The Minimum Income Necessary To Afford A Five Million Dollar House

A five million dollar house is big bucks in every single city in America. Once you cross the $5 million mark, it is classified in the luxury territory, even for cities such as San Francisco and New York. Therefore, I thought it would be fun to calculate the minimum income necessary to own a five million dollar house.

When it comes to buying a home, a good rule of thumb 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.

In other words, if you want to buy a five million dollar house, then you should earn about $1.67 million a year. In addition, you should have at least a $1,000,000 down payment and ideally another $500,000 buffer in the form of cash or liquid securities. The buffer is just in case you lose your job or something bad happens to your house.

Does needing a $1.67 million income to buy a $5 million home sound like too high a hurdle? After all, once you make over $1 million a year, you have a lot more disposable income. Just know that in the past, people would buy their homes with all cash. So the minimum income to buy a $5 million home also depends on your net worth and cash balance.

I understand very few people can afford to buy a $5 million home. But it's always fun to dream as home prices get higher and higher over time. Further, it's always good to plan ahead. For those of you who currently own a $1-$3 million dollar home, $5 million may be the next step if so desired.

How To Afford A $5 Million House

As I just calculated, having a $1.67 million annual income to afford a $5 million house is recommended. However, in this permanently 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 $1,000,000 a year, to buy a $5 million home. Your minimum income should also be consistent over the next several years. However, without a large cash buffer, you will feel stressed and a little paranoid during the initial years of ownership.

Having a $4 million mortgage after putting $1 million down is a lot. At a 3% mortgage rate, we're talking a monthly payment of $16,864. That's $202,368 in yearly mortgage payments, before paying taxes. But people who buy five million dollar houses generally put way more down than just 20%.

If you pay a total effective tax rate of 32%, then you would need to earn $297,600 in gross income just to pay $202,368 a year in mortgage payments. Then, of course, you've got to pay for everything else in life.

If you plan on buying a $5 million home, you probably want to put down a greater down payment percentage. For example, a $2 million mortgage after putting $3 million down is only $8,432 a month at a 3% interest rate. That's only about 10% of your monthly $83,333 gross income figure if you make $1,000,000 a year.

The people I know buying $5 million homes and up are often putting down 40% – 100%. Further, most people I know who make over $1 million a year don't have a $1 million base salary. Instead, their base salaries are much lower, more in the $200,000 – $500,000 range. The rest of their compensation comes in the form of stock grants and year-end bonuses.

When I was working in banking, an Executive Director had a base salary of $250,000. An ED's year-end bonus could range from 0% – 200% of base salary. Depending on the size of the bonus, a portion of it would be in deferred stock and cash compensation over three years. The greater your bonus, the larger percentage of the bonus was deferred.

The Cost To Own A Five Million Dollar Home

When you own a $5 million house, remember that your homeownership costs will be magnified as well. We’re talking $60,000 – $150,000 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 $5 million home, there are also higher heating bills during the winter, higher homeowner's insurance, higher maintenance costs, higher cleaning costs, higher landscaping costs, a bigger mortgage, and so on. If you've got a leak in your roof, like I had during our “Bomb Cyclone,” it becomes much harder to find!

Therefore, don't think about the cost of a five million dollar house as just the initial purchase price. Think about the ongoing cost to maintain a five million dollar house. Then there is the cost to furnish a larger home. The opportunity cost of owning a $5 million home is also the cost of not renting it out.

One of the reasons why I sold my old house in 2017 was because it had four bedrooms and three bathrooms for just my wife and me. The market rent was between $7,500 – $8,500 a month at the time, which we weren't willing to pay. Further, there were between $50,000 – $85,000 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 and waterproofing, which the new buyers did: $35,000

The property taxes and recurring maintenance are the main reasons why buying an expensive house can be a bummer. The more you have, the more you have that can go wrong. A smaller, more manageable house is often the way to go for those who want to achieve financial freedom sooner.

Minimum Income Necessary To Afford A $5 Million House

The absolute minimum income necessary to afford a five million dollar house is $1 million. The recommended income for owning a five million dollar house is $1.67 million. An acceptable income to own a five million dollar house is $1,250,000.

In other words, the multiple of total income to own a five million dollar house is between 3X – 5X. Once you get beyond 5X, you will likely be unable to comfortably 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 that much. Or, you would need to know with extreme confidence that your income will continue going up over the next 12-24 months.

