We all hear the phrase “house rich, cash poor” a lot but too few of us know what this phrase actually means. Quite simply, it all comes down to how much money a homeowner has tied up in their house and how much money that homeowner has in their pocket.
A more technical way of defining “house rich, cash poor” is saying that the homeowner has more equity locked in the value of a house than in liquid assets.
Leon Goldfeld, co-founder of a New York-based brokerage Yoreevo that offers buyer agent commission rebates, defines “house rich, cash poor” as having a debt-to-income ratio higher than 40% regarding homeownership expenses or as having home equity being more than 80% of a homeowner’s net worth.
Along with clients not spending more than 30% on living and homeownership expenses, Goldfeld advises clients to have no less than six months in cash reserves to cover total monthly expenses if some unexpected “thing” or emergency comes up.
Patricia Vosburgh, an agent is St. Petersburg FL, advises her clients to make every effort to avoid being house rich and cash poor. “The slightest financial hiccup in you life can become an issue. You’re working constantly to hold onto that house, that asset. And not really able to enjoy the benefits of homeownership.”
According to Cedric Stewart, a sales consultant with Keller Williams in Washington DC, “…(first-time buyers) often don‘t leave any money for the ‘What If’ fund, such as an emergency home maintenance issue.”
Move-up buyers can also get into trouble by being house rich and cash poor when they take the money they receive from the sale of their current home and plunk it ALL down on the next house. Having no wiggle room is not a comfortable room in which to live.
Help your clients avoid being house rich and cash poor by helping them “deeply” understand their finances prior to buying a home. Suggest they both talk with a lender AND enter their income and debt into a mortgage calculator. Suggest they have 6-12 month reserve of cash to cover recurring monthly expenses and payments PLUS a financial cushion in case of emergencies. And you might suggest that your clients obtain a home warranty from the seller or pay for it themselves.