When you buy a personal house, lenders base your qualifications on the maximum amount you can afford to pay every month. The lender does not consider if you need to save money for investing, if you are trying to save money, or if you will need to qualify for a rental property in the future. I think many people who end up buying the most expensive house they can qualify for, end up saving very little money and struggle to get a loan on more properties. When you buy the most expensive house you can qualify for, you also reduce the amount of money you can save. When deciding how much to spend on a house, do not blindly trust your lender to tell you the best answer.
I use my extra money to invest in rental properties, but I always have extra money after paying all my bills. There is no way I could purchase 100 rental properties in the next 10 years if I spent as much on my mortgage as most Americans. Now that I have a much smaller mortgage payment compared to my income, I have plenty of money to invest in rentals, and I can qualify for multiple loans. For more information on my rentals check out my complete guide on investing in long-term rental properties.
Just because you can qualify for a house, does not mean you can afford it
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 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 being positive all the time, and I am especially positive about money! I firmly believe the more negative we are about money, the less of it we will have.
Having said all that, I don’t think people should blindly spend money on everything they see. Be smart about what you spend your money on and try to buy the things that truly make you happy or help you make more money. It is important to have enough extra money to invest with. One of the biggest expenses that ties up our money is the home we live in. I think most people need to look closely at how much they spend on their house and if it allows them to save any money.
If you buy the most expensive house you can qualify for, you won’t be able to buy rental properties
One of the best investments anyone can make is buying rental property. I own 16 rental properties and they make me over $8,000 a month. If you buy the most expensive house you can qualify for, then you won’t be able to qualify for any rental properties. Many investors run into a road block when they try to buy a rental property because their debt to income ratios are too high to buy any more houses. The only solution is to make more money or reduce the amount of debt you owe.
How much home can you qualify for?
Most lenders, real estate agents and financial experts give a percentage for what is acceptable to spend on your primary residence. Many people say your payments on a house should range from 28 to 33 percent of your income. I think this ratio is why so many people live pay check to pay check. My current house payment is about 10 percent of my income after taxes, and that is why I have so much to invest. 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 the house.
You need to make the decision yourself on how much mortgage payment you can afford, not your lender or your real estate agent. 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.
I could not afford my first home although I did qualify for it
I bought my first house in 2002, which was the top of the real estate market in Colorado. 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 I always had credit card debt. I wasn’t able to save any money until I started making much more money.
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 $15,000 on repairs and upgrades. That was frustrating, but I bought my houses at the peak of the market and Colorado lead the nation in foreclosures in 2006. I was able to make my payments, but I could not really afford that house because I didn’t save any money.
I spent much less on my second home than I could qualify for
My second house was purchased at a foreclosure auction for cash. I had to borrow money from my sister and my father-in- law to pay for it. I 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. We ended up selling it in 2013 and made a nice profit on the home.
The third house we bought was more expensive than the others, but still well within our budget. We can easily make the payments and save enough money to invest in rental properties.
I am spending much less than I can qualify for on my new house
When we bought our new house, we could afford it, but I still had many mental hurdles to overcome.
1. The home is much more expensive that our home now and my perception was I would spend a lot more money every month. I struggled with this because I love having extra money to invest in rentals. 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. 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 that meets every criteria we are looking for. To find a house for sale that is a foreclosure or short sale and meets all our criteria is unrealistic. I have checked the public trustee site to see if there are any foreclosures coming up that might fit our needs and there is nothing remotely close. 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) think 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 analyzed these 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.
Can you afford your house or just qualify for it?
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 a home and consider how much you could save and invest? I made the mistake of buying my first house because it was the nicest I could afford and I 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 percent 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 percent 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.