Remember, once you get to the five million dollar level, everything gets amplified on the upside and downside. Be mentally prepared to deal with expensive fixes and more frequent issues.

Related: What's It Like Living In An $18 Million Mega-Mansion?

The Recommended Net Worth To Afford A $5 Million House

If you follow my primary residence no greater than 30% of net worth guideline, then your net worth should be at least $16.7 million to afford a $5 million house. And if you want to bring your primary residence down to the ideal level of 20% of net worth, then you should have a net worth of at least $25 million.

Ideally, you will have a minimum income of $1 million and a net worth of at least $16.7 million before you buy a $5 million house. But most people probably don't have such a net worth level before buying. The good thing is that, over time, one's primary residence tends to decline in value as a percentage as one's overall net worth grows.

$1 Million Income Family Budget Owning A Five Million Dollar House

Below is a realistic budget for a family of four living in an expensive city earning $1,000,000 a year. Each parent is responsibly saving $20,500 a year in their 401(k) in 2022. Each parent will continue to max out their 401k every year they work so they can both end up 401(k) millionaires.

After putting $1 million down on a dream $5 million home, the family is left with a $4 million mortgage that costs $202,368 a year. With home maintenance, property taxes, and insurance, the total gross cost to own their $5 million home is about $281,000 a year. Luckily, they have over $500,000 in cash and liquid stocks to draw from in case of a financial emergency.

The next biggest expense is their two children, who attend private grade school. Not only is the family paying $110,000 a year for private tuition, they are also paying $15,000 a year for extracurricular activities. Finally, the parents are contributing $15,000 each a year to their kid's 529 plans.

They could be contributing a total of $30,000 to each child for a total of $60,000 a year. However, the family also wants to donate $25,000 to charity and live a rich lifestyle.

Minimum income necessary to own a five million dollar house is one million dollars

$1 Million Income Budget Analysis

As you can tell from the $1 million family budget, by the time all expenses are tallied up, the family doesn't have much cash flow left. The first big hit to income is taxes. Paying $352,610 in federal and state income taxes is pretty painful, which is one of the main reasons why you want to make more passive investment income. Passive investment income is taxed at a lower rate.

If President Biden successfully gets his way, the family's income tax bill will likely go up by another ~$9,155 a year (2.6% higher tax on income over $647,850). That said, perhaps there will be a nice offset if the SALT cap deduction limit gets raised from $10,000. We shall see.

Spending a $1 million income is relatively easy to do in a big city with two children. The family is also saving for retirement, saving for their children's college education, and building equity in their five million dollar home.

Sure, there are plenty of items to cut. But when you're working so hard and making a million dollars a year, you also want to enjoy some spoils as well. Below is a recap of the income tax rates for married, filing jointly in 2022.

Should You Buy A $5 Million Home And Up?

Since the best time to own the nicest house you can afford is when your kids are at home, some of you might be looking for an incredible new home. At the very least, it's fun to look at $5 million homes and up online.

Even if you make at least $1 million a year, I'm not sure it's worth buying such an expensive home. The upkeep can really be a bummer, especially if the home was not well-constructed.

Consistently earning over $1 million a year is also hard to do. You can ride a good luck wave for several years. However, the economy tends to move in feast-or-famine cycles. It certainly was this way when I worked in banking. And it certainly is this way as a small business owner.

Therefore, I do believe having at least a $16.7 million net worth is necessary before buying a $5 million home. Your net worth is more certain than your income. But even your net worth is highly susceptible to declines, depending on how it is allocated.

Another thing to note is the type of home or condominium you are upgrading from. Going from renting a small studio to a $5 million home might be too overwhelming. You may not be able to appreciate all that a $5 million home has to offer.

On the other hand, upgrading from a $3 million home to a $5 million home may be much more digestible. You won't feel as big of a shock. And, you'll also be better experienced in knowing how to best utilize the new space. Therefore, for maximum appreciation and adaptability, you probably don't want to upgrade in price by more than 100%.

Getting Out Of The Real Estate Frenzy Zone

Finally, I want to point out that once you buy a five million home, you are well outside the real estate frenzy zone. The real estate frenzy zone is home prices around +/- 25% of the median home price of your city. In other words, it's the zone where the most number of homebuyers can afford a home.

If there is ever a downturn, luxury properties will likely be the first to get hit. Or, they'll just turn completely illiquid and not trade for years. I've noticed this with luxury property in Honolulu. Some of the properties I've eyeballed since 2015 are still on the market!

