Now that we’ve had some fun figuring out the minimum income and net worth required to buy a $5 million home, I thought it’d be nice to be more inclusive. This post will discuss the income and net worth requirements to buy a home priced from $200,000 to $50 million.
The income and net worth figures are determined by my 30/30/3 Home Buying Rule and my Net Worth Home Buying Rule. I truly believe the combination of these two rules creates the ultimate guide to responsible home buying.
My goal is to also provide a consistent home buying guide that works as we become wealthier.
Income And Net Worth Requirements To Buy A Home At All Price Points
Take a look at the chart below based on my two home buying guides. As you can see from the chart, the more expensive the home price, the more you need to make and the higher the net worth you should have.
You’ll see the minimum income and minimum net worth required to buy a home and the recommended income and recommended net worth needed to buy a home.
The Ideal Home Buying Financial Combination
Now let me share the ideal combination from best to worst before buying a home:
1) You make the Ideal Income and have the Ideal Net Worth before buying a home at a certain price point. If so, you will have minimal financial worries and will likely enjoy your home to the fullest. At times, you may feel like you should live it up more. But it is your financial discipline that got you to where you are today.
2) You have the Ideal Net Worth and at least the Minimum Income Required Income. In this situation, you also won’t have too much financial worry. Your net worth is well-diversified and generates a reasonable amount of passive income on top of your active income. You can probably make more active income if you want to.
3) You have a Reasonable Income and Reasonable Net Worth. You’re right in the middle, however, your goal should be to boost your net worth so that your primary residence gets below 50% of your net worth. In general, no one asset class should take up more than 50% of your net worth, let alone a single primary residence.
4) You have the Ideal Income and Minimum Net Worth Required. In such a scenario, so long as you are confident in your employment prospects over the next several years, you should do fine. In five years, your net worth will most likely grow strongly if you keep on saving and investing in stocks, real estate, and alternative assets.
5) You have the Minimum Income Required and the Minimum Required Net Worth. Buying a home with this combination is a stretch. However, you are bullish on your future income and net worth growth. As a result, each year you work, you will feel more comfortable affording your home. The ultimate goal is to get your primary residence equal to 30% of your net worth or less by the time you retire or take things down a notch.
First-time Versus Experienced Home Buyer
If you don’t make the minimum income or have the minimum net worth, it is not recommended you buy a home just yet. If you proceed to buy a home with this suboptimal combination, you will be too financially exposed to sleep well at night. Any job loss or recession may cause you to lose your home to a short-sale or foreclosure.
For first-time homebuyers, the most likely financial combination is having the minimum income and minimum net worth. But for experienced homebuyers, having financial combinations 1-3 above is the optimal way to go.
If you become very wealthy (over $10 million per person), you might be able to stretch the rules further if you want to buy a nicer house. But my guide really does suggest keeping your primary residence value to under 50% of your net worth, and ideally under 30% of your net worth, no matter how rich you get.
Once you become very wealthy, you tend to actually spend less of a percentage of your net worth on a primary residence. Most extremely wealthy people have the lion’s share of their net worth in businesses or investments.
What About A High Down Payment Scenario?
Instead of just assuming a home buyer puts down 20%, there are certainly scenarios where some home buyers put down much more. It is estimated roughly 15% of all home buyers pay cash.
In a higher down payment scenario, both income and net worth suggested requirements can decrease. However, how much of a decrease will depend on how much cash and semi-liquid investments you have after buying a home and your future income.
Example: Let’s say you are a FANG tech worker with a 75% down payment because you have lots of appreciated stock. You want to buy a $3 million house, put down $2.25 million, and have a $750K mortgage. What should your minimum income and net worth be?
For the disciplined buyer, your income should still be at least 1/5th the price of the house, or $600K. Given you have $2.25 million to put down, your minimum net worth of $900K based on my chart is far surpassed. Therefore, you’re good on the net worth front, especially since you should have more wealth behind.
