There is more hype and interest surrounding home ownership than ever before. Despite all of that, many claim that it’s harder than ever to own a home or any real estate in this economy! Well, the market is certainly different than it was 30 years ago – or even last decade. However, it’s important to know that home ownership is within your grasp if you really want it, as is investing in real estate.
Of course, there are merits to renting, but if your long-term goal is settling down in your own house, then don’t fret. Home ownership is not a thing of the past by any means. Let’s break down the merits of different real estate decisions and how you can achieve them if you want them!
Renting Vs Buying
Many people have had success investing in a home – and because of that they tend to assume buying is an obvious investment for everyone else, which isn’t always the case. Unfortunately, past performance isn’t always a good indicator of performance in the near future, and you should be cautious if buying would push your finances to the limit. Another thing to be aware of is PMI – an additional amount you’ll have to pay monthly if you don’t have a large enough down payment.
Generally, it seems to be a financially sound decision to buy if you plan on living in that house for 5-10 years. Depending on the market, it is possible for it to be less or more, but a good minimum is 5 years. This means that if you’re young and planning to relocate for your career or personal reasons, it may be best to postpone purchasing a house.
Before you buy, make sure you can cover all expenses associated with owning a home. Almost everyone I know has encountered unexpected issues after moving into a home they purchased. Some of these are minor and can be easily fixed, but others can destroy emergency savings! On top of that, there is usually a long list of furniture, decorations, landscaping equipment, and other items that need to be purchased shortly after you move in.
Renting may be a good option if you don’t want to stay in the same place for a minimum of 5 years or you aren’t financially ready for a mortgage, a large down payment, and possible unexpected expenses. Alternatively, renting is great if you don’t want to deal with the responsibilities that come with home ownership.
How Long Are You Planning On Living There?
More specifically, are you staying put and settling down, or do you still need some flexibility? If you plan on staying in the same place for at least five years, as I said earlier, buying can make a lot of sense – if your finances are in the spot where you’re able to. However, renting generally makes a lot more sense if you’re only planning to stay for a few years. It’s important to be honest with yourself about where you are financially and where you want to live in the future.
Look at your current personal situation and try to determine if it may change significantly over the next couple of years. If it probably will, try to factor that into your decision-making process. For example, if you plan on getting married soon it would probably be best to wait and make the decision with your soon-to-be spouse before purchasing a home. Likewise, if you think you’ll have kids soon, you’ll probably want to make sure you have enough space to accommodate children – as well as live in a stable environment.
Home Ownership Comes With Additional Headache And Costs
There can be a lot of risks when owning your own home, even with all of the potential positives. Closing costs are expensive, the market can plummet, renovations may be required, and general repairs can set you back a pretty penny. It is your responsibility to keep up with appliances, air filters, fire alarms, landscaping and gardening, plumbing, and a multitude of other potential expenses.
If your finances and time are already being pushed, it is probably better to wait on home ownership until you can handle all additional costs and responsibilities that come with it. I understand the desire to own your own home, but don’t forget to be realistic about your current financial situation. If you’ve gotten some estimates and found that it’d likely be cheaper to buy a house, consider whether you can afford the upfront costs, even if it is cheaper for you over the long run. If you can’t, just save money until the upfront costs are no longer an issue.
Markets Vary, But Buying Real Estate Pays Off In The Long Run
Markets can fluctuate and favor renting or buying over the other. While buying generally looks better in the long run, if you live in an area where the houses for sale are prohibitively expensive, renting a cheap apartment could be the best option. Think about it this way, renting a cheaper place in the short-term can help you save up enough to buy a nice house later!
Renting Pros
- There is more freedom to move.
- Maintenance is not your responsibility.
- There are no miscellaneous fees like closing costs.
- You’ll encounter far fewer unexpected expenses.
- You have the ability to try out different living environments.
Buying Pros
- Equity is built when you own the property.
- Home values generally increase over the long run.
- There are potential tax advantages you can use.
- Customization of the property is only limited by your HOA (if there is one).
- You have more long-term stability.
Buying A Home
Most of us will buy a home at some point in our lives, or at least try to. Unfortunately, purchasing your first home can be a long and confusing process. That’s why I decided to break this down step by step – with all the ins and outs I had to learn firsthand! Let’s skip the jargon and get straight into what you need to know.
Prepare
The first part of the home buying process is probably obvious – preparation. It pays off if you do a bit of the legwork up front. How you handle this initial phase is part of what will determine how difficult or easy the rest of it is!
Start Saving Early
Start saving as much as you can afford for your down payment. It may require a tight, zero-based budget. However, the more you can start saving now, the better off you’ll be when it comes time to actually close on your home. Also, do not use your emergency fund towards your down payment. There are usually a lot of unexpected expenses that come with moving and settling in, which you may need your emergency fund for. Consequently, using your emergency fund as your down payment will only put you in a bad financial situation that you may not be able to afford.
