What You Should Know Before Buying Your First Home
This guest contribution comes from Megan, who is the founder of home improvement & real estate blog, Your Wild Home. As a millennial, she enjoys writing about the unique challenges and opportunities available to millennials in the housing market. When she's not reading at a local coffee shop, you can find her giving advice on U.S. News, Redfin, Homes.com, and many other sites.
What You Should Know Before Buying Your First House
You’re out of school and plugging away at that job you wanted. You’re young and free — except for some fairly significant school debt. Having grown accustomed to dorm life, the apartment you now inhabit is a decided step up. Even if, by most standards, the living quarters are still sketchy.
With money finally coming in, you’ve got so many plans: travel, concerts, maybe a decent set of luggage. Take your Mom out to a truly decadent dinner this year for her birthday.
But you also know it’s time to start thinking about investing for your future. Could buying a home at this early stage of the game be a possibility? Consider the following pros of renting versus purchasing.
- Flexibility to Relocate: Who knows where your current job and just-beginning adult life may take you? Perhaps you have a significant other from school who works in a different city. Or you’re shooting for a temporary overseas assignment. Assuming you might not remain where you are for long, renting may feel like the safest option.
- Lower Immediate Cost: Insurance, utility bills, taxes and repair costs remain minimal or nonexistent. There is no significant down payment other than first month’s rent and perhaps a security deposit. In contrast, traditional home purchasers are required to come up with a down payment of as much as 20% of the home’s present value.
- Property Value Stability: Homeowners necessarily ride the waves of property value fluctuation. Without a mortgage or tax payments, renters are safe from such volatility.
- Renovation and Labor Free: Renters have no responsibility for a home remodel, restoration or even common household repair. Lawn and garden care, exterior structure upkeep and snow and leaf removal are tasks best left to the landlord.
- Long-Term Savings: Instead of paying monthly rent with no investment value, consistent mortgage payment establishes substantial credit and accumulates real property wealth. Federal income tax reporting deducts mortgage interest as well as some closing fees and property taxes.
- Property Value Instability: Yes, this is a pro. Purchasing a home while property values are low gives you more bang for your buck and the eventual certainty of value increase.
- Renovation and Labor Amenability: Remember that young and free descriptive tag? Comparatively few responsibilities? It’s an ideal time to take on home remodeling projects! Slowly — one room or project at a time. Sometimes it’s small improvements that lend the greatest payoff. While you anticipate the inevitable upswing of property values, you are simultaneously creating design profit.
Consider Renting Your Home
An excellent way to maximize home purchase investment while you’re still paying off those school loans is to rent the property out. An immediate second source of earning, rental income can pay off standing debt as well as reinvest in your new home.
Here are some things to add to your to-do list:
- Investigate Mortgage Requirements: Mortgages for investment properties tend to have higher rates and more stringent credit score requirements. As you go through the initial process of gaining pre-approval — discovering just how much house you can afford and how you would like the house to be structured — a higher-than-expected mortgage can be discouraging. Don’t worry — you have other options:
- Check out FHAs: Loans from the Federal Housing Administration are available for investment property purchases as long as the purchaser lives onsite. Credit requirements are lenient, buyers with a score of 580 or higher need only pay a 3.5% down payment. The FHA also offers capital improvement loans, known as 203(k)s, for home repair and remodeling.
- Go Small: There’s no need to jump into landlording on a large scale. After all, you’re just out of school and relatively new to the learning curve of investment planning. Consider the purchase of a duplex instead of multi-family structure. Your goal is to keep costs low as your investment grows. And you don’t want property management to interfere with your day job.
Keep things simple while your significant obligations are still few, but don’t be afraid to go bold with property investment opportunities! Your future self will thank you.