Now that we've had some fun figuring out the minimum income and net worth required to buy a $5 million home, I thought it'd be nice to be more inclusive of more homebuyers. This post will discuss the income and net worth requirements to buy a home priced from $200,000 to $50 million.
The income and net worth figures are determined by my 30/30/3 Home Buying Rule and my Net Worth Home Buying Rule. I truly believe the combination of these two rules creates the ultimate guide to responsible home buying.
My goal is to also provide a consistent home buying guide that works as we make more money and become wealthier. My net worth home-buying guide is more appropriate for experienced homebuyers looking to upgrade homes or buy their forever homes.
Income And Net Worth Requirements To Buy A Home At All Price Points
Take a look at the chart below based on my two home buying guides. As you can see from the chart, the more expensive the home price, the more you need to make and the higher the net worth you should have.
You'll see the minimum income and minimum net worth required to buy a home and the recommended income and recommended net worth needed to buy a home.
The Ideal Home Buying Financial Combination
Now let me share the ideal combination from best to worst before buying a home. The ideal income and net worth requirements will help you buy with more confidence.
1) You Have Both The Ideal Income And Ideal Net Worth.
You make the Ideal Income and have the Ideal Net Worth before buying a home at a certain price point. If so, you will have minimal financial worries and will likely enjoy your home to the fullest. At times, you may feel like you should live it up more. But it is your financial discipline that got you to where you are today.
2) You have the Ideal Net Worth and at least the Minimum Income Required Income.
In this situation, you also won't have too much financial worry. Your net worth is well-diversified and generates a reasonable amount of passive income on top of your active income. You can probably make more active income if you want to.
3) You have a Reasonable Income and Reasonable Net Worth.
You're right in the middle. However, your goal should be to boost your net worth so that your primary residence gets below 50% of your net worth. In general, no one asset class should take up more than 50% of your net worth. A primary residence should be no more than 30% of your net worth.
4) You have the Ideal Income and Minimum Net Worth Required.
In such a scenario, so long as you are confident in your employment prospects over the next several years, you should do fine. In five years, your net worth will most likely grow strongly. Just keep on saving and investing in stocks, real estate, and alternative assets.
5) You have the Minimum Income Required and the Minimum Required Net Worth.
Buying a home with this combination is a stretch. However, you are bullish on your future income and net worth growth. As a result, each year you work, you will feel more comfortable affording your home.
The ultimate goal is to get your primary residence equal to 30% of your net worth or less by the time you retire or take things down a notch.
You don't want to stretch so much to buy a home that it leaves you stressed after. That would be counterproductive.
First-Time Versus Experienced Home Buyer
If you don't make the minimum income or have the minimum net worth, it is not recommended you buy a home just yet. If you proceed to buy a home with this suboptimal combination, you will be too financially exposed to sleep well at night. Any job loss or recession may cause you to lose your home to a short-sale or foreclosure.
For first-time homebuyers, the most likely financial combination is having the minimum income and minimum net worth. But for experienced homebuyers, having financial combinations 1-3 above is the optimal way to go.
If you become very wealthy (over $10 million per person), you might be able to stretch the rules further if you want to buy a nicer house. But my guide really does suggest keeping your primary residence value to under 50% of your net worth. Ideally, keep it to under 30% of your net worth, no matter how rich you get.
Once you become very wealthy, you tend to actually spend less of a percentage of your net worth on a primary residence. Most extremely wealthy people have the lion's share of their net worth in businesses or investments.
What About A High Down Payment Scenario?
Instead of just assuming a home buyer puts down 20%, there are certainly scenarios where some home buyers put down much more. It is estimated roughly 15% of all home buyers pay cash.
In a higher down payment scenario, both income and net worth suggested requirements can decrease. However, how much of a decrease will depend on how much cash and semi-liquid investments you have after buying a home and your future income.
