Can I Afford My Dream Home? (I'd Have To Break Some Rules…)

This episode delves into the financial considerations and rules surrounding the decision to purchase a dream home that might stretch one's budget.

1. Assess the definition of a "dream home" and its feasibility based on current and projected financial circumstances.
2. The importance of adhering to financial rules, like the 25% income rule for housing costs, but with flexibility based on other strong financial indicators.
3. Consider the trajectory of your income and future financial stability before making significant commitments that stretch your budget.
4. The role of savings in financial planning and how it can buffer decisions that might otherwise seem financially imprudent.
5. Practical advice on managing debts, like home equity lines of credit, and their smart utilization in personal finance.

1: Introduction

Overview of the primary topic, setting the stage for the listener's query about purchasing a dream home.
Brian Preston: "Is it okay to break some rules to afford that dream home?"

2: Listener's Query

Discussion on the listener's situation regarding exceeding the usual 25% of gross income for housing.
Bo Hanson: "Define what 'dream home' means to you—is it realistic for your current financial stage?"

3: Financial Rules and Flexibility

Exploration of when it might be acceptable to bend financial rules based on robust saving habits and future income stability.
Brian Preston: "If you're saving more than 25% for retirement, this might provide some flexibility in your budget."

4: Closing Thoughts

Summary of the discussion, emphasizing careful consideration and financial planning when making large commitments.
Brian Preston: "Always plan with a buffer for unforeseen circumstances to maintain financial health."

1. Define your dream home realistically considering both your current lifestyle and future aspirations.
2. Evaluate your financial trajectory to ensure income stability and potential growth can support your dream home purchase.
3. Prioritize savings and emergency funds to safeguard against financial disruptions.
4. Use debt wisely by understanding the terms and implications of loans or credits.
5. Consider long-term implications of increased housing costs on your overall financial health.

"We want to buy our dream house, but we'll have to go past 25% gross income to do it. Are we allowed to break the Money Guy housing rule if we're saving well over 25% for retirement?"
We'll walk you through that question and more in today's Q&A episode!

People

Brian Preston, Bo Hanson

Companies

Leave blank if none.

Books

Leave blank if none.

Guest Name(s):

Leave blank if none.

Content Warnings:

None

Brian Preston
Is it okay to break and scramble some eggs so you can afford that dream home? Brian, I am so excited about this. Cause sometimes in life things happen that make us have to make difficult decisions. Not every decision we get to make is a nice easy one. And I love that we get to weigh into those types of questions.

Bo Hanson
As a matter of fact, I love that we can answer all your questions. So right now we have the team out in the wings collecting your questions. If you don't have your question in yet, get it into the chat. Cause we wanna load you up so that you can do money better. With that, I'm gonna throw it over to you, producer Riby.

Ribby
Awesome. We've got a question from Hallie to kick us off. It says we want to buy our dream house, but we'll have to get past 25% of our gross income to do it. Are we allowed to break the money guy housing rule if we're saving well over 25% for retirement? We want to treat this house as our abundance goal, like step eight of the foo and feel like we have the room and the budget for it.

So how would you think about this? Well, I think, Hallie, at the onset you said something I love. You are saving 25% and so you're already doing the thing that you know you're supposed to be doing. And so then the question is, for the dream home, can we break the rule? And I'm assuming the rule that we're going to break is the 25% of total housing costs or 25% housing cost is greater than 25% of gross income.

Bo Hanson
And I think there are a few things you have to define. 1st. 1st, you have to define dream home. Like when you say dream home, are you talking about the dream home for our situation right now? Like the house that makes sense?

Or when you say dream home, are you talking about like that home that when you were at the very beginning of your life, you dreamt about, like the mansion with the six car garage and the indoor basketball court and the swimming pool and that sort of thing? Because those are two different things for two different stages of life. I'm going to assume for purpose of this question you're talking about, hey, the house that makes a ton of sense for where we are right now and the house that we really want to be in right now long term. Well, then I think the second part of the question you have to answer is what does our current financial path and our current financial trajectory look like? Meaning are we in vocations where it seems likely that our income will continue to rise, our expenses will continue to decrease to where we can reasonably afford this home, and it will become more affordable through time.

