Today’s post is about getting through the process of buying a home smoothly and in a way that keeps your lifestyle comfortable. The title is also an homage to arguably the best line in Road Trip: “It was his most challenging challenge ever.” One of the most important aspects of buying a home is knowing about your financial state before buying and being realistic about your financial state afterwards. The last situation anyone wants to be in is “house poor”.
Here are the steps, in order, for buying a residence:
1. Know all the ins and outs of your financial situation
Get your credit reports, reduce your debt, save money and make sure that ALL of your bills get paid on time. Put toghether all of your bank accounts, investments, loans payments and income. Make sure you have a good idea about what your inflows and outflows are. Also be sure to build in some extra for emergencies (like 5-10% a month).
2. Have a very solid idea about what your financial situation will be after you buy
Keep in mind that when you buy your own place, the maintenance and emergency expenses are going to be on you, not your landlord. Because of this, you should expect 1-3% of your home’s value in maintenance costs each year. So, if you go middle of the road and estimate 2%, and your place is a $250,000 residence, expect $5,000 a year in maintenance and repair costs for painting, yard work, pool service, appliance issues and roofing. Of course, you can offset some of this cost by doing things yourself, but ONLY do things you are qualified to do (like mow the yard). In any case, this is a few hundred extra dollars a month in upkeep.
3. Get Pre-Approved
A surprising number of people do not do this. The last thing you want to do is see a bunch of properties that you cannot afford, just to learn that they are out of reach. Know what range to look for before even thinking about looking. Also, the pre-approval process will help you gain knowledge about your financial situation. Mortgage people have access to a lot of financial information and can help guide you through everything.
4. Be honest with yourself about what you purchase
Going through steps 1-3 with help with the financial honesty. That is a very important step. However, that’s just a start. If you do not have children, work 80 hours a week, and your friends and family all live in town, buying a 5 bedroom single-family fixer upper is probably an awful idea. You would be setting yourself up for a lot of extra work for a house that does not meet your needs (a big, older house will have a lot of upkeep and maintenance to deal with and this particular buyer probably wouldn’t need extra bedrooms for visitors/children). Given a particular lifestyle, bigger isn’t necessarily better.
5. Understand the advantages to owning from an investment standpoint
Owning a home is a great investment in the medium term. One of the problems with the housing bubble was that people were thinking of homes as 2 year investment vehicles. The investment advantage of a home is definitely there (people wouldn’t own rental properties as investments if they weren’t making money on the tenants), but it takes some time to reap the real gains. Mortgage principal pays off faster as time goes on and having a longer outlook allows the owner to take advantage of peaks as they come along rather than sticking to selling quickly and hoping the market is ok. Additionally, rents increase over time (and housing prices with them, roughly) those rents are going to look relatively much higher 15 years from now than they will 2 years from now. In short, if you run your household the way a good property manager would run a rental property (by taking care of maintenance in a timely and thorough way and paying a little more now to save a lot down the road, for instance) you will come out way ahead on your investment.
6. Use a Realtor and an awesome Inspector
Buyer’s agents (usually) cost nothing to the buyer while providing all kinds of useful knowledge and taking care of a lot of the work so that the process is as unintrusive as possible for the buyer. Agents have access to all kinds of market information and data. Ask a lot of your agent, and you should be able to make a very informed decision. A good buyer’s agent will also have some excellent Inspectors to refer the buyer to. A very careful, thoughtful inspector can make all the difference in the world. I would never let a client go through with a purchase without an inspection.
Home buying is becoming a very good way to make a medium-to-long term investment in today’s economy. Affordability is very high and there are a lot of macroeconomic indicators that are looking better each month. Because lending standards are pretty tight right now, the competition for homes is also pretty low. In other words, if you can qualify for a loan and buying a home makes sense for your situation now is a super time to jump into home ownership.