How Much Should You Spend on a House After Inheriting Millions?

Full episode and show notes @: sunnybranchwealth.com/blog/buy-house-with-inheritance

Have you inherited millions or received a huge gift from your parents to buy a house? 

Just because you can afford that $3 million dream home, it doesn't mean you should buy it. 

As a financial planner specializing in inheritance, I understand that navigating a home purchase can be challenging when traditional mortgage rules don't apply. 

In this episode, I walk you through the framework I use to help Sunnybranch clients figure out how much house they can afford and, equally important, how much house they want. 

You'll learn about the hidden costs of homebuying, how inheritors can avoid buying too much house, and how different types of inherited assets may change your home-buying strategy. 

Sunnybranch Wealth LLC (“Sunnybranch Wealth”) is a registered investment advisor offering advisory services in the State of Oregon, the State of California and in other jurisdictions where exempt. Registration does not imply a certain level of skill or training.

The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.

Transcript

Hey, I'm Katherine and thanks for joining me at Heir Necessities, the podcast that turns complex financial topics into real talk for Gen X, millennial and Gen Z inheritors. I'm a certified financial planner, a financial advisor for inheritors and an inheritor just like you. Each episode of this podcast, I'm breaking down a different topic related to generational wealth and inheritance. My goal is that you can stop asking Google or ChatGPT what to do before or after you get a windfall. Come here instead for the real talk, jargon-free answers you need.

On today's episode of the podcast, I am breaking down a question that I get a lot, which is some variation of either "I inherited this much money" or "My parents gifted me this much money. How much house can I afford to buy?" This is a really pertinent question because housing is expensive. This is going to be the biggest purchase that you make and the personal finance guidance that a mortgage should only be X percent of your income doesn't apply if you have this huge amount of money that can be used either to buy a house in cash or to significantly increase your down payment so that your mortgage amount is smaller.

There are always questions and trade-offs going into these house purchase discussions and without someone on your side, it can be so hard to figure out how much you could actually spend. Should you use all of that money to buy a house? Is that irresponsible? Should you be saving it? Should you increase your house budget at all? I'm here today to help walk you through what that process should look like, whether you've gotten a large gift from your parents to help with a house purchase or you've inherited multi-million dollars and you're trying to figure out what to do next.

This is something that I help clients walk through all the time. So if you listen to this episode and your questions still aren't answered, please reach out. I can help you get to the place where you're comfortable and confident in the house search process, where you know what your limit is and what you're going to do financially for the long term after you invest in a new home.

The 3 Essential Questions for Inheritors Buying Real Estate

There are three main questions that you need to be asking. How much mortgage can your house support depending on your income? If you're taking money from the portfolio, how much can the portfolio support in terms of expenses? How much house can you afford to maintain? Which is a very different question than how much house can you afford to buy. And then third, what am I comfortable with from a housing perspective?

And this third question might throw people for a loop because you're not going to find it in any of those personal finance guides to buying a house, but it's actually one of the most important questions for inheritors to consider because it's the one that they think about the least.

Understanding Housing Costs Beyond the Purchase Price

Everyone is going to think about some variation of these questions. Can I afford to buy this house? Can I afford the mortgage? Well, once I buy it, how much is it going to cost to maintain not just property taxes and insurance, but is this house in a nicer area? How much is yard work going to cost? How much is interior work going to cost? Keeping up the exterior, the ongoing maintenance expectations of that house, especially if you're buying a house in a nicer area than you would otherwise because of the gift or this inheritance that you've gotten.

The Psychology of House Hunting With Inherited Wealth

That third question, which is really about how much house do you want, is where I see inheritors get tripped up the most. Because just because you can afford a million dollar house or a two million dollar house or a three million dollar house, it doesn't mean that you are actually the kind of person who wants to be living in that house. And I see inheritors get swept up not so much in how much money they have. This is more true for the people who have been given a gift of a down payment from their parents. Their parents are still alive. Their parents can then get a vote in these discussions and sort of sway the process in a way that's not always right.

They might want to see you established in this two bed, three bath house they're envisioning for your future family. You're a single person and you don't know if you want to have kids. But somehow this is the house you end up buying when maybe if you were left to your own devices, you would have bought a condo or a townhouse somewhere. There are a lot of different variations on this and people are really individual in how it affects them, but when you have enough money that you can really afford to buy any kind of house you want, you need to think about the values of what kind of house do I want to buy? Do I want to buy the most expensive house I can? Or do I want to save some of this money?

