A one million dollar house is a lot of money in most parts of America. After all, the median home price in America is about $400,000. Therefore, if you buy a one million dollar house, you are paying 2.5X the median.
However, one million dollars doesn't get you very far in expensive coastal cities like San Francisco, San Jose, Los Angeles, Seattle, and New York. Therefore, where you are buying matters.
It's clear the housing market is strong now and will likely stay strong for years to come. Therefore, buying a one million dollar house or 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 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.
How Much You Need to Afford A $1 Million Home
In other words, if you want to buy a one million dollar house, then you need to:
- Earn at least $334,000. Your home is ideally not much greater than 3X your household income.
- In addition, you need to have a $200,000 down payment, or 20% down.
- Finally, it would be ideal to have a $100,000 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.
These benchmarks are somewhat fluid and will vary based on lender requirements. A higher salary usually compensates for a lower down payment — and vice versa.
In this relatively 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 $200,000 to buy a $1 million home. However, without a cash buffer, you will feel stressed and a little paranoid during the initial year.
Alternatively, you might feel more motivated to work harder and be nicer than ever before since you now have a big mortgage! Motivated is how I felt after buying a $1.5 million home back in 2005.
The Cost To Own A One Million Dollar Home
When you own a $1 million house, remember that you will have more costs than if you bought a median-priced home. We’re talking $14,000 – $30,000 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 one million dollar house as just the initial purchase price. Think about the ongoing cost to maintain a one million dollar house. The opportunity cost of owning a $1 million home is also the cost of not renting it out. In other words, if you can get $5,000 a month for your million dollar house but would never pay $5,000 a month yourself to rent, there is some economic waste.
One of the reasons why I rented out my old house in 2014 was because it had four-bedrooms and three-bathrooms for just my wife and me. The market rent was $7,500 a month at the time, so we decided to rent it out rather than live in it. I then bought a $1.25 million house that felt much better because it was more utilized.
For reference, our old house was worth over $2.4 million because it was also in a more expensive part of the city. Living in a right-sized one million dollar home felt much better.
Family Budget Owning A One Million Dollar House
Below is a real budget for a family of three living in an expensive city earning $200,000 a year. Their house costs $1.3 million and they have a $3,000 a month mortgage base. Their mortgage is $700,000 with a 3.125% interest rate.
The family bought the house five years ago for one million dollars and put 20% down. In other words, the family stretched to buy a $1 million home for 5X their annual household income of $200,000. The family contributed to a 401k and lived a relatively middle class lifestyle.
But for the first couple of years, the parents were stressed at having such a large mortgage relative to their income. Ideally, the family would have had a minimum income of $250,000 to $350,000 to more comfortable afford a one million dollar home.
The last thing you want to do is buy a one million dollar house and get laid off. Many who bought $1 million homes not only lost their jobs, but also foreclosed or short-saled their homes during the 2008-2009 Global Financial Crisis.
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 $1 Million House
The minimum income necessary to afford a one million dollar house is $200,000. The recommended income for owning a one million dollar house is $334,000. An acceptable income to own a one million dollar home is $250,000.
In other words, the multiple of total income to own a one million dollar home is between 3X – 5X. Once you get beyond 5X, you will likely not be able to comfortable sleep at night. That said, having a large mortgage might motivate you to work much harder and be much nicer to your colleagues.
Once I paid off my mortgage, I actually became less motivated to work hard and play nicer. Why bother when my living costs dropped so much? Less motivation is one of the ironic downsides of paying off your mortgage early. At the same time, I felt proud to have fully paid off debt.
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.
Cities That Could Face A Housing Downturn
Given buying a one 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 one million dollar house with 20% down and the housing market declines by 20%, you just lost 100% of your equity.
Therefore, be aware of cities where real estate prices are way up with upcoming supply. These cities are in the upper right. 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.
Cities in the lower left quadrant, with less supply and less price appreciation 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.
A Better Way To Invest In Real Estate
While you are building your income and down payment for a new one million dollar 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. 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.
Good luck buying your $1 million house! It's the sweet spot price point in many of the more robust cities in America. Many dual-income couples make between $200,000 – $300,000 a year nowadays. Once you buy it, enjoy it. In 15 years, it might become a $2 million house or even $3 million house!
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