When you first start a career or a marriage, one of the first big questions is where you’re going to live. Most people seem to think renting a place is the best idea for the first few years. But is there really anything wrong with buying a house young?
As it turns out, buying young can set you up for a great financial future. It’s a matter of knowing how to make the best decisions for your situation. Read on to learn more.
The Age Question
If you’re younger than 35, you’re probably going to get some sideways looks or maybe even some comments when you start talking about buying a house. This is especially true if you aren’t married or if you don’t have children. “Are you sure you want the responsibility of owning a house so young?” is a popular line.
The truth is, there’s no “right” age at which you should buy a house. Sure, many people believe that the older you are, the more likely it is that you’ll have the financial security to be able to afford to buy and maintain a house. But when it comes to being ready to own a house, your age has nothing to do with it; it’s all in how you manage your money.
There are several good reasons you may want to buy a house young. For some people, finding a nice place to rent in your area can mean paying more than double what you would on a mortgage. This is especially true in college towns, where the expectation is you’ll be living with multiple roommates who each have their own sources of income.
Even if you can find a decent place to rent, you start losing money fast if you plan to rent for a long time. With a mortgage, even if you’re paying the same amount monthly, you’re putting money towards an investment in something you’ll own over time. If you’re paying rent, you’re throwing that money down the metaphorical drain pipe.
You may also want to buy a house as a way to start growing your net value. As a very general school of thought, if you stay in a house for longer than five years, you’ll make money when you sell it. You can also rent it after you move out for a great source of passive income.
Starter vs. Forever
A lot of millennials tend to be of the mindset that they won’t make major purchases unless they can get the exact thing they really want. The mindset makes sense; save up your money instead of wasting it on something you’re going to get rid of later. This holds true with furniture, cars, and luxury goods.
But when it comes to real estate, getting a small starter home can actually help you get into the house you want later down the line. Let’s say you pay $1,000 a month in rent; that’s $12,000 a year you’re throwing into a hole. Over five years, you’ll pay $60,000 that could have gone into the principle on a house.
Now let’s say that instead of renting a place until you can afford the house you want, you get a small home for $250,000. If you pay all the money you’d put towards rent into that mortgage, at the end of five years, you could have significant equity in that home. Then let’s say you sell the house for $300,000; now you have whatever you paid down on the principle of the loan + the equity of $50k to put towards a down payment on your next house.
The Five-Year Rule
Aside from the money you’ll save by not paying rent, buying a house can help make you money in the long run. Real estate agents refer to this as the five-year rule: if you stay in a house for five years, you’ll make money on it when you sell it. There are a few reasons this rule works.
First of all, with a few notable exceptions, the U.S. housing market has risen in value pretty consistently. In 1950, the average cost of a house, with the price adjusted for inflation, was $44,600. Today, that price sits at $236,400; that’s higher than even the peak prices before the 2006 housing market crash.
What this means for you is that catastrophic national disaster notwithstanding, your house will be worth more money than you bought it for five years down the line. Even if you make no improvements to the house, you’ll still be able to make some money off the sale.
But there is also a general assumption that you’re going to do some work on the house during the five years that you own it. This can be as simple as repainting that awful peach bedroom or as involved as remodeling the kitchen. Every little bit helps, and it all goes towards the final profit you’ll make off your starter home when you sell it.
And finally, it’s assumed that you’ll be able to afford a more expensive house in five years. Aside from the profit you’ll make selling your old house, you’re also likely to have gotten at least one raise in the previous five years. Combined with the hefty down payment you’ll be able to make, you’re looking at being able to afford a very nice home indeed.
Where to Start
Okay, so you’ve decided you do want to buy a house – where do you start? A good first step is to go searching around on the internet. Check out the real estate prices and options in your area, and get an idea of your priorities in a house.
You should make a list of things you absolutely must have in your house. This will include things like, “There have to be at least two bedrooms,” or “There must be a fenced-in yard.” Then from there, make a list of preferences – things like a large kitchen, a playroom or office space, or a lot of natural light.
Now that you know what you want, it’s time to talk to a real estate agent. They will help you find houses that fit your needs, negotiate on your behalf with the sale, and generally be someone in your court through the whole purchase process. We’ve worked with hundreds of real estate agents – some with great local reputations, other’s not so much. If you need a recommendation, please reach out! And check online rankings, too.
It’s also a good idea at this point to go talk us about getting pre-approved. This will do a few things; for one, it will help move the buying process along once you find a house you like. For another, it will give you an excellent idea of what you qualify to buy and the price range you want to look at.
What to Look For
After you hire an agent, you’ll start looking at specific listings that fit your criteria and making a short list of the ones you want to tour. When you to look at the houses in person, there are a few things you’ll want to keep an eye out for. It’s easy to fall in love with a house at first sight, but you want to go in with a critical eye.
Make sure to pay attention to the major issues in the construction of the house – do the pipes leak; is the floor uneven? Ask if the wiring is up to code and when the roof was last replaced. If this is going to be a starter home, you don’t want to have to spend a bunch of money repairing major issues with the house. Don’t worry if these things aren’t easy to spot – you’ll most likely have a professional inspection done early on to identify any potential major problems.
Next, you also want to look at the practical characteristics that will define everyday life in the house. Are the outlets located in convenient spots, such as next to the bathroom sinks and above the kitchen counters? Is there enough closet space, and are the drawers deep enough to hold everything you need them to? If no, are these easy enough fixes or deal breakers?
Remember, you aren’t looking for your perfect dream home. You want something affordable and well-built that you can live comfortably in for the next few years. And don’t forget to ask your real estate agent’s advice; they are an excellent resource and should have valuable input.
Making an Offer
You’ve toured all the houses, you’ve run over the math, you’ve talked to the bankers, and now it’s finally time to buy your house. Let your agent know about your decision, and they’ll help you put in an initial offer. More than likely, there will be some negotiating over the price, but once you reach an agreement, it’s time to start the paperwork.
You’ll need to gather several documents for your mortgage paperwork, including bank statements, pay stubs, tax documents, and more. The closing process can take a few weeks, and then you’ll have a closing date. This will be when you sign all of the paperwork and shortly after, get the keys to your new home.
Learn More About Buying a House Young
Buying a house young can be a great way to start investing in your future today. Make sure to keep your ambitions in check and your checkbook balanced, and you’ll come out on top.
If you’d like to get started on the mortgage process, get in touch with us at the Tammi Lindly Team. We can help you make smarter mortgage decisions so that you can build wealth and prosperity through real estate. Contact us to get started finding your next home today.