So I am at a point in my life where I am itching to become a home owner. As statistics have it, Millennials made up 32% of buyers in 2014. That number is steadily increasing as more and more young adults enter the real estate market. This age group, myself included, have been scrutinized for not entering the real estate market with ‘oodles of enthusiasm’. Who would be eager to enter the market after the 2008 financial disaster that left millions in underwater mortgages which later destroyed their credit scores?
Those were indeed dark days, but the future is bright, and – more importantly – rent is constantly on the rise. There are several pros and cons associated with owning vs. renting which I will not mention here. That discussion can be saved for a different post all together. This post is mainly for people like me who are curious about entering the market, and what we should expect from our first home. But first, let’s discuss some prerequisites.
Like most desirable things, there are barriers of entry to owning a home. Mainly, it’s the cash. The down payment is what prevents most buyers from becoming owners; a close second is credit scores. Our generation is not known for our incredible saving habits. With all kinds of smart phones, tablets, events like Coachella and EDC, plus tons of people to rub our faces in what we’re missing out on via social media, there have definitely been easier times to save money. However, saving and, more importantly, investing are things we must all eventually start doing if we plan to one day retire and not work our entire lives. The sooner you get started, the better! Don’t be impulsive like my friend, Marty, over on the right.
I know I haven’t been the most frugal person over the years. Spending money on things I did not really need, not saving like I should, all bad habits I am trying to get rid of. However, it is never too late to set goals and achieve dreams! Saving for a down payment takes time, but I have managed to surprise myself on how much I can save when I budget for things. Create a budget for yourself and stick to it! Consistency is key. Set your goals and hold yourself accountable for them. If you don’t make yourself accountable, no one else will either. It might take 3 years of frugal spending habits to save for a home, but I guarantee you will be thankful you were miserable 3 years instead of decades in the future. Check out Reddit’s Personal Finance subreddit for tips. There’s tons of information along with success stories for you to get motivated.
Once you have your finances in order, it is important to know what to expect from your first property. Let’s put things into perspective a bit. After all, everyone needs to start somewhere!
Remember moving out of your college dorm room or first apartment? Yeah, it’s always a sad/nostalgic time, but (typically) we move on to better places; bigger apartment, house with roommates, etc. A place to live will always have some kind of emotional weight associated with it, regardless if you’re renting or owning. Your first home should not be seen as the two story, four bedroom, four bath, three car garage dream house you can ‘see’ yourself living in. Your first home should be seen as an investment that will provide you housing all while building equity. One of the biggest, if not the biggest, benefits to owning a home is the equity you build over the years. Equity is the difference between what you pay for a home and its market value.
I have encountered clients that want a big house for their first home without considering the problems that may arise from such a decision. Some of you may have heard the term ‘house poor’, but for those who have not, let me define it for you:
House Poor: A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities.
Purchasing more house than you can afford can be a really bad idea. As the saying goes, sh*t happens. Do not put yourself in a situation where you can’t cover unforeseen expenses just because you wanted a guest room in your first home. Again, BUDGET! Know how much you can afford on housing while taking into account all of your other expenses, seen and unforeseen.
Some clients have even gone as far as stating that they would rather continue renting than living in something that isn’t ‘what they had in mind’. I would argue that at least with a starter home, one is building equity for themselves and not the landlord. Size is but one factor in selecting a home, and not all big homes can be called ‘nice homes’. It is best to keep an open mind and try to see opportunities rather than comparing your dream home with what is presented before you. If you find yourself unsatisfied with what you can currently purchase, save some more. Every $20,000 saved allows you to buy an additional $100,000 in house.
I can assure you that all of the owners of those dream houses you see did not start out in that marvelous home. They too started with a small, two to three bedroom home. Think of home prices as steps in a slow ascending escalator, your financial abilities as the amount of steps you can climb per stride, and your loan term as the length of time it will take you to reach the top. You don’t want to set too fast of a pace or else you won’t make it to the top.
With very few exceptions, California has consistently seen an appreciation in home prices. A home that is valued at $250,000 today can easily appreciate to over $300,000 in a 5 years or less, depending on market conditions. That’s like taking home an extra $10,000 per year. Additionally, upsizing is much easier because you have the equity from your first home to put towards a new one.
There is absolutely nothing wrong with wanting a lavish home, however, expecting one as your first home can be problematic. Do the research and realize that you don’t need a huge house for your first home. There is nothing wrong with starting out with a condo or townhouse. The key ingredient here is the equity you build over the years. Let the escalator do the heavy lifting, all you need is to prepare yourself to climb aboard!