How Much Should You Make To Afford A Three Million Dollar House?

A three million dollar house is big bucks in most parts of America. Once you cross the $3 million threshold, you are entering into luxury territory. After all, the median home price in America is about $400,000. Therefore, if you buy a three million dollar house, you are paying 7.5X the median.

However, three million dollars still doesn't buy you a mansion in cities such as San Francisco, San Jose, Los Angeles, Seattle, and New York. You can get a nice house for $3 million in the expensive coastal cities. However, where you buy your three million dollar house matters.

Given you are looking for a three million dollar house, I'm assuming you are looking in a big metropolitan area where high incomes are common. Therefore, let me share with you the income recommendations necessary to buy your new home.

A good general rule of thumb when it comes to buying a home is to spend no more than 3X your gross income on the price of a home house. It is part of my 30/30/3 rule for home buying to help people buy responsibly.

Therefore,, if you want to buy a three million dollar house, then you should earn $1 million a year. In addition, you should have at least a $600,000 down payment and ideally a $300,000 buffer post down payment. The buffer can be in the form of cash or liquid securities you can easily tap if you lost your job or have some type of accident.

Does needing a $1 million income to buy a $3 million home sound like too high a hurdle? Well remember, in the past, people would buy their homes with cash. Nowadays, most homebuyers are taking out a mortgage to buy.

The Absolute Minimum Income Necessary To Buy A $3 Million Home

In this low interest rate environment, you can stretch to buy a home up to 5X your annual gross income. In other words, you can make as little as $600,000 to buy a $3 million home. However, without a cash buffer, you will feel stressed and a little paranoid during the initial years of ownership.

Having a $2.4 million mortgage is HUGE. At a 3% mortgage rate, we're talking a monthly payment of $10,962. That's $131,544 in yearly mortgage payments a year, and that's after paying taxes. If you pay a total effective tax rate of 30%, then you would need to earn $187,900 in gross income to pay $131,544 a year in mortgage payments.

Then of course, you've got everything else in your family's lives to pay for. Therefore, before buying a three million dollar home, you may want to come up with a larger down payment to reduce your overall mortgage size.

Luckily, I do think interest rates will stay low for the rest of our working lives. So buying a three million home with only a $600,000 income is doable, provided you keep your job.

The Cost To Own A Three Million Dollar Home

When you own a $3 million house, remember that you will have more costs than if you bought a median-priced home. We’re talking $36,000 – $90,000 a year in property taxes alone, depending on the property tax rate by state. Hawaii has the lowest property tax rates while Illinois, New Jersey, and Texas have the highest property tax rates.

To maintain a $3 million home, there's also higher heating bills during the winter, higher home insurance, higher maintenance costs, higher cleaning costs, higher landscaping costs, higher mortgage, and so on. If you've got a leak in your roof, like I did during our “Bomb Cyclone,” it becomes much harder to find!

Therefore, don't think about the cost of a three million dollar house as just the initial purchase price. Think about the ongoing cost to maintain a three million dollar house. The opportunity cost of owning a $3 million home is also the cost of not renting it out.

One of the reasons why I sold my old house in 2017 for $2.75 million was because it had four-bedrooms and three-bathrooms for just my wife and me. The market rent was between $7,500 – $8,200 a month at the time, which we weren't willing to pay. Further, there were between $50,000 – $100,000 in upcoming maintenance issues we may have needed to do. These included:

  • Rewiring the entire house from knob and tube to ROMEX wiring: $50,000
  • Replacing windows in the back of the house, which the new buyers did: $35,000

Owning a house around three million dollars is expensive. If I held onto the house, it would be worth over $3 million today. But at the time, I just couldn't take the maintenance and tenant issues. Further, I reinvested the proceeds into stocks, muni bonds, and real estate crowdfunding, which have done well.

Family Budget Owning A Three Million Dollar House

Below is a real budget for a family of four living in an expensive city earning $500,000 a year. Each parent is responsibly saving in their 401k to the tune of $18,000 a year. The parents also purchased their home for only $1.5 million back in 2012. Yet, they still don't have much cash left over each year.

