Why “Trading Up” Your House May Be Killing Your Financial Future

by | BiggerPockets.com

At some point in my life, I’ve dreamed about living in a gigantic mansion on some exotic location where the ocean breeze lightly blows against some beautiful Egyptian cotton curtains. I’d bet that most of us have that dream at some point—and perhaps some of us are already creating a path to get there some way, somehow.

Well, maybe not all of us have those dreams—but still, we often strive to live a little better. Let’s start with that small 2-bedroom condo. Oh wait, we need more space. We need a 3-bedroom townhouse. But then we really want a yard—and this kitchen is too small. And where’s the “man cave”? Our kids need a room. Pretty soon, we are trading up from that tiny apartment to a gigantic house or from a neighborhood where you are a bit scared to walk at night to that subdivision with the really good schools.


It’s the American dream, isn’t it?

But sometimes you have to consider the costs of trading up your residence. I know two couples who live in Orange County, California who, after living there maybe a couple of years, are already looking to trade up to a new home that cost nearly double what their previous residence is worth (i.e., $350,000 to the $800,000 range). Sure, it is in a much better neighborhood. Sure, sometimes you need that extra office and nursery—but consider the costs! Even at 4%, your monthly payment will have gone from $1,337 to $3,055 (assuming you put 20% down each time and this is a 30-year fixed loan)! That is a lot of change no matter what you do.

Related: Should I Pay Off Debt or Use Those Funds to Invest?

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What About Building Net Worth?

Sure, you can build equity faster every month with the bigger house, but that is because you are putting that much more money into it. You are tying up cash into a house that you have to live in. Whether the housing market goes up or down, you are tied to living in that residence. It is also an extremely illiquid investment. While you think you can sell a house quickly today, that’s not always the case in a given market. Your entire net worth has become dependent on what the next person is willing to pay for your home. It is an extremely volatile and risky investment if you tie up most of your wealth into a house.

“The Market is Going Up. I Can Sell to Buy a Better House!”

Can you? If you only own that one house, is it worth it for you to sell that home to buy another one? In a rising market, all houses go up in value. If you are trying to buy a similar or better house, wouldn’t it cost you more money even though you sold your house for more money? What difference would it make?

And another thing: Every time you trade up a house, you are paying a lot of expenses. I have flipped properties before, and I know selling costs can sometimes range from 8 to 10% of the actual selling price. It is a huge transaction cost. Those real estate agents are waiting for those big bucks, bucks that you don’t have to spend if you decide not to sell your property and go buy another one. Imagine selling a $350,000 house and having to spend $30,000 for transaction fees. That’s the price of a car!

Related: Are Extra Mortgage Payments Worth It? A Look at the Numbers

If You Have to Trade Up, Trade Up Wisely

All I am saying is that it may not necessarily be wise to trade up for a bigger place until you are truly financially ready. Sometimes living in that 2-bedroom condo will give you an opportunity to save a lot of your wealth for other investments. Or maybe you could live small and trade up really big further down the line instead of constantly switching.

I’ve heard that the average time Americans live in a residence is 7 years. Maybe the next time you switch up you should wait 15 to 20 years. It is a long wait. You may not like your old home so much, but hey, the rewards for saving now can benefit you greatly in the future.

We’re republishing this article to help out our newer readers.

What do you think?

Leave your comments below!

About Author

Leon Yang

Leon Yang is an active real estate investor in Las Vegas. He is a buy and hold guy who also likes to flip from time to time. His main passion is to traveling to the less traveled places and inspiring others to become financially independent through real estate.


  1. some of my friends went for bigger and better home, and either lost it pr were in big trouble. I have been in my home since ’85, and told wife when we bought, this is first and last, when we moved to california. had I entered competition with friends, be in the same boat.

  2. Great article Leon, if people are smart when they buy personal residences, they can do great. Buy properties they can add value too, or houses below market. I think lenders idea of a safe debt to income ratio is way too high, unless you never want to save money. I figure house payments should be about 10% of income, instead of 28%.

  3. Too many Americans are taught to always buy bigger and better. Like Mark, the better way is to buy the size and location you want and improve it by adding value. There is no more middle class, you’re either have money or you don’t. Only have good debt, in time you’ll have your dream property, one that you can actually afford to own and live in.

    Great post Leon. One’s with a plan are the one’s that succeed in life.

  4. Shhh! Hey don’t write articles like this. If everybody thought like you there would be little or no foreclosure business, and no one would be under water with their mortgage.

    This is a consumer driven economy, cost the banking industry millions of dollars in marketing in order to convince the same to first go to college (debt) get a good job (become a wage slave) and then buy the biggest and most expensive personal residence they can afford (slave to the banking industry for life). On top of all that buy a car that makes you look successful (that puts you more in debt).

    The above formula makes the USA go around. I left out the holidays where tenants are convinced to buy worthless stuff their kids don’t really need that will have them in debt for the next 4 months.

    On a personal note, I am still living in the first personal residence in 1986 for $77k, $100k in renovations later the place just appraised for $450k.
    During the run up to the RE bubble bursting one of my work friends harassed me to no end to move out of my blue collar neighborhood (his words) and join him in Mc Mansion heaven.
    I would estimate 40% of that neighborhood including his residence have been foreclosed.
    This fellow is now living in one of his rental houses, trying to put his credit back together.
    I did not need to tell him “I told you so”.