Do A Soft Credit Check And Adjust As Needed
If your bank or credit card company give you a free credit score estimate, use it. If you want a more accurate estimate, use a paid service like myFICO. It’s important to have a good head on your shoulders with your credit score and to begin fixing any problem areas you may have.
If you have a low score, you’ll get worse interest rates. In other words, your mortgage could be much more expensive. If you have a bad credit score, it may be a good idea to wait to purchase a home until you can fix it. Otherwise, you could be left with an unreasonably large monthly payment. Of course, as long as you follow good financial habits, your score should be good enough to land you competitive rates.
Calculate What You Can Actually Afford
The key here is to be brutally honest and realistic with yourself. Based on your credit score, debt to income ratio, and your other life expenses, be sure you aim for something you can afford. Also, you don’t need a down payment that is 20% of the property’s value to purchase a home, but if you have a smaller down payment you will have to pay PMI. If you don’t know what PMI is, it’s basically just an extra amount you’ll pay every single month (as part of your mortgage) if you have a down payment of less than 20%.
If you still want a house, and can’t afford a 20% down payment, be sure you calculate PMI into your monthly total. On top of that, don’t just go with the biggest loan you get approved for. It is possible for a lender to approve you for a loan that you can’t comfortably afford. It’s up to you to determine what is actually in your budget.
Shopping Around
Now it’s time to shop around for the right lender. Don’t be afraid of walking away. It’s better to be picky here and make sure you get a good deal. It’s wise to take a little extra time now because it can save you a lot of money in the long run!
See If Any Special Perks Apply To You
Look into any special deals for first time homeowners offered through the local or federal government. It’s always a good idea to check because sometimes there a lot of ways to ease the burden of purchasing your first home. If you can’t find any on your own, be sure to mention that you’re a first time homeowner to your real estate agent, and he or she may know about deals or tax credits you can get.
For those who aren’t a first time homeowner, you’ll probably see fewer perks. However, it’s still worthwhile to check if you can and mention it to your agent once you get one! He or she may know about perks you’re unaware of.
Compare Rates And Choose The Best
Now that you have all the basic information you need, go ahead and start seeing what offers you can get from lenders. Weigh the best options carefully and narrow them down based on which ones fit your financial situation well.
Pick One And Get Pre-Approved
You may want to do this process with a real estate agent, but the main thing you need to know is that you need a pre-approval letter when you’re ready to buy a house. These letters are only valid for a certain time-frame, so be sure you’re ready to buy a home as having to reapply can negatively impact your credit since they’ll be performing hard credit score checks.
Finding A House
Obviously, at some point, you have to find the house you want. Sometimes this can be a short process, and other times it will be lengthy. Don’t let yourself get discouraged. Be patient and you’ll have a better chance of getting the right house for your situation and needs!
The Right Agent Is Key
Find a good agent near you who can help you find the right home (and lender) for you. Make sure it’s a good fit and that they’re professional. Nobody wants an agent who just goes through the motions with you – purchasing a home is a big deal whether it’s your first time or not! Word of mouth can be a great way to find some of the best agents in your area.
Determine Must-Haves And Wants
I hope this goes without saying, but it’s a good idea to know what you want going into this. Have an idea of where you want to live, the type of house you want (i.e. the style), how much land you want, whether you need a garage, how many bedrooms and bathrooms you need, and so on. Of course, do your best to line up what you want with your budget – in other words, be realistic about your housing wants and needs.
Adjust As Needed – But Stick To Your Budget
If you’ve been realistic, but find yourself just over budget, you’ll probably have to compromise somewhere. Maybe you’ll need to change neighborhoods, move to the next city over, get a slightly smaller house, or sacrifice certain amenities. When you’re over budget, you’ll have to find something your can compromise on to afford the house.
Put In An Offer
Putting in an offer is a relatively short part of the process. On top of that, your agent will do most of the legwork here on your behalf. Naturally, there are still a few things to keep in mind.
Inspection
Usually, you (the buyer) will have to pay for the inspection. Make sure it’s done thoroughly and finds all potential pitfalls or concerns with the house. Not only is it good to be informed about any problems, but it can be used for leverage when you negotiate.
Negotiation
Depending on the inspection, and the skills of your real estate agent, you may be able to ask for a lower price or get the seller to cover closing fees. Alternatively, they might be willing to just outright pay for any repairs that are necessary. Negotiation will be heavily driven by the current market too, so if it is a seller’s market you may have an uphill battle.
Closing, Warranties, And Insurance
Your real estate agent should walk you through the closing process, all you need to do is show up and follow the instructions closely! On top of that, make sure you’re getting a home warranty and homeowner’s insurance when you close. It’s important to be covered in case of emergencies, so it doesn’t lead to financial ruin. If you’re opting for a newer build, you may decide that you don’t need a home warranty. However, a good homeowners insurance policy is a must!