Nobody needs a $5+ million home, which is why they are most at risk during a downturn. At the same time, during a massive bull market, the $5 million mark is considered “affordable luxury” in some cities like San Francisco and NYC. These homes can get bid up quickly.

Personally, my family is enjoying our much cheaper home forever home. We're utilizing all the rooms on a daily basis and that feels great. As an economics buff since college, having economic waste is a real bummer.

However, by 2025, if our wealth grows, we might seriously consider buying a five million dollar house. But by then, $5 million homes might be $6 million homes!

A Better Way To Invest In Real Estate

While you are building your income and down payment for a new five million dollar house, I would invest in real estate to keep up with the market. 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 $5 million homes).

If you follow my BURL strategy, you could generate enough passive rental income to rent your five million dollar home and have a lot of income left over.

For example, instead of buying a five million dollar house with a 3% cap rate, you could rent the house for $150,000 a year instead. You could then invest $5 million in multi-family properties generating a 7% cap rate for $350,000 a year in passive rental income.

After paying $150,000 a year in rent for your five million dollar house, you'd have $200,000 left over to do as you wish. Meanwhile, the properties you invested in may also appreciate in value as well, especially if they are in rapidly-growing 18-hour cities.

By using the BURL strategy, you are optimizing your capital. And one of the easiest ways to BURL is to invest in regional eREITs or private individual real estate deals around the country.

Here's a fun video of a $25 million house to make $5 million feel like nothing. When it comes to real estate, there is an endless amount of money to spend!

Earn More Passive Real Estate Income

Check out Fundrise, the leading real estate crowdfunding platform today with over 300,000 investors and $3+ billion in assets under management. With elevated inflation, we should continue to see rising rents and rising home prices for the foreseeable future.

Also explore CrowdStreet, a real estate platform that focuses on individual deals in 18-hour cities. 18-hour cities tend to have lower valuations, higher yields, and faster growth rates. Sometimes, CrowdStreet offers funds as well.

Personally, I've invested $810,000 in 18 real estate crowdfunding deals and a fund to diversify away from my SF real estate holdings. I want to earn more passive income and take advantage of demographic shifts. The demographic trend towards lower cost cities is real. Take advantage!

The Minimum Income Necessary To Afford A $5 Million House is a Financial Samurai original post. It is my next price point if I were to upgrade as we bought a nice home in mid-2020.

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65 thoughts on “The Minimum Income Necessary To Afford A Five Million Dollar House”

  1. Sorry but this is a stupid post. I know people who make $750,000 per year and live in $750,000 homes. Nobody but the truly wealthy or some self-indulgent strivers would live in a $5 million house.

    Anybody who spends differently from the way I see things is dumb.

    1. Believe it or not, people earn and spend different amounts of money on a home. If a baby closes his eyes, the world still sees him.

      If you can’t afford a $5 million home yet, then just keep working to build up a net worth or an income but can’t afford you one. I’m assuming this is your desire and given you landed on this post through search.

      1. No, actually I have no desire to live in a $5 million house and it would never even cross my mind to look at homes in that range unless I had a net worth of $100 million. I stumbled onto the site because I used to come here when it had useful information for upper-middle class people.

        Also, not sure why you added this sentence to my comment: “Anybody who spends differently from the way I see things is dumb.”

        1. Got it. Try to understand that just because other people don’t see the world as you do, doesn’t mean other people don’t have different financials, desires, and goals.

          Good job finding this post, even though it’s not on the homepage. I would be curious to know what keywords you inputted to stumble upon it.

          Feel good pursuing your goals. There’s no need to call someone stupid who has different goals.

          And if you’ve written something smart about housing, I’d love to read it. Please share!

  2. We have quite a few friends with $5M+ worth of homes but almost all of them(outside of the Bay Area where we lived for 20 years) have it split between multiple homes/condos. We currently have two MN homes valued at about $3M each and a $2.5M Florida condo. Our primary residence in MN will be sold in 18 months when we become empty nesters. We may upgrade our Florida condo to a larger condo or waterfront home with the proceeds(80% equity in the home) or we might wait and see if our 2 bedroom condo is enough space for the 6 months we will reside in Florida.

  3. Sam: you numbers all make sense, but we have to consider the psychological costs of high home prices and opportunities costs to our kids and communities. I also doubt the validity of 3x income/home price ratio when FAANG incomes are mostly (inflated) stocks.