So if I'm at 30% or 35%, do I see a scenario where it will drop to where it is below that 25%? That is a different situation than someone saying, hey, I'm going to use a school teacher as an example. I'm a school teacher, or we're school teachers with fixed salaries. They're not going to deviate a ton. And if we buy this house, we are going to essentially perpetually be well above that rule.

We're going to be in that 35% to 40%. That starts to make me really, really nervous, because what you're doing is you are establishing a foundation where your entire financial picture is always at risk of something going bad or something going negative. The reason we give you the 25% is so that should circumstances change or should life get tight, there's enough margin in the system to where you don't risk losing the home, you don't risk not being able to sustain the family. Brian, what say you? First of all, love that Haley had so many, had so many references to the financial order of operations.

Brian Preston
You too can get your copy moneyguy.com resources completely free. She said that she's at step eight. Prepaid future expenses or what I like to say abundance goals. And, you know, it seems crazy if I'm going to tell somebody, hey, when you get to step eight, not only can you fund the kids college, not only can you start being an entrepreneur in real estate and other things, maybe this is also the time. If you're going to expand into nicer cars, why couldn't you expand into a nicer home?

And there's a few things that made me feel really good about this situation. She shared that they are saving greater than 25% now. Yes, this housing might exceed 25% of their gross income, but if they're checking the boxes, the big why on that 25% is because I want to make sure that you're not house rich, life poor, meaning you're foregoing saving and investing for the future. And usually there's a pretty good indicator that your expenses now will also impact what your expenses are when you're in retirement. And that's how much of a draw you are on the assets and how much you need to save so that those assets can support you when you're no longer working with your back, your brain, or your hands.

So I love the fact that you look like you're checking a lot of those boxes. So let's, let's talk about a few of these things. First of all, what are your ongoing costs going to be? Bo was alluding to this with two things. He said, you know, what is your income going to do now?

What are, where is it at now? But where is it also going? If you're in a static situation, that's a little scarier because your expenses could be a bigger portion of your total take home, which is, you know, ongoing could be a problem. However, I've talked to people where you know that your life is going to be completely different in five years. Now, I don't want you to pull a Clark Griswold where you are going ahead and counting money that's not in the bank, or you're being a little false with your assumptions, and you get yourself, when you get the jelly of the month versus getting that big promotion that you think is in your future, it blows up your entire financial life.

Don't do that. However, if you know you're on a career path and you see some goals ahead that are greater than 80% likelihood to occur, I think it's especially with you already being in step eight of the financial order of operations. I'm not going to poke you too hard on that, because I think that it's one of those things where you're making a lot of the right decisions. And I look at some of my life decisions where I had stretch goals, whether it was buying, um, that second house, meaning that my upgraded house, I didn't have two homes. I was upgrading from my first house to the second home because we were a growing family and we needed a little more space.

My income, if I'd have made all decisions off of my income, then I would have missed out on, you know, some great memories and a great house for the, for the family. So just be honest with yourself. Don't be too rosy with those assumptions. Nothing wrong with putting on the 3d glasses. Remember, that's where you actually run the scenarios where you have your dream of man, this is, you get all the promotions, everything works out, you get the perfect house.

There's also the down to earth what you think will happen. And then there's of course, the do do plan. Like maybe you lose your job, or maybe things aren't as rosy as you think. Make sure you're putting on your 3d glasses with all those assumptions. I want to make sure I understand.

Bo Hanson
So you're saying yes, it's okay to break the rules now? Are you suggesting it's okay to break the rules, so long as over time, it comes back inside the rules. Or are you saying if you have a small enough footprint on the expense side, it's okay to stretch? Well, think about. I mean, if you are in step eight, and I mean, how.

Brian Preston
How you spend your money past step eight is kind of on you. This is why I let people prepay their mortgages, even if they're under 45. This is when you can go buy the Tesla, if you want the Tesla. I mean, you're living your best life. That the only.

