“Seriously Derek… All your posts talk about people buying houses for $100k and $150k. What kind of fairy tale land is this? I live in California where the cheapest house known to man is $700k. How in the heck can I afford to buy a house?”
If you live in New York, Boston, Seattle, San Francisco, San Diego, or any other ridiculously expensive area, then this post is for you. Because today, I’m going to show you how it’s possible to purchase your very own house on almost any income.
Want to buy a house in an expensive area? Step right up and let’s get crakin’.
How to Buy a House in an Expensive Area
Let’s say that you have your heart set on buying a house (and you absolutely refuse to move to a lower-cost area), what all can you do to make it happen?
The Rules of Buying a House
Before we get into the action steps, let’s lay out the ground rules for buying a house.
- put at least 10% down,
- buy a home with a 15-year fixed mortgage, and
- have a monthly payment that’s no more than 25% of your take-home pay.
So what does this mean for all you folks that want to buy a house in an expensive area?
Let’s say you’d like to buy a nice condo in the San Fransisco area. The cost? $899,999.
In order to buy this, I’d recommend that you:
- put $90,000 down (10%),
- buy it on a 15-year fixed mortgage loan,
- and with a resulting $5,680 monthly payment, you should be netting 4x that at $22,720…
…which is basically a pre-tax income of $400,000 a year.
Whew! These numbers might be pretty tough for some of you, but don’t stop reading! Let’s figure out how we can make it happen!
Want to calculate these details for your situation? Use my free Mortgage Payoff Calculator.
1) Clear Up All Your Debts
It makes absolutely no sense to save up money in your bank account while you’re making interest payments on your car, your student loans, or your credit card. Before you start saving up for a house, you should be completely debt free.
- Allow you to save up faster once the debt is gone, and
- It will allow you to make your house payments without the stress of a million other payments.
Want help? Check out my Debt Snowball tool. By entering values into just a few cells, you can figure out exactly how long it will take you to clear all your debts.
2) Live on Practically Nothing for That HUGE Down-payment
Want to buy a house in an expensive area? You’re going to have to save up a massive down-payment…which means that you should live on practically nothing for a few years while you save.
Let’s say that you don’t have the $400,000 income that’s needed to buy the $899,999 condo in San Fransisco.
Well, if you…
- increase your down-payment,
- you’ll decrease the amount that you need to borrow,
- which will decrease the payment.
If you net “only” $18,000 a month (Ha, I think I just choked a little….since I net less than a third of that), you’d need a house payment that’s $4,500 or less (25% of your take-home pay), which on a 15-year note means you can borrow about $630,000.
So, to buy that $899,999 condo, you’d need to scrounge up a down-payment of $270,000!
It definitely won’t be easy, but with $18,000 a month coming in, it’s certainly doable (save $10,000 a month for 27 months!).
So where do you start?
There are three major areas where all of us spend the majority of our money:
- your Car, and
If you want to save a crap-ton of money in a short amount of time, you should focus on these three areas.
So in other words, I recommend that you:
- Live in a low-cost apartment and share it with friends to further minimize your payment
- Buy a cheap car with cash or better yet, do without it and use public transportation
- Shop at discount grocery stores and stop going out to eat
If you want to do even more, you can always cut the cable and live on Netflix and SlingTV (I know, that’s the annoying recommendation that you hear daily…but it’s actually pretty effective!).
3) Earn More Money
There’s always the other side of the coin, right? If you don’t want to live like a hobo on a $300,000 income, then why not just work to bump your pay up to $400,000 a year?
Since I’m no expert at earning $400k a year, I decided to hop on Forbes.com. And of course, they had some solid advice on how to earn way more money.
Here are their top recommendations:
- Change jobs
- Request a raise
…and there’s 40 other recommendations as well, but these are the four best ones for this particular situation.
Changing jobs can give you an immediate raise, and the nice thing is you can ask for any amount that you want. If they can’t do it, then you simply keep working your existing job. It’s a risk-free situation.
Requesting a raise is a bit more tricky. Unless you have hard proof that you’re worth more than what you’re currently getting paid, I would be careful with this one.
The two recommendations I love most: coaching and blogging.
You already make hundreds of thousands of dollars a year! There are a ton of people that would like to know how to do that! Become a life/career coach and you could make even more!
And blogging – this has always been a passion of mine. I haven’t quite earned $100k a year doing it yet, but it’s definitely possible! Heck, Michelle from MakingSenseofCents.com earned nearly a million last year! Crazy huh? So why not give it a shot?
If you’re interested in learning more, check out my Start Your Own Blog page. Here, you’ll find out how to sign up, how to build your page, and how to start earning some money!
In a normal situation, I wouldn’t suggest that anyone invest their money while saving up for their down-payment, but for most of you, this isn’t a normal situation.
Let’s say you earn an ‘okay’ income for your area and net $100k a year. That’s $8,333 a month, which means your payment should be no more than $2,083 each month.
But don’t give up! Saving up $605,000 is still possible! Let me show you!!
If you can live on just $40,000 of your $100,000 income and invest the rest into a reputable brokerage like Wealthsimple, you would likely save up your $600k in just 7 years (thank you compound interest!!)
I don’t know about you, but I’d rather wait 7 years to buy a house than to live paycheck-to-paycheck all my life…
Disclaimer: There is no guarantee of positive returns in the market…but we all know that don’t we?
5) Buy the Starter Home
I’m hoping this goes without saying, but for your first house…don’t target the Taj Mahal of the neighborhood. You’re already struggling to find the money for a home..any home. Don’t put yourself in a bad situation by purchasing an even more expensive house than you need.
Sure, it would be nice to have a 4 bedroom, 2 bath house vs. a 2 bedroom, 1 bath condo, but that can come later.
Get into the market small now, keep saving your money, and then buy that bigger house down the road.
Let’s Get You a House!
Alright, so let’s recap. If you want to buy a house in an expensive area, it’s in your best interest to take the following steps:
- Clear yourself of all consumer debts
- Cut your lifestyle waayyyyy back
- Do everything in your power to make more money
- If it’s going to take you a while to save, invest the money to give you an extra boost
- Don’t be tempted into the bigger houses – start small and stick to your budget
And there you have it! Sure, it might take you a while, but once you’re in your home and have a manageable 15 year mortgage, you’ll be so happy you waited!
Are you looking to buy a house in an expensive area?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.