    A friend who bought a $5M home in cash in South Bay mentioned his teenage son immediately started slacking off after learning how much their home is worth and became a problem student. The other problem of having such big mortgages, especially for 2 income families, is people started getting nasty at work, gunning for every promotions & play politics, instead of looking to create new products or startups (ever seen stressed working mom throwing tantrum at work because they need that 2ND paycheck for their nannies/private schools tuitions/mortgages for the next 20 years?) I work at FAANG and now see these mortgage slaves turn our once pleasant work place to toxic, as opposed to 10 or 15 years ago when we took home 2x-3x lower salary when home prices were reasonable. Some would argue 3x income/home ratio in 2005 is 3x ratio in 2020, but they forgot FAANG salaries are mostly stocks, and the low rate that inflates home prices also inflate FAANG stocks and create the illusion that we can afford it because for the next 20 years our stock-based compensation will continue remain 3x the mortgage payments.

    Bay area’s absurd housing prices also discourage our kids from pursuing their true passion, since they’ll never be able to afford a home unless they work in tech like their parents do. Almost all teachers in South Bay now lives 2 hours away and constantly reminding the rich kids they teach of that fact.

    1. Perhaps there are other factors involved in their son becoming a problem student? I don’t believe a more expensive is the main reason.

      How old are your kids and what is your housing plan?

      If you’ve been at a FAANG for 15+ years, surely you’ve done quite well no? So perhaps it is because you are very wealthy and we’re able to buy a home at much lower levels that you aren’t as competitive and feel the younger generation is. But circumstances have changed, and maybe you were more similar to them in your younger days than you realize.

      1. Our generation went through the 2000/2001 dotcom bust/911 and 2008 sub-prime mortgage crisis, younger generation who never went through 2000/2001 and 2008 seems “comfortable” taking on mortgages that require 2 incomes for the next 20 years? I don’t know.

        In addition to your 30/30/3 rules, how about we add a stress-test rule, like if your mortgages requires 2 incomes for the next 20 years, and you don’t have cash reserve to live with only 1 income for than 1 years, then you cannot really afford it.

  4. Sam, great post. I was actually just wondering this as a home in our neighborhood sold for $4.6M.

  5. Certain SF South Bay cities – Los Altos, Palo Alto $4- 5M is considered “par” for the course. Get’s you a SFR with 4-5 Bedrooms, 2500 sq ft + they would hardly qualify as “mansions” also highly doubt these folks have a NW of $15M + but likely dual incomes putting them over the $1M annual mark.

    SFJoe is correct ..most put down 50% (courtesy FAANG stock) so the mortgage you have listed there is cut in half and then some; same with private school tuition and other expenses – can be much lower ..having said that completely agree saddling yourself with stress and health issues from work to pay $350k in taxes is egregious !! Then again each to his own ….

    1. To each their own indeed. I just wanted to find an income and net worth range that will enable $5 million home buyers to feel at peace.

      There are definitely a lot of FAANG workers with $5M – $10M net worth around here!

      1. Bay Area Person

        I’m part of a FAANG household with a $10M net worth and a regular >$1M income (lately close to $2M thanks to stock and the Fed’s policies). We live in Palo Alto and always wonder if we could afford a $5M home—the answer’s always no because it’d just be too stressful (at our age, around 40, we also want to save for retirement and slow down eventually instead of spinning in the rat race to afford a relatively normal, non-mansion in Palo Alto). I have to agree with Sam that if our net worth was closer to $17-20M and our housing affordability was not directly dependent on double FAANG (which can be tiresome as I’m sure many other big companies are) incomes, we’d feel a lot more comfortable with said high cost home. Peace, as Sam says, is the operative word.

        1. You are wise not to get the $5M home and save more for retirement at your age. My wife started with a FAANG company in 1999 at age 34 and had 18 rewarding but very hectic years there. We look back on those years and wonder how we survived with her crazy hours/travel, me working, and raising our three kids.

          Lifework balance is a beautiful thing! My wife has a C suite position with a Fortune 20 company, but her hours are half of when she worked in Silicon Valley, and she only travels ten days a year. She will be retired in a year when our youngest is a senior in high school. It’s hard to predict what the next five years will bring and when you may want to step away from the rat race.

        2. Hello – Just out of curiosity – with a 10MM net worth and a good resume, why not leave Palo Alto and move to someplace less expensive and retire now?

  6. These pieces never get old. I could go for one for a more seasonable 1 and 2 million dollar home.

  7. Sam, as I’ve commented before on your pro-forma expense analyses at various levels of working-rich, they are always bang on. This one is too.

