Given our primary residence is likely one of our largest assets, buying responsibly is prudent. At the same time, living a better lifestyle by owning a nicer home as we get wealthier is also something many people desire.
Therefore, let's try and figure out what our appropriate primary residence value should be as a percentage of net worth. I've got a certain percentage in mind that will help maximize lifestyle.
The percentage will also provide enough investment exposure and minimize financial worry for being too house rich.
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Keep Your Primary Residence Value A Reasonable Amount
One great thing about a bull market is that the unnecessary big-ticket stuff we buy declines as a percentage of our net worth over time. If we can survive the initial liquidity crunch after purchasing a house, things tend to turn out well.
You could actually make more from your house than your salary too. Given the house price is usually much greater than your salary, even a small percentage increase in your house price could surpass your cash flow savings.
For example, let's say you have a $100,000 net worth that is all in your company's stock. You inexplicably purchase a $50,000 BMW even though you only make $80,000 a year. That's unwise because you just spent 50% of your net worth and 62% of your gross income on a car. Driving a beater or taking public transportation would have been more appropriate.
However, let's say your company hits it big and your company stock grows to $5,000,000 in 10 years. If you still own your car, its original purchase price only ends up being less than 1% of your net worth. Meanwhile, you were able to enjoy a fun vehicle for 10 years. Therefore, purchasing a $50,000 BMW 10 years ago turned out to be a good gamble.
I want to do the same type of thought exercise with a house. How much should we really “gamble” to live a better lifestyle today?
Using net worth as a variable to determine how much home one should buy or continue to own is a useful exercise.
The Average American Has Most Of Their Net Worth In Their Primary Residence
The typical American has over 70% of their net worth in their primary residence. As a result, the typical American got blown up during the 2008-2009 Global Financial Crisis. And if God forbid, a raging fire burns your house to the ground and you don't have insurance, you will lose a lot of your wealth.
As the housing market tanked, so did the fortunes of ~67% of Americans who owned homes back then. Granted, stocks and other risk assets also got crushed.
From the Global Financial Crisis, we've learned that it's prudent to be diversified. We also learned that having the majority of your net worth in one asset with debt is not the best idea.
At the same time, during a housing bull market, going all-in on real estate is fantastic for wealth creation. Therefore, we need to think of a good balance.
The global pandemic has made millions of us appreciate our homes more. Given we're spending more time at home, it's only natural to assign a greater value to real estate. The key is not to overextend ourselves.
The Ideal Primary Residence Value As A Percentage Of Net worth
In my opinion, the ideal primary residence value as a percentage of net worth is no more than 30%. This is a percentage to eventually shoot for as a first-time homebuyer. For veteran home buyers, you can use 30% of your net worth as a barometer for your next house purchase.
For example, let's say you are a first-time homebuyer and have a $300,000 net worth with a $100,000 household income. The bank says you can borrow up to $350,000 to buy a home. You decide to borrow $280,000 and put down $80,000 on a $360,000 home.
A $360,000 primary residence equates to 120% of your net worth. This is a common scenario most first-time homebuyers face. With a $1,300 a month mortgage and an $8,333 a month gross income, you should have no problem affording your house.
With 30% of net worth as the ideal primary residence value, you have a target net worth of $1,200,000 ($360,000 / 30%), based on the original purchase price of your primary residence. Your goal will be the earn, save, and invest as much as possible to boost your non-primary residence net worth equal to $900,000 ($1.2 million target minus existing $300,000 net worth).
If you can save $10,000 a year for 26 years and earn a 8.3% annual return, you'll be able to accumulate a $900,000 non-primary residence net worth. If you boosted your savings by $20,000 on average, you could accumulate a $926,000 non-primary residence net worth in only 19 years, assuming the same 8.3% annual return.
Depending on how much your primary residence appreciates in value during this time, you may have to shoot for an even higher net worth. Challenge yourself to keep actively building wealth.
Grow Into The Value Of Your Home
If you end up following my 30/30/3 house-buying rule, then you will most likely achieve the ideal primary residence value as a percentage of net worth within 15 years. The idea is to buy responsibly and grow into your home as you get wealthier. This way, you get to live a better life while using other people's money.
If you buy your first home at 30, by 45 you should be sitting pretty. Your wealth should have grown tremendously during this time period. So should your home's value. Within 15 years, you should feel very at ease with the ongoing cost of owning your home.
Your 40s and 50s are when you will likely start to tire from the work grind. Your risk tolerance may also decline given you may have parents and children to care for. As a result, having your primary residence equal to the minority of your net worth is a prudent goal.
However, if your net worth grows much quicker than the average person and your home’s value, then you may consider buying an even nicer home. This is a predicament many people are now facing thanks to a bull market since 2009. Many people find they live in their homes for less time than they originally planned. Enjoy Your Forever Home For Now; It Will Likely Change
Upgrading Your Home As You Get Wealthier
During a YOLO economy, the propensity to spend more on a better life increases. In early 2020, my increased awareness of death and destruction all around thanks to the pandemic propelled me to pay up for a nicer home.
