Primary Residence Value As A Percentage Of Net Worth Guide

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.

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.

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.

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.

wealth outside home chart

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 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.

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 now worth ~$750,000 in 1H2021.

How Much Your Primary Residence Should Be Worth Based On Net Worth
3043 Maritime Forest Dr, Johns Island, SC 29455

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!

4141 Chisolm Rd, Johns Island, SC 29455
4141 Chisolm Rd, Johns Island, SC 29455

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 Buy A House At All 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.

Different levels of Net worth required to buy a home at different 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

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120 thoughts on “Primary Residence Value As A Percentage Of Net Worth Guide”

  1. 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.

  2. “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

    1. 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.”

  3. 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.

  4. 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.

  5. 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.

  6. 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.

    1. 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.

      1. 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!

  7. 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?

  8. 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.

  9. 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.

  10. 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

  11. 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?

  12. 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

    1. 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.

  13. 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?

    1. 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

      1. 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

          1. 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.

  14. 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?

    1. 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.

  15. Christopher

    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

    1. 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

      1. 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!

  16. 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

    1. 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.

  17. 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.

    1. 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.

  18. Money Roning

    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.

  19. 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?

    1. Givemeadvicetoo

      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.

  20. 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?

    1. 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.

      1. 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.

        1. 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?

              1. 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…

  21. I’m 18 years old and just getting started saving. My dad has saved $35,000 in Funrdrise for me which he has told me not to touch for several years, $19,000 in a UGMA custodial account and I have about $40k for college in a 529 plan. I go to a community college so that $40k would be for another 2 years from now. Who knows, if I just get my AA degree I may just use that $40k to go to a down payment on a home or condo some day. At 18, am I financially in the right place?

    Thanks,
    Shannon

  22. For people living in small, midwestern towns, I like your point of investing the difference in REITs and the like. My wife and I earn about $280k with a 3.3M net worth and live in a fairly large >3000 sq. ft. Victorian that maybe is worth $250k. So, our house is worth 90% of annual income and 7.5% of our net worth. But, realizing the low cost nature of our house, I have always invested in other REIT real estate (currently about $400k), with the thinking that if we want to move to another market when retired (currently age 55), I could sell both our house and REITS and buy in a more expensive market. That puts our house plus REITs at about 20%, which is on target.

  23. I’m 48 and I’m thinking finally putting ~20% of our NW into a house. Prices in the Bay Area are just insane now so I would like to wait for a correction… Although we have waited for 15 years because the prices have always been insane! (Yea I know, should have bought 2009-2012..)
    Our NW is about $12M so 20% would be $2.4M but I have a “psychological” limit of $2M…
    We are renting a small 3br house now for $3500/mo (in a good area) which is a good deal! Our landlord is nice and hasn’t raised the rent for a few years… we have been in this house for 10 years. Our almost teen age kids just think we should double the house size.. :-)

    But we are afraid to pull the trigger as I’m sure we will get a 25% correction in home prices once we buy!

    Question for Samurai. In this situation would you take a mortgage or pay cash? We have ~$5M in cash, ~$1M in index funds and ~$6M in company stock (which I feel is grossly overvalued but the market believes in us…) My income is about $350k/year and I’m probably going to work for another 10-12 years.

    1. If you have $5 million in cash, I would just try to use the cash to get a great deal for $2 million. I used cash in 2019 to buy a house in Golden Gate Heights and it saved me $100,000-$150,000 off the asking price.

      One realization I have is that the time to own a really nice house is there in an 18 years your kids are at home. Because after your kids leave, you don’t need a larger home. You might want a smaller home.

      With $12 million in net worth, what are some of the reasons why you think you are so frugal? Thanks

      Check out this post; https://www.financialsamurai.com/what-if-you-buy-a-home-at-the-top-of-the-market-and-a-recession-hits/

      1. I’m frugal probably because I only got wealthy last year when my company IPOed so my NW went up by more than 10x. We still haven’t really spent a penny of the windfall (except for the IRS…) and are even driving our 10 and 14 year old cars..
        I guess now when I finally have money I’m afraid to lose any of it.
        And yea we realize that in less than 10 years it’s probably just two of us and we won’t be needing a bigger house…
        That post about buying at the top of the market was a good one.
        Thanks.

