So, You Want to Buy a House…

I was 9 when my parents bought our first house. It was a huge deal for us as a family- I remember my parents being really excited and I remember also feeling a little sad because for the first time in my life I would no longer be sharing a bedroom with my sister. I distinctly remember her feeling pretty happy about that!

The next time I thought about owning real estate was when I was about 14. My father had been growing his business at the pizza shop and had wisely decided to take the earnings and invest in rental real estate. He was philosophically committed to focusing on mid-to-low income housing and to making sure it was being rented at a fair price, and kept in good condition. He felt it was a moral obligation- he used to say, “everyone needs a place to live, and it is important not to take advantage of that”. As a young man, my dad had wanted to be a monk, and those monk-like tendencies would often emerge in how he thought about business. He included me in many aspects of investing and renovating real estate, and I learned a lot at a young age, including these tips:

1) If you are going to borrow money to buy something, you better expect it to increase in value. A mortgage, or a student loan, are investments that — at least if made wisely- can more than cover the cost of the interest you are paying. Contrast that with a car that depreciates significantly the moment you drive it off the lot. When looking at a real estate investment, think about why that particular property would increase (or decrease) in value, and factor that into your decision.

2) Make sure you factor the cost or maintenance and renovation into the purchase of a home or of real estate. This was one of the things that I learned the hard way. Although my childhood home was filled with promise and optimism when purchased, it ended up as a tarnished prize because as things broke there was neither the money nor the time for anyone to fix it.

3) Creativity is key when buying real estate on a budget. My father bought his early properties “no money down”- and sent me when I was 18 to a course to teach me how to do the same. The world is pretty different now, and a few financial crises have taught people that making sure that buyers are qualified is an essential aspect of not having a housing crisis. Nonetheless there are still ways to buy property with a small down payment, or no down payment at all- but that doesn’t at all reduce the need to be sure that you can make the mortgage payments.

4) Owning a home means needing an emergency cash buffer. Property taxes can go up. Insurance premiums can rise. Natural disasters can cause damage. Watch the movie “The Money Pit” before you buy your home. A humorous but sobering message about how much a home can devour your savings. Be prepared!

5) My father sat with me one afternoon to show me how much can be saved in the total cost of the property if you pay a bit more every month above what is required against the principal payment. This opened my eyes to how amortization works- and also helped me to be wary of “deals” on mortgages that could end up costing the buyer a fortune. If you do get a variable rate mortgage, make sure you know what the downside could be when rates rise — and be honest with yourself about whether you can afford that. The last time a got a mortgage I had to fight with the lender because I wanted a traditional fixed rate 30-year mortgage. He was trying to persuade me to buy an apartment that was three times more expensive than what I was getting (seriously THREE times!) — and to do that by getting an interest-only mortgage. That may seem appealing on the surface, but the details included adjustable rates in a few years and a balloon payment of principle, none of which is economically prudent. Not too long after I made that purchase, the housing bubble burst and many a home owner lost their house in foreclosure using these styles of mortgages.

6) Really think about why you want to rent vs buy. There are some excellent reasons (like “why pay someone else when you can pay yourself?”- which was another favorite saying of my father’s). Homeownership can also be an excellent way to save for retirement- the equity accrued becomes an asset that you can access when you stop working, either via selling and downsizing, or by using a reverse mortgage. These are all very rational reasons to buy a home. There are a lot of emotional reasons that people want to own their own house, which are also valid, but are best weighed against the stress that could be caused if it is not the right time and it strains your finances.

Understanding the home buying process (there are many websites on the topic, and a lot of real estate agents do educational seminars to find prospective buyers) is key before taking the plunge. A home is for most people the largest investment they will make in their entire lives, so taking the time to really examine whether it is the right time for you is worth the effort. If the property you fall in love with gets sold to another buyer, don’t sweat it, and don’t compromise with your finances and put yourself in a bad spot. There are many “fish in the sea” -let it go, and find that home that ultimately was meant to be for you.