Given many of us value our homes so much more since the pandemic began, it's natural to feel OK spending a higher percentage of your net worth on a home. In addition, many of our investments have gone up as well.
But given our net worths are already up a lot, I encourage you to stay disciplined and stick to the 30% figure when buying a new home. A larger net worth already gives you the green light to buy a nicer primary residence.
Many of us will never be as frugal as Warren Buffett. He bought his primary residence in 1958 for $31,500. Today, his Omaha house is worth roughly $300,000.
Sure, Warren's house is massive with 6,570 square feet. But compared to his $100 billion net worth, $300,000 is nothing. So let's throw Warren's primary residence example out the window. Anybody who references Warren Buffett is not arguing in good faith.
If you're looking to decumulate wealth, buying a nice primary residence is one of the best ways to enjoy your money. However, there's also a good chance that if you buy the perfect house, it will likely appreciate in value and make you wealthier!
Realistic Home Upgrade Example Using My Net Worth Guide
Instead of using Warren Buffett as an example for how much home to buy based on our net worth, let's use a more realistic example.
Let's say your net worth was $3 million on January 1, 2020. You own a wonderful 2,650 square foot, 4-bedroom house in Charleston, South Carolina that was worth $630,000 in 2020. You've lived in your home for eight years and bought it for $380,000 in 2012 when your net worth was just $500,000.
I use Charleston, South Carolina as an example because it consistently comes up as one of the best cities to buy real estate in America. Below is an example of your existing primary residence worth ~$750,000 in 2021.
Fast forward to today. Your net worth is up 60% due to strong investment returns and savings. With a $4.8 million net worth, you're itching to buy an even nicer home.
Living in your home for 10 years is a very respectable amount of time. However, you want more land for the kids to run around on. You also want a pool and a hot tub! Besides, with your current residence valued at $750,000, it only makes up 15.6% of your net worth.
Your New Primary Residence For $1,250,000
Based on the target primary residence value equal to no more than 30% of your net worth, you can now buy up to a $1,440,000 house. If you sell your current house for $750,000, you're only spending $690,000 more if you go to my target maximum.
That said, buying a house that's almost double the value of your current house feels like too much. Therefore, you look for a $1,250,000 house that equals 26% of your greater net worth instead. Anything cheaper and spending all that time and money moving probably isn't worth it.
You've found your $1,250,000 new primary residence in the picture below! So much land to play games!
Invest The Difference If You Did Not Buy
One of my favorite things to do as a savvy investor is to invest the difference based on what you could have bought. Not buying what you could have bought often feels like a win, especially if you're a frugal person.
In the above example, you can use the leftover $190,000 that you saved from not buying a $1,440,000 house and invest it a real estate ETF, a REIT, or in real estate crowdfunding. This way, you get to live in a nicer home and maintain an appropriate amount of real estate exposure as your wealth grows.
In 2017, I reinvested $500,000 of my San Francisco rental house sale proceeds into real estate crowdfunding. My goal was to diversify, maintain real estate exposure, and simplify my life.
As a new father, I no longer wanted to deal with this property's tenants and maintenance issues. At the same time, I wanted to keep earning passive income because my post-work lifestyle depended on it.
Check out Fundrise, my favorite real estate crowdfunding platform where you can invest in diversified institutional real estate funds. For most investors, investing in a fund is the way to go.
The Ideal Amount Of Time To Live In Your Primary Residence
Even though investors have made a lot of money since the pandemic began, it doesn't make sense to move every couple of years, no matter how much your wealth has grown. Moving is a pain in the ass. Further, transaction costs eat away a large percentage of potential profits for short-term holders.
Therefore, I say it's worth reassessing whether you want to buy a nicer primary residence every 10+ years. The duration is very similar to the ideal length of time to own a car.
Ten years gives you a long enough time to get settled in and enjoy your home. Ten years is also a long enough time to ride out most real estate cycles. If your net worth compounds by 7.2% a year, it will have doubled in 10 years as well. At which point, you are more than welcome to upgrade if you like.
If you have children, it's generally a good idea to provide as stable of an environment as possible. I moved around every 2-4 years as the son of foreign service officers. It was an adventure, but it was also heartbreaking each time I had to leave my friends. Therefore, if you are to upgrade, it may be best to upgrade close by.
Finally, by the time your kids leave the house, you might want to downsize not upsize. Therefore, it's up to you to run the numbers and decide what your best life looks like. Frankly, the best time to own the nicest house you can afford is when your kids are living with you. It's not like you're going to upgrade to an even larger and nicer house once they are gone.
Ideal Primary Residence Value As A Percentage Of Net Worth By Age
The following house buying or house ownership guideline is pertinent for the majority of people. If you are somehow able to strike it rich early on and buy your first or second primary residence for less than 30% of your net worth, more power to you.
- Age 25 – 30: 80% – 200% of net worth – Shoot to buy a primary residence by age 30. For most first-time homebuyers, the value of their house will be way more than their net worth. And that's fine, provided your income continues to grow.