  24. In general, I agree with this guidance but I think the 46+ age bracket seems a bit off at certain NW levels, especially in HCOL areas. Let’s say you’re 60 and have a NW of $10M. At 20% of NW, trying to find a nice beachfront (or even ocean view) house in a metro area of CA for $2M won’t cut it. But $3.5M can land you something pretty sweet (at least for me). The balance of $6.5M can still sustain a pretty nice lifestyle based on passive income. And if you want to enjoy that location, why not?

    Specialized situation, maybe. But if it ends up being my situation, I care a lot. Any thoughts on this specific situation?

    1. Hopefully by age 60, you will have already bought your forever home by 46, and due to strong net worth growth from your 40s, your primary residence naturally declines as a percentage of net worth.

      At age 60, I would think most people are staying in one place or downsizing.

      30% is my recommended percentage. But 20% or less is ideal as wealth grows. Of course, people are free to do whatever they want.

      1. I think there are many folks that will want a new forever home once they are empty nesters and even possibly relocate. At 46, many households (like us at that age) have kids that are still living at home so we want a larger house in a good school district with a large yard, public parks with kid playgrounds and ballfields close by, close drive to kid activities, etc. Once the kids move out, we will be looking at a new forever home but having increased wealth, possibly decreased expenses since the kids are grown, different criteria (smaller, in popular/expensive urban area), wanting/needing to spend more time at home late in life due to aging bodies, etc. it may make a lot of sense to spend more on our primary residence (as a percentage of NW) as it’s the best way for us to optimize enjoyment of our money before we die.

        Again, I agree with the general guidance but we may end up spending more than 30% vs the 20% cited in the table since we will still have plenty left over for the fun stuff we want to do.

  25. David Bianco

    Buying and paying off a home in the Bay Area was the best financial decision of my life. The peace of mind is priceless, that all I have to do is pay property tax and put food on the table. I could theoretically work at Trader Joe’s and still make ends meet for my family. The little house is worth a lot now, and I’ve considered cashing out, but that would just lead to higher taxes if I traded up, at least anywhere I actually want to live (the West Coast). So what me worry? I do want to put an extension in so I can have a proper home office. Seems to be a trend in my neighborhood.

    As for this or that % of net worth, I don’t consider my primary part of my net worth. It’s an expense unless I sell it or rent it out, right? We have bought a couple modest rental properties. That’s worked out so far. But, honestly, I’m looking abroad nowadays for real estate. I feel the need for diversification away from the U.S.

  26. I don’t count our primary home as part of our net worth because I look at it as an expense. I do count our secondary residence in NY b/c even though we have no intention to sell it, theoretically we could if we needed the cash and we would still have the primary home to live in. Of course, one could always sell the primary home and just rent, so the primary home is arguably an asset, but I consider that a nuclear option, a plan Z if plan B, C, D, etc really don’t work out. If you have a valuable enough primary home, you could sell it, geo-arbitrage to a much lower cost place like Costa Rica, and live off the cash.

  27. Sam, curious to know about second homes. Specifically a vacation home currently used only for consumption. Mine has nearly doubled in market value in the 8 years I’ve owned it. I consider it part of my NW, but should I consider it part of my investment portfolio and asset allocation?

    1. Is the calculation for minimum and recommended income based on past interest rates?

      My salary is about 100k, I have no debts and my net is about 200k. I’m having trouble getting my target monthly payments, unless my loan is about 130k. This gives me about 1300-1600 mortgage payment which is about 25% of my net income. This also means I need about 70k down.

      Am I just being too frugal? With tax and insurance my monthly take home is 5 5k and monthly payments greater than 1 6k will really cut into my ability to save beyond my company match.

      I will be living in NJ and that only gets me a small 1bd 1 ba condo. Fortunately I live with my family so I have time on my side.