Today, their $1.5 million home is worth closer to $3.2 million. If they had to buy their home today, after putting 20% down, their annual mortgage would go from $60,000 to $129,596. In other words, they would need to earn about $100,000 more in gross income more to comfortably afford their home. This puts their total gross income figure at $600,000, or bang in line with my minimum income recommendation.

In other words, the family earning $500,000 is extremely blessed that they bought their $3.2 million home near the bottom of the housing market in 2012. They could not afford their current home on their salary today.

Family budget after owning a three million dollar house

The last thing you want to do is buy a three million dollar house and get laid off. Many who bought multi-million dollar homes not only lost their jobs, but also their homes during the 2008-2009 Global Financial Crisis. We've had an incredible bull market since 2009, which means it's worth being more cautions now.

When buying a home with debt, you are essentially making one of the biggest career and investment gambles of your life.

Minimum Income Necessary To Afford A $3 Million House

The absolute minimum income necessary to afford a three million dollar house is $600,000. The recommended income for owning a three million dollar house is $1 million. An acceptable income to own a three million dollar home is $750,000.

In other words, the multiple of total income to own a three million dollar home is between 3X – 5X. Once you get beyond 5X, you will likely not be able to comfortable sleep at night for at least the first year. You would need a massive cash or liquid buffer after stretching so much to feel OK paying so much. Or, you would need to know with extreme confidence your income is going up over the next 12-24 months.

Remember, once you get to the three million dollar level and higher, everything gets amplified on the upside and downside. The cost to maintain a three million dollar house and all the hassles goes way up.

Below is a great chart that shows the minimum income necessary to afford a $1 million home, $2 million home, and $3 million home. The bigger your down payment, the lower the income necessary. The below chart is more aggressive than my 30/30/3 home buying rule. Making only $578,148 to afford a $3 million home is way too little.

Minimum income needed to afford a $1 million, $2 million, and $3 million home

Cities That Could Face A Housing Downturn

Given buying a three million dollar house will likely be the most expensive purchase of your life, you should be aware of cities that may be at risk of a housing downturn. If you buy a three million dollar house with 20% down and the housing market declines by 20%, you just lost 100% of your equity. That's $600,000 gone!

Therefore, be aware of cities where real estate prices are way up compared to its prior peak and with upcoming supply. These cities are in the upper right quadrant of the graphic below for 2022+. I would definitely be careful about stretching in cities like Austin, Dallas, and Nashville. In such heartland cities, try and keep your house price purchase to no more than 3X your household income. There is an endless amount of demand to build in these cities.

Conversely, cities in the lower left quadrant, have less upcoming supply and haven't appreciated as much since the peak. Therefore, they look more attractive. In such cities, you are relatively safer to stretch to buy a home equal to 5X your household annual income. It's much harder to build in cities like San Francisco, San Diego, Miami, Seattle, and even denver due to laws and geography.

For an example of the dangers of paying too much, just look at Zillow shutting down its iBuying business and writing-off over $500 million in losses in 4Q2021. Stretching to buy a three million dollar home that's over 5X your household income is like Zillow stretching to buy properties in a hot real estate market. Don't do it!

Which cities to buy three million dollar homes, and which cities to avoid buying $3 million homes

A Better Way To Invest In Real Estate

While you are building your income and down payment for a new three million dollar home, I would invest in real estate to keep up with the market. In fact, you may want to follow my BURL strategy for real estate investing. It states you should Buy Utility (high rental income homes) and Rent Luxury (rent $3 million homes). This way, you optimize your capital.

Here are my two favorite real estate investment 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. There is no minimum income necessary to invest in Fundrise. Further, the investment minimum is only $10.

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, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you earn a high salary or have a higher net worth, you can build your own select real estate portfolio with CrowdStreet.

Both platforms are free to sign up and explore. Real estate is the ultimate inflation hedge. Not only are rents expected to rise, so are property prices. Therefore, I've invested $810,000 real estate crowdfunding. My investments now generate steady passive income so my wife and I can be stay at home parents.

I get the desire to own a $3 million home or thereabouts, especially if you have kids. After all, the best time to buy the nicest house you can afford is when your kids are still living with you. However, the key word is AFFORD. Don't put your financial life in jeopardy by stretching too much. Stay disciplined, especially as home prices have done so well.

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