The only cloud that sits over the top of this that you need to be aware of, though, is if your expenses get too big when you actually retire. That's going to be harder for you because you have to be able. Your assets have to be able to carry that. And also make sure this isn't based off of a one off year. You know, for.

I see a lot of entrepreneurs, they start making good money, and they're like, oh, I have all this free money coming in. What they don't think about is that their tax liabilities will also be increasing in the background. So just make sure you're taking into account all expenses, not just your household expenses, but also, what are your taxes going to be? What are your property taxes going to be? Make sure you're putting the whole ball of wax into your assumptions.

Bo Hanson
Love it. Love it. Halle, thank you for your question. We appreciate you being here. Did I say Haley instead of hallelujah?

You did. It's okay. We just let it happen. We knew what you meant. You know, there's some names that you.

I always confuse those two names, like Haley and Halle. All the time. Interesting. All the time. Good to know.

Where's Katie at? She's not in here. All right, next question is from Nick. He says, we are in a home with an unfinished basement with a growing family. We need to finish the basement sooner than we expected.

Ribby
Saving to cash flow. It is possible, but would take time. Could we use a heLoc? And I'm just curious, like, you know, I know we have some stories about helocs, like, use with caution, but I would be interested to hear what you think of helocs and Nick's situation. Yeah, I love.

Bo Hanson
So we talk all the time about how debt should be thought of as a chainsaw. Like, it's. It is dangerous and it can hurt you, and it can. It can hurt you very badly. But it is a useful tool.

And I think so often, especially we financial mutants, we get caught up in this idea of, I can never use debt, never use debt. Never use debt. Never use debt. And some people do take that stance, and that's all right. However, there are times when debt can be a very useful part of your financial plan in this situation.

You said, hey, I've got this. I've got this unfinished basement. But my family's growing. And like, this is not like, oh, we're putting in a luxury thing. This is something so that we have room for the family so that we can live the life that we want or need to live now.

And we have the ability, we have the free cash flow to save for it. But that's going to be at some point in the future. And the way the family is growing, we need it now. What I love hearing, Nick, is that if you have the ability to save for it, to cash flow it, that also suggests to me you have the ability to pay the cash flow necessary to satisfy the debt over a finite timeline. So when I think about this situation, not knowing your specific numbers, your specific situation, I don't think it's crazy if you want to use a home equity line or a line of credit to potentially do this, so long as you are, like, very, very laser focused and serious about how long it's going to take for you to pay that off.

Because if there's a scenario where you could save to cash flow it, there's also a scenario where you could save to satisfy the debt rapidly. And I think that would be the approach that I would take if I were sitting in your situation, sitting in your shoes. What you have to answer, though, is, is the opportunity cost, the interest cost of having it today worth not having it, saving the interest and maybe paying less for the actual renovation over the long term. Yeah, I look at my home equity line snafu. Mistake was that, remember?

Brian Preston
And you said something completely different. I used my home equity line as my replacement for cash. I was access to cash instead of actually having cash. Your question, Nick, is, can I use a home equity line for actually improving my home? Man, it's almost like these things are designed for this purpose.

This is actually the right reason to use a home equity line is because you're improving the actual house that you live in. This is. Look, we live in a unique time in history right now, and it will be interesting to see how this all plays out, because we know interest rates are higher, we know housing has gone way up property. So because of that, I mean, we've even had this discussion, Bo, you've had this discussion? Yeah, we're talking about it right now.

If you wanted to upgrade your house, meaning move, sell your existing home and move to another home, the purchase price is outrageous. And then you not only do you have the outrageous purchase price, but you also have the outrageous interest rates on that. So you're looking at your own house and be like, but I could go expand or fix the things in my existing home. Yes, the interest rate on that home equity line is going to be expensive, but the incremental cost, way less than an upgrade from, from selling and buying, the much higher price point is significantly cheaper. So I.

Nick, if you've done that type of research, I actually think this, this is a great use of a home equity line. But begin with the end in mind of the fact that I want you to have a plan for how you're going to pay this loan off. You know, that fits within the financial order of operations, based upon the interest rate and based upon your financial goals, so it doesn't derail your financial life. But this is not an access to cash trap. This is you actually using a home equity line so that you can expand your house.