  28. Hi- It would be great for you to publish an article that digs deeper into things you should do if you are one of the people who’s portfolio diversity gets out of whack. I imagine there are different degrees of investment changes and lifestyle changes that should be done depending on how far outside your targets you reside. For example, if I was 90% real estate at 50 you might tell me to sell my house and start diversification immediately or at what threshold outside the 30% target should you truly make lifestyle changes vs future portfolio investment shifts. Seems like the thresholds and different actions plans would be a great article coming from you.

    In my situation I am skewed house heavy- I built a $1.3 M house that has appreciated to $2.2M in 6 years. My net worth with that house is $3.5M and I am 51. With two 7 year old kids I chose to do the dream house to enjoy family life in the best comfort and I had very high confidence in appreciation in the area. I have $385K left to pay down on house and after reading your article it makes me think invest in another asset vs paying off the house. Wife and I make combined $400K a year. I am overly skewed in my primary but I felt certain on the house appreciation and wanted to enjoy my investment. Love to see an action plan article to guide those of us that are out of whack.

    Thanks love your site. Been reading for years and I follow a few of your tips

  29. FIRE Walk with Me

    Can you comment on how your 30% suggestion applies to expensive cities? Your 20% guideline for 46+ year-olds suggests that middle-age individuals need to have at least $7.5 million to be able to purchase an average home in San Francisco, for example.

    1. Now that is a good question I hadn’t thought as much about in HCOL areas.

      The ideal is 20% by 46, but the overall goal is 30% or less. So we’re talking closer to $4.8-$5 million net worth.

      The bright side of not getting to 30% or less is that you are living it up more with the net worth you have. And if you feel little to no financial stress at 40%, 50%, etc, then no worries.

      Sooner or later you will get to 30% if you keep working, saving, and investing.

  30. Hi Sam, I have been reading your articles sporadically through the years. Thank you for sharing your wisdom and financial advices. I found them very informative and empowering. I have to admit when I was in my mid-20s, the saving goals seemed impossible to reach due to my entry level salary and abysmal savings record. However, a decade and pandemic year later, luck have struck and I was able to profit from investing in the stock market. I am sitting on a million dollars in long term gains with $250K in principal and not sure what to do. Curious on what your thoughts are with all this “funny money”. Honestly, I believe the investments have more room to grow but want to be careful navigating taxes but still be able to strive toward financial freedom.

    My financial situation is as follow.
    $100K salary from job
    $200K saved in various 401k accounts – contribute max to 401k
    Own a $800K house in NYC with $275K left in mortgage
    Have 65K interest free LT debt (loans from parents to purchase house)

    No other income source

  31. Hmm, what about not buying a primary at all?

    For me personally, I’ve bought rentals in the past but I feel like buying a primary isn’t super necessary. People say I’m ‘throwing money away on rent because rent will never appreciate’ — but the large sum that could have served for the down payment of my primary…I’d rather invest it in the SP500.

    Seems like there’s a very large opportunity cost here if you just have your money sit there as ‘equity.’ Even if your home grows in value over the next 20 years and you want to sell it to buy a new home: where would you buy a new home? In a completely different market? All the other homes in your market would have also appreciated so purchasing a new home wouldn’t net a return.

    Don’t get me wrong, I feel in very niche cases a primary home could be considered an investment that could yield an actual return. But I think for most people who aren’t willing to sell eventually or downsize/geo-arbitrage won’t actually capture any profits (and therefore just makes the house a huge expense and not a financial investment).

    1. Sure, you are free to rent all you want and invest the difference. The data shows most people don’t have the discipline to regularly save and invest the different. But perhaps you can.

      The value of a primary residence also grows immensely if you have a partner and children. But it’s hard to appreciate the value as much if you are single and/or don’t have children. What is your family situation?

      Given the return on rent is always negative 100%, I like the idea of having a chance at making money from a primary residence and living in a nicer place. The housing stock for purchase is generally better than the housing stock for rent, but not always.

    2. I completely agree with your thought process Angie. As a single guy, I have no use for a single family home. I own a commercial rental property and know how much maintenance and wear & tear happens. Buy utility, rent luxury is what I live by.