But obviously, if you put such a large down payment down, you’ll have a lot less difficulty affording the mortgage. The reality is, if you only have a $750K mortgage after putting $2.25 million down, you can probably get away with as little as a $150K income (1/5 of 750K). But $150K is going to be really tight and leave little for saving and investing outside your primary. Therefore, I would not recommend.
As a compromise, I would consider using the recommended income ratio of 1/3 of price of the home, applied to the mortgage balance. Hence, a more appropriate income in this scenario would be $250,000. You would make $20,833 a month and have a $3,368 monthly mortgage payment at 3.5%. This would equate to an affordable 16% of monthly gross income.
If you follow this path, just make sure you keep your job or at least make a similar amount for the next three years at a minimum.
The Relative Importance Of Income And Net Worth When Buying A Home
Income is the most important factor for buying a home with a mortgage. Without a high enough income, you won’t be able to get a loan. In this stringent lending environment, your income needs to be at least 20% of the price of the home you want to purchase. Most people with W2 income and a credit score of over 720 should be able to qualify.
If you are a freelancer with a more volatile income, then your income may need to be much greater than 20% of the price of the home. Further, at the bare minimum, you will need at least two years of minimum income before a lender will proceed. Therefore, you may want to refinance or purchase a home before giving up your W2 income.
As you get wealthier, lenders will be more willing to take into consideration your net worth when making a loan. This is called asset-based pricing, which comes in handy if your income falls below the 20% of home price threshold. For example, some borrowers with illiquid stock holdings can pledge their stock as collateral.
A High Net Worth Provides More Security
Between a high income and a high net worth, I would choose a high net worth. Not only does a high net worth provide more security, you will be better able to shelter it from high taxation. A high income is more a means to an end, which is a high net worth.
Therefore, the best combination, from a tax perspective, is to have a high net worth and just enough income to pay for regular living expenses and the house you want.
As I wrote in a previous post about 2022 income tax rates, the ideal incomes are:
- $170,050 MAGI for singles
- $340,100 MAGI for married couples
We can then select $12,060,000 for singles and $24,120,000 for couples as the ideal net worth. These are the estate tax exemption limits for 2022. With this combination, you pay the least amount of taxes and still get to do whatever you want. If the estate tax exemption amounts get cut, then you would adjust accordingly.
If you happen to spend on something lavish, you can always draw down principal if $170,050 or $340,100 income is not enough.
A Bigger, More Expensive Home Is Not Always Better
I’ve been in several 10,000+ square foot homes before and I’m not sure I’d like to live in them with a family of four or five. As an economics major, I just find unused space to be wasteful. It makes me happy to have all or almost all rooms regularly used on a daily basis. I feel the same way when I load up my car with four or five people versus just me driving.
After about 1,500 square feet of space per person, it just feels like too much. Perhaps this feeling is a function of me living in expensive New York City and San Francisco since graduating college in 1999. But I feel plenty happy living in a house that is 750 square feet per person.
Eventually, if you have children, they will find somewhere else to live. As a result, you may eventually want a smaller home as well.
The number of maintenance issues and potential problems seem to grow exponentially with larger homes. Then there are higher property taxes and insurance bills to pay as well. Personally, the maximum annual property tax threshold I’m willing to pay is $100,000. After that, it just feels like too much.
A house’s layout is also extremely important. If you plan to work from home and raise small children, having a house that has multiple floors or sections is important for privacy and noise control. If you’re older and are more susceptible to falling, having a home mostly on one floor is more ideal.
Finally, what is growing in demand is exterior space. Homes with multiple decks and large yards are becoming increasingly popular post-pandemic. The indoor and outdoor living combination is one of the reasons why places like Hawaii are so ideal.
What Causes People To Buy Underutilized Mansions?
I’m curious to know the psychology behind why people buy mega-mansions. Is it just because they can? One friend in high school owned a 12,000 square foot house with an indoor heated pool in Langley, Virginia. A couple decades later, he told me the house was the main reason why his family had to file for bankruptcy.