Example Of A High Down Payment From A Tech Worker
Let's say you are a FAANG tech worker—Facebook (Meta), Amazon, Apple, Netflix, and Google (Alphabet)—with a 75% down payment because you have lots of appreciated stock. You want to buy a $3 million house, put down $2.25 million, and have a $750K mortgage. What should your minimum income and net worth be?
For the disciplined buyer, your income should still be at least 1/5th the price of the house, or $600K. Given you have $2.25 million to put down, your minimum net worth of $900K based on my chart is far surpassed. Therefore, you're good on the net worth front, especially since you should have more wealth behind.
But obviously, if you put such a large down payment down, you’ll have a lot less difficulty affording the mortgage. The reality is, if you only have a $750K mortgage after putting $2.25 million down, you can probably get away with as little as a $150K income (1/5 of 750K). But $150K is going to be really tight and leave little for saving and investing outside your primary. Therefore, I would not recommend.
If you are able to sell enough stocks to pay cash for a home, then you don't have to follow my home-buying guideline as strictly. Just know that you'll still have to pay property taxes and ongoing maintenance costs for the life of ownership.
Split The Difference When Buying
As a compromise, consider using the recommended income ratio of 1/3 of price of the home, applied to the mortgage balance. Hence, a more appropriate income in this scenario would be $250,000.
You would make $20,833 a month and have a $3,368 monthly mortgage payment at 3.5%. This would equate to an affordable 16% of monthly gross income.
If you follow this path, just make sure you keep your job or at least make a similar amount for the next three years at a minimum. Buying a home is an incredibly emotional and stressful process.
Here's a podcast episode of my wife and I discussing the anxiety of moving forward with a new home purchase. As you can hear from the discussion, a lot has to go into upgrading homes. Here are some warning signs you should be aware of when buying a new home.
The Relative Importance Of Income And Net Worth When Buying A Home
Income is the most important factor for buying a home with a mortgage. Without a high enough income, you won't be able to get a loan. In this stringent lending environment, your income needs to be at least 20% of the price of the home you want to purchase. Most people with W2 income and a credit score of over 720 should be able to qualify.
If you are a freelancer with a more volatile income, then your income may need to be much greater than 20% of the price of the home. Further, at the bare minimum, you will need at least two years of minimum income before a lender will proceed. Therefore, you may want to refinance or purchase a home before giving up your W2 income.
As you get wealthier, lenders will be more willing to take into consideration your net worth when making a loan. This is called asset-based pricing, which comes in handy if your income falls below the 20% of home price threshold. For example, some borrowers with illiquid stock holdings can pledge their stock as collateral.
A High Net Worth Provides More Security
Between a high income and a high net worth, I would choose a high net worth. Not only does a high net worth provide more security, you will be better able to shelter it from high taxation. A high income is more a means to an end, which is a high net worth.
Therefore, the best combination, from a tax perspective, is to have a high net worth and just enough income to pay for regular living expenses and the house you want.
As I wrote in a previous post about income tax rates, the ideal incomes I came up with are:
- $191,950 taxable income for singles
- $383,900 taxable income for married couples
Keep in mind, the ideal incomes go up based on new tax rates and income thresholds each year. Here are the 2024 income tax rates.
We can then select $13,610,000 for singles and $27,220,000 for couples as the ideal net worth based on the latest. Access the latest estate tax exemption limits here for 2024 and 2025.
With this combination, you pay the least amount of taxes and still get to do whatever you want. If the estate tax exemption amounts get cut, then you would adjust accordingly.
If you happen to spend on something lavish, you can always draw down principal if $170,050 or $340,100 income is not enough.
A Bigger, More Expensive Home Is Not Always Better
I've been in several 10,000+ square foot homes before and I'm not sure I'd like to live in them with a family of four or five. As an economics major, I just find unused space to be wasteful. The ideal home size and layout is well utilized.
It makes me happy to have all or almost all rooms regularly used on a daily basis. I feel the same way when I load up my car with four or five people versus just me driving.
After about 1,500 square feet of space per person, it just feels like too much. The ideal house size and layout is likely closer to 700-1,000 square feet per person. Perhaps this feeling is a function of me living in expensive New York City and San Francisco since graduating college in 1999. But I feel plenty happy living in a house that is 750 square feet per person.