      I rent a very nice 800 sq ft apartment with sunset views in a 10 year old building that’s walking distance to restaurants, farmers market, etc. Comparable condos 1 block over would be $500/month more not including the 20% down payment and closing costs. Owning a home sounds amazing and I enjoy daydreaming about it, but I’ll pass for now. With a little effort I save the difference and invest in low cost index funds like VTI and VGT.

      1. From an investment returns maximization situation, BURL makes a ton of sense!

        The calculus changes a bit once you have a family. The value of a primary residence skyrockets when you become the protector of children.

  32. The BMW example doesn’t make sense to me. If you use 50% of your net worth to purchase a $50,000 car. Then 10 years later your net worth grows to $5 million. That means the car cost you $5 million. Invest that money and you’d have $10 million instead of $5 million plus a 10 year old BMW.
    I think 20-30% is about right. That way you can invest more. The problem with an expensive home is you pay more for everything – taxes, insurance, furtniture, cars, etc…

    1. That’s a great way to look at it as well. In this case, $100,000 of the net worth was in private companies stock. The employee couldn’t have bought more, even if he wanted to.

  33. Comment from the UK here where, due to higher population density and stricter planning laws a higher percentage of net worth is spent on a home.

    A 30% rule works for those in middle age but for first time buyers the percentages don’t mean much as it is likely they will be multiples of net worth. Here is my history of home purchasing…

    First home bought aged 21, when my entire net worth went into the down payment. Home value £50k, net worth £5k = percentage of net worth 1000%

    Second home, aged 25, = percentage of net worth 700%

    Third home, aged 37, percentage net worth 70%

    Current home, aged 44, percentage of net worth 30%.

    1. Currently 38 y.o., I went all in (all my cash reserves + highest mortgage) for the first three homes purchased. Each was sold to upgrade to the next home. Although, I have lifetime employment with my job, parent support if ever needed, and believe 100% in the investment potential of the coastal real estate I live at.

      Had i gone 30% I wouldn’t be living/affording the home I am in today. It paid to be aggressive.

      Every situation is different in my opinion.

    2. Glad to see you finally hit the 30% mark! It is a goal I think people should aim for by age 45.

      30% is usually impossible for first-time homebuyers. And I’ve stated this in the post.

  34. So, what do I do? My NW is $1.1 mil, I’m 48 years old, and annual income is $600k the past two years (I own a business). I don’t own a home, but looking to buy and by your metrics I should only spend $210k? There is nothing in San Diego that exists for that price. I’m actually moving to N. Idaho (Coeur D’Alene) where median home price is $450k. Won’t find anything there for that price either.

    Given what you see above, what should be my target price for a home?

    1. Can you clarify how you got $210K? You are currently income rich, net worth “poor” for your age and level of income. It will rectify itself over time.

      The question now is how much longer you can sustain your current level of income? Banks want to see at least two years of steady income before lending business owners money.

      So one solution is to see how much a bank will lend you and then go from there. You Could use my 30/30/3 rule for home buying.

      1. I saw in your post that a person my age should have 20% of their net worth tied up in their home. $1.1 mil @ 20% = $220k (sorry my typo above had $210k).

        My business is in it’s 5th year now and I do have the tax returns to qualify and show steady income for the the last 2 years. FICO is over 800 as well and I have cash reserves of $301k for down payment.

        I feel pretty strongly that I can sustain a level of income at the $500k level or higher. Oddly, I feel a mortgage of $2,500 feels like a lot even though my income could support it.

        1. Got it. If you’re moving to Idaho, sounds like you can get a wonderful home for $600,000, which equals your gross income.

          I’d go for that and look to build your NW to $2M+, which seems easy with your income.