    I lived it. And I observed many contemporaries living it.

    If we recast the pro-forma for Canada (Toronto, for example) the situation for the hypothetical family would be much worse given the punishing tax system, inflated costs of living and weak buying power of the dollar. In fact, the matching monthly net would likely be negative. This family could not live that lifestyle in a $5M home. They would need to make adjustments, which of course they could do. You do have some wiggle room at that level, even if you are intensely keeping up with the Joneses.

    And yet, there are many – I’m talking many – $5M homes in the city and surrounding area. I’m observing and commenting here in Canadian dollars purely for illustrative purposes, keeping everything $-related apples to apples.

    Who owns these homes? Lots of people I know or could have known (I travelled in the same circles before I retired early in my 50’s). Not many of them had the net worth you articulated but some were on the way. Most of them however would have had those types of incomes. Which, as your analysis points out, leaves a hypothetical American family net zero and the same Canadian family needing to make cuts to get there. Historically, many if not the majority of these $5M house-holds would have done it on one income, not two.

    Just my own data set speaking here (but it was pretty big).

    Another very fun analysis and post Sam, thank you.

      1. I’m older than you are so for the sake of argument “$5M” was say “$3.5M” at the time this kind of thing was up for consideration for me. I had multiple real estate holdings that added up to this number.

        I always felt this was a little too much relative to the risk/reward profile, my incomes, my net worth, and my true lifestyle needs and wants. It was fun while it lasted during the thick of the kid years but I sought to simplify as soon as it was practical to do so. Too much overhead, too many things to worry about, too much cost. I didn’t think it would continue to enhance my life; in fact, the opposite.

        I have a more favourable liquidity ratio in retirement and that suits me well from a risk management and temperament perspective.

  8. I’ll admit this is a bit rant-y, but why, why, WHY are the kids in private school? Isn’t the point of a $5 million home that the property taxes are part of what fund the public schools? I still remember the $500,000 hypothetical couple living in Park Slope of all places, which has the best elementary public school system in the entire country, and they were still spending their money to send their kids to an Ivy-League elementary prep school. At some point, when is sending kids to private school about their needs versus a lack of parental boundaries?

    TLDR; When you purchase a five million dollar home in a large city, isn’t part of what you’re paying for the public school district?

    1. It is ironic isn’t it? The more you pay in property taxes, the less you get or want to get out of the public school system.

      It has likely to do partly with social pressures, partly with a perceived safer environment with smaller classrooms, and also the belief these feeder schools will lead to entry into better schools.

      Personally, I’m willing to pay up for a SAFE environment. I went through fist fights, bullying, and witnessed knife fights while in public school. So it depends on your public school system. My school was considered good!

      1. Here in Canberra, Australia private school (Anglican Church) costs about USD 15k per year, so USD 55k sounds very pricey. The main reason we would move to a more expensive neighborhood here is because my wife thinks the public schools are better there (I’m not keen on the Christian school). Personally, I think the public school in our neighborhood is fine.

    2. CJR,
      You are right …on paper it makes no sense to pay $5M and then send kids to private. However a good majority of the folks in the South Bay cities in the $4-5M – Los Altos and Palo Alto are sending kids to Harker, Nueva etc which are in the $40-50k Tuition range.

      Sam said it below – a bit of keeping up with the Joneses, a bit of seeking a safe environment with smaller classrooms, individual attention, and the belief that doing so will give the kids a leg up on admissions to the Ivies, UC etc

      If one can comfortably afford it; why not I suppose ? We always want to do the best we can for our children …

    3. No. Not even close. Maybe even the opposite. What it means is you’re in a club>> the club of folks having the means to buy a $5mm house. And those people also aim to be in the club of people who dont blink at 60k private school tuition bills.

  9. Since we’re talking about depreciating assets, why not throw in hypercars, private jets, and yachts!?! Let’s not restrict ourselves to enjoying just one location!

    1. Love it Dan! Unfortunately, today’s $5 million homes were just $4 million just a few short years ago. Hopefully they don’t turn into $6 million homes in another few short years.

      1. Similar to my used 2002 Honda! It was worth $2,500 in 2019, today I can find buyers willing to pay $3,500 for it! Maybe next year I can get $4,500!

