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 five 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 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. Eventually there will be distributions from my private funds. But that could occur years from now.
For twelve years, I felt low stress financially. But now, the stress is back as I strive to regain financial independence by the year 2029.
This post will delve into my two home-buying guides to aid you in making a well-informed decision if you’re contemplating purchasing a nicer home.
Furthermore, despite my home purchase not necessarily contributing to increased happiness, there’s a notable shift in one particular aspect. In the end, this newfound element might hold even more value than mere happiness.
Climbing The Property Ladder With My 30/30/3-5 Home Buying Rule
Since 2003, I’ve owned multiple homes, and I find it valuable to meticulously document my sentiments after each home purchase to assist others in preparing for their significant acquisitions. The psychological aspect plays a crucial role in financial decisions. Crunching numbers is essential, but experiencing the unknown is equally important to truly understand your emotions.
Despite the expectation of increased happiness with my recent home purchase, I find that I’m not as content as anticipated. Consequently, I want to reevaluate my home buying guides to determine if adjustments are necessary. The purpose of my home buying guides is to safeguard buyers and instill confidence in their purchases.
My 30/30/3 home buying rule states:
- Spend no more than 30% of your gross income on a mortgage (you can include all housing related expenses in addition to the mortgage to be more conservative)
- Put down 20% and have a 10% buffer in savings
- Pay no more than 3X your household gross annual salary for a home, although I’ve stretched the multiple to 5X when rates were lower
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 focused on trying 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. Even though these are investments, they are also requirements. If I don’t meet the capital calls, I got blackballed. I’ve also got ongoing property taxes and maintenance expenses to pay.
For those of you who want to climb to the top of the property ladder and feel great, 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 pay 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 guide 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. In addition, my liquidity is low. 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 more 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, instead of $900,000. If your net worth is $10 million, a $2.5 million home may be more appropriate instead of $3 million.
Whatever home you want to buy, multiply it by 4 to get your target net worth figure. If your net worth isn’t at the target or greater, then don’t buy the forever home until it gets there. At the very least, your net worth should be 3.4X greater than the home you want to buy.
If you have already purchased your forever home, then you can find out when you’ll finally feel more at ease by multiplying the purchase price by 3.4-4.
A Primary Residence Equal To 10% Of Net Worth Feels Too Stingy
In my net worth buying guide, 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 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 enjoys a financial challenge, this is a good one to consider.
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 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 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 both subjective and objective. They are based on my experience owning multiple homes since 2003, meticulously recording my journey, and financial logic.
To me, the top of the property ladder is owning a home worth 5X your annual household income or 30% of your net worth. The farther you push these limits, the more likely you’ll 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 buying anything nice or getting 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. This hedonic adaption is also the reason why you should travel as cheaply as possible when you’re young. Couch surfing is no longer appealing after age 40.
Despite not experiencing increased happiness with my new home, I do have one positive emotion: 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 voila I’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.
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.
So many of us in the FIRE community take saving money to unhealthy extremes. We suffer from frugality disease because we’re so accustomed to saving the majority of our income for long periods of time.
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 challenging!
Unexpectedly, it turned out to be the best visit ever, thanks to one small yet crucial detail: everyone had their own en suite bathroom with bidets, 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 maybe even forever.
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 about pursuing happiness. It’s about finding satisfaction. When you can return to a wonderful home after a hard 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?
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Fundrise currently manages over $3.5 billion for over 500,000 investors. I’ve invested $954,000 in several 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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