Can you Afford your Primary Residence?

Photo May 08, 6 56 42 PMThis topic is near and dear to me as my family and I are considering moving to a bigger, nicer, more expensive home.  We love our home now, but it is not our dream home and there are many things we would love to change or add.  We thought we would find our dream home in a few years, but we have not been actively looking.  My wife happened to make a wrong turn last week and fell in love with a house she saw for sale while I was at my conference.  The house is much more expensive than the home we have now, but we live well below our means as far as our current mortgage is concerned.  That really got me to thinking about how much the average person spends on their home.

When investing in rental properties you need money to invest.  There is no way I could purchase 100 rental properties in the next 10 years if I spent as much on my primary residence as most Americans.


If you read my blog, you know I am not about being frugal.  I spend money on the things that make my family and myself happy.  There are many blogs out there that preach frugality;  your spending should be as tightly controlled as possible and you should spend as little as possible on every single thing you spend money on.  I won’t list any of these blogs because I feel they promote a negative attitude towards money.  I am all about positive and I am especially positive about money!  I firmly believe the more negative we are about money the less of it we will have, I see it case after case in my friends and family.  Having said all that, I think most people need to look closely at how much they spend on their house.

What the experts say

Most lenders, Realtors and financial experts give a percentage for what is acceptable to spend on your primary residence.  The figures I see thrown out a lot range from 28% to 33% of your income should be spent on mortgage payments.   I can tell you my current house payment is about 6% of my income after taxes.  I am very lucky and make a good living, but I also don’t feel the need to constantly max out what I can qualify for when buying my primary residence.  Just because a lender says you can qualify for a certain house payment, does not mean you can actually afford it.  You need to make the decision how much house payment you can afford, not your lender or your Realtor.  In our industry we use the term “house poor” to describe people who buy the most expensive house they can afford and end up saving or investing very little money because all their income goes to their home.

My first house

I bought my first house in 2002 which was the top of the Real Estate market in Colorado.  We were way ahead of the game as far as foreclosures and in 2006 Colorado had the highest foreclosure rate in the nation for 9 out of 12 months.  My county had the highest foreclosure rate in Colorado!  This was a great time to be an REO broker, but too bad I was not an REO broker at the time and did not get into that field until 2008 when things had calmed down significantly.  When I purchased my house I bought the most expensive house I could afford and I had no problem making my payments.  I also managed to save almost nothing in 5 years and always had some type of credit card debt.  I wasn’t able to save any money until I started making more money and had about the same expenses.  I did not buy a bigger and more expensive house as soon as I started making more money like many people do.  I lived in that house for a total of 7 years and we did not move until we found an amazing deal on a foreclosure for not much more money.  I ended up selling my house for less than I bought it for after spending  about $15,000 on repairs and  upgrades.

My second house

My second house was purchased at the foreclosure auction for cash.  I had to borrow money from my sister and my father in law to pay for it.  I then was able to refinance the home and pay back everyone a few months later.  This was a steal of a deal and we loved the house and still do.  One of thing we are considering now is if we want to leave our current house for the new house.  Even though the new house is bigger, nicer, has better views, larger lot, bigger garage and other improved features we still question giving up our current house because we love it so much.  The house is now worth about 50% more than we paid because of the deal we got, improvements and market appreciation.  On July 9th we will have lived in our current house 4 years and I think it has turned out to be a great investment, a great place to live and our payments have always been well below 28% of our income.  I made a lot of mistakes when I bought my first house that I was able to avoid the second time around.

The new house

The new house is awesome, but we are not under contract yet.  I don’t know if we will get it or have to keep looking for another home that would be worth moving for.  We have made an offer and we are patiently waiting for a response.  I have had to work with a few issues before we made an offer.

1.  The home is much more expensive that our home now and my perception was I would spend  lot more money every month.  I struggled with this because I love having extra money to invest in rentals or do other things.  After looking at the numbers, my payment would not be as high as I thought and I would still have plenty of money left to invest.  We have enough equity in our home now to pay for the down payment on the new house and have some left over.

2.  The new house is not a smoking deal, it is a fair market sale and we will have to pay close to market value.  As you know I try to buy everything below market including my personal residence.   I have realized the chances of finding our dream house at a below market price are very slim.  This is the first home we have seen for sale that meets everything at a reasonable price in months, to find one for sale and at that is a foreclosure or short sale is unrealistic.  I even checked the trustee site to see if there are any foreclosures coming up in the system that might fit our needs and there is nothing remotely close in they system.  We plan on living in this home for a very long time, so I don’t have to be as concerned about how great of a deal it is.

3.  My family(father, sister, mother)  thinks I’m nuts and making a huge mistake.  They look at the purchase price and think I am digging a hole that will swallow me up and all of my hard work will be for nothing.  I have to realize they don’t know all my finances, they don’t know the house, they don’t know what is best for me.

Once I got over those issues I realized the things holding me back were not big issues.  The main issues I am concerned about is how happy we will be in the new house and if we can truly afford it and save money.  I think the new house will make us much happier and we will still be able to save plenty of money to invest.

What about your house?

Do you own your house because you love it or because it was the nicest you could qualify for?  Did you weigh all the positive and negatives before buying and consider how much you could save and invest or just consider if you would have enough to squeak by?  I made the mistake of buying my first house because I could and didn’t think about the financial sense of it all.

If you did make a mistake, don’t beat yourself up over it.  We all make mistakes and mistakes are one of the best learning tools available.  All we can do is move on and not make the same mistake next time or do our best to fix the mistake as well as we can. I think spending 28% of our income on housing is a recipe for disaster, yes you may make your payments, but can you save enough to invest in anything?  Are you ever getting ahead in life spending that much on a home?  I think my new rule is to spend 10% of my income on my personal residence and no more.  Depending on where you live and the housing market this may not be possible, but at least think about what you are giving up before spending that much on a home.

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12 responses to “Can you Afford your Primary Residence?

  1. I love reading your articles because they are telling real stories that I can really relate 🙂 Thanks.

  2. I was just talking to a co-worker about this the other day. Just because a lender says you can afford it doesn’t mean they are right. I remember my first house the mortgage company said I qualified to buy a house up to $225k. No way at that time in my life could I have survived more than a year with that payment. Wish more people knew that number is inflated.

  3. Great stuff as usual. That “expert” recommendation of 28% is of *gross* income, by the way. This makes your 6% even better.

    And funny on your family’s reaction–I’m going through the same issue for a different reason. I’m just finishing “The War of Art,” which loosely says if you’re making those close to you uncomfortable, you’re doing right by not giving in to resistance.

    Good luck on having your offer accepted.

    • Thank you! We found out there is another offer today. We upped our offer and are hoping we will get good news tomorrow. I guess the market is doing better when there are multiple offers on the high end private owner properties.

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  6. It’s official! We are under contract on the new house. Had to beat out three offers but still got it under asking price. My wife wrote a very nice letter explaining how perfect the home is for our family and the other agent said it actually worked!

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