  35. My wife and I are 57 and thinking of moving from a single-family home in a big city to a western state in a few years to retire. Our house is probably worth $1.2M today, and we have about $8.1M in liquid investments aside from that, with no debt. So 13% of our net worth is in our house today. I’d like the freedom to pay up to $3M out west, for a secluded house with nice views and property, but at least $2M. That’s slightly over the FS 30% ceiling. Looking at property, there are just nicer things for more money, of course! My wife is antsy about looking above $1.5M, which just seems like a lot of money to her; but in terms of diversification, we are too equity-heavy now anyhow. So why not invest in a healthy growing area in the form of our residential real estate out west. We will still have about $6M invested in that scenario, plenty to yield cash flow for expenses (we don’t live a lavish lifestyle, we just kind of buy what we want without being extravagant, right now probably $12K/mo. with everything including charity, on average). I know the markets can go down, so that $6M could become $4M; but we’d still have a nice house to live in and we could still obviously live on the income from $4M. A part of me feels nervous about upgrading so much in price, when moving from an expensive urban area to a hot rural area; but that’s what the market prices say. I do think the western values will be more stable/appreciate over time, whereas I don’t think my urban house has gone up in value in ten years.

      1. If I count the cash from selling the old house, 30% of $9.3 is $2.8M. I could definitely get something good for that.

  36. The best part of upgrading your home is to benefit from home sale tax exclusion. I’ve done this two times in the past 10 years. Unfortunately I never bought the most expensive house possible. I want to keep moving every few years (assuming real estate continues to go up) but need to convince my wife to keep moving.

  37. Hi Sam

    I am in the housing market now and this topic is something I’m thinking a lot about.

    We live in NYC and I want a $2M apartment.

    We make $400k which isn’t enough in my opinion to justify that price. However, we have $1.7M in a brokerage and $750k in retirement at age 31.

    $2M just seems crazy at this age but I’m trying to figure out if I can do it.

    My wife and my parents live in $500k homes in the Midwest and would think we are crazy if we did this. The crazy thing is, $2M isn’t even a lot in NYC.

    Or, I can rent for 4 years and maybe then I’ll be able to either comfortable do $2M or move to $2.5-3M.

    1. You can buy it for almost all cash using the 1.7M, and then you’re still making $400K a year. What’s the worry? After the house, eveything else needed in life is cheap considering you are young and assumingly healthy.

      1. Thanks for the input. I just feel a $1.5M brokerage is a really nice start at developing a portfolio that will compound and start to provide some real passive income. If I move a lot into a home, I feel ill be starting over in a lot of ways. Even though I have retirement savings. Like Sam currently has, I want $200k of passive income in 10 years.

        1. I don’t think the recommendation is to move the brokerage $$ into the apartment, just that you have the capital to almost buy an apartment outright. You should still get a mortgage, but “sleep well at night” knowing you have the capital to continue with payments if something ever went wrong (versus most first time home buyers taking all of their net worth and making the purchase)

  38. I had to laugh when your first example of a first time home buyer is someone making 100k a year with a net worth of 500k.

    90% of people making 100k don’t even have a net worth of 500k.

    Additionally, and more relevant, 99% of first time home buyers don’t have a 500k net worth.

    1. Glad to make you laugh! But I think it’s a fine example to use for a large portion of the population.

      23 year old graduates are now making $150,000 – $200,000 a year in tech, banking, and consulting.

      When they are 30, they are making 2X that. And if they buy a home with someone else, they are making even more.

      The median household income is also about $69,000 now.

      But, I do hear what you are saying, and I have lowered the net worth to $300,000 to make you feel better. Maybe you can share something about yourself?

  39. Interesting way of looking at things. We own several homes- our primary and those we rent out both short and long term. Our youngest has been gone now in the military for a few years and we actually want to do the opposite. We want to downsize. No need for a 5 bedroom 4 bath house anymore. I’m about ten months from starting to take a state pension and between that and the rentals we’ve more than replaced my income. So money isn’t a problem. What we have discovered is a problem is that the downsizing in our area just doesn’t pencil out. By the time we pay realtor fees etc, a newer smaller house will likely be close to a financial push. So we’ve decided to remodel. We love our neighbors, neighborhood, city, and state. Sometimes the grass really isn’t greener. I don’t know if we’re unique but I suspect not. If I was fifteen years younger I’d be persuing the strategy discussed to a T. I suppose that’s kind of what we already did.

