A two million dollar house sounds like a lot, and it is in most areas of the country. However, in places like San Francisco, Menlo Park, Cupertino, San Mateo, Burlingame, San Carlos, Marin, New York City, and Greenwich, a two million dollar house is close to the median-priced home. We're talking three or four bedrooms with two or three bathrooms.
It's clear the housing market is strong now and will likely stay strong for years to come. Therefore, buying a two million dollar house or even higher is reasonable IF you can afford it. After all, inflation will likely keep pushing up rents and inflating prices.
A good general rule of thumb is to spend no more than 3X your gross income on a 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 $2 million house, you need to make at least $667,000 a year. You should also have enough for a 20% down payment, or $400,000, plus a $100,000 cash buffer in case you lose your job.
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 $400,000 to buy a $2 million home. However, you will feel stressed and a little paranoid during the initial year if you don't have a large leftover cash buffer.
A Two Million Dollar House Has More Expenses
When you own a $2 million house, EVERYTHING costs more. We’re talking $24,000+ a year in property taxes, higher heating bills, higher home insurance, higher maintenance costs, higher cleaning costs, higher landscaping costs, higher mortgage, and so on.
Therefore, don't think about the cost of a two million dollar house as just the initial purchase price. Think about the ongoing cost to maintain a two million dollar house. The opportunity cost of owning a $2 million home is also the cost of not renting it out. If you have underutilized rooms, then you're waisting money.
I should know, because I bought a house in San Francisco for $1,525,000 back in 2005 and sold it for $2,740,000 in 2017. The house was too big and costly for just my wife and I at the time. It felt like a waste to have two unused bedrooms and bathrooms. Further, there was no way we’d be willing to pay $8,800 a month to rent the house, so we rented it out for three years.
We now live in a a smaller house that’s 50% cheaper and we love it. It feels awesome to fully utilize the house, especially since we are stay at home parents to a baby boy. We bought the house for $1,250,000 back in 2014. Ironically, it is now also valued at over $2 million. However, since we bought it for so much cheaper, it doesn't feel like a two million dollar house.
Family Budget With A Two Million Dollar House
Below is a real budget for a family of three living in an expensive city earning $350,000 a year. Their house costs $1.8 million and they have a very affordable $900,000 mortgage at 3.15%.
If they bought a new two million dollar house and put down $400,000, their $1,600,000 mortgage at 3.15% would equal $6,854, or almost $3,000 more a month. $3,000 more a month is $36,000 a year after tax, or about $50,000 more in gross income a year.
If you had a down payment, you would need to make at least $400,000 a year income to afford a $2 million house. In other words, you could stretch the multiple for buying a house to 5X your household income ($400,000 X 5) in this low interest rate environment. However, you need to be absolutely sure about your career and income projections.
The last thing you want to do is buy a two million dollar house and get laid off. Many who bought new homes did after the 2008-2009 Global Financial Crisis.
Minimum Income Necessary To Afford A $2 Million House
I recommend you DO NOT overextend yourself in this real estate market. If you don't earn at least $400,000 with 20% down and an extra 5% as a cash buffer, I wouldn't buy a $2 million house. Interest rates could head up as inflation stays elevated.
If you must buy a $2 million house or up, limit your income multiple to 4X. Split the difference between the recommended 3X and the maximum 5X income multiple. In other words, try to consistently earn at least $500,000 in household income before buying a $2 million house.
Here's a great chart that shows the minimum income necessary to afford a $1 million, $2 million, and $3 million house. The bigger your down payment, the lower the income necessary. The below chart is more aggressive than my 30/30/3 home buying rule. It shows that you need between $392,544 and $574,080 to afford a two million dollar home.
Where To Buy Real Estate?
House prices in many cities have far surpassed their previous peaks with valuations in many cities trading way past peak levels. Meanwhile, some cities in the upper right quadrant are seeing a large upcoming supply of new inventory. I would definitely be careful about stretching in cities like Austin, Dallas, and Nashville.
Cities in the lower left quadrant, with less supply and less price appreciation look more attractive.
A Better Way To Invest In Real Estate
The house I sold for $2,740,000 was only generating $60,000 after all costs. Therefore, I reinvested $500,000 of the proceeds into real estate crowdfunding. As a result, my investments are now earning about an 8% annual return with zero involvement. The investment is completely passive.
Non-coastal city real estate is trading at much cheaper valuations with net rental yields that are 4–5X higher. In the past, we couldn’t access these types of opportunities easily. Thanks to technology, now we can.
While you are building your income and down payment for a new home, I would invest in real estate to keep up with the market. Here are my two favorite 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.
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.
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.
Good luck on buying your $2 million house! It's the sweet spot price point in the most expensive cities in America. Once you buy it, enjoy it. In 15 years, it might become a $3 million house!
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