Having a mansion with a ton of land to run around on would be really nice. I’d love to have a water park, a playground, a tennis court, a basketball court, a lake, a paintball field, and a helicopter pad area. But other than that, what else does one need?
With a family of four or five, my limit is a five-bedroom, five-bathroom home across 5,000 interior square feet and 1 acre plot of land. I’m sure I could get used to a larger home, but even if I had the money, I’m not sure I want one.
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With elevated inflation, we should continue to see rising rents and rising home prices for the foreseeable future. Making more passive income is why I’ve invested $810,000 in online real estate so far.
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I wish everyone would read something like this before buying. Do you know how many people are buying $500k homes with no where near a $150k net worth? FHA and other loan programs have made this easier, and I can’t believe people think they’ll never have an emergency or job loss that could put pressure on their finances. Maybe too much reliance on family/government support. Wonder where we will be a year from now.
Can you please give your opinion (write another blog post?) on borrowing against your stock to buy a house. How risky it is? What are the pros? Have you ever done it and why?
I like the tables. It really shows how much people are stretching these days to afford expensive and large homes.
Another great post, Sam. Very motivating for someone currently in the lower end of this chart looking to add rental properties. First, it helps guide risk tolerance, and just as importantly it provides that extra motivation to progress through the levels that are laid out here. I have a couple years as a freelancer after my previous career track got turned a bit sideways. Meeting with a lender this week and I’ll be keeping your guidelines top of mind – thanks for sharing!
The figures here and your explanations definitely seem reasonable. However, I’m a bit surprised at where I wound up on the chart. I seem to make well beyond what is the ideal income for the properties I have or plan on buying within the next few years. That raises an eyebrow but isn’t the especially surprising part. I tend to be on the lower side of the total net worth field – usually barely reaching the “reasonable” metric or falling a bit short. I generally view myself as conservative with my finances, but maybe I’m pushing it.
I wonder why that is? I suppose #4 mostly answers that – and I’m definitely still at the beginning stages of my career at this point. Thoughts?
On a somewhat unrelated note, we have a similar interest in housing! With a family of five, I think a five-bed, four-bathroom house that is ~4-5k sq ft would be pretty much perfect. Unlike you (I think?) I do like living in more rural areas, and I certainly wouldn’t mind a few acres of land. That being said, floor plans make a huge difference regarding how “breathable” some of the houses feel with more than a few people living in them, so the exact size of the house can be a bit up for debate.
I always find posts like these fascinating, Sam. Interestingly, I fell into the reasonable category for both income and worth during my first home purchase five years ago when looking at this chart retroactively. I would argue that the worth category is more important than the income one since unexpected expenses popped up left and right over the first two years, which my worth helped cover. Had covering these expenses been left to my income alone, it would have been trying time.
I don’t see a factor in this spreadsheet for buying a home in areas prone to the effects of climate change; climate change is becoming a large financial consideration for homebuyers in 2021. Many standard homeowner insurance policies don’t cover damages due to climate related events such as flooding and natural disasters. How do you account for this risk in your minimum income net worth calculation for homeownership?
For new retirees > 60, with NO active/wage income but $400,000+ passive income within the next 1 1/2 years and $300,000 now in passive income, and $10 M net worth, (1/2 taxable, 1/2 tIRA + some Roth) how do I tweak your guidelines to get an appreciation of the home price and mortgage I can afford?
I’d just use your passive income X 3-5 or buy a home equal to 30% of your net worth or less if you want.
How much should we figure property taxes into this? Austin is crazy high at 2.75%, which on a $400k house is a lot. And how do you get a high net worth without high income?
Investing is one way. Starting a business and building tremendous equity is another common way.
My ratios take into consideration all costs, including property taxes. Luckily, Austin doesn’t have income taxes, so that offsets.