10 Key Mistakes To Avoid
- Going with your first lender and not comparing options.
- Purchasing too much house. If you can’t afford it, stay away. If you don’t need it, stay away.
- Rushing the purchase and not thinking everything through.
- Using your emergency fund for the down payment.
- Purchasing while you have bad credit and locking in a high interest rate.
- Picking a house for purely emotional reasons.
- Not comparing different types of loans like FHA, VA, and USDA with conventional loans.
- Underestimating the total costs.
- Waiting too long for the “perfect” house.
- Looking for a home before you have a pre-approval letter.
Buying Real Estate Is Nifty
Congratulations! If you made it through the process of purchasing a home, it’s time to celebrate. Be sure to enjoy your new house, but also remember to plan your move. Pack ahead of time and try to knock out as much as possible, as soon as possible. Letting things sit around in your new house can lead to a lot of long-term clutter. For a lot of people it’s definitely worth hiring movers to help out in this process!
Case Study: New Construction
Buying a new construction home has tons of perks and downsides. It’s certainly not for everyone, so it’s important to consider all of your options carefully before deciding on new construction. Like most things in personal finance, buying a home is personal and should be treated accordingly.
The Reasons To Go With New Construction
The nice things about new construction are just that – really nice. With all the perks, buying a new build can be enticing. Some of the best perks include:
- You can have your ultimate, perfect dream home. Of course, the price will increase proportionally depending on the extent of your demands, but it may be well worth it. If you have eclectic tastes, or your family has specific needs, being able to set up your house to be perfect for you could be a must.
- With new construction, you’ll have far less maintenance for the first few years. Yes, things will eventually wear down and you’ll have to fix or replace them, but there is an easier adjustment period.
- Many new homes come with the latest technology. This is multi-faceted. It can decrease your energy bill, include fancy gadgets, or offer minor quality of life bonuses that you may prefer to have.
- Last, but not least, new construction homes generally come with fewer surprises after you move in. You likely know what to expect and how to handle it. With a house that isn’t new, you may be surprised at how many little (devastating and annoying) surprises you’ll encounter and deal with in the first few years.
Reasons To Avoid New Construction
With all those perks out of the way, it’s important to realize that new construction isn’t perfect. It has tons of downsides, which include:
- The sheer cost. New construction can be a good deal, but generally the more you customize it, the far more expensive it becomes. At some point, it stops being a good deal and just becomes gruesome.
- With new construction, the value of your house can shift drastically. The price you buy it at is more likely to trend down than another older house you bought off the market. This isn’t always true, as it will keep going up in value in certain markets. However, just know that it may be better to stick in your new construction house for quite some time and not resell immediately.
- Unfortunately, the builders may have to shift their timeline for staffing or supply chain reasons. This can be brutal if you’re planning on moving, but it’s a harsh reality that comes with new construction.
The Best Route For New Construction
When it comes to a new construction build, there are several options you have available. I’ll break down the three main things you need to consider when you’re deciding what exactly you’re looking for.
Custom
First up, what everyone probably thinks of, is a completely custom new build. This is exactly what it sounds like. You pick everything from scratch, and you may even work with your own architect on it. It’s quite nice in theory, but it can come with an intimidating price tag.
Semi-Custom
The second option is to go with a builder who is doing semi-custom houses. Often, these offerings will have a general design or floor plan, but you can choose to add certain things and customize the internals of your house extensively.
Spec
With spec houses, what you see is what you get. The builder has already decided everything from the floor plan to the material for your countertops. This one is usually much cheaper, but it clearly doesn’t have as many customizable features – if any.
What About Buying Real Estate Investment Properties?
Now it’s time to discuss the details of the different real estate investing options. There are tons out there, and I can’t cover them all in one article, but I’ll do my best to go over many of the major topics.
Knowledge Is Key For Real Estate
First off, I want to stress how important knowledge is for investing in real estate. If you don’t know what you’re doing, then it’s really easy to cause a lot of headache and lose money. This doesn’t mean real estate is a bad investment. Rather, it just means it’s wise to do your homework first or find a good mentor to help you out throughout the process.
Rental Properties
Rental properties are probably the main thing you thought of, so let’s dive into them first!
Single Family Real Estate
First up is your standard single family housing. Think of an average house designed for one family to live in – that’s all it is. These are a simple and straightforward rental property you can get into. Some people find that they have a hard time making enough of a profit on them, but it all comes down to the deal you get when you buy the property. Get a bad deal then, and you’ll struggle for years. Do your work, get a good deal, and you’ll be fine.