Now, I would encourage you, or caution you is probably the better word, make sure you don't turn this thing into the Taj Mahal that exceeds the market value of what you could get down the road. This is something I have to. When my wife and I have done improvement projects, I'm like, you know, there's tile, and then there's tile. You know, that, you know, you're. You're spending.

Instead of spending six or $7 a square foot, you're spending $35 to $40 a square foot. Are you really going to care that much about it later? Just don't, don't, you know, be, be mindful of what this will do to the market value of your house and try to stay within those, those thresholds. And I think in that same vein, be very careful when it comes to a line of credit. It becomes very easy to think about it as this monopoly money piggy bank.

Bo Hanson
Oh, well, okay, well, I have this much money I can borrow, but I only borrowed this much. So what's three grand more? Okay. I get five grand. All right.

It becomes very easy to become numb to the numbers because. Okay. Yep, change order approved. Yep, change order approved. Yep.

Change order approved. Go into it thinking, okay, this is the absolute top amount I'm gonna spend. Even if I have more equity that I could tap, I'm not going above this amount. Cause what you don't wanna do is get there and say, like, oh, no, I thought I could have this thing paid off in two to three years, but now it's gonna take me five or six years because the scope of the project expanded. Good answer, Nick.

Ribby
I hope that helps. Thank you for being here, and we really appreciate your question today. Ready for Wade's question? Yes, ma'am. Wade says, for upgrading from a starter home, you guys suggest 20% down.

Can that come from equity? I've been told that contingent contracts are hard to get accepted. Reaching 20% without equity is going to be rough. What do you think? I think that you're right on that second part.

Bo Hanson
A lot of folks, when you're trying to upgrade, when you're moving into your. Into your second home, removing into an upgrade, it's really difficult to save 25% for the future, service your current mortgage, and still build up cash for a 20% down payment. So most folks, and this is not based on analytical study. This is based on anecdotal evidence. Most folks, when they go to upgrade, they have to use the equity from their prior home to be able to put money into the second home to be able to afford it.

The question becomes timing, because you did say something, Wade. Contracts can be written in such a way how I'm going to buy this house contingent upon me selling my other one. That's called a contingency contract. Well, we have come through such a hot housing market that perhaps, as a buyer, having a contingency made you less attractive. Does that mean that you should go do something risky, like go ahead and commit to buying the house without a contingency?

I don't think so. I think that's going to put you in a bad spot. What I would say is you just got to figure out what works and how you can negotiate this real estate transaction, that maybe you're not the most attractive cash buyer, but you can't fudge it and pretend like you are, or else you're going to get yourself in a bad spot that you don't want to be in. Wade, I'll just tell you, look, we just came through a housing market that was very unique. It wasn't just the fact that contingency contracts went away.

Brian Preston
It was also that due diligence and appraisal requirements went away. People lost their absolute mind during that market. I mean, to buy houses sight unseen, without due diligence, without care about appraisal, just shows how we. We kind of lost the plot to a degree I have. Fortunately, I don't think that that's necessarily the case.

Now, you might live in a market where it's harder. But I still know that from, from what I've seen, and even some of those hot markets, due diligence is fully backed now. Now, you can actually run an inspection period. You can actually bring in the home inspectors. You can actually require appraisal requirements.

Um, and I think contingency contracts are back to a degree, too. So don't let somebody try to, because, look, real estate agents love to not have the contingency in there because that's a lot less work. And I'm. That's not picking on. I love real estate agents, but I'm just saying that it's.

It obviously makes it a lot less complicated if you're willing to just go out there and sign a full contract without all that stuff built into it. But I'm just telling you from a financial standpoint, because houses are some of the biggest debt and assets that you're going to be dealing with. So we just want to make sure you're in a safe place and don't get yourself in trouble. But here's what's beautiful about housing transactions. They can all be customized.

