There are several pieces of advice that I can provide a new home buyer, starting with the most important: DO NOT BE HOUSE POOR.
Do Not Be House Poor
What does this mean? Well let me start with an example.
You contact your local bank, lender or mortgage person. They prequalify you based on your income, debt, credit, etc.
You are now pre-approved for $250,000!! Exciting right? Well, understand, most lenders provide you the max amount that you are able to borrower. They don’t say “You are approved for $250k but you should be financially responsible and borrower half of that.”
You call your REALTOR and head out to look at properties in the range of $225 – $275k. You find the ideal property and get it for $245,000. You finance it with 3.5% down and finance the balance of $236,425 with P&I monthly payments of $1,270. You also include taxes and insurance of $500 per month for a grand total of $1,770.
Prior to that you were comfortable leasing a property for $900 a month. Now as a new home buyer you increase your monthly nut of $870.
House poor for a new home buyer means that most of your earned income goes to the house you live in. Understand this really isn’t an investment or asset per say, as it doesn’t put money / cash flow into your pocket every day.
My suggestion. Try to find a property (especially a fixer upper) that is say half of what you are approved for. This will allow you to stack money and start investing into real cash flow assets like a duplex.
Expect The Unexpected
When you were leasing that 2 bedroom apartment and the dishwasher stopped working, what did you do? Or the AC stopped blowing cold, what happened?
You called your landlord. And hopefully they paid for and fixed the problem. New home buyers have to understand items and sometimes big ticket items (Roof, HVAC, Water Heater, Etc) may have issues. And you are responsible for them.
Get a good inspection during your due diligence period. If you are accepting a 25 year old HVAC system As Is, then be sure to account for that going bust in the future.
Get Creative. Buy This Instead.
An asset puts money in your pocket each month. A liability takes money out of your pocket each month. What do you think your house is? An Asset or Liability?
So… If you want to grow wealth sooner than later, the name of the game is to keep personal overhead very low. I suggest if you are looking to purchase a home to live in, treat it as an investment.
Consider looking for a duplex. If you can have the other half of the duplex cover the entire expense (or close to it) then you are living FREE!
Just imagine having an extra $1500 a month that would have gone into your “home” and instead goes into a bank account.
In 12 months, you stacked $18,000. That could be 20% down on a $90,000 rental house! Do you see where I am going with this?
Sacrifice Now. Big Rewards Later.
I get it. As a new home buyer you maybe thinking, I am starting a family. I do not want to have a neighbor sharing a yard. I don’t want to live in a duplex, etc.
Whatever your excuse it, that is fine. Get over it. Reason is, if you sacrifice now, you will be able to live in future properties that you never thought possible.
Buy Liabilities & Continue To Be Poor.
Unfortunately, most people were not taught about money. I certainly wasn’t. Not in grade school or even college for that matter.
And well over 90% of Americans are in the same boat. Living paycheck to paycheck. My advice for the new home buyer is to not be emotional. Study numbers.
Rely On Numbers. Not Emotions.
It is an exciting time. To have your own home. Decorate it how you want. Raise a family. But wouldn’t your kids be way more excited if you lived modestly now and 10 years from now moved into a beach condo? Or cabin on 20 acres? Or whatever your real dream home is?
Follow the numbers going into and out of your bank account.
New Home Buyer Task
Growing wealth can be a fairly simple process even for the new home buyer. I believe it starts early. Once you take that vow of a big debt obligation in the beginning it is difficult to get yourself out of it.
So here is my suggestion for the new home buyer if you are in the market looking around. Call your Realtor and tell them you want to look at duplexes with the goal that most of the income from the one side will cover the entire financial obligation.
If you do not have multi family in your area, try to find properties with a mother-in-law apartment or extra building on site that you can lease out. Even if it is to offset some cost. Hey $500 offset is an extra $500 in the pocket right?
What is it going to hurt? Worst case you get some education in looking at multifamily properties.
I wish you much luck out there!
Florida Real Estate Broker / Investors