Dave Says: How Much Dirt, and How Much House?

Dear Dave,

My wife and I own a small catering business. We have a few big corporations as clients, and our company has been very successful over the last two or three years. Now, we are planning to build a house. I was wondering what you think about how much should be spent on the land itself versus the construction of the actual house.

— Lee

Dear Lee,

When the whole thing is done, the payment you end up with shouldn’t be more than 25% of your take-home pay on a 15-year, fixed-rate loan. The ratio of land to house can vary, and that part’s up to you. If you’re buying a big piece of land, you’re probably going to have a higher ratio of land cost to home cost than if you bought a simple lot and put a really nice home there.

Generally, a standard subdivision lot is going to be around 20% of the total price. If you spend $100,000 on the lot, you’ll end up with a total project cost of about a half-million. Now, keep in mind that’s just a fairly standard ratio. It’s not a rule.

The only rule here is my rule about mortgage payments. Again, no more than 25% of your take-home pay on a fixed-rate, 15-year note. Otherwise, you can end up house poor. And when you’re house poor, it takes away your ability to save, build wealth, and give.

Having a big house and a lot of land is cool if you can afford it, Lee. But it’s not worth it if it’s financially stressful and prevents you from living your best life!

— Dave