How to choose a home within your budget
Essential financial advice for young business owners
When I was in university, I dreamed of owning a big home with a huge backyard in a flashy area of the city. In fact, even as a boy, I remember riding my bike through upper-end neighbourhoods and wondering, “What the heck does this group do for a living? How do they make so much money?”
I assumed the home owners were either CEOs of public companies, owed their own successful businesses or perhaps had inherited their wealth. Even in those early years, I made a promise to myself that one day I would own a big and expensive home.
Looking back, I don’t know why I had this passion for a big home. My parents were not overly ambitious, and I didn’t know any wealthy entrepreneurs. But there it was nonetheless.
Maybe the dream was my way of telling society that I wasn’t just the awkward immigrant kid who went to elementary school speaking a foreign language and eating Italian cold cuts. Maybe this was my way of saying I belonged with the rich kids.
After university, I spent four long and regrettable years in public accounting, where I earned a minimum salary and worked almost 70 hour a week. During that time, I often calculated that on a per hour basis, I was earning below minimum wage.
I remember thinking, “I will never be able to afford an expensive home on this income.”
Eventually, as I was going through several career changes, I got my first break while I was working for a real estate investment company. My team completed a big project, and my portion of the commission was approximately $100K. That was a lot of money in 1990.
Once I was sure the money was on the way, I convinced my wife we needed to take advantage of the windfall and buy a big home. My childhood determination was driving my adult financial reality.
Even before I received my commission, my wife and I had signed an agreement to buy a home for $410K.
That number is not in today’s dollars, but for comparison, the average home price at the time in Toronto was about $300K, so this house was about 35% more expensive than the average. If we bought a home like that today, we would be buying something worth approximately $1.3M.
I was 30 years old, buying a home worth $1.3M today, and able to make the necessary 25% down payment.
I thought I had arrived at the rich kids table and the fun would now begin. I couldn’t have been more wrong. The picture started getting ugly – very quickly.
First, since I was considered an independent contractor, my $100K cheque was paid without withholding tax. Only later did I realize that I was personally responsible for paying roughly $30K in tax. And when I filed my tax return, I didn’t have the money because I had used it as a down payment on the house, so I ended up carrying a debt with CRA.
Second, soon after closing, my wife become pregnant, which shouldn’t have been a surprise to me because we had decided it was time to have a family. But I had not thought through the fact that she would be out of work for a period of time, and I would have to carry the monster mortgage.
The final blow occurred when the Canadian economy entered a very deep recession in the early 1990s, and my real estate career ground to a halt. No one was buying real estate, business owners were declaring bankruptcy and home prices declined significantly, which ruled out selling my house as a way out of my financial jam.
So there I was at age 30, owning a BIG house with an expensive mortgage (interest rates at the time were about 15%), with a pregnant wife and no commissions. What had happened to my dream?
Trust me when I say that the next five years were very tough in all areas of my life. But my wife and I managed to stay married, our first son was born and the economy slowly improved.
But the financial damage had been done and it took almost a decade to recover.
If I could rerun the tape, I would not have bought such an expensive home. I would have avoided becoming house poor.
By living in an expensive area, I assumed a big mortgage, huge monthly expenses (like property taxes and utilities) and the urge to keep up with the lifestyle of my neighbours (a nice car, expensive trips and fancy furniture). As a result, I delayed adding to my investment portfolio until I was near 40, losing about 10 years of compounding which I will never be able to recoup.
Don’t make the same mistake.
When considering a home purchase, don’t stretch to buy one. Instead, buy a home that you can easily afford (even on one salary).
This plan will save you thousands of dollars on interest payments, allow you the flexibility to save for retirement or your children’s education, help you avoid the desire for conspicuous consumption (such as designer brands or Ferraris) and reduce the constant worry about money.
In his book, The Millionaire Next Door, Thomas Stanley and William Danko suggest that an affordable home is equal to 3.5 times your annual income. So, if you are earning a combined income of say $200K, then an affordable home would be valued at approximately $700K.
Financial independence comes from a simple lifestyle and decades of choices that are conducive to building wealth. Buying an unaffordable home is not conducive to building wealth.
If you are considering moving to a bigger home, please call Dri Financial group at 416.355.6370 and let us help you make a sound financial decision.
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