Eventually, if you have children, they will find somewhere else to live. As a result, you may eventually want a smaller home as well.
Larger Home, More Problems
The number of maintenance issues and potential problems seem to grow exponentially with larger homes. Then there are higher property taxes and insurance bills to pay as well. Personally, the maximum annual property tax threshold I'm willing to pay is $100,000. After that, it just feels like too much.
A house's floor plan is also extremely important. If you plan to work from home and raise small children, having a house that has multiple floors or sections is important for privacy and noise control. If you're older and are more susceptible to falling, having a home mostly on one floor is more ideal.
There is growing demand for exterior space. Homes with multiple decks and large yards are becoming increasingly popular post-pandemic. The indoor and outdoor living combination is one of the reasons why places like Hawaii are so ideal.
Cash Flow And Liquidity May Feel Uncomfortably Tight Post Purchase
However, if you buy too much house and use too much of your liquidity, you may end up feeling house rich cash poor. Or worse, you could feel house poor and cash poor. Therefore, it's important to have discipline and buy within your means.
I used a lot of my liquidity to buy a dream home in 2023 because the price had come down about 14% while stocks went up. But I'm finding the extra property tax payments and lower investment income to be stressful. It's as if I'm back to living paycheck to paycheck, especially since I have large capital calls from my private fund investments. Buyers beware!
What Causes People To Buy Underutilized Mansions?
I'm curious to know the psychology behind why people buy mega-mansions. Is it just because they can? One friend in high school owned a 12,000 square foot house with an indoor heated pool in Langley, Virginia. A couple decades later, he told me the house was the main reason why his family had to file for bankruptcy.
Having a mansion with a ton of land to run around on would be really nice. I'd love to have a water park, a playground, a tennis court, a basketball court, a lake, a paintball field, and a helicopter pad area. But other than that, what else does one need?
With a family of four, my limit is a five-bedroom, five-bathroom home. Ideally, it has about 5,000 interior square feet and one acre plot of land. I'm sure I could get used to a larger home. However, even if I had the money, I'm not sure I want one.
Invest In Real Estate To Earn More Passive Income
Stocks are very volatile compared to real estate. Therefore, if you want to dampen volatility, diversify your investments, earn more passive income, and build wealth at the same time, invest in real estate. Real estate is my favorite asset class to build wealth.
The combination of rising rents and rising capital values is a very powerful wealth-builder. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.
Best private real estate investment platforms
My favorite real estate investing platform is Fundrise. With about $3 billion in assets under management and nearly 400,000 investors, Fundrise is the leading, vertically integrated real estate platform today. Investors can invest in their diversified real estate funds with as little as $10.
Fundrise primarily focuses on single-family, multi-family, and build-to-rent properties in the Sunbelt. With lower valuations and higher yields, Fundrise investments are in the sweet spot of a positive long-term trend. The strong demographic trend toward the Sunbelt is a powerful investment thesis.
Another great private real estate investing platform is Crowdstreet. Crowdstreet offers accredited investors individual deals run by sponsors that have been pre-vetted for strong track records. Many of their deals are in 18-hour cities where there is potentially greater upside.
If you want to get more surgical in your private real estate investments, Crowdstreet is a strong solution. I've met the people at Crowdstreet on two separate occasions and came away impressed with their risk-management and product offerings.
If you are a real estate enthusiast with more time, you can build your own diversified real estate portfolio with CrowdStreet. However, before investing in each deal, make sure to do extensive due diligence on each sponsor. Understanding each sponsor's track record and experience is vital.
I've personally invested $954,000 in private real estate since 2016, $300,000+ in Fundrise. Both platforms are sponsors of Financial Samurai. To be able to earn more passive income in a less volatile way has been wonderful. It frees up time so I can do more of what I want.
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Have you reevaluated this with 30yr mortgage rates being close to 7% vs 2.x%?
Great information! Thank you.