  10. I have a young family and live in a home slightly above this category. Your math roughly matches.

    – Mortgage cost can be lower depending on where you park liquid assets.
    – Charitable donations are pre-tax, and gifting appreciated securities helps. No such luck with political contributions.
    – That’s SF Day School level tuition, not CAIS level tuition
    – Most people I know with income at this level and families keep their burn rates under $300k and bank the rest
    – Incidentally, none of them have G550s. :)

    1. Christine Minasian

      When you say burn rates under 300k, are you staying they only spend 300k per year on EVERYTHING? Just trying to compare where we are at. Sam is spot on with a lot of his line items (charity, food, clothes, country club, travel). We try to save 40% of our net at that income level always. You have to- to Sam’s point…nothing is forever.

      1. My sample size is small, but the pattern I’ve observed is roughly 50-60% down, the rest in an ARM at a preferential rate due to an asset management relationship. For a while you could get a sub 2% 5/1. I know someone who just took out an eight figure mortgage under 2% 10/1. Anyway, this cuts Sam’s mortgage payment line by more than half. If your private school is more like 32-35k/kid, there’s another 40-50k. If you further throw out country club and count 401k and 529s as savings, I think Sam’s example’s burn is in the low to mid-300s.

        Maintenance is quite low IMHO. Also, some folks in this category have access to after-tax 401k options; the example doesn’t explore this. (Great future blog post topic?)

        Also IMHO, on the alma mater front, go for a “modest” endowment (250-500k), committed over 5-10 years. Gift highly appreciated equity shares.

        Totally with you on the high savings rate / nothing is forever. That’s my motivation for savings

    2. Not so on the G550! I see plenty of preschool parents drive a G55 and a Tesla X P200D. Not sure about their net worth though. But to spend $150,000+ on a car… ouch, that is so much money. I’m sure CAIS tuition will go up to match. New campus, new remodel in 2023.

  11. I’ve been to some $5M usd homes in HK which are just like regular 2/3b condos or decent sized SFH. Not as grand as we might envision. I think it depends on the city. But agree with you that $5M homes in NYC and SF are already considered luxury.

  12. Very interesting read. I feel that your numbers are too low to truly enjoy the home. Most people I know who have bought a home at your levels are super max stressed out and several have lost them to foreclosure.

    A home at that level is a true luxury and luxuries are bought with cash. Also the up keep is way more than you have cited. Flowers alone are in the 20k range.

    My advice is any home over 5 mill is cash only and then with a large buffer to truly enjoy the home.

    Some of the most most Unhappy people I know are the ones who have over extended and fear of loss is all they know.

    1. Did you buy your home with cash? Curious to hear about your upkeep costs and what they were.

      $17,000 a month mortgage on a $100,000+ a month income isn’t too bad. Keeping the percent under 20% is pretty manageable.

      1. Another thing to consider is the higher your net worth, the cheaper you can borrow. We have a $7M line of credit in our main brokerage account, and when we bought our condo in 2019 for $1.7M, we put $200k down and borrowed the remaining from our line of credit, which only costs us about 1.6% annually. We’ve paid some of it down, but it’s obviously much more lucrative to leave your money invested and working for you when you can borrow at such low-interest rates.

        1. Trying to get ahead

          I have several million with a broker and don’t have access to this type of lending. Who is offering this and what do you need to have in terms of assets? This is a margin loan?

    2. Christine Minasian

      I would agree to pay cash for a $5M home to sleep at night. I see plenty of people that have over $5M homes and they are stressed out and crabby as hell. Not for me…

        1. Christine Minasian

          Do you honestly think the more money you make, your stress level goes down?? Whether you grow a business or get more clients/patients? Just curious.

          1. When it comes to managing debt, yes. When you have a higher income, you worry less about being able to afford a fixed level of debt or other expenses, hence the percentages.

            Can you share how you know people with $5 million homes are stressed?

            1. Christine Minasian

              We have a very close friend that owns hundreds of very popular fast-food restaurants. They have worked super hard to accumulate that many due to tough decisions, managing payrolls, etc. He owns multiple homes obviously- his main home being close to $8M. He is so intense and crabby half the time, we walk on eggshells around him, unfortunately. He’s young and very unhealthy as well due to stress. But he does have a VERY nice lifestyle I will say that!

              1. Gotcha! Perhaps he is faking being crabby all the time as a form of Stealth Wealth so people aren’t too jealous of him. This is definitely a tactic my wealthy friends deploy.

                But I’m sure dealing with lots of people means a lot more stress. It’s why I like running an asset-light business with nobody to manage.