- Age 31 – 35: 60% – 150% – Work to grow your net worth through aggressive savings and investing
- Age 36 – 40: 40% – 100% – Shoot to have your primary residence equal to a minority of your net worth by age 40
- Age 41 – 45: 20% – 50% – Shoot to have your primary residence equal 30% of your net worth by age 45
- 46+: 20% of net worth or less if desired
Again, the typical American homeowner has 70%+ of their net worth tied up in their primary residence. They are house rich, cash poor. Ideally, I'd like for all of us to be house rich and cash rich.
Related: Income And Net Worth Requirements To Afford A House At Different Price Points
House Rich And Cash Rich Is A Nice Combo
Be house rich because home values have grown over time. Also be house rich because our homes have provided us a better lifestyle than a rental would have. Eventually, we might end up living for free because our home values have grown so much.
Meanwhile, be cash rich because we have tremendous investments outside our primary residences. These investments not only may generate solid investment returns, but they may also generate growing passive income.
By our mid-40s, our primary residence should almost be an afterthought. It should be a small percentage of your net worth. Getting our living costs out of the way frees up our time and energy for other things.
At the same time, once your primary residence is valued at 10% or less of net worth, you may start feeling like you're being too frugal.
Live Better As Your Net Worth Increases
What's great about using percentages as a guideline is that it's applicable to various levels of net worth.
If you've got a $10 million net worth, the ideal net worth for retirement, owning up to a $3 million primary residence isn't unreasonable. The past several years have minted new deca-millionaires who've been used to being frugal.
If you're rocking a $200 million net worth and feel conflicted about whether to upgrade to a $30 million mega-mansion from a $10 million home, my 30% guideline should help. Suddenly, $30 million seems totally reasonable since it's half the amount you could responsibly afford.
Here's a chart showing the different levels of income and net worth required to buy a home at various price points.
There's no point in investing and working if you don't enjoy your money. Therefore, I say it's good to live better if you choose to continue to work and take more risks.
At the same time, be appreciative of all that you have today. Living in your primary residence for more than 10 years as your net worth grows will help keep you disciplined.
In conclusion, shoot for your primary residence value to equal no more than 30% of your net worth by age 45. If you do, you will find a great balance. In finance, there are few things better than enjoying your home in a stress-free manner while it also appreciates in value.
Real Estate Suggestion
If you're interested in investing in real estate more surgically, check out Fundrise, one of the largest real estate crowdfunding platforms today with around $3 billion in assets and 380,000+ investors. Fundrise specializes in residential real estate to take advantage of positive demographics and rising rents.
Gaining the appropriate exposure is more than half the battle in growing your wealth through real estate. You can now start investing in residential real estate across the country, hassle-free for just $10 a month.
Alternatively, if you are an accredited investor, you can check out CrowdStreet. CrowdStreet focuses mostly on individual real estate opportunities in 18-hour cities where valuations are lower and growth rates tend to be higher. Just make sure to carefully do your due diligence on every sponsor to create a select portfolio.
Personally, I've invested $954,000 in private real estate to earn more passive income and diversify my SF-heavy real estate portfolio. Real estate is my favorite asset class to build wealth, especially during times of uncertainty. With prices down due to aggressive rate hikes, I'm dollar-cost averaging more aggressively now.
Both platforms are Financial Samurai sponsors and Financial Samurai is an investor in Fundrise. Primary Residence Value As Percentage Of Net Worth is a Financial Samurai original post.
Could you commetn on how much leverage should be considered in this calculation? Banks will often approve you for more mortgage than some are comfortable taking on.
Hi Sam,
Great post.
I’m 39 with a wife and two kids. I’m a social worker and my wife stays at home taking care of the kids and doing Rover. We’d like to upgrade to a larger home but we will have to withdraw some money from my investment portfolio. Probably just use the dividends. We want to purchase a home around 2m. We were thinking of putting 1.5m down so we’d have a 300-400k mortgage.
I feel comfortable enough having about 4m invested and a dream house. Thank you for your input.
$6.2m net worth
$800k home
No mortgage
80k in cash
$5.4m in stocks and bonds and about a million is in dividend stocks yielding 4.5%
Thinking about buying a $1.2mm house.
Ages 38
1 kid, 1 on the way
$2.35mm net worth
$150k cash
$700k home
$270k mortgage
$1.7mm investments
$40k 529
$360k taxable
$1.3MM retirement mixed 401k/Roth IRA
2 new cars owned outright
No debt besides mortgage
$265k salary — 2 people working
Typically $30-$60k bonus
Upside in my job would probably be offset by wife working less hours at her job after child 2.
This too risky?
You’re within my 30/30/3-5 home buying rule. So if you think you’ll be able to live in the house / own it for at least 5 years, preferably 10+, then I think you’ll be fine. But if your wife stops working and your household income goes below $200,000, you WILL be stressed, especially if the stock market takes a dive and a recession comes.
Personally, I think the best time to own the nicest house you can afford is when you have kids at home. Thankfully, mortgage rates are coming down. This will probably spur demand and cause real estate prices to go up further.
Need advice here!
I’m 42.