Can I afford a 2 million dollar house with a net worth of 6.3 millions plus
My house (paid off, no mortgage)which I will sell after I bought my dream house, planning to liquidate 900k ( stocks/mutual funds) for a down payment and have 1.1million mortgage and planning to put all the sale proceeds to the loan after I sold it.
Thank you.
Hi!
I am 39 years old and I have a townhome that is paid off and could probably get 3,000 a month renting it out which would cover my mortgage, insurance, HOA, taxes etc with 1.2m down on a 1.5m home. I make about 70k a year and have 5.6m in the stock market. My net worth is way higher than my income but I was wondering if I could make it work. Thank you!
Can you add an ideal income and reasonable net worth section for the younger buyers please?
How much lower than $50,000 do you want me to go? The median household income is about $76,000.
I wouldn’t feel comfortable recommending someone buy a home earning less than $50,000, bc there aren’t too many homes worth $150,000-$250,000 any more.
What about tech worker couples who don’t have the net worth (yet but will in the future) but have high incomes? Or 2 Doctors making their first big paychecks?
Sure, just follow my 30/30/3-5 home buying rule.
High income and good potential upside.
Awesome write up! Always good to get a baseline of where things should be. Thank you!
I am 35 yrs old. Net worth of 11M+. Annual cash flow of 400K roughly (all passive RE income). No active income.
I’ve had a good year where I made 7 figures and am able to write off all income via cost segregation.
I have about 1.5M in liquid cash I am wanting to use for a personal home purchase. Currently live in a 500k home. Ready to upgrade my personal home. The past decade I only invested in investment RE so now it’s time for me to invest in a better property for myself. Most of my NW is illiquid via RE.
My plan is to pay all cash for a home and I believe this is an advantageous time to buy via cash.
It won’t change my monthly expense dramatically given there will be no mortgage. Current mortgage is $1600 :)
I am looking at this home purchase, outside of pure enjoyment, but also as an equity. If I ever needed additional quick cash I can take a LOC against it. Regardless, prime real estate appreciates at least 5% annually, especially if improvements are made along the way.
Do I need a 1.5M house, probably not but I feel like I deserve it, genuinely want a nicer property and I have the cash for it. Life is too short. Midwest home shopping is much more “affordable” than West coast as well.
Thoughts?
Sam, I am now retired, not yet (nor is my wife) on social security (I could be, am 68, wife 66). I am considering selling my $800,000 home and buying a $ 2.5 M home. I have $10M+ net worth and PASSIVE potential income of $500,000-$600,000. ‘Potential’ because it consists of regular distributions from alternative investments – mostly real estate funds (LP investor), real estate syndications (LP), private equity funds (get GP stakes in companies as an LP investor), Cannabis lending, and smaller investments in litigation finance and music royalties. Half my assets are in retirement accounts which consists of mutual funds (40%, liquid) and alternative investments (60%) like cannabis lending and private equity (not liquid) and 98% of my taxable investments are in alternative investments, not liquid. So I could sell off the liquid part of our IRAs and also the cannabis investment (over a 1-year period) to free up enough capital to buy the house outright (need $1.7M). But obviously this would be a stupid financial move to pay ordinary tax rates on so much IRA $. This leads to my question – can a retired guy with a net worth of $11M, most of it is not liquid, but showing a lumpy $550,000 all-passive income, get some type of mortgage? BTW, Our social security would total well over $100,000 if we wait till age 70 and perhaps $90,000 if we took it now.
Are these numbers still reasonable considering mortgage rates are now 6-7% vs 2-3% when this article was written?
Hello,
Great article as always but (as always) it makes me feel like I am missing out financially. I feel like I am doing well until I read some of the comments.
Total household income = $215K
Net worth = $1.6M
Debt = 0
Home Value = $315K ($180K)
Cash on side= $250K
Maxing out 401k (2x),
$8K per year to college funds (2x)
Cars (new 2022 Toyota worth ~42k and 2010 Honda worth ~$7k)
Have I been too conservative and missed out on opportunity by NOT keeping up woth the Jonses and moving every few years into a more valuable place?
