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How would you like a home for $1?
In the Sicilian town of Salemi, in Italy, a mayor came up with a whacky idea in 2008 when he found the town (literally) crumbling. An earthquake had destabilized the buildings in the town and the local economy wasn’t sustaining itself. So Mayor Vittorio Sgarbi announced that he would be giving away 3,700 houses which were in poor shape to anyone willing to renovate them. The token price charged was 1 Euro (a little more than a dollar) though the house would technically not be free – you would have to pay deposits and renovate it and make sure it met construction standards. But it could still have been a really good deal for people with an adventurous spirit.
Just after the pandemic, towns in Italy started reviving this idea again in 2021 – and this time around it was a really good deal for people in the US who could not afford the exorbitant real estate prices here. For prices from $8,000 to $15,000, they could get a two-bedroom house in a scenic location. Since then, I’ve found a multitude of similar ideas – from homes in the US that are listed at $1 to an authentic castle in Scotland that was selling for $1!
Before you book a flight to Europe, hold on for a moment. When you buy a house, it’s not just about the building – you sign up for the weather, the geography, the lifestyle, the infrastructure of that place, and the community. The reason real estate is at the price point it is in the US is because it’s in one of the most advanced countries in the world. That’s why buying a house in the US is a life goal for many. Some even go overboard with their life savings because it’s a “once-in-a-lifetime purchase.”
There’s a way to buy a house without cutting corners while making sure that you don’t bite off more than you can chew. Here’s a guide to how much income it takes to buy or rent the typical house at every price point – at today’s interest rates and lending criteria – based on my experience as a real estate agent. Chances are, it’s not what you’re expecting.
Buying vs Renting
Before we dive into how much it takes to cover your housing costs, here’s something important: There’s a huge difference between buying and renting. The costs will also vary substantially based on the path you take. There’s a saying that “Your rent is the most you’ll ever pay each month, and your mortgage is the least you’ll pay.” If you ask anyone in the industry, they’ll tell you that’s absolutely true.
Your rent doesn’t throw any surprises – once you negotiate it, you just pay the amount every month and any issues are for the landlord to deal with. There aren’t any surprise city assessments, supplemental tax bills, insurance premiums, or foundation repairs that could empty your bank account on a moment’s notice. Whereas, when you buy – where do I even begin?
Well, to start: You have your mortgage. In most cases, this is broken down between a mix of principal and equity usually amortized over a period of 15 to 30 years, at which point, your home is paid off, in full. If you have a fixed interest rate, this means your mortgage payment will not change throughout the duration of the loan. If it stops there, it’s not very different from renting. But there’s more.
Second, when owning – you have property taxes. This is typically based on a percentage of the purchase price. It generally ranges anywhere from 0.4% to more than 2% of the property’s assessed value, every single year. However, it’s important to realize that this amount often re-adjusts on an annual basis as values increase and, if you live in an area like Texas that could mean seeing your property taxes suddenly jump by 50-100%.
Third, you also have insurance costs. This is something that you can’t skimp on – when you own a property, your lender requires you to have a comprehensive insurance policy to cover anything that might happen, like a car driving into your rental property. Just like property taxes, this amount readjusts every single year depending on the number of claims in your area.
Fourth, you have repairs. This might include replacing an AC unit, fixing a water heater, spraying for termites, and all the other ‘fun’ stuff that comes with home ownership. In terms of how much this costs, some people use the 1% rule, which says you’ll spend 1% of your home’s value every single year on repairs while others use the $1 rule, which says you’ll spend $1 for every square foot of livable space, every year.
Then there are all the miscellaneous costs – including potential HOA costs, landscaping, upgrades, routine cleaning, and every other part of homeownership you don’t think of until you check your credit card statement. Hence the higher cost of owning a house compared to renting. Here’s how much you need in both cases.
The cost of renting
The rule of thumb is that rental costs shouldn’t exceed 30% of your income before taxes. If you make $40,000 per year, you shouldn’t spend more than $1000 per month, for example. But this rule of thumb was apparently created in a 1969 amendment to Public Housing, before record student loan debt, $700 auto payments, and pay-as-you-go mobile games entered the picture.
So there are now more accurate guidelines that are adjusted for today’s cost of living, like the “50/30/20” budget which recommends that you spend no more than 50% of your take-home pay after taxes, on needs – like housing, food, and transportation, 30% for wants like clothing, travel, and hobbies, and 20% for additional savings and debt repayment. With this, your entire financial picture is taken into consideration, with a little saving mixed in at the same time. But that probably means that you’ll have to spend way less than 30% of your income on housing, which could be a challenge.
For instance, just consider that in a state like New York, some residents pay up to 70% of their income on housing. In Miami, it’s 41.6%. In Los Angeles, it’s an average of 35%. 30% is a pretty tight ask. What’s the solution?
I personally take the approach of ‘backward budgeting.’ You first add up your fixed, non-negotiable costs, like debt repayment, food, insurance, transportation, and everything you can’t possibly live without. Then include 15%-20% as a buffer for savings, throw in 10% for discretionary expenses, and then, allocate whatever is left over to rent – after taxes. For some people, this might be 15%, for others, 25%. But the bigger advantage is a mindset shift that prioritizes saving and puts spending second. In the long term, this will help you a lot, especially if you want to buy a home one day.
If you want a simpler answer: Ideally, keep your rent below 20% of your gross income, before taxes, if you want to maintain healthy savings. 30% is the “golden standard,” but the lower the amount, the better.
This means…if you want to rent this house in Arizona for $2800 per month? You should make $110,000 to $170,000 per year.
This house in Fresno? You should make $140,000 to $210,000 per year.
This house in Venice Beach? You better be making $600,000 to $900,000 per year.
Keep in mind that these are just ‘conservative guidelines.’ There are alternatives you could consider like splitting costs with a partner, living with roommates, spending a different amount, etc. But generally, 20-30% of your income tends to be the overall threshold that you should aim to spend on rent, all things considered.
Now let’s take a look at what it costs to buy a house:
Buying a home
When it comes to buying a home, each rule tends to be a little different. First, we have “The 28 Rule.”