For those of you who are looking to upgrade homes, let me tell you a sad truth. I climbed to the top of the property ladder with my latest home purchase, and after four months, I feel no happier.
Whenever someone would congratulate me about my home purchase, I felt nothing. What’s there to celebrate about when I’ve got more bills to pay? Would be my most common thought. Of course, I responded with a thanks instead.
Although I appreciate the extra space, I’ve had moments of dread regarding whether I did the right thing. My wife and kids were perfectly happy living in a 30% smaller house. Why did I give up my financial independence for this?
With so many “surprise” capital calls, my liquidity has been sucked dry and I’m now living paycheck-to-paycheck with not enough passive income to cover our living expenses.
Eventually there will be distributions from my private funds. But that could occur years from now.
For twelve years, I felt more or less financially stress-free. But now, the stress is back as I strive to regain financial independence by the year 2029.
Climbing The Property Ladder With My 30/30/3-5 Home Buying Rule
I have owned multiple homes since 2003 and like to carefully record my feelings after each home purchase to help others better prepare for their big purchases. So much about money is psychological. You can crunch the numbers all you want, but until you experience the unknown for yourself, you won’t really know how you’ll feel.
I’m supposed to feel happier with my new home purchase, but I’m not. As a result, I want to revisit my home buying rules and guides and see if I need to make some adjustments. My home buying rules are suppose to protect buyers from overstretching and make buyers feel great about their purchase.
My 30/30/3-5 home buying rule states:
- Spend no more than 30% of your gross income on a mortgage
- Put down 20% and have a 10% buffer in savings
- Pay no more than 3-5X your household gross annual salary for a home
If you follow at least two out of the three rules, you should be financially fine. The last thing you want to do is buy a home and feel stressed out.
However, now that I’ve gone through how I feel about my latest forever house purchase, I’ve changed my mind. If you want to truly feel great about your new home purchase, then it’s important to fulfill ALL three rules, not just two.
I Fulfilled Only Two Out Of The Three Rules
For me, I’m spending no more than 30% of my gross income on a mortgage because I don’t have one. I put 100% down by paying cash. I also paid within the 3X – 5X of gross annual household income for the house.
However, I don’t have a 10% buffer (10% of the value of the home) in terms of liquidity, which is causing me stress. Instead, I’ve got a 1% buffer. If some big expense were to happen, I’m in trouble. I will have to borrow money or sell a property at the wrong time.
As a result, I’m intensely focused on try to save as much money as possible over the next three years to build back my liquidity. I’m also hoping there will be no more surprise capital calls for a while.
For those of you who want to climb to the top of the property ladder and not feel stressed, I strongly recommend you fulfill all three rules before buying. I’d also stick to paying no more than 3X your annual household income for a home too.
You have to be supremely confident in your income and the health of the real estate market to stretch to paying 5X your annual household income. Don’t let real estate FOMO make you buy a home you cannot comfortably afford.
Climbing The Property Ladder With My Net Worth Home Buying Guide
My other home buying guide is to ideally keep your primary residence purchase equal to 30% or less of your total net worth. This net worth buying rule is mostly for older (40+) and experienced homebuyers looking to buy their forever home.
By limiting the home’s purchase price to no more than 30% of your overall net worth, you are well diversified and have enough investments outside of your home to feel more financially free. You might not be completely financially independent with 70%+ of your net worth invested, but you’re at least heading in the right direction. .
I spent about 29% of my net worth on my home. Therefore, I should be feeling relatively stress free if 30% or less is the appropriate recommended limit.
However, because I utilized ~70% of my taxable stock and bond portfolio to pay cash for the house, I have seriously compromised my passive income generation. As a result, I want to find a job again to make up for the shortfall.
25% Of Net Worth Is A More Appropriate Limit
To feel great about your new forever home purchase, you may want to keep its purchase value equal to 25% of your net worth or less. If you do, you likely won’t have much financial worry because 75%+ of your net worth will either be generating enough passive income or is easily tappable in case of an emergency.
For example, if your net worth is $3 million, you may want to limit your next home purchase to $750,000. If your net worth is $10 million, a $2.5 million home may be most appropriate.
Whatever home you want to buy, multiply it by four to get your target net worth figure. If your net worth isn’t at the target net worth or greater, then don’t buy the forever home until it gets there.
If you have already purchased your forever home, then you can find out when you’ll finally feel at ease by multiplying the purchase price by four.
A Primary Residence Equal To 10% Of Net Worth Feels Too Stingy
In my net worth buying guide post, I also suggest aiming to have your primary residence eventually account for only 10% of your net worth or less.
However, I am now uncertain if this is a realistic goal. Achieving this goal might lead to a sense of living too frugally, potentially hindering the pursuit of ultimate happiness.
Consider living in a $300,000 home with a $3 million net worth; this might not strike a balanced lifestyle. Given the increased time spent at home, it makes sense to live in the nicest home affordable.