My current salary is $700k, plus $150k discretionary bonus. I currently have 1.7 million in diversified, liquid investments. I have about $700,000 in equity in my apartment–if I sold it I think I’d end up walking away with about $500,000 after taking into account fees and capital gains. So net worth I suppose is 2.2 million? I would say my job is stable, but by no means guaranteed to last forever….
My husband has two houses, combined worth about 5 million–but has very few liquid assets.
I am looking to buy a house in the Bay Area for about $1.5-1.6 million. I may find something with an ADU for added income stream, but my dream house does not have that feature. Right now, I’d purchase the house on my own, and he may cash in one of his houses ($2 million) and contribute to half the house–but no guarantee of that.
We have one child, who we will send to public schools and college (sadly, despite this salary and fairly intensive savings, we are not rich!)
Do you think it’s too big of a stretch for me to buy a house in that range at my age? I’m thinking of all the other taxes / insurance on top and feels like a big expense–certainly could not be a forever house since I won’t work 30 more years to pay for it, but might be nice until we get to college years.
Advice?
Sam,
Appreciate the informative article and reference chart. I’m 59 years old, retired at 55 and have approximately $7 million in retirement savings (not including home equity). My wife and I are exploring options for a retirement destination/home and found several possible locations; however, the home prices are around $1 million. We have always been prudent savers and lived below our means. The thought of spending $1 million for a home is frightening! With the exception of our current mortgage, we do not have any debt and should have $300K in equity with the sale of our current home. We would appreciate your insight on the following:
– The purchase of a $1 million home a risky move for our financial future?
– If we purchase a home in that price range, what is a recommended financing strategy assuming our retirement income withdrawals are taxed as normal income?
We do not live a lavish lifestyle, enjoy playing golf and travelling. If possible, we pan to leave our two children with a decent inheritance and provide for charitable donations.
Thanks for your time.
“Assuming $10,000 in annual savings and a 10% compound annual net worth growth rate, your household can eventually achieve a $1,200,000 net worth in about 10.5 years.”
Not sure where you came up with those numbers, but $10,000 in annual savings with a 10% compound annual net worth growth rate, starting with nothing other than the $10k/yr only ends up $189,237 after 10 1/2 years; nowhere close to $1.2 million. Looks like you compounded your growth rate by itself possibly. It is the following geometric series: $10k*(1.1)^10.5 [1st 10k over 10.5 years] + $10k*(1.1)^9.5 [2nd 10k over 9.5 years] + .. + $10k*(1.1)^1.5 + $10k*(1.1)^0.5 = $189,237.40
Great catch. I’m missing a number, variable, or paragraph somewhere. I re-wrote the passage to make it clearer about the concept.
“With 30% of net worth as the ideal primary residence value, you have a target net worth of $1,200,000 ($360,000 / 30%), based on the original purchase price of your primary residence. Your goal will be the earn, save, and invest as much as possible to boost your non-primary residence net worth equal to $900,000 ($1.2 million target minus existing $300,000 net worth).
If you can save $10,000 a year for 26 years and earn a 8.3% annual return, you’ll be able to accumulate a $900,000 non-primary residence net worth. If you boosted your savings by $20,000 on average, you could accumulate a $926,000 non-primary residence net worth in only 19 years, assuming the same 8.3% annual return.”
Also curious to get your take on luxury mechanical watches, not so much as investments but as a bit of a storage in value. I only pay cash for cars, just $160k on mortgage and I will be 100% debt free from that in next 2/3 years. I am 44yo with a $1.5m net worth, $750k of which is assets invested in the stock market and $400k in value in my stake in the company, and $125k cash in savings. I save $44k per year toward retirement, and am able to save an additional $25k per year in cash. I have a net worth goal of $2.2M by age 50, and $3.5 by age 57 when I plan to stop working so hard, make money but not in a high stress job like I have now. Some of that cash saved each year c goes toward home improvements, and an occasional classic or nearly classic car I will buy, improve, own for a few years and sell for profit. Done this a few times and I make out pretty good doing it. My question is how is my watch habit seen from your point of view. I rarely buy watches new, and if I do I buy due not just me liking it but usually limited production so resale ends up being close to retail, if I had to or wanted to sell. I have sold some for profit and I know the market well but I have around $35k tight up in my core collection I am not likely to sell. Watches like Zenith Chronomaster, Omega Aqua terra, Grand Seiko Snowflake, Nomos Metro power date etc. Much of the collection are classic watches or have cult following etc. I tend to spend between $4k and $6k per year recently in adding to my collection. How guilty should I feel doing this? Am I diluting myself that this is better than spending money on disposable things that carry not residual value? I tell myself in a pinch I can pretty easily get out of any of these if I needed the cash.
