Suze Orman on Whether to Buy That House

Look at what it would rent for, not just what you can afford.

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Before interviewing Suze Orman last week, I asked my husband for any ideas for questions to ask her. He suggested I ask how a 30-something couple could decide whether or not they could afford to buy a house, and how expensive that house could be. (A question that serves our own self-interest, since we are that couple shopping for our first house.) I managed to squeeze the question into our conversation.

Here's what Suze said:

In Young, Fabulous & Broke, I said real estate is one of the best investments out there. If you purchase real estate in the right way, it will pay off in the long run. The right way is, when you purchase real estate, you have to say, what does an apartment rent for versus what can you buy something for. If you buy something and can’t rent it out for anything close to the mortgage payment, including insurance and other costs, then real estate is overpriced. Have you lost your mind? Not, “Did you qualify for a mortgage?” Not, “Did you have enough money in your emergency fund?” If you had simply done your homework to see, what does the same thing rent for, then you wouldn’t have gotten caught. But people just bought real estate thinking it’s a good investment. People, don’t be so stupid.

Well, we certainly don't want to be stupid, so now, when we look at houses, we try to calculate what the rent would be and how that compares to the monthly mortgage payments. But as my husband pointed out, even if we found a million dollar mansion that could rent out at a price that paid the mortgage, we still couldn't afford it. So how do we make that more difficult calculation of what we can afford? We've turned to a trusty old Excel spreadsheet. We entered in our income, our expenses, and figured out what we have left over to pay the mortgage. Of course, all of these calculations are still just theoretical because we have yet to find a house that we want to make an offer on.