Buying first home an investment/How much house can I buy

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
SpartanBull
Posts: 131
Joined: Fri Jun 06, 2014 12:31 am

Buying first home an investment/How much house can I buy

Post by SpartanBull »

Hi there,
I'd like to think I fall fairly in line with most Boglehead philosophies. Avid saver, 3 fund Portfolio, etc. All that being said, I'm in the early stages of buying my first house, and I'm trying to determine what price range I can look at. I'm self employed and lets say for the sake of this discussion that I make 200k/year Gross....And I confidence that this wont go down anytime soon. It may increase with growth of my business, but I don't have major concerns about loss of job/income, etc.
Is a home for 450k/500K out of my price range, comfortable, stretch? 25 Years old, Self Employed, Making 200k annually. I can certainly make do with something much less expensive, however I have trouble wrapping my head around how I can get hurt buying too much house. I don't exactly look at it the same as buying a car or a vacation or something like that...because a home is an asset. So even if I spend more than needed on a house (as long as I can afford it) isn't that money increasing my net worth...and therefore buying a house for 250/300k in the long run does not help my financial situation THAT much? Interested in any opinions. Thanks!
wilked
Posts: 2426
Joined: Thu Mar 24, 2011 1:50 pm

Re: Buying first home an investment/How much house can I buy

Post by wilked »

Buying first home an investment
Homes are not investments. A rental property is an investment, an REIT is an investment, a home you live in is not

Buy a home if you are ready to settle down to one place, not looking to stay mobile, and plan to live there at least 7-10 years.
Tamalak
Posts: 1979
Joined: Fri May 06, 2016 2:29 pm

Re: Buying first home an investment/How much house can I buy

Post by Tamalak »

SpartanBull wrote:I have trouble wrapping my head around how I can get hurt buying too much house. I don't exactly look at it the same as buying a car or a vacation or something like that...because a home is an asset. So even if I spend more than needed on a house (as long as I can afford it) isn't that money increasing my net worth...
Yes, a home is an appreciating asset. An appreciating asset that has:

1. The returns of a bond
2. The risk of a stock
3. Horrible liquidity
4. Horrible transaction costs (about 10%!)
5. No diversification
6. Significant maintenance costs and taxes (high ER!)

Basically a house is an Edward Jones portfolio that you live in. You don't want it to be larger than it needs to be to serve its REAL purpose which is to avoid paying rent. And if you're not comfortable committing to live in it for a good long while it isn't worth it over renting.
Last edited by Tamalak on Mon Aug 15, 2016 3:44 pm, edited 1 time in total.
jf89
Posts: 426
Joined: Sun Aug 11, 2013 11:53 pm

Re: Buying first home an investment/How much house can I buy

Post by jf89 »

In theory the principle you pay towards your mortgage is building equity, but this is your home, not an investment. The downside to buying more home is that you'll also pay higher taxes, higher bills to heat/cool/power it, and higher upkeep costs (more yard to mow, more roof to replace, more flooring to clean, etc...). Plus, compared to other investments, homes make horrible investments if you're just trying to make money on the sale. After taxes, maintenance, and other fees you're almost assured to lose money on the transaction unless your real estate market has insane appreciation while you own it.

Just get the house you need and let your extra money serve you elsewhere (like building your business, helping to grow your retirement savings, or putting together a down payment on a real investment property).
"Save as much as you can, diversify diversify diversify, and you can't go wrong with tech stocks" | -First investing advice I recall from my parents in the 90's (two outta three ain't bad)
MI_bogle
Posts: 441
Joined: Mon Aug 01, 2016 3:56 pm

Re: Buying first home an investment/How much house can I buy

Post by MI_bogle »

Tamalak wrote: Basically a house is an Edward Jones portfolio that you live in.
Thanks for the chuckle! That is a good one


OP, I would say that the rule of thumb for max housing is around 3x income, but that obviously is not always possible depending on the market. My personal preference is to stay under 2x annual income, because I don't consider a house an investment and the more house you buy, the more you pay in upkeep, utilities, and you end up buying a lot more stuff to fill the space (assuming it is bigger than a cheaper house).

A great example of how you can get hurt buying too much house is the housing crisis - if you buy a 600K house and 4 years from now it's valued at 300K because the housing market collapses like it did in recent memory, you will take it in the shorts if your life circumstances dictate that you sell it at a huge loss.
Post Reply