It is crazy to me how much people on the coasts are willing to pay for houses, especially in a world that is accepting more and more remote work. The idea of buying a house at 3x to 5x annual income and 2x to 3x net worth seems financially irresponsible to me. The only way I think it can be justified is by assuming that the house will become your primary vehicle for investment, allowing you to engage in some sketchy bookkeeping and count all of your mortgage payments as your “retirement savings”. That’s a whole lot of eggs in one basket.
If I make $200k per year with $500k net worth I would much rather have a $200k-$300k house and be able to contribute to equities than own a $750k-$1M house and pray every day that the case-Schiller index in my area bucks the historical trend and continues to go up.
What do you think is an appropriate multiple and what did you pay?
Believe it or not, some people just like to live in more expensive areas due to the weather, culture, activities, job opportunities, etc. I’m sure Ohio is great where you live. But perhaps real estate and other things are cheaper there for a reason?
In a bull market, the person who paid an infinity multiple for their house has won the most. There has been so much wealth created since 2009, it is unbelievable.
A lot of people don’t get any joy or utility out of investing in stocks. Of one day, down the next. For those with children, real estate tends to also more valuable.
Perhaps your views will change as your income and net worth changes.
Related: Why Real Estate Will Always Be More Enjoyable Than Stocks
Thanks for the information. Very Ttmely post for me. Recently retired and relocating. My thoughts on how much house were very close to your table. Don’t do mortgages so I’m staying close to our current home sale price. Pensions cover yearly living costs and I like having more in investments.
Given current interest rates and how low PMI / MIP are currently, I don’t think it makes much rational sense to put more than the minimum (5% down conventional loans are not uncommon) if you are anywhere in the top 3 buckets stated, or in my case shopping below even my current ideal x2 price point. While I do agree with pretty much everything you have in this article, unless you are looking to get a guaranteed return (ignoring inflation as debt gets cheaper too for the moment) of around 3.5% for a 720+ mid score conventional (jumbo is generally cheaper even rate wise) why put more down than the minimum? Might be interesting to rerun the calculation on that where minimum reserves vs higher income should produce a different result.
How does age in career factor into these metrics? These metrics may be a risk to those in an age group close to getting axed by corporate America
Thank you for this post! If I have one home and want to buy a second, would I add my current mortgage to the home price numbers in this chart?
You could certainly do that and then look to see what income and net worth is required for your new home.
A lot depends on whether you will sell your first home or rent it out. And if you rent it out, whether it will be cash flow positive or not. If it is, by a decent amount, then you can just look at the chart as it is.
I appreciate the response! In this chart, are retirement accounts considered part of net worth? Thanks again.
Yes indeed.
Great article as usual Sam, thank you. Post like this are great reference points for big decision purchases.
Most people buying 200-300k homes have zero net worth
Maybe. But if that were true, how do they come up with the down payment?
Would you recommend I recommend people have a zero net worth before buying a $200-$300K home? If not, what do you recommend?
You could have 20K downpayment in cash with 100k in student loan debt. That is a negative net worth.
True. Hence don’t buy if you don’t have the minimum net worth.
But everybody is free to do what they want.
Does min. net worth include the down payment before your buy?
The minimum net worth equals 30% of the home value you want to buy. So it is required for your down payment and a buffer post purchase.
$30m net worth and $3m income. Guess that means i could afford a $10-$15m house(s). Instead own 2 houses outright, worth $~$2.7m combined with purchase price of $1.7m. Expensive areas so not particularly big or fancy. Agree with those who say the bigger the house the bigger the headaches. Of course, a home represents more than just monetary value. If that’s where you want to invest your money, more power to you. As someone once said, you can only sleep in one bed at a time..
With a $30 million net worth, I would stick to $9 million at most. Ideal range would be $6 – $9 million.
What an awesome article, Sam.
Thanks for everything you do.
Can you please comment on how the 20% of income applies to high down-payment situations?
