You started your career. Saved some cash. And now you’re looking to buy a home.
But with sky high housing prices, you’re wondering if buying is the right move.
You’re hesitating because you don’t want to FOMO into your first home purchase.
You tell yourself, “If I don’t buy now, prices will just keep going UP!”
I don’t know your exact financial situation or what your personal preferences are (and I do not provide financial advice) but these are some things to consider before you decide to buy your first home vs continue renting.
Owning a Home is a Numbers Game
Are you a high earner now or just scraping by?
Your gross income will be a major factor in purchasing a home.
Lenders will look at how much income you make every month to make their calculations about your monthly cash flow to see if you can afford to make the payments.
Then, they will look at your debts to see if the ratios are within their range.
Some lessons were learned (?) from the 2006 – 2008 housing meltdown and lending standards have been relatively stricter with new forms and standards.
Can you spend up to 40% of this income on your monthly mortgage payment? If not it’s time to consider new skills or a new job so your income is higher.
Can you afford the property taxes? Can you afford the monthly Homeowner’s Association (HOA) fees? Can you afford the utility bills?
In the end, paying for a mortgage is a numbers game.
See below for more “numbers” involved in owning a home.
You Need Some Cash Reserves
The pandemic has shown that anything can happen in life – even tenants not having to pay rent while landlords must pay their mortgages.
The lesson here?
You NEED some cash reserves just in case doo doo happens.
If you are buying a home and just spent your last nickel on your home, you may spend some sleepless nights worrying about your finances.
What happens if your company downsizes due to a global pandemic?
What happens if you have unexpected car expenses?
I know how it is to worry about finances and trust me it is not fun.
Owning a Home is More Than the Mortgage Payment
If you are like most people, you own a car and make monthly car payments. Then, during the life cycle of the car you have maintenance and repairs you must periodically perform.
Regular maintenance like oil changes, new tires, air filters, light bulbs, batteries, and windshield wipers. Oh, and don’t forget gas.
Owning a house is like owning a car. You may be able to afford to make the down payment and monthly mortgage payments, but can you afford the other expenses that will come along with the house?
Items that come along with owning a house includes a refrigerator, washer and dryer, furniture, water softener, microwave, and stove.
Periodically you will have major repairs for various systems in the house. These are the big-ticket items that can hit the wallet pretty hard.
I learned about how much these systems can cost and was amazed at the prices! Now I know why real estate is such a big driver in the economy.
Want a new A/C unit? That’s a minimum of $5,000 - $10,000.
Need a new roof? That’s $15,000.
Want to remodel your bathroom? That can easily be $5,000 - $10,000.
Want to upgrade your kitchen? You’re looking at $15,000 - $20,000.
Sounds daunting to buy a home but it can still be possible if the numbers work out.
Location, Location, Location
Real estate is highly localized and home prices/value can vary down to street your home is located on.
I remember one home that I helped remodel where one side of the street had a completely different value compared to the other side of the street.
Factors like school districts, access to amenities, and location of major employers will be major influences on the current price and future value of your home.
Do you know enough about the location you want to buy in? Do the prospects look good?
Market conditions can and will change. So, keeping track of what is going on in the market once you buy a home should give you good look into the house’s future value.
Currently, businesses and people are fleeing the state of California for more business and tax friendly states like Texas. No doubt housing values are changing in both states.
You’re Now Competing Against the Big Boys for Houses
Hedge funds like Blackrock have been in the market for yield and have been buying up housing to rent. Some reports show them buying up entire neighborhoods with an average of 20% above listing price.
Zillow has been buying houses for years to flip (but now it looks like they’re liquidating their inventory).
The trend here?
The big boys (with deep pockets) are also looking at residential housing and putting in cash offers.
Can your mortgage offer compete with their CASH offers?
Owning a Home Can Be a Hedge Against Rent Inflation
One benefit of signing on the dotted line and buying a home is that you essentially lock in your rate for housing for the typically the next 30 years.
It is kind of like a hedge against landlords raising the rent on you.
Then, once you have paid off your mortgage you can essentially live rent free (if you pay your property taxes).
Make sure to factor in ALL your costs of owning the home and average it over 12 months to get your true monthly housing costs.
Property tax, home insurance, landscaping, maintenance, and repairs should all be factored in.
Some Rich and Wealthy People Rent Instead of Own Their Homes
One thing I have learned from studying the rich and wealthy is they like options. They have the money and therefore many choices in life. They can buy multiple homes in different cities, states, or even countries.
But for most of us working stiffs, we can’t own more than one home at a time (yet).
When you buy a home, you usually have a 30-year mortgage. That means you are locked in to one location until you sell your home or can find a tenant for your home.
Exiting home ownership also generally takes some time and is generally illiquid.
You generally must find a real estate agent to list and market your property.
You have to find a buyer and negotiate the deal. Escrow takes time.
When you rent (instead of own) you have more options.
Want to move to a new state or country?
You can do it. Wait for the lease to end or end it early.
Don’t like the city, state, or country’s (insert your reason here)?
Pack up and leave.
Want to start a business?
You can “creatively” reduce your housing expenses while building your business.
With a mortgage you MUST make the monthly payments.
Or you get foreclosed on and lose the hefty down payment and any mortgage payments you made up until that point.
The wealthy also look at the return on investment (ROI) of their down payment.
When you buy a home, this down payment leads to more expenses (see above) and therefore generates a negative ROI.
BUT the wealthy, often can find better ways to put their money to work for them.
Starting/investing in businesses, buying rental properties, and purchasing stocks are things the financially literate do with their money.
Closing Thoughts
Purchasing a home is a serious decision and there are many hidden costs of ownership associated with it.
Before you jump in and sign on that dotted line, run the numbers and see if they make sense for you.
Even better is to go talk to a lender and see how much you can PREQUALIFY for (they shouldn’t run your credit for a pre-qualification but for pre-approval they will)
P.S. Know someone who could benefit from this article? Send this to friends and family by pressing the SHARE button below!