I cant help but feel like that given what I am reading.
meant I purchased home for $180K
how old are you?
Did you ever feel like you were missing out before you read this article? If not, then you aren’t missing out. You built the situation that you laid out in this post because it makes you feel good, so no need to pretend like you feel like you are missing out.
I wish everyone would read something like this before buying. Do you know how many people are buying $500k homes with no where near a $150k net worth? FHA and other loan programs have made this easier, and I can’t believe people think they’ll never have an emergency or job loss that could put pressure on their finances. Maybe too much reliance on family/government support. Wonder where we will be a year from now.
I also think a lot of people don’t budget well for the unknown. There is a bias of optimism, especially in home purchasing because it is a long term decision and emotional, as much as financial. People don’t accurately forecast their taxes, insurance, utilities from a bigger property, and the needed repairs. Heck, many don’t even accurately budget moving expenses and new furniture needs. Locking in historically low mortgage rates have definitely given people much more purchasing power for the same monthly expense, but at some point, you become house poor. Just because you got a good deal, doesn’t mean you can afford it!
If we really do trend towards a recession or continued big inflation, I expect housing to correct as people default on their loans, or household savings to decrease even more. I wish our governments would amend zoning laws to allow for more housing at various price points, and more desirable rentals. Not everyone needs to own a home, and not every home should be someone’s primary appreciable asset.
Can you please give your opinion (write another blog post?) on borrowing against your stock to buy a house. How risky it is? What are the pros? Have you ever done it and why?
I like the tables. It really shows how much people are stretching these days to afford expensive and large homes.
Another great post, Sam. Very motivating for someone currently in the lower end of this chart looking to add rental properties. First, it helps guide risk tolerance, and just as importantly it provides that extra motivation to progress through the levels that are laid out here. I have a couple years as a freelancer after my previous career track got turned a bit sideways. Meeting with a lender this week and I’ll be keeping your guidelines top of mind – thanks for sharing!
The figures here and your explanations definitely seem reasonable. However, I’m a bit surprised at where I wound up on the chart. I seem to make well beyond what is the ideal income for the properties I have or plan on buying within the next few years. That raises an eyebrow but isn’t the especially surprising part. I tend to be on the lower side of the total net worth field – usually barely reaching the “reasonable” metric or falling a bit short. I generally view myself as conservative with my finances, but maybe I’m pushing it.
I wonder why that is? I suppose #4 mostly answers that – and I’m definitely still at the beginning stages of my career at this point. Thoughts?
On a somewhat unrelated note, we have a similar interest in housing! With a family of five, I think a five-bed, four-bathroom house that is ~4-5k sq ft would be pretty much perfect. Unlike you (I think?) I do like living in more rural areas, and I certainly wouldn’t mind a few acres of land. That being said, floor plans make a huge difference regarding how “breathable” some of the houses feel with more than a few people living in them, so the exact size of the house can be a bit up for debate.
I always find posts like these fascinating, Sam. Interestingly, I fell into the reasonable category for both income and worth during my first home purchase five years ago when looking at this chart retroactively. I would argue that the worth category is more important than the income one since unexpected expenses popped up left and right over the first two years, which my worth helped cover. Had covering these expenses been left to my income alone, it would have been trying time.
I don’t see a factor in this spreadsheet for buying a home in areas prone to the effects of climate change; climate change is becoming a large financial consideration for homebuyers in 2021. Many standard homeowner insurance policies don’t cover damages due to climate related events such as flooding and natural disasters. How do you account for this risk in your minimum income net worth calculation for homeownership?
For new retirees > 60, with NO active/wage income but $400,000+ passive income within the next 1 1/2 years and $300,000 now in passive income, and $10 M net worth, (1/2 taxable, 1/2 tIRA + some Roth) how do I tweak your guidelines to get an appreciation of the home price and mortgage I can afford?
I’d just use your passive income X 3-5 or buy a home equal to 30% of your net worth or less if you want.