For example, if I want to buy a $3 million house but pay $2.25 million in cash and mortgage $750k (maximum deductible) would that mean an income of $150k or $600k? Thanks Sam
Good question.
For the disciplined buyer, your income should still be at least 1/5th the price of the house, or $600K. Given you have $2.25 million to put down, your minimum net worth of $900K based on my chart is far surpassed. Therefore, you’re good on the net worth front, especially since you should have more wealth behind.
But obviously, if you put such a large down payment down, you’ll have a lot less difficulty affording the mortgage. The reality is, if you only have a $750K mortgage after putting $2.25 million down, you can probably get away with as little as a $150K income (1/5 of 750K). But $150K is going to be really tight and leave little for saving and investing outside your primary. Therefore, I would not recommend.
As a compromise, I would consider using the recommended income ratio of 1/3 of price of home, applied to the mortgage balance. Hence, a more appropriate income in this scenario would be $250,000. You would make $20,833 a month and have a $3,368 monthly mortgage payment at 3.5%. This would equate to an affordable 16% of monthly gross income.
If you follow this path, just make sure you keep your job or at least make a similar amount for the next three years at a minimum.
This is SO helpful to read. I love the metric. Currently have the ideal income for a $750k home but don’t even have the ideal net worth for a $200k home. Would you say this is for buying a primary residence? Or does this also a apply to purchasing a rental property?
I can’t ever imagine anyone with a 650k+ net worth ever buying a $200k home unless as a rental property. 100k yes, probably 40k down payment, 10k in the bank, 50k in investments. Excluding car jewelry etc.
Also, great post Sam
I’m happy living in my 3BR/3BA townhouse…before COVID hit you could buy the same unit in my development all the day long for $200k.
Mostly because I grew up in a older (1920s) high-maintenance home literally twice the size and saw mom go broke trying to keep it after the divorce.
But also because I had to do all the yard work on the above so now I’m content to just pay a modest monthly fee to have everything outside done for me.
Assumption is that your net worth is $650K or higher?
Simplicity is nice!
We did $200k/$650k+ in net worth in Raleigh a 6 years ago. We also did $300k/$1m+ more recently in Minneapolis. Its tough for people in larger cities to imagine just how inexpensive real estate can be in mid-sized cities.
Oh I believe it! It’s the main reason why I invested $810,000 in heartland real estate from 2016-2017!
The way I did so is through real estate crowdfunding.
After reading this it makes me want to stay at my job longer even though everyday I want to quit! Ha.
Net worth 2.6mm and bring in around 190k a yr. 65 to 85k of that is now passive. But main job is slower and slower.
Thinking of hanging it up soon and concentrating on building more passive income.
I love these posts. Thank you, Sam.
Picking the right amount to spend on a home can be tricky. Plus, many of us ended up with expensive homes because we bought in an appreciating market. I bought my first home at 22 and have just traded up ever since. There are some practical, non frivolous benefits to owning a larger home, like we love having 2 home offices since we both work from home, and a home gym is really nice when you have young children at home and during COVID, and having a dedicated kids’ space means your home will be the landing pad for your kids and all their friends, which is something we treasure. And finally, if you have parents or in laws who like to visit for extended periods of time, having a guest house or in law suite may save your marriage. YMMV!
I think an important consideration to how much home one can afford which is not mentioned is property taxes. For example I currently live in Illinois where my home is only worth approx $400k, however my monthly property taxes are more then my mortgage. My family is considering a relocation to Colorado and a $800K home is almost identical total monthly payment to what we are paying today due to lower taxes. Similarly HSA or MUD fees can have a significant impact on affordability. I like your ’30/30/3′ rule, but I prefer to apply it to the total payment obligation.
My 30/30/3 and Net Worth home buying guides take into consideration all expenses, including property taxes.
Yes, property taxes are a bummer. And they also differ by state. But my guides encapsulate this expense.
Differ by county in Florida.
