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A house is a BIG purchase. Maybe the largest purchase of your life. So it’s super important to know what you’re really getting into before you drop the big bucks. I want to share five important things to consider before buying a house. There are lots of questions about houses. When is the best time to purchase? Is it better to rent or own? If I make $X, can I afford this home? Will I really make money buying a house?
Almost every college grad has an eventual goal of owning their own home. Some people tend to jump on board without thinking twice. All they hear is that “buying is always better than renting.” One year in and I know some people who are absolutely miserable. That’s why I think it’s important to run through this list of considerations prior to purchasing your first home (especially if you’re young!). A house can be an exciting purchase when you’re ready for it. But it can absolutely control you if you’re not.
1. Houses are NOT necessarily an investment.
Big fat myth number one. Here’s the dictionary definition of a house for you. It’s a “building for human habitation.” That’s it. The truth is: if you’re going to be living in the house, it’s not an investment. You won’t be generating any sort of cash flow. You’re going to be tied down to when you can buy or sell the house. There is a recurring cost for keeping a house.
Just because your house will most likely go up in value does not mean it is an investment. Inflation can automatically push up a house price. If you buy a house and then sell it at a higher price, most likely the overall housing market has gone up too. And if it’s your primary residence, you’ll have to find another home.
When a home is your only home…well, it’s your only home (makes sense…). It’s not something you can just buy and sell whenever you want. Selling costs money too. There are closing costs. There are fees left and right. You have to pay capital gains taxes if you sell too early (usually under 2 years). It takes a lot of time and energy to sell a home, especially if you’re new to real estate. Don’t come in with the expectation that you’ll be able to flip houses like a pro.
This is not to discourage home ownership. It’s true that you can build equity (ownership of the home calculated by market value – loan). It’s equally true that if you’re able to purchase a house at the right time and place, you have a great chance of making money. However, it’s unwise to consider your primary residence as an investment.
2. Can you really afford it?
There’s a big difference between being able to purchase something and being able to afford something. In my list of common spending guidelines, I mentioned that the common rule of thumb for home purchases was no more than 3x your annual income. Eyeing that $300,000 home? Your household income should be at least $100,000.
It seems like a restricting number. Maybe you know people buying homes while making half that amount. You really only need 3.5% down payment to “purchase” the home. So if you have $10,500 saved up, you can technically “buy” that $300,000 home. But can you really afford that purchase?
Remember that this is a rule of thumb to protect you from hidden costs and from becoming house poor. I understand there are situations where people may have large down payments that allow them to purchase homes without following the 3x annual income rule. The main thing to keep in mind is that the cost of a house isn’t just tied to the initial sale price. You don’t want to have just enough money to get a house and then become a slave to the ownership.
3. The hidden costs of purchasing a home.
So you have that down payment saved. Congrats! Here’s a small list of some other things looking to steal money from you wallet. Some of these items can cost you a few extra thousand dollars. Other considerations might seem small. But those small things add up. Especially if you’re on a tight budget for a home purchase.
Here are some bigger, more traditional things to consider:
- Closing Costs: Typically 2-5% of your house purchase…not to be slept on.
- Home Inspection: $500+
- Origination Fee: Usually 0.5 – 1% of the loan amount, this is the fee that is charged just for processing your loan and getting it in place for you.
- Escrow: Third party account to close the buying process, usually a base fee of a a few hundred dollars + % fee.
- Real Estate Attorney: Not applicable everywhere, but something to be considered.
And…here are even more things you may want to budget for:
- Moving costs: Regardless of whether you’re paying friends with pizza or hiring a moving company, this takes time and money.
- Broken items: Expect that some things may get damaged in the move.
- Immediate repairs: If the house isn’t brand new, there are some things you may need to fix almost immediately.
- Eat-out budget: You may not be able to use the kitchen for some time if you have a lot of stuff you need to unpack.
4. The hidden costs of living in a home.
I remember buying my first car. Nothing fancy or flashy. It costed me a lot at the time. But in young, naive head, I thought that the car payment was all that would ever need to worry about. Then I found out about insurance. Oil changes. Gas. New tires. Yikes. I didn’t plan ahead well enough to forecast all the extra expenses.
Likewise, the additional cost of maintaining a home can surprise first time homeowners. Is the cost of buying the same as getting settled into a home? Not at all. There are plenty more things to consider even after closing your home and getting settled. You ready?
- PMI: The fee you have to pay because you didn’t put in at least 20% for your initial down payment, there are calculators out there, but you can estimate 0.5 – 1% of your mortgage per year. If you have a $200,000 loan, you’re looking at up to an additional $2000/year!
- Increasing your emergency fund: That’s right. Most likely, you’ll need to up the amount you need in case of anything that breaks. And things definitely break. They also tend to break when you have no money. So this is important.
- Insurance: Flood insurance. Home insurance. Hurricane insurance (hello Floridians).
- Property Tax: This can be confusing, and could be a separate post. If you want to learn more now, check out this informative article.
- HOA Fees: If you have amenities, you probably have to pay an HOA fee. It depends on your community. But this can be several hundred dollars a month. Hey, but at least you get access to that crowded community pool, right?
- Landscaping: You have to take care of your own lawn. And trim the trees. Especially if the HOA are on your butt. Whether you choose to do it all yourself or hire someone, that’s time and money.
- Utilities: More than likely, if this is your first home, it’s bigger. And with that comes an increase in utility costs.
5. You’re the owner now. You’re now responsible…for everything.
Renting is like working for an employer. You might not enjoy having to report to someone. Maybe you want more control. Well, owning a home is comparable to being your own boss. That first week that you quit your job and start your own business might be the happiest week of your life. But down the road, you realize something. Once you own something…you’re now held responsible.
And that’s something that a lot of people going from renting to buying need to realize. Under a landlord, you call for help. You’re living there, but you’re not responsible for fixing everything. When something breaks, you call the landlord. When something’s not working, you call the landlord. Well, when you ARE the landlord, you have to deal with whatever goes wrong.
This isn’t ultimately something that should stop you from being a home owner. It’s just something you should definitely consider before buying a house.
The intent of this blog post was not to scare away anyone from buying a home. In fact, it makes a lot of sense to purchase a house. And I’ll probably write up a future article that explains all the benefits of home ownership. But it doesn’t make sense to buy one when you’re not ready. I share this because I was in the same boat. I was force fed into thinking that buying a home was the only smart thing to do financially:
“You have to buy young! The earlier the better!”
“Houses are the greatest investment. You’re missing out if you don’t start when you can!”
“Never rent! You’re just dumping money. Your mortgage will be cheaper than your rent!”
Obviously, some of these quotes are optimistic. Some are biased. But some may also be true depending on when the home was bought. However, the important thing to remember is that we can’t just look at one side of the story. Home ownership comes with a lot of other considerations as well. And I hope that this post has shed some light on some of those things.
Are you a home owner? Do you agree with these points? Are there additional things that someone looking to buy may need to look out for? Maybe you’re currently looking to buy a home. Did you consider some of these things? Maybe you have a different opinion or goal when buying a home.
As always, I’m very interested in hearing your thoughts! Feel free to comment below or contact me directly.