  5. Great article and great perspective.

    When building wealth, we can control to some extent our income by working hard and making investments, and our expenses. Lately I have been shifting my focus from how to make more money, to how to get by with less. Not to save the earth, not so I can save for some luxury item, but because it truly affects cash flow. What kind of money do you have to invest to get a rental property that cash flows $500 a month? Well, if you cut $500 a month from expenses, you just bought it…

  6. I think what you say is true is most cases. In my case, I was looking to upgrade during the real estate crash and was able to get into something that cost 1/2 the cost of build price. It was a win win for me. My mortgage increased by $550/month but my new house was almost twice as big as my old house in a better neighborhood. I figured when the market recovers (which it did), I have the option of selling the upgrade for a profit if I wanted to. The thing I learned is that you don’t have to do the same thing everyone else does, there is always an new investment opportunity around the corner, you just have to be ready.

  7. Amazing…people took less than a decade to forget how an over extended mortgage with a simple loss of income (layoff, injury, etc…) sends this example couple into financial hardships. And they will not be there by themselves.

    Place your bets on the next housing bubble. My money is on the start of 2015.

  8. Robert, I agree with you, another housing bubble is coming soon. Home prices are increasing quickly and homes are selling just as fast. It is very difficult for me to believe that all these people buying these homes have saved enough for a down payment and still have enough in the bank to cover any loss of income should that happen. People are still living paycheck to paycheck and using credit cards like crazy .

    I am new to RE and have not yet purchased my first property, which will be at least a triplex that I plan to live in myself, (not trading up for a number of years – so I had better like it a lot), but my goal is to have some cash reserves because you just never know.

  9. This logic also applies to cars. If you buy or lease a new car every five years you will watch your personal wealth dwindle and fancy cars are expensive to fix to boot. I am still driving my honda I bought in 1997.

  10. Living well below your means is just pretty darn smart, if you have the income to allow it. Part of that is resisting the purchase of a bigger house if the one you have is just fine, or buying a newer car when the one you have is still reliable. For me, this has meant saving and reinvesting (mostly in RE), 30+% of my income. Do this for the first 25-30 years of your working life and the next 30+ years should work out pretty well for you.

  11. Today it is costing me more to down size. I live in NJ and to buy a smaller house then
    the one I live in now will be more money… higher taxes and price for the next town over.
    That is crazy !!

  12. While I completely agree with your basic point, people forget how good people did using the “Serial Home Buyer” investing strategy.
    That is but a house, live in it at least 2 years then sell for a tax free profit.
    Now any idiot can do this in a rapidly appreciating market.
    The ones that do well buy at a discount, add value to the property, have the ability to stay put if the market isn’t giving them what they wanted, and will buy the next one at a discount too.

    Advantages are better financing, actual access to the equity via a HELOC, and of course the profits being tax free as long as you live there at least 2 years.

    You can work on smaller margins when the financing costs are way less and you know there are no taxes. Also since you have to live someplace the expenses you incur are just things you’d pay anywhere. They might be higher but overall you probably would have the big majority of the money coming out of your pocket regardless.

    Anyway done wisely this can be a big money maker!

  13. David K.

    Still in same 3 bed 2.5 bath with garage condo I bought in 2009. Place was brand new and since then I bought another condo on the beach. Debated on buying a BIG single family but now I have 2 condos and an investment property for the same as one big single family. It’s real easy to spend 550k on a single where I am, but I can’t justify spending it!

  14. Mike Rosso

    Great article Leon. I almost made this mistake 6 months ago and then I read Rich Dad Poor Dad. So glad I did! Now I’m thinking of putting that saved cash into my first rental property instead. Funny when I asked my fincial advisor about trading up for a bigger house i got the, “go ahead think of it as an investment” lol

  15. Trading up was the smartest thing I ever did. The house that I bought for $100K more is now $1 million more.

    That being said the really smart move would have been to keep the old place as a rental.

  16. Anthony Wick

    And, the funny thing is, at the end of the day we are all just sitting on our couches in front of our tv’s. Bigger house just equals more space you either aren’t using much, or a bigger space that you “have” to fill with expensive stuff that you aren’t going to use.

    • The funny thing is, my 4 bedroom house rents out for a lot more than a 3 bedroom house. And the game room is a huge draw. A house is an investment and can be converted into an income stream. It’s anachronistic in the age of airbnb and HELOCs to say that a house is “just to live in”. If you can’t figure out how it can generate income, you probably shouldn’t be in real estate. Stick to stocks or other investments.

  17. Camila Lohr

    While this makes sense to a degree I have to say I disagree with part of it. I think a lot of families don’t need the bigger house because they end up not using half of it, spending thousands just furnishing rooms that don’t ever get used, it’s silly really.
    That being said I have lived in not so nice neighborhood, to get my food in the door in LA as a 23 year old recently graduated student. And here is where i disagree with you about this, we save and become wealthy monetary wise, but we spend our life living in an area we aren’t happy, I will say there is a lot of worth in someones years, safety and general happiness that comes from living somewhere you truly love. I find most people don’t need to wait until they are 50 to do so, getting so caught up in investing every last dime and living in a small apartment with 3 kids, because that would be miserable, once you have upgraded. Having a small kitchen where everyone bumps each other is just not as nice, unless you are into living minimally.
    Also you never know when life will strike at you and you would have spent 40% of your life living small to achieve big later, but that later never comes. I think there could be a balance for sure but in the end i invest to live better, not live to invest. Cheers!

    • Dapo Oduba

      I couldn’t agree with you more, Camila. I think it makes no sense living in a place you don’t like/love or feel safe in, while having a lot of money sitting in a bank account or tied up in other investments. This is especially true once you start having kids.

      The key is to find the balance or sweet spot for you, which is different for everybody. Although I see some sense in the article, I think the idea of an expensive home should be seen relative to one’s income rather than as an absolute measure. I would rather live in a place I love and costs me not more than a certain percentage of my income, while I work on increasing my income and net worth. Personally, I find it easier to generate wealth building ideas and strategies when I’m in the “right” environment which stimulates such ideas. Cheers!

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