Bo Hanson
So let's say that you are in that, like, super hot housing market where contingencies aren't, aren't a thing. Maybe what you can do is you go ahead and sell your home, and depending on how small or large your footprint is, you rent something short term while you try to find the house that you're going to buy and move into. Or maybe you could even sell your home and rent it back from the purchaser. All of these things are viable options that might be able to solve that contingency problem. You just don't want to get yourself in the situation where you commit to buy a home before you know that you've sold the other home.

And all of a sudden you got two houses, two mortgages, and two uh ohs you got to figure out really, really quickly. Awesome. Wade, thank you for your question. I hope that helps as you think through this decision. And we appreciate you being here.

Hey, you know what? Can I throw one other thing out there? I'm gonna throw two things out there. One, if you have not subscribed yet, we'd love for you to subscribe. If you've not gone to the website yet and given us your email address so you get our.

What do we send every Saturday? Oh, we send out a newsletter. We send out a newsletter. Newsletter is super awesome. It's awesome.

Super awesome. It's popping for sure. I don't know what the cool kids say now happening. It's cool. It's radical.

I think Nifty is what they're going with these days. Is that right? Totally tubular. Nailed it. Trying to think of everything else the teenage mutant Ninja Turtles might have said.

That's the first thing that you can do. Second thing you can do if you are thinking about buying a house, trading house, living in housing, we have an entire hub out there on housing. We have checklists that you can use. We have tools that you can use, that you can go check out. Go to moneyguy.com resource.

You can check out all of those sources. So that way you can be an educated consumer, even in this difficult market that we're in right now. Excellent. With that, we're going to move on to Mickey's question. Nikki or Mickey?

Ribby
Mickey with an m? I could have gone several ways. Oh, I know, mouse. Oh, honestly, I thought you were into the divorce. Hey, Mickey, you okay?

Bo Hanson
Oh, I thought you were spelled differently. Spelled differently. Another housing question for you. Okay. We have a lot of those today.

Ribby
It says, our house in our old town is filled with grief, and we don't like it. We don't want to be landlords and may not move back, but can't buy as cheap. Now, obviously, does selling it equal emotions? Dictating a financial decision? And I wanted to just add how, like, sometimes we want something or there's emotions involved.

So how do you parse through how to still do that the right way? I don't know that I can fully understand the question you gotta take back. So they wanna sell their house, but admittedly, in a town they moved out of. Yes. And it's filled with she said or they said filled with.

Looks like some grief has happened while they're there. They don't really love it anymore. They want or something. No, it could be, you know, somebody, a loved one passed away there or something. You never know.

Bo Hanson
Oh, okay. Got it. All right. And so we don't want to be landlords, and we're not going to move back. They don't want to move into it.

Ribby
They want to sell it. Selling it equal emotions. Yes. Yeah. Here's the problem, especially with first homes or with homes, and we see this all the time, homes are emotional assets, whether we mean for them to be or not.

Bo Hanson
They are. They can be emotional in the sense of, oh, that's where, you know, that's where we got married. That was our first home. That's where we brought our baby home from the hospital. That's where they learned to walk.

That was this first and that first. Or it can be, like you said, it can be grief. Oh, that was the house that I had, a loved one who's no longer here, and we assign a lot of emotion to it, or we may just say something, man, I love this house, and it is worth this much in my mind, and I would never sell it for less than this much. And that may not be what the market commands. And so that's why I do think houses can be very, very emotional and very, very difficult.

And this is one of the areas where I do think that a real estate professional who actually knows the market and understands it well can be an asset. Because what you don't do is a lot of us say, all right, I'm going to go to this transaction. I'm going to do it myself. I'm going to put the for sale sign out in the yard. I'm going to do this.

I'm going to do it, and I'm going to save on all the real estate commissions. I'm going to get a better deal, better for the buyer, better for the seller. While that may be true, the actual cost that might exist is you not recognizing how emotional this decision is. It's difficult to say. And, Brian, maybe you have some better insight than I do in this situation.

If selling the house would be emotional, because you've said some things that I love. I don't want to be a landlord. We're not going to move back into the house. And housing has gone up. You said it's not as cheap as it was back then.