I would personally feel dissatisfied living in the home we bought in 2014. While it’s currently valued at about 10% of our net worth, it isn’t sufficient for our family of four. Both my wife and I work from home, so we decided to rent it out for semi-passive income.
Rather than adhering strictly to the 10% goal, consider flipping it around and using it as motivation to build a net worth equal to 10 times the value of your primary residence. For example, if you currently reside in a $750,000 house, strive to achieve a $7.5 million net worth before you die.
Of course, you don’t have to go to this extreme. But if you’re someone who’s always up for a financial challenge, this is one of them.
The Net Worth Guide Is Different For First-time Homebuyers
For first-time homebuyers, you will most likely spend way more than 100% of your net worth on the purchase price of a home. For example, you might have a net worth of $100,000 and buy a $400,000 home. That’s fine if you follow my 30/30/3-5 home buying rule and have income upside, as most first-time homebuyers do.
When you’re younger and have a lot of energy left to grind in your career, you tend to have less fear. But as you get wealthier and older, your energy will fade.
If you decide to retire early or take things easier, having your home equal to more than 50% of your net worth is going to bring about unnecessary stress, especially if you still have a mortgage.
Even if you don’t have a mortgage, due to your net worth composition, you might not be able to generate enough passive income to cover your living expenses. Hence, I strongly suggest following one or both of my home buying guides.
Hedonic Adaptation Happens Quickly With Homeownership
As you can tell from my home buying guides, getting to the top of the property ladder is subjective. They are based on my experience owning multiple homes since 2003 and meticulously recording my journey.
To me, the top of the property ladder is owning a home worth 5X your annual household income or 30% of your net worth. If you push these limits, you will likely be overly stressed out and experience buyer’s remorse.
If you believe that purchasing a luxurious house will bring you happiness, that feeling is unlikely to last for more than six months. Hedonic adaptation occurs swiftly with homeownership, just as it does with a raise or a promotion.
Once you opt for a larger home or a newly remodeled home, it becomes challenging to imagine living in a smaller or older place, especially if you have the same number of people in your home.
Despite not experiencing increased happiness with my new home, I do have one positive emotion. That is a heightened sense of satisfaction.
Perhaps, Satisfaction Trumps Happiness
Since my middle school days, the dream of owning a hillside abode had my heart. Fast forward 30 years, and voil II’ve got one—a testament to the grind paying off, filling me with an undeniable sense of satisfaction.
What adds to this satisfaction? The fact that, as a dad, I didn’t shy away from going all in and securing the nicest home I could manage while the little ones are still, well, little. No hoarding funds here—just a calculated plunge into creating the best life possible for my family, amplifying the dad satisfaction levels.
While I was looking for tenants to rent out my old house, I met a father of two teenage boys. He was a partner at a media agency who likely made over $500,000 a year. He wanted to move his family into my home but his wife, who also works, wouldn’t let him. Instead, they remained in their 50% smaller, three-bedroom apartment to save money.
I get the whole money-saving ethos—I’ve been stuck doing so since 1999. But you know what? I’m also stoked that I mustered the courage to shake off my frugal shackles and embrace decumulation. This significant leap feels downright satisfying.
Final Sense Of Satisfaction From The Home Purchase
After putting the finishing touches on this post, I hosted my parents and sister at my place for a solid five nights and six days. Having seven people under one roof can be a handful!
Unexpectedly, it turned out to be the best visit ever, thanks to one small yet crucial detail: everyone had their own en suite bathroom, dialing up the privacy and comfort.
In the past, I’ve noticed tension creeping in around the fourth day of my parents’ visits as our differing habits started to grate on each other. Not this time around. We could’ve easily played housemates for a whole week or even longer.
As my parents gracefully age, having this larger abode also gives me the flexibility to take care of them, provided they’re open to moving in. The same goes for my in-laws.
Happiness might be a fickle friend, but the sensation of satisfaction appears to be more enduring. For me, satisfaction is that tranquil feeling that comes from giving it your all, almost regardless of the outcome.
So, perhaps the main objective when upgrading to a nicer house isn’t solely about pursuing happiness. It’s about finding satisfaction. When you can return to a wonderful home after a long day’s work, it’s reassuring to know you’ve done everything possible to provide for your family.
Reader Questions and Suggestions
Have you climbed to the top of the property ladder before? If so, were you happier after you bought a new house? If so, how long did this happiness last? Do you feel more satisfied instead? What percentage of your net worth do you think is the maximum one should spend on a nice home?
If you’re looking to invest in real estate passively, check out Fundrise. Fundrise runs private real estate funds that predominantly invests in the Sunbelt region where valuations are lower and yields are higher. Its focus is on residential and industrial commercial real estate to help investors diversify and earn passive returns.
Fundrise currently manages over $3.5 billion for over 500,000 investors. I’ve invested $954,000 in private real estate funds since 2016 to diversify my investments and make more money passively. After I had children, I no longer wanted to manage as many rental properties. Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.
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