How to Buy A $1 Million Dollar Property While Earning $50,000 a Year

It's almost a meme to complain about how unafforable buying a home is today. And house prices are high both in absolute terms (a 2 bedroom shack can go for almost $1 million in some parts of California), and in relative terms (the average house price is about 5x the median salary, a multiple not seen since the Great Depression).

But prices and affordability aren't the same thing.

The Difference Between Cheap and Affordable

Few Americans, could shell out $300,000 cash for a 5 bedroom/5 bathroom home despite it being cheaper than the 2 bedroom shack going for $800,000.

But many more Americans can AFFORD to buy that 2 bedroom shack for $800k if they only had to put 3% down and make monthly payments to their lender despite it being more than 2 times higher in price.

And that is because programs exist to help Americans buy homes that didn't exist 20, 50, or even 100 years ago.

In fact, to buy a home 100 years ago (1924), the only financing the average buyer could get was directly from the seller. And while seller financing is still available today, Americans have more lending options thanks to government organizations like the FHA. Despite that, the FHA didn't widely back 3.5% down purchases until the 2000s.

How To Buy A Home in LA While Earning $50k a Year - The Down Payment

As hinted at earlier, low down payment requirements allow normal people to purchase homes they otherwise wouldn't be able to afford.

An $800,000 or even a $1,000,000 home becomes possible when you consider a 3.5% or $35,000 down payment. Especially when you have 2 adults each earning $50,000 a year. That could be husband + wife, parent + child, friend + friend, or any other combination you can think of.

The Monthly Payment - DTI

The maximum monthly payment a buyer can afford is determined by Debt-to-Income Ratio or DTI.

If you earn $4,166 a month and have debts of $2000 a month, or $2000 / $4166, your DTI is 48%.

Likewise, if you have debt payments of $1000 a month, your DTI is $1000 / $4166 or 24%.

On the other end, if you have debt payments of $4166, your DTI is $4166 / $4166 or 100%.

The lower the better.

And different lenders have different thresholds.

FHA backed mortgages have a DTI threshold of 50%, meaning the maximum debts you are allowed to have in order to qualify for an FHA backed loan as a household earning $100,000 is $4,166.

Assuming you both earn the same and have the exact same amount of debt, each of you should have no more than $2083 in monthly debt payments.

That means, with an FHA loan, the most expensive home you could buy would have to have a monthly payment maximum of $3,333, including property taxes, home insurance, and mortgage insurance.

That puts you in the ballpark of about $400k to $500k for a home.

Still short of the $1,000,000 that homes are going for in LA.

As mentioned, one way to lower your DTI is to lower your debts. Another way is to increase your income.

If only it was that easy.

It can be. If instead of buying a single family house, you bought a multifamily home consisting of 3 to 4 apartments.

While there are problems that come with being a landlord, I only promised to show you a way to buy a home that cost $1,000,000 while earning only $50,000 a year. And owning a building that you live in is still owning your home.

Step one is to partner with someone who is also earning $50,000 a year or more. This increases your income to $100,000 a year.

Step two is to look at properties with multiple units so that the rent can count towards your current income, also increasing it.

If you are looking at a 4 unit building and stay in one, you can count the rent from the other 3 apartments towards your income.

Assuming a median rent of $2500 a month per unit which is not uncommon in the LA area, that's an additional $7500 a month in income.

That increases your gross income to $15,833 a month or $190,000 a year. Assuming you and your partner have no other debts and an interest rate of 7.7%, you're looking at a building in the range of $850k to $950k.

Conclusion

Without a doubt, houses are more expensive now than they have ever been. They are also, arguably, more unaffordable. But that doesn't mean they are necessarily impossible to buy now.

With some creative thinking, you too can buy a home despite not earning more than the median income.

Just because it's not your ideal home doesn't mean it can't be your starter home. And the benefits of home ownership, especially in a high inflationary environment and popular destination like Los Angeles, where home appreciation rates have averaged 8% per year over the past 30 years, outweigh the benefits of renting in my opinion any day.