So those are three things that kind of lend itself to maybe selling this house is an emotional decision. Maybe analytically, it's actually the best decision, the most advantageous. And that's what I was going to say. Look, if you have a house, and here's something you ought to know from a tax perspective, is that if you lived in this house two out of the last five years, so if you moved away less than, you know, three years ago, or four, you know, if you lived in it two, got the two years and five, and maybe you've moved away now for a period of time, but it still qualifies for that tax free gain. That's $250,000 tax free for a single individual.

Brian Preston
That's $500,000 for a married couple of tax free gain. And post this inflation run, we've had a lot of houses have really appreciated a lot. So if you have a house that is out of community, because, you know what's hard about being landlord. When you don't live in the same area, it's hard to keep up with it to see what the attendant is doing within the place. So I get it.

If you don't want to be a landlord and if this thing has some emotional baggage or some, some memories that you're just having trouble processing and, you know, you also don't want to keep up with it. Yes. Let's, let's figure out how we, we get out of this so that you can move on with your life. And I do like what? Something Bo said.

If you don't, because I don't want you to make an emotional decision and make mistakes. Maybe you're under price it or maybe you, um, you just make a misstep because you know that you have some emotional baggage with this house, then why not get a professional to kind of help you and find somebody? Really get word of mouth, talk to people in the community. Because not all real estate agents are created equal. I just did a transaction down in Florida and had an outstanding real estate agent, but I've had real estate agents in the past where I felt like I was doing the work more so than they were.

So just make sure you do your due diligence, find somebody that can be your partner in this transaction and protect you from your blind spots, but also be your local boots on the ground versus, it sounds like you're living in a different community and you know, you have some emotional blind spots on this. But also do the measurement on the taxes to see if this is going to be a tax free gain for you. How about this? Can I, can I, can I extend this question just, just a smidgen? What about someone who doesn't necessarily want to own the house in the old community, but maybe it makes sense to rent it for whatever reason, or maybe housing prices haven't come back or something.

Bo Hanson
Is there a scenario or do you have an experience share where like, okay, maybe I rent for a season until I can actually sell the house. Is that something that, what Bo's hitting on is I fell into this when we moved up to Tennessee. My house in Georgia, you couldn't give them away back then. I mean, South Atlanta housing back pre this inflation run of the pandemic. It was just hard to sell a house and not really recover from the great, remember I had shared that I bought my house in 20 00 20 03 20 04 it appreciated before the great Recession, but then post great recession, it actually, it went down in value by over 50%.

Brian Preston
I know that sounds crazy to say out loud, but it's true. It went down by over 50%. The bank ripped out my home equity line. It was a pretty rough thing, and it never did recover. But it actually.

I had a loss. Can you believe I sold that house at a loss? Crazy. Still, in 2019, people think that's, like, assigned. How can you lose money on it now?

Look, if I'd held it for two more years, I would have made back and then even had a profit. But when I couldn't give the house away, when I moved to Tennessee, because we had life things going on that required us to move, I rented it for, actually a year and a half, so I still qualified. Even I didn't need the tax free gain because I had a loss. I would have qualified with this answer of living in the house two of the last five years. But it is one of those things I think you kind of have to look at your scenario, mitigate the damage that's going on.

What I didn't want to have is have a house just sitting there in a community I no longer lived in. It was better to have a tenant there that could kind of look after it. Plus, I created some cash flow. Now, full disclosure, I had a great tenant. They really good tenant, but even a great tenant ruined my hardwoods, and I had to completely, once they moved out, and I would decide to finally sell it because the market had gotten a little better, I had to completely redo the hardwoods, and that was kind of frustrating.

But that's. That's what it's like to be a landlord. Yep. It's one of the. One of the things you have to do.

Ribby
All right, well, Mickey, thanks for being here, and thanks for your question, and we hope that helps as you think through all the angles of your question. The money guy show is hosted by Brian Preston. Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission in accordance and compliance with the securities laws and regulations. Abound wealth management does not render or offer to render personalized investment or tax advice through the money guy show. The information provided is for informational purposes only and does not constitute financial tax, investment, or legal advice.