  13. Oslerscodes

    Pretty close.
    In 2018 we bought an 8000sqft home for a few cents under $5M. We were upgrading from a townhouse that sold for $1.8M. We are in a VHCOL market with homes in our neighborhood slated for tear down selling for between $2.5-2.8M. We had looked in the $3-4M range and still haven’t seen anything that would rationalize even close to that expense. Until we saw this place which was modern and spectacular. Every few months we get requests to use our place in tv and movie shoots.

    We had just started a family and have stable jobs (stable for ongoing employment and location) and anticipate spending ~20 years here. I had reliably earned in the $800-999k range for 5 years and my wife $400-600k. Our down payment was $1.4M ($3.6M mortgage) and net worth at the time $4.xM. Today our mortgage is down to about $3M (3 years left at 2.7%) and net worth $8.5M and income is up for the past 2 years although we both admit we’re working too hard (a 7 figure mortgage will do that to you) but have the ability to up/down regulate our schedule. The house has also appreciated by 20-30% if we needed to sell (appreciation not included in NW number).

    Would I do it again? I’m not sure. It’s definitely made a very comfortable life a little less so but that’s related at least as much to the kids (we used to be away 1-2x/month). We needed to move on from the townhouse to accommodate grandparents and the kid(s) plus there was some construction that was going to disrupt our lives anyways. We really couldn’t find anything that impressed us in a more modest price range and so it was really lack of alternatives (our best alternative at the time was renting a 3000sqft condo in a new building) and deciding that if we were going to buy a $5M place anyways it made more sense to do it in 2018 and live in it for 20 years than in 2024, when our NW was up and likely prices as well, and only do it for 15 years.

    1. Awesome details! Thanks for sharing. Great to see both income and net worth go up while debt went down.

      I don’t think you’re going to regret living large with your kids at home. But do let me know otherwise.

      Do you guys feel any burnout from work? Any desire to take it down? What do y’all do?

      1. Oslerscodes

        Burnout absolutely. But special circumstances as we’re both based in healthcare and the pandemic has doubled or tripled my annual work hours (40 weeks @ 100-120hrs/wk). Income thankfully matched. And with all family out of town have been really isolated.

        Net income benefit for last 2 years being applied equally to lifestyle upgrade (see below), savings/mortgage acceleration and “permission” to take extended time off before kids head to school formally.

        Now with travel easier and work a little less intense being able to host family and friends has been huge. We’re planning on doubling down and finishing the interior (furniture, art, …) plus the backyard with a pool, kitchen, lounge, fireplace. Oh and a Toto washlet.

    2. Similar. We’re considering building a house that would appraise for $5m+. We bought our current home for $1.2m and it is now worth $3m, and the mortgage is down to $750k and shrinking, so we’ll have at least $2m from our current house sale to contribute to the new build, plus the value of the lot we purchased years ago. We never intended to build a $5m house when we bought the lot, but construction costs are really high in our area. I’ve found it is difficult to get a construction loan for over $3m, regardless of income and assets, but maybe we haven’t spoken to enough lenders. It is a bit out of my comfort zone to have such an expensive house, but it’s in a great location and we can probably afford to carry it even into retirement, so that’s how we found ourselves looking at a $5m+ house despite not have a $16m+ net worth. Also, we’re in a great school district and happy with our local public schools and our real estate taxes are lower than your suggested range, and college for the kids will be funded before we break ground, so our budget is more comfortable than what you’ve outlined, which otherwise looks about right.

      1. Can you share your rough income and net worth?

        I’m afraid of construction loans because of all the various issues that could go wrong with construction – cost overruns and delays. By the time I get my simple remodel done in a rental property, it will have been 2.2 years! The original estimate was 6-8 months.

        1. HHI is $1m plus with upside depending on the year. I don’t track our HHNW but it’s less than $16m and more than the $5m value of the home. We don’t have any second homes or any other extravagant spending, and .we live in a HCOL town that we would never leave because we love the lifestyle and raising our family here, so the housings cost is money well spent. Construction is very scary, no doubt, but we’ve had the itch for a long time!

            1. Exactly. And we definitely plan to apply the proceeds of the existing home sale to the equity on the new home.

  14. In my opinion if you’re in the market for a $5 million home and aren’t paying cash for it, you don’t need that $5 million home.

