the same in their shoes so OC needs to calm down.

        And x, shut up. Nobody is asking for a free house. The world isn’t the same as it was in the 50s and will never be that way again. Stop expecting millennials to do things the same way you did, because it’s much more difficult to buy a house and start a family today.

        Y’all need to consider each other’s perspectives.

  2. Hi Financial Samurai- I have the ability to build a $1.6M house on the water in Florida (new development that is very unique) with a down payment of $160k vs. buying a $675k house (17 year old home in nice neighborhood) with a down payment of $40k. Family gross income is $700k and we have zero debt (sold our home a year ago, own our vehicles outright and have no other debt). Not really any comparable new homes on market but older homes sell for about $1.9-2.0 million and we have gone through a series of negotiations with the builder that has resulted in such a good price. We plan to move from either home in 6-8 years after move-in. My thinking is that with such a large discount on the new home, it might be a similar outcome financially whether some of our money goes to the more expensive home vs. investments. What are your thoughts?

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