Love your articles so much, thank you for all you do. I found this one funny as I live in Charleston sc. The example you used with a $6xx,xxx home bought in 2020 would be worth $750k a few years later. Try $1.3M! IT is insane to see how much home prices have gone up in the least few years since pandemic, even more so than most other metro regions. I don’t follow the stats, but antidotally, my home, and the home of two other friends of mine have all doubled in 3 years!!! Charleston is probably not the best example to use due to this as it is not the typical real estate market vs the typical American city. As a home owner I am somewhat ambivalent, since this is my primary I count it toward my net worth but certainly do not count it as an investment as if I sold it I would still have to live somewhere. As an employer this is terrifying. Trying to increase our prices and find efficiencies in our business to pay people to be able to afford to live here is beyond stressful and has lead to insane inflation in cost of living here that is not sustainable! Keep up the good word and I am looking forward to your next article.
Wow! That price appreciation is insane! I hope the job market is paying enough to support those prices.
Thanks for reading! I recorded a new podcast with Fundrise’s CEO about his real estate outlook and more. Worth a listen!
I wish I bought Charleston single family homes then!
I am a bit on a conservative side. I buy cars with my monthly income and houses with annual income. Those are the levels we feel comfortable with and with some research you could get excellent value for the money. In 2018, we built a 3100 sq ft vacation home in a Florida community 15 min from the Gulf for $325K now worth about $650K, which has since become our primary. We also have a 2200 sq ft condo in the north 10 minutes from Lake Michigan worth $290K (where we spend summers) we bought in foreclosure for $85K in 2012. We used to have a third home I recently sold also bought in foreclosure where I lived and worked 700 miles from home. Given your rule we could easily afford $2.5m worth of housing but what for? We are in early 70s, retired, and we want to live comfortably but not extravagant.
You’re in your early 70s and about to pass away so I don’t think it really matters how frugal you are with your homes. Ball out and get your dream house or don’t but regardless you’re about to give all the money away to the government and kids
Hi Sam, thanks for providing practical guidelines … I am mid 50s with 2 fairly young kids (7&11). Net worth 5.5M all pretty liquid, income 330K. Looking to live in a house for 10 years while the kids grow up, and looking at places in the 1.8-2M range (putting down at least half). I know it doesn’t meet all 30/30/3 tests, but wanted to get your expert opinion on whether this makes sense.
It’s in the range! Goal is to get the primary residence under 30% of net worth. So if you’ve got good cash flow and find a need, I think you can go for it. Please read my other post regarding writing a real estate love letter, home, inspection, contingencies, and more.
Thanks so much for the post reference – I haven’t written a love letter in a very long time – This is very helpful again Sam!
Do you have similar guidance for rental properties?
Wife and I feel in love with a house and would like to offer 1.25M, paying cash. Our numbers…
3.3M net worth
310k income
175k cash (after purchase)
1.725M in retirement and brokerage accounts
164k in 529 (1 toddler, 1 baby)
Thoughts?
Seems like a go, with that much cash still left over. What’s your income / monthly savings?
I have a huge disparity between income and net worth on your chart.
Recently married- I make 75,000 and my wife makes 50,000 for a total gross income of 125,000. I am 42 years old, and she is 32. We are expecting our first child in July.
I have a net worth of 730,000 and she doesn’t have anything for net worth.
We want to buy a house together, while we keep my 300,000 twin home (this is figured into my net worth) as a rental.
What price would you advise that we can afford? We would put down the 20 percent to avoid PMI.
I would target $375,000 up to $625,000 based on my 30/30/3 home buying rule.
Hi I have recently retired. I have net worth of 23 million. I’m 49. I have another 5 million coming to me over the next 4 years in a company payout. I have a primary worth about 700k. I have a second home /condo worth 2m. Both owned free and clear. I generate 500k in passive income from my investments. I am considering upgrading my primary residence- . Honestly the only homes worth the upgrade to give me more land would cost me a minimum of 2 million-2.5. I do have 3 kids. 2 in college and 1 still in high school. So I’m still funding them too! Any advice is appreciated.
Congrats! I’d encourage you to live it up or give more away given dying with millions doesn’t sound very efficient. But, feel free to do what you want!
Thank you!
Hi
I am 45yo. We have a combined net worth close to 4.8mm- 0.8mm retirement, 1mm stock and rest mostly cash. Our combined income is close to 0.5mm. We are looking to retire in 5-7 year. Live in an expensive area so a 30% rule will not get much in terms of house- semi detached 1500sqft. Any suggestions on what we should target as house price and what split between own fund and mortgage
39 years old.
Single.
$120k/year salary – 5 years at my company, senior level expert integral to many processes (they could fire me, but it would be VERY painful for them)
Various 401k accounts at ~$300k total.
$50k cash on-hand.
$450/month car payment, no other debt.
I am confident I can cash out of my current house approximately $175k. The house I am considering is $700k.
I feel like I can do it. Would you agree?
It’s a stretch. But sell your house first and then make the decision. Don’t be left holding two mortgages and needing to sell one house.
See: 30/30/3 home buying rule
Prices will likely come down over the next 6-12 months.
Hi
So buying a nice big house is something that’s important to me. I’m 38 and have a networth of around 1 million dollars of which 150k is house equity 450k is stocks and 400k is cash in my company. The issue with my income it’s very variable down to the nature of my work so in 2020 I probably earnt a net amount of 70k usd yet this year I will probably earn somewhere in the region of 1- 1.5m – so I’m a Henry till my year end bonus. By the end of the year I will have a good idea what my following year income will be but I would hope it’s close to 1m USD after tax as a minimum. My question is with such variations in income and my age should I buy a house of about 1.5m? As that’s what the ones I want cost – based on your 30% absolutely not but my logic is as follows.