  40. This is a spot on target. We are just a shade over 20% of NW tied up in our paid for $3M home. It seems about right honestly, not a stretch at all. Since we only get one trip in life, why in the hell would you not enjoy it. I used to be worried about owning an expensive home (it is for our MCOL area), but I think the trend only continues up for quite a while.

  41. Sam,
    Thanks for the insightful article. I hadn’t really thought of percent net value our house should be. This was very thought provoking. It seems like this is only one financial factor though, with PITI vs net income being the primary one that comes to mind. Mortgage debt vs net worth being another (useful for those who blow the 30% recommendation)?

    Would love to see these, and any other financial factors you see fit to include combined into another article.

    Thanks for sharing your expertise!!

  42. forget refinancing

    Does it ever make sense to pull the trigger and sell an investment single family home and pay off the mortgage on the primary residence, therefore realizing net worth by being mortgage free? Or should it continue to ride and have about 50% net worth in equity in both properties?

  43. We traded up to our dream home in October 2020. Purchase price 830k, today FMV around 1 mil less than 11 months later. We are in Northern Colorado, current NW $2.4 mil. Mid 40s. We did a 30 year at 2.5% and the outstanding balance is about $469,000 and I’m totally cool with this. We paid off a second SFH rental house and our 3 rental properties pay our house payment quite easily. Wife is a teacher and we are just counting down the tenure to retire with a great pension. I’m private sector business owner. My pay goes to maxing retirement account, eating out and travel as well as paying cash for kids college. With two kids still in the home we are living our dream home and so glad we took the leap and traded up.

  44. Not a bad way to look at it. I like it. 17% happens to be our number for the house relative to overall net worth.

    I’m in that odd frugal camp that still enjoys thinking in terms of value for what I pay. I’ve toured nicer homes that would work fine in the net worth ratio spread, but older, imperfect homes that are a bit smaller feel just right to me. I didn’t realize this until our offer had been accepted on a pretty fancy house and I was like… wait, I like simple and small-ish.

      1. Yeah. We thought we wanted the house but in the end, staying close to friends and family was a much larger thing than we thought. It’s also when I realized I feel more comfortable in smaller, simple houses. I think it was the first time my wife and I had a big plan and ended up being a totally bad idea. :)

  45. I have a primary residence and rental properties as well.. Kudos to trying to develop a ratio based metric with net worth in mind.
    Off topic, my wife is Japanese, and invariably when I visit Japan I would look into their real estate. Japanese don’t particular hold/see residential real estate as an “asset”, due to different government policies in place. There are many youtube and articles talking about this, and it’s interesting to see real estate investing from a different angle (although from different country)
    I have always wonder if this is is due to demographics (declining population), denser housing in cities, or other factors.
    -Andy

      1. I think the Japanese mainly see them more from a practical standpoint, somewhere to live in during their life. Most of them don’t anticipate appreciation (or anticipate price up and downs like what the US is used to)
        Also, there is a trending thought that a house lifespan is only 20-30 years. After that time period, the house should be rebuilt or extensively remodelled (reborn) This is probably economically policy driven.. (kind of like their cars.. different story)

        Of course there are outliers.. the luxury homes, etc. Commercial real estate is treated differently as well.
        My wife’s family comes from the country side, there are actually a lot of abandoned homes (akiya) that townships and smaller cities are trying to give to anyone willing to take care of them.

        Japan is not the only country with this problem, but it was an interesting first hand experience. A combination of national policy, tax code ad regulations, culture, population growth/decline, leads to a different treatment of the “asset”

      2. In Japan, a house is a depreciating asset, like your car. They’ll usually build new, let it depreciate down about 30 years and then tear it down to build a new house on the land. It has its advantages as well as it’s disadvantages.

  46. Damn Millennial

    This is a tough one. Now more then ever…

    Living in a bigger city it is for sure a luxury to have a home you enjoy with a decent amount of land. We had to send mailers out to our target neighborhood to get an off market deal set to close 10/1.

    We are in Denver and it is a perfect house for us as we start a family. Quarter acre lot and a half a block down a quiet street to the park for nightly walks.

