Buy vs Buy: How Much House Should You Buy?

The popular debate of “rent vs buy” ignores the much bigger question: How MUCH should you spend on your primary residence, whether you rent OR buy?

To illustrate this point, I’d like to tell the story of my two emoji friends, Morgan and Hannah.

They both bought a home in 1989, exactly 30 years ago. And they both had identical assets at the time and identical incomes their whole careers. Specifically both Morgan and Hannah had:

  • $30,000 in cash
  • $2,000/month available for housing and investing

Where they differed was in how much house they bought.

Morgan bought a mansion. Morgan believed real estate was a great investment, so she went big. She bought a house for $150,000, the biggest house she could afford, believing it would go up in value. She used all $30,000 as a 20% down payment and took out a mortgage for the remaining $120,000.

Hannah bought humbly. Instead of buying the biggest house possible, Hannah bought a more humble home with a lower down payment and lower monthly mortgage payment. Hannah bought a $75,000 house putting 20% or $15,000 towards the down payment and getting a mortgage for the other $60,000.

Invest the rest. Both Morgan and Hannah are believers in investing as well. So after all their housing expenses were paid from their budget, they invested the rest in an S&P 500 index fund. Hannah also dumped her remaining initial $15,000 in an S&P 500 index fund in 1989.

Real estate did great. Both of their homes more than doubled in value over the last 30 years. They both increased by the US average over that time, gaining 3.5% per year, and are now worth $415,587 and $207,794 respectively.

The devil is in expenses. While the home values both went way up, they also had to pay the expenses of homeownership along the way. Those expenses scaled with the cost of their homes, so Morgan ended up paying a lot more. Here’s a look at the breakdown of their monthly expen