1. I live cheap – my expenditure is 60k USD a year
2. Assuming the bonuses are paid by the end of 2023 I should be having a networth of at least 3 million usd
3. I am about to start a family
4. Im not into cars, watches or anything else materialistic
5. Even in the worst markets I can easily cover my living costs by my income
6. If I made this purchase i would have no mortgage payments
A house to buy cash would cost me 1.5 million – 2 million usd
Would it be that bad to own my house outright and still have at least 1m invested which would provide enough income to cover my expenses ?
Or do I just tuff it out in my current house and wait till longer and get the networth up to hopefully 5-6 million in the next 4-5 years then buy the forever home?
It’s the only thing I aspire to own and my low living costs and general frugal lifestyle means I feel quite comfortable in my current position
Any advice would be welcomed
I think there are going to be great buying opportunities over the next 12 months thanks to a global recession and Fed rate hikes.
So I’d wait until end of 2023. Build up your net worth to AT LEAST $3 million if you want to buy a $1.5 million house.
Great insight. I want to comment since my situation and geography is different than most commenters. 29 Y/O male. Living in WV. Got a late start and only started making reliable money last 3 years so my income is 75-85k a year now but net worth only $60,000 (no debt, and mostly in liquid bonds and equities).
I can save ~20k a year reliably living how I want to single, but I currently rent. A modest home here or near my family in Ohio is 100-150k, but a 300-500 in Northern VA where my girlfriend lives and 200-300 in several other eastern but not coastal areas we may end up for various reasons. My future with her is not certain, yet, with the mortgage rates on the rise.
On my own a modest home is 200% of my net worth and locks me into that for at least several years if I want to ensure not taking a loss. Even if we stick it out and buy together, a modest home will be between 150-300% of our net worth depending on location. I understand from your numbers this is probably ok at our age and my/our incomes can easily support these types of mortgage payments, but I do like to stay cash rich, although long term want to actually transition to being more land rich with some acreage.
So based on the housing environment, should I buy something really cheap on my own now to build equity, then buy again with her, or wait and see how things go with her and go a bit bigger? Hate to put the earning pressure on myself with an expensive house but I may need to get into a more expensive area so worried about depleting nest egg. Can I wait and just rent now?
Any chancer you live near White Sulfur Springs? My father in law lives in W. Virginia.
One thing that happened when I got a mortgage is that motivation to earn went WAY UP! I worked harder and longer hours. And I found better ways to invest. Once I paid off a mortgage, that motivation declined by around 30%.
I say rent now, figure things out with your girlfriend first, and then start a life together and own your primary residence. There will ALWAYS be another home available. And there will always be deals.
The housing market will likely continue to go up in 2022 though. But if you buy, and change jobs, change relationships, etc… you may be stuck.
BTW, how did you find this article? Always curious to know.
Also, I wrote this new book just for your situation. You are going to love it. Check it out.
Sam
Sam,
Thank you SO much for taking the time to respond time by bit of an outlier question (that I pretty much figured the answer to out as I wrote it down haha).
I’m in Charleston, so not super close to your father in law, but I know that area and drive through it going to VA sometimes.
I hear you about the motivation part. Not sure if that will be true of me but I probably want to work the same or LESS hours than I do now if my life moves forward, however plans like that rarely happen do they?
Thanks for the advice. Yes, concerned about being pinched by rising prices and rates this year if I end up still on my own in 2023, but I think I’ll just adjust my budget in that case and look fo the right deal, as you said. Too much opportunity to get into a much better home with her if I keep my nest egg intact this year.
Lots in the works and I appreciate the advice for me operating on a small money level compared to most of your readers.
I found article googling resources on what percentage of your net worth a home should be. Although I’ve read your material before here and there over the years.
Most folks take the % of income approach, which makes a little more sense to me since a house you live in is not a something you buy in order to make money as much as to simply have the life you want. I suppose there is a marriage of the two ways of approaching it. I’ll distribute this article to my girlfriend and get her thoughts.
Best,
Daniel
No problem!
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I’ll take a look at those resources, thank you! Definitley will sign up for newsletter.
One more tack on question: I’ve looked at your recommendation asset allocation materials for overall investment at various ages and with various financial strategies, but what I have not been able to gather is what sort of mix you would recommend when a very large purchase is on the horizon for a person at my low level of wealth and I can’t afford a serious market downturn.
Basically, I’m going to drop 40-60% of my net worth in to a home in the next 15 months no matter what. I’m over 90% equities in all my retirement and long term investing, but currently about 2/3 bonds in my home fund according to traditional time horizon recommendations to bring portfolio to fruition in 10/23.
That makes my overall wealth mix roughly 60/40 stocks to bonds at age 29 when ideally I’d be at 90/10.
