What is an appropriate percentage of net worth to spend on a house?

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VartAndelay
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What is an appropriate percentage of net worth to spend on a house?

Post by VartAndelay »

For example if someone has $250k total how much should he budget to buy a house? Or what if he has $1 million? Or even more?
Makefile
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by Makefile »

I think it makes a huge difference whether the house is being bought with a mortgage or free & clear. And in the mortgage case, there are established percentages of income for what's considered an acceptable mortgage payment and you could work back from that with interest rates to estimate the house price.
LiterallyIronic
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by LiterallyIronic »

Does this person have income or need to buy the house exclusively from existing assets?
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VartAndelay
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by VartAndelay »

Makefile wrote: Fri Jan 08, 2021 11:00 pm I think it makes a huge difference whether the house is being bought with a mortgage or free & clear. And in the mortgage case, there are established percentages of income for what's considered an acceptable mortgage payment and you could work back from that with interest rates to estimate the house price.
Buying with cash.
LiterallyIronic wrote: Fri Jan 08, 2021 11:01 pm Does this person have income or need to buy the house exclusively from existing assets?
0 income
rich126
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by rich126 »

Net worth isn't really useful. My first couple os houses exceeded my net worth, easily.
2tall4economy
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by 2tall4economy »

It depends on a lot.

There are so many answers to this topic it will make your head spin.

The ones I like the best / think are most interesting for the thought exercise are:

“Whatever you can pay In cash” - the misers approach; feels like it can be good for maximizing financials but actually the only thing it buys you, maybe, is stability - that you’ll probably regret sometime later in life when circumstances change. generally isn’t a good financial idea for various reasons (ie better to rent and invest etc).

“Whatever you pay in rent converted to a mortgage at a reasonable rate and minimal down payment” - probably the most balanced response. I find this one the compromise because you keep the most of your money working for you but you still have a house that you “own” (with the bank as a majority, unfriendly partner)

“$0. Never stop renting” - assuming you have a reasonable housing budget and not an overinflated one, this is probably the best answer from a financial perspective and a somewhat bogleheaded one.

“10% - 15% of your portfolio” - what ultra high net worth individuals do. About this much of their portfolio (obvious it varies quite a bit) hold in hard assets, of which real estate is usually the largest. Often includes art, cars and multiple homes. Of course, for someone starting out or with only a few million this probably isn’t reasonable.


I personally have gone back and forth between 2 and 3 most of my life. I did #1 once and regretted it :) ....and someday I hope to be able to have enough to do #4
You can do anything you want in life. The rub is that there are consequences.
oldfort
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by oldfort »

Wrong metric. Create a budget. Figure out what the sum of all your non-housing expenses are and what wealth is needed to generate enough investment income to pay your non-housing expenses, call it X. The amount you can spend on housing H = net worth - X.
carminered2019
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by carminered2019 »

I had zero NW when I bought my house but now my house is paid off and it's about 10% of my NW.
CurlyDave
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by CurlyDave »

VartAndelay wrote: Fri Jan 08, 2021 11:09 pm
Makefile wrote: Fri Jan 08, 2021 11:00 pm I think it makes a huge difference whether the house is being bought with a mortgage or free & clear. And in the mortgage case, there are established percentages of income for what's considered an acceptable mortgage payment and you could work back from that with interest rates to estimate the house price.
Buying with cash.
LiterallyIronic wrote: Fri Jan 08, 2021 11:01 pm Does this person have income or need to buy the house exclusively from existing assets?
0 income
I don't think you are looking at this the right way. If you have enough cash to buy a house you certainly have enough to invest in a portfolio which would provide income in keeping with a 4% withdrawal guideline.

Now you have to live somewhere, so the real issue might be how much income is left after withdrawing enough for a house?

How is your credit? And, is there a way to increase your income above 0? Or, is the size of your portfolio large enough to support both buying a house (either all cash, or with a mortgage) and living on the income the portfolio will produce?

There are many, many possibilities, it really depends a lot on portfolio size and the cost of living where you want to be.
Normchad
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by Normchad »

I bought my first house when I was 23, at that time my networth was negative. So striking doing the math, it was about -1200% of my networth.....

my rule of thumb, that I like, but others don't. Multiply your annual salary by 3. Add that to whatever cash you have lying around for a down payment. Buy a house that costs that much, or less.
kcxie
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by kcxie »

The lower the percentage of your NW, the better.
carminered2019
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by carminered2019 »

If you had 250K and bought 250K house then your NW just got shifted or 0%.
manatee2005
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by manatee2005 »

VartAndelay wrote: Fri Jan 08, 2021 10:51 pm For example if someone has $250k total how much should he budget to buy a house? Or what if he has $1 million? Or even more?
We can't answer the question based on this information.

How old are you? Do you own or rent now? How will you pay property tax, bills etc?
Goal33
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by Goal33 »

Bought my first house in 2016 for 600k, my networth was 150k.

Bought my second house in 2020 for 1m, my networth was 800k in March when I started escrow, 600k by the close of escrow, and is now 1m - thanks to the market swings of 2020 :dollar :dollar
softwaregeek
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by softwaregeek »

Depends on your future income stream. A 25 year old government employee with realistic prospects of 35 years of rising income is different than a 65 year old retiree.
DVMResident
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by DVMResident »

Buy vs rent is a better guideline than precent of NW.

You have to live somewhere and that somewhere should be acceptable to you. The real choice is buying or renting.
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wander
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by wander »

It will be very different from people to people. For me, the mortgage should be within 3 times of our one incomes, whichever is lower, so if one of us is unemployed, we don't need to rush looking for another job. Say, one of us makes $50,000 a year, our mortgage should be around $150,000. If we have $500,000 cash, our house should be around $650,000. When we had zero cash starting out, we rented an apartment. You cannot escape the math.
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Sandtrap
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by Sandtrap »

VartAndelay wrote: Fri Jan 08, 2021 10:51 pm For example if someone has $250k total how much should he budget to buy a house? Or what if he has $1 million? Or even more?
Affordability has to do with "income/expense" as well as "net worth". Also, ability to afford annual expense of a home, whether paid for in cash or financed, etc, etc.

It's not so simple as "net worth = 3 million" = "$920,000 home".

j :D
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aerosurfer
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by aerosurfer »

Your post history can be summed up;

Age 30
Don’t want to work
No income
How much house can I buy in cash..... in a major city
Don’t want bonds because short term performance has been bad

That’s all fine and well, like others have said, you need a budget of your annual expenses weighed against your withdrawal rate.

Ballpark housing price can give you a good guess of Taxes and insurance, then it’s onto medical expenses (or savings), after that its Expenses how you want to live your life.... All that needs to add up to annual expenses to what it takes to give you the vision you desire, and having the portfolio to have it.
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Re: What is an appropriate percentage of net worth to spend on a house?

Post by LadyGeek »

This thread has run its course and is locked (not personal nor actionable). General comment threads are off topic in the forums with "Personal" in the title. See: A reminder that non-investing general comment threads are OT
- It must be personal. In other words, you must be asking about your own situation. You can also ask on behalf of someone specific, such as a family member.

- It must be actionable. You must be able to do something specific with the replies that will make a difference in your situation.
If you have a specific question, please ask directly and provide sufficient information for members to supply appropriate advice.

VartAndelay - You will get better answers to your questions by starting a new thread in this forum. Post your portfolio information in the new thread using the Asking Portfolio Questions format. It will make you think about the "big picture" while giving us the information we need to point you in the right direction.

If you have any questions, ask them in the new thread. Starting a new thread to ask a different question is not productive. We need to see all the information together, which is why we created that format.
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