The views, thoughts, and opinions expressed are solely those of the author, and information provided is for entertainment purposes (see disclaimer)

Buying more house than you can afford is never a good decision. If you are new to the ins and outs of home ownership, you might get caught thinking that if you can afford a $1100 per month rent payment, then you can easily afford a $1100/mo mortgage payment. What you may not be taking into account are the myriad of expenses that come along with home ownership in addition to your mortgage payment. Here’s how to avoid becoming house poor.   

A local realtor post a challenge this week, inviting renters to send information about their monthly rent payment and receive several property listings with the same mortgage payment. While I think this is a GREAT idea for renter’s to see what is available to them in their market, to start learning about the process of purchasing a property and become a home owner…, comparing monthly rent payment to monthly mortgage payment is very misleading, and you may find yourself in over your head financially. 

Thinking as a real estate investor, I would offer a different equation. Mortgage = 1/2 Rent. Going back to our example, if you pay $1100/mo in rent now, I would be looking at mortgage payments around $550/mo if you want to keep your housing expendituress in a similar range. 

Here’s why:  

Did you know that most landlords expect to 40-50% of rents received to be ‘lost’ to ongoing expenses for things like maintenance, taxes, insurance and unexpected repairs?   

Going back to our example, most landlords who are renting for $1100 per month are expecting to have expenses of $440 to $550 each month.

A general rule of thumb is to expect to pay 1-2% of the value of your home, EACH YEAR, on maintenance expenses. Some of these are big ticket items that you need to save up for: New HVAC, replace the roof, repaint the exterior, refinishing or replacing damaged and worn out flooring. Some are pricey but more manageable like replacing a failing hot water heater, replacing broken kitchen appliances, plumbing repairs, restaining a deck, etc. Then there are the surprises, like when a tree falls over during a storm. You need to have savings reserves for the unexpected, because the unexpected happens often enough to budget for it. 

All of these are expenses related to simply maintaining your structure. If you have visions of kitchen renovations, an updated bathroom, a master bedroom addition, etc then those costs will be over and above the 1-2% rule.  

As with most general rules of thumb, your situation will very, (and you should always get expert financial and real estate advice for your situation * See disclaimer below).  

For my own homes, I set aside at least 1.5% of the total value of the home, and usually closer to 2.5% for older homes, for anticipated maintenance and surprise expenses. For newer homes, you may have quite some time before you run into major systems expenses, but this usually comes with an initial higher purchase price (generally measured in price per square foot for comparable homes).   

Why its no fun to be house poor:  

It can be tempting to buy the most house the BANK says you can afford. But that might not take into consideration your lifestyle desires (hello beach vacation!), savings for the unexpected, furniture budget or renovation work you want to do in your home. If your house payment and maintenance expenses are too high, you might not have room left in your budget for fun things like eating out, family vacation, pool membership, cool new furniture. You might be over extended if there is a large unexpected repair expense, job loss, illness, etc. Take a realistic look at your finances and determine how much YOU can comfortably spend on housing and go from there.

~ Sarah