I don’t like this but don’t want to risk a -20% hit to my down payment if there is a recession and I was top heavy in equities.
Given your predictions for markets in next year or so, what should I do with my housing fund? My gut would be shift it to maybe 60% equities and simply adjust my budget if there is an unlikely recession.
Thanks for that help.
Hi Sam,
Thanks for sharing your philosophy. I am still having trouble to see where we would fit. We have a net worth of $2.4M and make $500k per year with half of that from RSUs. We are looking to buy our first home in the bay area for around $2.4M ( relatively good schools and neighborhood). Does this value seem reasonable or do I need to be more conservative with the home price?
5X gross income is the recommended max. However, your stock holdings are unpredictable. So 5X and 100% of your net worth is aggressive.
Of course, if you continue to get a compensation increase and your net worth goes up more, you’ll probably be fine.
Personally, I would look for a $2 million house or wait until my total income was $650,000 or my net worth was $3 million to buy a $2.4 million house.
Hi Sam, thanks for the great post! Not sure if you’re still taking/replying comments on this but keen to get your input.
We’re in the fortunate position of having a net worth of 2.5M w/ yearly income of 500k and 40 years old. Based on the 30% rule, we should target a house of around 750k. However based on current cash flow, I project that our savings will be anywhere from 6-10M at around 55. Based on this, the current pandemic and having a young family (so *plenty* of time spent at home), we’re thinking of splurging for our forever home at around 2-2.3M. This would be 100% of our current net worth, but 30% of this hypothetical future net worth (assuming status quo).
Are we taking on too much risk? Top of my mind are the current asset bubble both in stocks and housing, and impact of rising rates on house prices.
All the best,
Christopher
I would DEFINITELY say spending 100% of your net worth is overly aggressive. Economies can turn on the dime. A lot will depend on variables that may be out of your control. However, if you also have $1M+ in cash, buying a $2.5 million home might not be so bad. The first year after purchase you will likely be sweating bullets though.
Sam
We are indeed looking to put 1.2M downpayment on the 2-2.5M house, leaving us with another 1.5M nest egg invested in stocks/index (mix of cash and retirement accounts). Assuming our financial situation doesn’t change drastically, this pot should grow to 6M+ over the next 15 years (assuming 6.5% return).
It definitely feels like we’re on the cusp of a big change though, re: inflation, rates, and the end of easy money. Maybe best to err on the side of caution :-\. Thanks again!
$2.5M is the limit. 80% chance if you buy, you will probably end up fine.
Just depends how comfortable are you about the other 20%.
Hi Sam,
Thanks for the insightful article.
My Wife and I have lived in Bay Area for many years. We bought our home after the subprime mortgage crisis (thinking that it’s probably the right time to buy).
We’re in a situation where we’re looking to buy a second home for a better school district for our children. Preferred location is upper Peninsula. We’re both employed and live frugally (not keeping up with the Joneses).
– current mortgage is $3k/month (fixed loan at 2.4%). Loan to be fully paid of in 14 yrs
– combine annual income is under half a million (salary only)
– available downpayment is about half a million
Been to a few open houses and had witnessed buyers paying 30-40% over asking price. It feels like there’s a big FOMO factor on the bids. I understand that inventory is low.
We have been looking at a few scenarios:
– buy a small property with less than 1,000 sqft to live on (the price range is already over $2M)
– buy a bigger property or duplex with some additional space to rent out (price is over $3M, but some cost can be offset with the rental). I do agree on bigger homes with bigger maintenance fees
– buy commercial property with similar scenario as above (live in one section and rent out others; though some county have different rules about it). Do you/anyone have experience in this?
– current home will be rented out as it’ll be income producing asset (able to rent out for $4k/month). I don’t think it’ll be easy to find a single family home with property tax of $10K in Bay Area’s Peninsula.
– renting a place (the area we looked at in Burlingame costs around $6-8K/month without utilities). Not cheap and return on investment is zero. Plus, there’s always a chance where Landlord increases rent or taking the home back
– private school (closest private school costs around $55K/year). Four years of High school will cost at least $200K for one kid (prices will continue to increase seeing what they’re doing in public schools now)
We have investments mostly in 401K (maxed out to get employee matching). We started ROTH accounts this year (I think it’s capped at under $8k/yr).
Looking for thoughts and suggestions from Sam and other readers as well.
I’ve been following your site for years and been reading a lot of the comments. It’s great to see everyone sharing their experiences (what works and what needs improvement). I believe everyone is also aiming for same goal: Great retirement while having some income producing investments.
Thank you
Hi Mark,
“Been to a few open houses and had witnessed buyers paying 30-40% over asking price. It feels like there’s a big FOMO factor on the bids.”
This is definitely no good. But real estate FOMO is the hardest type of FOMO to overcome.
Be patient. Better deals are coming. I’d especially look at mid-2023. No rush right now. Your mortgage rate and payment seems very affordable.
I like buying SFHs.