In Fort Lauderdale (Broward) after you add in schools, city, etc etc, etc, etc, it is about 2% of assessed value.
The assessed value is usually considerably less than market value. Florida also has up to a 50K homestead exemption from taxes as well as a cap on the assessment increase. It is a max 3% or the CPI, whichever is lower.
That’s good there are some caps in place, especially for retirees on fixed incomes.
I haven’t hit these targets yet and it’ll be years before I am ready to buy my first home. I live in NYC, and we were renting a 1 bedroom 700 sq ft apartment for $4,000 with a terrace – and it felt enormous and luxurious. With Covid still making things feel uncertain, it felt like a waste to spend all that on rent. So we found a Covid deal, in a “luxury” new build, with 2 free months, so we were able to get a 430 sq ft studio for only $1850 a month. (Same studio layout on lower floors are now renting for $3200 to give any non coastal city folks a perspective)
All that to say, I was surprised with how comfortable and not wasteful living in a smaller space ended feeling. I want to remember that when I eventually aim to buy an apartment in NYC. I am not sure my girlfriend will agree, but it feels great to not spend everything on rent.
Be sure to have a discussion about # of children before buying, remember accidents, twins etc also happen. Be surprised how small everything becomes with a toddler or two!
What BS is this. 50 million net worth to afford a 15 mill home?
The people I know in 15 million dollar homes have a net worth at minimum 10x of the homes value. You need significant income or assets to maintain such assets (property taxes, etc.).
Try to have a flexible mind. You could’ve bought a $5 million home or $10 million home that appreciated in value.
What is your home value and net worth?
“ Once you become very wealthy, you tend to spend less of a percentage of your net worth on a primary residence. Most extremely wealthy people have the lion’s share of their net worth in businesses or investments.”
A bigger net worth, the better. You eying a $15M home? If so, how far away are you from $150M net worth?
Check out the last section of my post.
Nope, while being in the top 1%, we could never afford a house in the millions, we had/have other expenses like college etc and other priorities like traveling, eating well etc.
What house do you think you can afford with a $500,000+ income? What is the value of your house currently?
600k house, that’s about the piece right now but I live in a less expensive area of the country. Need to max out 401ks etc also. The bigger the house, the more help one needs to maintain it, cleaners etc.
If you enjoy your $600K house on a $500,000+ income, that’s awesome and all that matters.
I can’t see how maxing out a 401k and saving/paying for education would feel too bad given your housing cost is so low.
Fun post Sam and very helpful! This reminds me of some of my family members. One side of my family grew up in a ginormous house. I can’t even remember how big it was except that it was four stories high, and really wide. But boy did they run into so many maintenance problems and later affordability problems until they were forced to sell. Another one of my family members bought a 6,000 square foot house for four which is also huge, but at least they bought it in an affordable area after saving, having very successful careers, and growing their net worth to a sizable sum. Are they happier than when they were in a 3-4k foot house? Yes and no. They definitely have unused rooms, have a hard time keeping it clean because it’s so big, and are starting to uncover lots of maintenance demons. Sounds stressful to me! I’m still a big fan of real estate, but agree that sometimes too much house is not better.
Great thoughts as usual! I definitely agree with the idea and using this rule to avoid putting yourself in a difficult position trying to pay an expensive mortgage.
I would say though this could be adjusted (even past the minimum) depending on age and stage of life. If you’re young and/or don’t have kids higher risk is more acceptable, and you can also take on roommates to help pay the mortgage. Your income is likely to grow and then you lock in some equity (and have an inflation hedge) plus as you’ve mentioned it adds some motivation. You can refinance later to make it an easier payment and possibly turn it into a cash flow rental (or just sell and lock in profits).
Even as someone who tends to be more on the conservative side financially, I bought a house at 7x my income and probably about 6x net worth so I could get in at 24. It did make things more stressful when things went south at the company where I worked, but I certainly don’t regret it (especially since the value has gone up 50% in the past 4.5 years)!