And that is sometimes a financial planning decision, but oftentimes with the kinds of clients I work with, it's less of a financial planning decision because my clients have enough money that they're going to be fine, and more of a values-based decision about the kind of person that you want to be and how you want to use wealth and show wealth in your life.

How Different Types of Inherited Assets Affect Your Home Buying Strategy

The other thing you need to understand if you're trying to figure out how much house you can afford after inheriting is what types of assets you can inherit. This is especially true if you have gotten a significant portion of your inheritance through a retirement account. Because inheriting $5 million in cash is very different than inheriting a $5 million IRA, which is again different than inheriting a vacation property that you don't want that's worth $5 million.

This means thinking about the type of asset that you inherited and how it's going to support your house purchase. If you want to buy a $2 million house because you live in a coastal city and it's the way to get that forever house that you dreamed about, it might be easiest to just buy that house in cash if you did inherit five million in stocks and bonds or cash. But if you inherited a $5 million IRA, it might be a smarter decision to make a larger down payment and then pay a mortgage over time.

Cash vs. Mortgage: Strategic Financing Decisions for Inheritors

These are the questions that really start to get tricky because they are long-term financial planning questions. We've moved past that sort of initial "what can I afford" and we've moved into the dollars and cents of how do I actually fund this purchase? I know how much house I want to buy, should I buy it in cash? Should I get a mortgage? If I do get a mortgage, how much mortgage should I get? I know how much I can afford, but is that a different decision than how much I should do from just again, a long-term dollars and cents perspective? What is going to be the most value for me over the long term?

And this is where working with myself, a financial planner who specializes in inheritance, can really come in handy. Because you have all these questions, they're all the right questions to be asking, but you don't have the tools to answer them. This is not your skill set, it is mine. And I want to help get you to that place again when you're making offers on these houses when you feel confident.

Real Estate War Stories: Learning From Personal Experience

Because listen, I've tried to buy houses and failed. I've gone through a long housing search. I've ended up in my dream forever home. And it was wild. I went through so many different permutations of how much house can I buy and how should I finance it. We had two houses at the same time. We lived in one while we were fixing up the other and then sold the first one to move into our forever home. It was hard. The math behind all of it, keeping all those numbers in my head and projecting out what makes the most sense for us as a family, how does it all work. It's difficult and this is my job and I have fun doing it.

But it's not something that I expect other people to want to do because it takes a huge amount of time. And it's hard to feel confident in the offer process when you have all these questions still swirling around and you're not really sure if you're making the right decision financially. Again, I want to help you get to the point where you make an offer on a house, you are so confident. You know where the money's coming from, you know you're making the right decision, and you can just be excited and ready for what's next instead of worrying about the financial aspects of that purchase.

Avoiding the "House Poor" Trap: Why Bigger Isn't Always Better

Whether you've inherited money or gotten a gift from your parents, the last thing that I want to caution you about is buying too much house. This could look like what I talked about before, buying more house than you need from a size perspective, buying a house that isn't actually the right fit, but more than that, buying so much house that you become house poor, meaning all of your money is wrapped up in this huge, relatively illiquid asset.

And it can be easy to do because you think, "Oh, now I have more money, I can buy more house." But you forget about the most important piece that I've talked about already, which is that more house costs more money to maintain. And you think about things like property taxes and insurance, but you don't think about the fact that a 4,000 square foot house is twice or more than twice as expensive to furnish than a 2,000 square foot house. And houses in nicer neighborhoods require significantly more upkeep because there are more expectations about how your yard should look. You need to keep your house looking like the neighbors so you don't have the worst house on the block.

Maybe that doesn't bother you, maybe you're okay with that, but for a lot of people when they move up a housing level, whether that's a bigger house or a nicer neighborhood, nicer house in the same neighborhood, whatever, they don't think about the social pressure that comes with that move. And that social pressure translates into dollars and cents. So that's really been the through line of all of this. There are financial aspects to consider. There are financial aspects to analyze.

The Hidden Social-Emotional Costs of Expensive Real Estate

But there's also a social-emotional component that ties in with the financial piece, and in my experience, that's what most current and future inheritors miss. If you get to the end of this podcast and you still don't know how much house you can afford to buy, please reach out. As I said, I can help you work through these questions and get to that point where you feel confident and when you make an offer on these houses you are just so excited for what the future could bring and not worried that you're making a financial mistake by spending this much money on a single asset.

Contact Information and Next Steps

You can reach out to me over email: katherine@sunnybranchwealth.com. Send me a DM on Instagram.

And if you have questions about how to contact me or anything else in this episode, I'll put them down in the show notes. I'll look forward to catching you on the next episode of Heir Necessities.