Just for clarification – in your net worth calculations, I assume you are deducting any outstanding mortgage balances, including that of your primary residence. But in calculating the % of total net worth of the primary residence, you don’t seem to be deducting the mortgage. For example, if I have a $1M net worth (net of any outstanding mortgage) and a $300k house, the house is 30% of my net worth. However, if I factor in a $200k mortgage on the house, the house becomes only 10% of my net worth.
Yes, because the total value of your house is what is at risk… it is your primary residence housing exposure. I assume everybody puts 20% down or more. So at 20%, a house that goes down or up 20% has a 100% affect on your equity.
One way to minimize your primary residence’s % of your net worth is to max out your mortgage. I’ve been in my house for 20 years. I started with a $600K mortgage and have gone as high as $1.2M. I’m a big believer of borrowing at < 3% and investing that money elsewhere. My mortgage is currently at $1M because the bank won't lend me more due to my relatively low income.
Hey Sam, great article! My wife and I work in tech (SF) and have a net worth of $2.2M. Our annual income has increased to $1.2M recently, and I anticipate that it will stay over $1M for the next decade. We’re 31 yrs old and are in the market to purchase our first primary single-family house in the city. We’re thinking up to $5M, but after reading this article, I thought we might be overreaching. Do you think $5M would be too ambitious for us?
Rent or buy a $2M home and invest the other $3M if feasible. I appreciate that at 31, that $3M would likely be a loan so just invest that sum over time as you earn/save it. Investing all of that $3M by age 35 let’s say, will make you a much happier person at age 65 or 75 than the fancy house. The difference will actually be more than $3M saved for investment purposes, as you will save on mortgage origination/interest, property taxes, property insurance, utility costs, furnishings, maintenance and repair costs, etc. the $5M home will cost you >100K/year for all these items.
A home is a liability. Focus on assets that generate revenue.
That $3M if all in the markets by age 35 will compound, assuming an average 9% annualized market return, to almost $15M by age 65 (plus the compounding from age 31) or $36M by 75, plus dividends less taxes and fund fees paid along the way. Do you love the $5M home enough to give up all that future security?
If you really want to you can upgrade to the $5m home at a later date but after your investments are in place generating wealth as you sleep. Too much home and fancy cars EARLY ON are one of the biggest mistakes we make in our financial careers. I made these mistakes too.
Don’t believe the numbers? I earned about a third of what you earn when I was your age but now earn a little more than you do at my current age. I built (at your age) the McMansion (7K+ sq ft) but in low COLA so it cost me $1.5M. Now, mid-career I have amassed a net worth of $20M+ focusing on income producing assets: 1- my business expansion, 2- commercial real estate and 3- market investments. Trajectory is for $50M at retirement age and I still would have purchased a more modest dwelling if I could do it over again. Not so much due to lost financial opportunity cost but all the hassles associated with maintaining too much (time and effort consuming) house.
But hey, get a bunch of different opinions and see which make the most sense for your needs and wants.
Interesting. Having amassed a modest $1.5M by the age of 40+, I now feel reasonably wealthy – enough to be ready to afford a starter home in the Bay Area. Which, these days, would be about 200% of my total net worth. However, by your logic, it sounds like I need not bother until I’m worth at least $6M. At which point homebuying becomes an ever-moving horizon.
On the other hand, using your 30-3-3 rule (well, more like 30-3-5 in my case), I should be able to afford that starter house. Why the discrepancy?
I live in San Francisco, and starter homes don’t cost $3 million to get to 200% of your net worth. Where exactly are you looking at?
30/30/3 is a good rule to follow for first-time homebuyers looking to get in. It’s consistent with the chart I have.
Share some numbers and examples and we can work things out. Yes, waiting until 40+ to buy your first home is on the older side.
Palo Alto and the good parts of Mountain View. You’d be hard pressed to find a SFH for much less than $3M there (maybe a condo if you’re lucky).
In any case, isn’t the whole idea of a 20-30% downpayment, and leveraging the rest, key to bootstrapping to home-ownership the vast majority of first-time buyers, who wouldn’t be able to afford a home otherwise? Whereas you seem to be saying, don’t buy a home unless you can in theory pay for it in cash, and then some?? Sounds like a diametrically opposite approach.
For my family, we’re talking $1.5M in savings/liquid assets and a yearly gross income of about $750K, about 1/2 of which is is tied to corporate RSUs and may or may not be sustainable in the long term.
Gotcha. That’s steep. Not sure what you should do as it’s unusual to see a net worth equal to 2X annual gross income when you’re over 40. It’s usually a higher multiple, with the ideal goal of getting to 20X.
As a result, you should probably lean towards the 30/30/3 rule. You can probably stretch to buy a house equal to 5X your annual income given rates are low.
What was your financial journey like from HS or college until now? Did you just recently come into earning your current amount?
Easy! PhD + startup = 10 years of my life.
I regret neither
That explains it! Thanks for sharing. It’s good you’ve found a job you like to do for a while. Most, including myself, are not so lucky. I had it after 13 years!
Ilya, look in a nice lower cost nearby area. With Palo Alto you’re picking one of the highest per square ft cost in the nation and highly competitive market. Check out Willow Glen is a fantastic historic neighborhood in San Jose for half the cost…