According to a recent article by CNBC make it, home ownership has dropped significantly for millennials in 2018 as compared to previous generations. Not only that, but of the millennials who do own a home, 63 percent said they have regrets about purchasing. The largest reason for buyers remorse? Hidden costs. In other words, they weren’t financially prepared.
My husband and I were no different seven years ago when we tried (unsuccessfully) to purchase our first home. We’ve done nothing but rent since then. For one reason. Debt.
I will never forget the day we made a handwritten spreadsheet of everything we owed. Our coffee table was scattered with statement after statement as we added one student loan to the next student loan, to the next. I felt like I couldn’t breathe. We owed $120,000. That was just $20,000 shy of the homes we were looking to purchase.
Looking back on everything, it was actually a miracle the nine offers we made on several different homes were never accepted, because if they had been, any house we would have purchased would have destroyed us. Our monthly expenses for student loans alone were through the roof. There was no way we would have been able to make home ownership work on top of that.
The reason most millennials regret deciding to purchase a home, in my opinion, is that they’re in a similar situation to what my husband and I were in after getting married. They’re being crushed with debt (especially student loans), they have little real world financial experience, and they’re too naive to understand how forcefully life can come at you, whether by hidden costs of home ownership or otherwise.
One of those could possibly work – either having a lot of debt, or having a lack of financial sense – but not both. Both combined are a death trap. We would’ve definitely been part of the 63% if we had purchased a home back then. We would have been bankrupt shortly after as well, and our house would have been a curse instead of a blessing.
Fast forward a few years and now we have no debt, a six month emergency fund, a separate down payment, a lot more financial sense, and a plan for our future. We’re actually prepared to purchase a home this time around.
Here is what we learned in the search for our first home (the second time around):
Not knowing all the numbers beforehand can lead to a huge financial mess. It’s smart to calculate preliminary numbers to see how much house you can comfortably afford, but many mortgage calculators online only show you the mortgage payment and interest. They do not show you all the other costs involved when buying a home such as a down payment, property taxes, HOA, homeowners insurance, PMI (if applicable), closing costs, and yearly maintenance (which is on average 1% to 4% of the total purchase price).
There are additional costs to take into consideration just to move. You may require a truck, two or three movers, blinds, a washer, dryer or other appliances, boxes to store your belongings during the moving process, etc. Those all add up quickly. Writing all of these costs down first will help you see a more complete financial picture of what you can afford before starting the house shopping process.
Keeping the monthly costs related to your home as close as possible to 25% of your take home pay prevents becoming house poor. Meaning, the mortgage payment (principle and interest), plus PMI, plus property taxes, plus HOA, plus home owner’s insurance should total around 25% of what you bring in monthly. This keeps payments low and prevents being “house poor.” House poor is when your very nice house straps you financially and prevents you from enjoying the rest of your life. In our scenario, everything totals to approximately 27% of our monthly take home pay.
Over several months we looked at many different homes. Ones that needed to be renovated, others a few years old, and others that were new construction. With each house, our thoughts were focused on investment potential. We wanted to find a home that we could not only afford, but a home that would also result in a good return for the money. We considered the location, purchase price, repair costs, the HOA fees if any, etc. It may seem odd to look at HOA fees, but if you’re spending, lets say, $2,400/year on the HOA, you are loosing any potential returns that money could yield inside an investment. Two hundred dollars invested monthly at 10% would grow into $41,310 in ten years – almost double the $24,000 given to the HOA in the same time period.
Most of the homes we looked at would not give us a positive return for our investment. Either the renovation cost exceeded the home’s value, or the home was over priced for the area, and therefore we kept looking.
If buying in a new construction neighborhood, certain phases are better than others. We settled on building a new home in a smaller neighborhood. We learned a lot about when to buy; the best times being at either the initial or final phases of construction.
Builders usually offer a lot of incentives when a neighborhood is first being built. These incentives are meant to attract people to start populating the neighborhood, and also give reason to continue building if people are buying. If you buy during the initial phase of a neighborhood, you’ll probably get a good deal because you’ll not only have the opportunity to take advantage of the incentives, but you’ll also be buying when home prices for the neighborhood are at their lowest point.
At the end of the building phase, when the neighborhood is almost completely bought out, the builder wants to clear his/her books and is eager to get the remainder of the inventory sold. This means they will be more willing to accept offers they wouldn’t have accepted during the middle of construction.
Always remember: location, location, location. There is a reason location is always stated three times by realtors. The first “location” is looking at the macro-area of where you are thinking to buy; which city is the most desirable? The second “location” is more narrowed in; where in the city is most desirable? The third “location” is where the house is located in the neighborhood; is it on a quiet and private street in a cul-de-sac?
We looked at all three locations mentioned above before putting in an offer for the home we’re building now and did our best to make sure it will be a good investment in the years ahead.
I hope the tips above help you in your home buying journey, and cheers to finding a home of your own that is a financial blessing.