The Money Pit – Avoiding the Perils of Being House Poor

A good financial planner can help those in the residential real estate market to sort through their best available options. Here’s how.

Home ownership for some is the ultimate statement that they have made it in life. And for many, it also represents a significant portion of their net worth. It’s an asset that can become an appreciating investment--or a financial albatross around their neck. This is not a discussion about whether to buy or rent, where you should live, or what a home is really worth. Instead I want to help you look at something often overlooked: what to do with your home when a family is growing or when two families combine into one household through marriage.

Here’s our example: A young couple has just recently married. He owns a large house, she a smaller one. They have five kids between them. Their initial thought is to sell both homes and buy a brand-new, bigger house customized to their liking. They also consider buying an older home, and just fix up the parts inside that are most important to them to make it fit their new lifestyle. Or is there another option? What should they do? What makes the most financial sense in this scenario?

As financial professionals, our real value to clients goes beyond investment recommendations; it is uncovering the questions that are often overlooked. We asked this couple if they might consider keeping the bigger house and selling the smaller one.

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They could put the proceeds from the sale of the smaller home toward upgrading the kitchen in the home they kept. Result: they can create the dream kitchen they saw in that new custom home. And with the bigger home they keep, there aren’t many unknowns with regards to upgrading or repairing the infrastructure (no bathtub falling through the floor).

The biggest unknown to this couple is what does a household of seven (parents and the five kids) really cost to run? A new budget needs to be planned, and proper allocation towards their education and retirement goals need to be assessed. Your own solution may have been different, but ultimately our goal as financial planners should be to give a family peace of mind and give them a life to enjoy on their new journey without felling trapped in their home.

Kevin Kaplan is a partner at Silicon Hills Wealth Management (opens in new tab) in Austin, Texas. He is passionate about photography, travel, pizza and live music.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Kevin Kaplan, RIA
Partner, Silicon Hills Wealth Management
Kevin Kaplan is a partner at Silicon Hills Wealth Management in Austin, Texas. He is also co-founder of Bundl, an automated online investment platform. A native New Yorker, Kevin has also worked for several large information technology firms and ran a successful fine art photography gallery. He is a world traveler, live music fanatic and a fan of 1980's pop culture.