Live, Move, Rent Out, Repeat
One common tactic I see is for a family to buy a house, live in it for 3-5 years, move to another, and rent out the previous property. After you’ve been repeating that for 15+ years, you can start building a healthy rental property portfolio!
Multifamily
Multifamily homes are quite similar to single family housing. This will usually be something like an apartment building or a condo. Nothing groundbreaking, and not completely different from a single family house. Think of this as just a single family house, but on a bigger scale. More money will be required to get your feet wet. Depending on what you go for, you may also have to take care of more things than you would for a single family house. For example, apartment complexes may have amenities or offer services (like spraying for bugs routinely).
Business Buildings
Office buildings or storefronts can be other lucrative options. They can often get really expensive to get into, but I’ve also heard the money is great in turn. It’s up to you how you want to get into real estate, but this may be better for a person with a lot of money to invest or with a background in real estate already.
REITs
REITs are more like an index fund or ETF – that produces dividends. They can be a great asset, but the downside is they can be heavier on the taxes. To handle that, you can always use retirement accounts to your advantage so that you can avoid some of the tax burden.
Flipping Real Estate
So far, most of what I’ve mentioned has been renting. Well, you can always just flip the property! Buy the house, make adjustments and renovations, and then sell it for a profit. With this, you’ll really need to know what you’re doing. You’ll need to get a good deal when you buy, know how to do renovations (or have a good contractor), and know what renovations the market cares about. You can make a lot of money with this, but it requires a lot of knowledge, time, and effort.
As an example, I know a carpenter who makes a killing from flipping houses. He saved up a lot of money over several years, then invested it into flipping. He only does it part-time, but he tends to make $40,000-60,000 every six months from it. The only caveats he has mentioned to me is that a lot of money is tied up during that period, and the crunch time can be rough.
BRRRR
The BRRRR method mixes a lot of what we have discussed already. It stands for Buy, Rehab, Rent, Refinance, and Repeat. This can be another lucrative one to get into, but it’s for experienced investors in my opinion. I’d wait until you have experience in other real estate investing opportunities, unless you can find a mentor who will help you along the way.
Which Real Estate Investment Is The Best?
Honestly, no option is the single best one. Flipping sounds great, but it’s incredibly risky if you don’t know what you’re doing. Investing in office buildings also sounds good, but that’s a lot of cash to have in just one asset. In other words, they all have pros and cons. Do your research on which ones sound like they’d suit you, and go from there. Real estate investing isn’t for everyone, but it never hurts to research it and understand it – whether you decide to dive in or not.
Is Real Estate Investing Right For Me?
Investing in real estate has made many people extraordinarily wealthy. However, it has also financially ruined people who weren’t suited for it and those who didn’t do their research. We’ve discussed the pros and cons of buying a property to live in as it compares to renting. We’ve also gone over the ins and outs of real estate investing. It’s a turbulent field, and now it’s time to figure out if real estate investing is right for you before you decide to dive in.
There is a lot more to it than some of the other common types of investing, like index funds and ETFs. Without further ado, let’s get into the details and see if it’s right for you.
The Perks Of Real Estate Investing
- First up, there is the obvious perk of being able to make money. Real estate has had some pretty amazing short-term gains in the past, and because of the use of leverage, you can make an incredible return on your investments.
- Second, real estate investing has a lot of potential tax breaks. You’ll need to research the details and stay on top of it, but that can make real estate even more lucrative.
- There are tons of options when it comes to how you invest in real estate. It isn’t a cookie cutter ordeal, so you can approach it however you feel is best.
- Real estate is a real, physical asset. For some, that may not be a perk or a downside at all – it’s just a neutral fact. For many, it being a physical asset makes it easier to understand and manage.
The Harsh Truths Of Real Estate Investing
- Most real estate investing is not passive income at all. You will likely have to do a lot of work to manage properties. In some cases, it may be as much work as a full-time business.
- Historically, over the long run index funds and ETFs tend to perform better on paper. With that said, if you know what you’re doing you can certainly make a lot with real estate and outstrip the “experts” who like to day trade stocks.
- Your money will be tied up. Real estate is one of the harder assets to liquify when you need to, so that is another concern to consider based on your financial goals.
- Usually, real estate requires a lot more knowledge to do successfully than other investments strategies – like diversified ETF holdings. This isn’t the end of the world, but it’s probably the biggest reason why people who get into real estate may end up failing.
- Because you’re usually holding onto a real, physical asset, there may be a lot of maintenance involved. Lawns have to be maintained, AC has to be kept working, and the house can’t fall into disarray.
- You will require a lot more money to get started in real estate. Down payments are a thing, and they can require a hefty amount of upfront cash.
Conclusion
Hopefully this gave you enough information about real estate investing and home ownership to get started. For those with more experience in real estate, please let us know your thoughts and tips in the comments!
For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter.