    It is hard with real estate as you are comparing the total asset value to net worth. This home will be 757K. Meet your 30/30/3 rule. Net worth now 1.15 Million.

    Was originally looking for a 4-plex in a cheaper town and lost out on many offers over the last year.

    Now going to take the plunge to enjoy a nicer place and rent out our current one. Feels like the timing is right. We are 31 and ready for a change.

    Real estate is tough, I like the idea of holding as much as I can responsibly and hoping for the best that it will look alright in a decade.

  47. Very smart to look at net worth before buying a home. Not an easy/fun exercise for some people, but knowing your full financial picture is so important before buying an asset as big and expensive as a home. Thanks for another great thought exercise!

    I do like your recommendation of aiming to live in a primary residence for 10 years before upgrading or downsizing depending on lifestyle needs. Things could change and a move might come up, but it’s a good goal t aim for. I find moving to be a pita especially with kids. It also feels good to maximize usage of a home and build memories. You also really get to know the ins and outs of a home by that time which can make it easier to upkeep. I’m still trying to figure out the right lightbulbs to use for the recessed lighting in my house. You’d think that would be simple, but halogens are more finicky than I thought. But I know I’ll be an expert about it soon enough haha.

    1. Oh yes, understanding each individual homes idiosyncrasies is important.

      I just realized, maybe the time to really spend up on a fantastic time is when you have children living at home with you. You get to spread out the value across many more people, so it feels much more worth it.

      What’s the point of buying a mega mansion if it’s just you or you and your spouse? You don’t need that much space.

      Hmm, time to go house shopping!

  48. Trying to get ahead

    I bought my primary residence for 600k when my NW was 700k. Now it’s worth 925k and my NW is 5mm. I’m on a path to 9-10mm NW conservatively (depending on market) in the next 5 years and planning on upgrading to 2.3-3mm home in 5 years (based on where we want to live for children). The wild card is we don’t want to sell 1-2mm of stock to buy it all cash so we will likely take a mortgage and don’t know what rates will be then. Our current income of 790k will easily be 1mm in 5 years as well.

  49. Boy, this is a difficult thing to develop a ratio for. I love that you have the guts to try, even though I’m sure you’re going to get flooded with responses from defensive people calling for exceptions to the general rule. Lol.

    With housing prices going up so much recently, and the high cost of land in California, my house is worth about 22.8% of my total net worth, but if I use the purchase price of the house as the numerator instead of current FMV, it’s only 12.4%. The debt percentage is even smaller, of course. It’s hard in high-priced areas like Orange County, California to keep your home value within the ratios you cited. My house was $435k when I bought, and now is worth about $800k, so without even trying, my house ratio went up, although my acquisition cost was low, so my debt on it is small and my property taxes are lower than the neighbors who just bought.

    It partially seems unfair to look at the house value as a percent of total net worth if housing prices spike from time to time in expensive areas. There really aren’t many cheaper SFRs in my area. I was thinking it might be better to look at the debt-to-net-worth ratio as the thing that matters more than the FMV of the house, but that could be deceiving, too. If you own a $3 million paid off house, and have a $3.5 million net worth, you’re still shooting yourself in the foot because all of that investable equity is just sitting there not earning you money. Better to live in a cheap house with an investment property.

    It’s fun to think about all of these ratios and to decide where you want to be. There are so many factors that play into it. High housing costs in certain areas. The amount of debt you’re taking on. The cost of upkeep and property taxes. Thanks for giving me something to think about!

    1. “ It partially seems unfair to look at the house value as a percent of total net worth if housing prices spike from time to time in expensive areas.”

      I see it as a fun challenge to try to grow your net worth faster than the speed at which your house appreciates.

      It shouldn’t be too hard given the historical appreciation rate of other asset classes. But of course, who knows the future.

  50. This is essentially the strategy my wife and I used. We bought our first home at 24, and we grew into it at 90% of our net worth. By the time we bought our second home when we were 32 we were able to land around that 30% value and it has been decreasing every since as our other investments continue to compound. So out house gets less risky and less important to our overall net worth as the years go on!

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