  15. Andrew Raspo

    Sam, I have been reading your articles for a while now and have a couple questions for you as I am contemplating buying a house of my own soon.
    First, for a little background, I am 23 years old and fresh out of college making $55k a year living in a fairly cheap coastal city in Florida. I was lucky enough to have a grandpa who started an investment account for all of his grandkids when we were little and mine has now grown to ~$175k (thanks Apple). I also have about $15k cash saved right now.

    Following your 5x rule you mentioned in this article for this low rate environment, I believe I can afford a house up to about $250K. My girlfriend would also be living with me so the mortgage payments shouldn’t be a problem. It’s the down payment where I am a bit torn on what to do. There are three options I have in mind and would be interested to hear your thoughts.

    Option 1: Buy a $250k house putting down 20% by selling some of the stocks from the account my grandpa gave me. To have a bit of a buffer here, I would need about $75k. With my $15k cash I already have, I would have to sell $60k in stock which would then trigger a capital gains tax, so I would actually have to sell ~$70k worth of my stock with the 15% tax rate. This option seems like it should be the best, but I just hate having to pay up that much money in taxes. It would also hurt to see my investment portfolio drop by so much.

    Option 2: Buy a $250k house putting down 5%. In this scenario, I would have enough cash to put down the down payment, and would only need to sell some stock to have a bit of a cash buffer. This would save me a lot of money in taxes and keep my investment portfolio higher, but then I would have to pay PMI which would add about $200 to my monthly payment. I feel that I would be comfortable paying this monthly payment still seeing as it would be about the same I am currently paying to rent (with a roommate). This option seems better to me mainly because I don’t want to see a huge chunk of my investment portfolio gone. I know it would be in home equity and not actually gone, but still doesn’t feel as good to me.

    Option 3: Continue renting and save up more cash to where I won’t need to sell as much of my investment portfolio, and I could still put down a hefty down payment. This option seems like the worst to me because renting seems like a waste of money when I think I could afford to buy a house of my own.

    I would be very interested to hear your thoughts and what you think would be the best option!

    1. You would be turning $70k of funny money into $250k of real estate. Given that the money was gifted by an insightful grandparent, I would just sell the stock. You can always buy more at $200/month in the saved PMI which would just be burned money anyway. $70K seems like a lot now because you are young, but you will replace that easily in a couple years while simultaneously living in your own home instead of renting. Also the longer you wait the likely more expense the same house will get. Best to move now if it’s the right fit.

      The real deciding factor though is the interest rate vs interest rate and PMI. If you are low enough and the PMI falls off at 78% then maybe it makes sense. However, I think you might find better use for the premium while sitting in your new home.

      Another option – perhaps the GF helps with the downpayment? Then just offset her portion of rent until it’s paid back to her? Might be worth a try.

      Parents loan? Siblings? Back to grandpa?

    2. I am a bit older but was in a very similar position to you about a year ago.

      With interest rates as low as they are right now, I chose to go with the 5% down route. My house is only 2x my annual income so I was comfortable taking on more leverage. Also, when using fairly conservative investment return estimates, the capital gains on leaving the cash invested comfortably outpaced the additional monthly interest/PMI costs. If you end up changing your mind and hate the idea of paying PMI, you can always make a large principal payment in the future.

      One additional thing I will point out – on a slightly more expensive house, my PMI is only $75/mo. When house hunting, I found that sites like Realtor severely overestimated monthly PMI costs. Just something to keep in mind when you are considering all the options.

      Best of luck in the home search.

    3. Side note, if you decide to sell stock make sure you have enough money set aside to pay for the capital gains.

      Personally I would sell the stock to get 20% down and avoid PMI. A higher down payment also means a higher likelihood of getting your offer accepted.

      Owning a house is amazing and fulfilling if you can afford it, and if you’re planning on being in the area for at least another 5 years it makes sense.

      Best of luck!

  16. One additional item to consider when moving up in house sizes is furnishing the home. I jumped from a 1800SF to a nearly 5000SF home. You realize how empty rooms feel without furniture. I can only imagine furnishing a $5M house. Plus likely in that market you aren’t going bargain hunting with your furniture either. So likely add another $200-400k to the budget to furnish the home.

    Probably add another $50k for a generator to support the home as well. No one wants to live in a castle in the dark.

  17. What a fun topic and a great read! I always appreciate your research on a variety of topics. There will always be someone with a bigger and more expensive house, but maybe they are not as well off month to month as we could guess. Keeping everything in perspective, I’m happy with the house I have. It’s a bit nicer than I need but nothing too crazy.

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