How much should we figure property taxes into this? Austin is crazy high at 2.75%, which on a $400k house is a lot. And how do you get a high net worth without high income?
Investing is one way. Starting a business and building tremendous equity is another common way.
My ratios take into consideration all costs, including property taxes. Luckily, Austin doesn’t have income taxes, so that offsets.
It is crazy to me how much people on the coasts are willing to pay for houses, especially in a world that is accepting more and more remote work. The idea of buying a house at 3x to 5x annual income and 2x to 3x net worth seems financially irresponsible to me. The only way I think it can be justified is by assuming that the house will become your primary vehicle for investment, allowing you to engage in some sketchy bookkeeping and count all of your mortgage payments as your “retirement savings”. That’s a whole lot of eggs in one basket.
If I make $200k per year with $500k net worth I would much rather have a $200k-$300k house and be able to contribute to equities than own a $750k-$1M house and pray every day that the case-Schiller index in my area bucks the historical trend and continues to go up.
What do you think is an appropriate multiple and what did you pay?
Believe it or not, some people just like to live in more expensive areas due to the weather, culture, activities, job opportunities, etc. I’m sure Ohio is great where you live. But perhaps real estate and other things are cheaper there for a reason?
In a bull market, the person who paid an infinity multiple for their house has won the most. There has been so much wealth created since 2009, it is unbelievable.
A lot of people don’t get any joy or utility out of investing in stocks. Of one day, down the next. For those with children, real estate tends to also more valuable.
Perhaps your views will change as your income and net worth changes.
Related: Why Real Estate Will Always Be More Enjoyable Than Stocks
I also thought the income multiples were high, probably because if you have ever read The Millionaire Next Door his studies show that the typical millionaire doesn’t finance more that twice their annual income when buying a personal residence. Even in your ideal scenario with 20% down, you would be at a 2.4 multiple. I do realize the book was written in the early to mid 90s, but I get great comfort in being more conservative and knowing that I am never stretching myself unnecessarily.
Thanks for the information. Very Ttmely post for me. Recently retired and relocating. My thoughts on how much house were very close to your table. Don’t do mortgages so I’m staying close to our current home sale price. Pensions cover yearly living costs and I like having more in investments.
Given current interest rates and how low PMI / MIP are currently, I don’t think it makes much rational sense to put more than the minimum (5% down conventional loans are not uncommon) if you are anywhere in the top 3 buckets stated, or in my case shopping below even my current ideal x2 price point. While I do agree with pretty much everything you have in this article, unless you are looking to get a guaranteed return (ignoring inflation as debt gets cheaper too for the moment) of around 3.5% for a 720+ mid score conventional (jumbo is generally cheaper even rate wise) why put more down than the minimum? Might be interesting to rerun the calculation on that where minimum reserves vs higher income should produce a different result.
How does age in career factor into these metrics? These metrics may be a risk to those in an age group close to getting axed by corporate America
Thank you for this post! If I have one home and want to buy a second, would I add my current mortgage to the home price numbers in this chart?
You could certainly do that and then look to see what income and net worth is required for your new home.
A lot depends on whether you will sell your first home or rent it out. And if you rent it out, whether it will be cash flow positive or not. If it is, by a decent amount, then you can just look at the chart as it is.
I appreciate the response! In this chart, are retirement accounts considered part of net worth? Thanks again.
Yes indeed.
Great article as usual Sam, thank you. Post like this are great reference points for big decision purchases.
Most people buying 200-300k homes have zero net worth
Maybe. But if that were true, how do they come up with the down payment?
Would you recommend I recommend people have a zero net worth before buying a $200-$300K home? If not, what do you recommend?
You could have 20K downpayment in cash with 100k in student loan debt. That is a negative net worth.
True. Hence don’t buy if you don’t have the minimum net worth.
But everybody is free to do what they want.
Does min. net worth include the down payment before your buy?
The minimum net worth equals 30% of the home value you want to buy. So it is required for your down payment and a buffer post purchase.