312 | First-Time Home Buyer | Bigger Pockets | ChooseFI podcast

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Episode description

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Episode description

In 2008-2009, the American dream of a home with a white picket fence turned into a financial nightmare, sending many families underwater for a decade. After looking at the numbers, there’s an ongoing debate over homeownership. Owning may not be the right decision for everyone.

Scott Trench and Mindy Jensen from BiggerPockets join the show to discuss home buying and their new book, First-Time Home Buyer: The Complete Playbook to Avoiding Rookie Mistakes.

Even if you’ve already purchased a home, Scott and Mindy’s book is a masterclass to help you rework the process during your next home buy.

According to their book, “…a smart home purchase will not only give you a place to live, but also offer flexibility, financial stability, and the chance to recognize and increase in that home’s value over time”.

Is purchasing a home a good investment? Mindy says, “Maybe”. Housing is an expense whether buying or renting. The more you buy, the more you are spending, and the less wealth you will have.

Don’t ask how much can you afford. How little can you spend to meet your lifestyle needs and what’s the best financial decision to meet those needs? There’s a lot of math behind a buying vs. renting decision.

As a real estate agent, Mindy tries to stop herself from asking clients how much they can afford. Instead, she asks about the price range, what kind of home they are looking for, and what condition it should be in.

Mindy’s home is an investment, but that’s because she buys dumpy homes, fixes them up, and forces the appreciation. However, she says the average person shouldn’t consider their home an investment.

For the average buyer, appreciation will generally occur over the course of the ownership time period, but it is the product of the housing market around you. It tends to appreciate 3-8% year over year. Selling after just a few years of ownership won’t make much when you sell, in fact, you may lose money to closing costs.

For regular buyers, a home is a place to live, not an investment. Roughly 10% of a property’s purchase price is out the door in closing costs the moment you buy it. If you don’t improve the property and force the appreciation, you have to allow appreciation to carry you back over time.

Over a long period of time, the returns on your home are low compared to investment alternatives like the stock market.

When deciding to buy or rent, what’s the breakeven point? Scott and Mindy assume a 3.5% appreciation rate, which comes from the Case-Shiller Home Price Index. At that rate, the breakeven point comes in 5-7 years. The higher the appreciation rate, the faster you reach the breakeven point.

You don’t need to live in the property for the 5 to 7 years to reach the breakeven point, you only need to own it for that time to make it work. You could rent it after you move out as an exit strategy and increase the desirability of buying.

If you rely on a lending calculator to answer the question, “How much house can I afford?”, you’ll end up being house-poor.

Median incomes and home prices around the country differ more than other categories, such as food. All the disposable income over what is needed for day-to-day life can go to your scarcest asset, which is housing in many high-cost-of-living areas.

There is no rule of thumb for what percentage of income you can spend. It’s about how little house you can buy and eliminate all of the waste.

When making the rent vs buy decision, Scott says the biggest variable to consider should be time, then what your appreciation is going to be, what you can do to force the appreciation, and then exit strategies.

There can be a dramatic difference between a home you would want to live in and one you could potentially rent. First-time home buyers tend to live in the property, but it’s likely they won’t live there forever and should make the smartest choice by thinking outside their own needs.

Mindy suggests using the internet to research what you need versus how can you rent it out.

It’s not a smart financial maneuver to decide you want to buy a house today and put an offer in tomorrow. Do some research and figure out what exactly you want.

Most people go in with the framework of buying the house they like and pray that it goes up in value so they can sell at a profit. But when you buy a home, there are three eventual outcomes. You live in it, rent it, or sell it for a profit. Keep all three of those in mind when buying.

If the chances of you moving are almost zero, it’s a great idea for a first-time homebuyer to begin looking for their forever home, but Mindy thinks the whole idea of a forever home is garbage.

It’s not realistic for a 20-year-old to be able to afford the 3000 square foot home and stay there for 30 years.

Lenders, real estate agents, and contractors are all incentivized to have you buy the biggest home you can afford because they make the most money that way.

If you don’t focus on the first home being your forever home, you can have more assets available for when you are in a place to get what you want.

The first step is to be clear where you fall on the “live in it forever, rent it out, or sell for profit” spectrum. Next, figure out the price range for what you want. Don’t look at the active listings, look at what has sold in the last 180 days. Finally, narrow that search down to the 10 properties you would have purchased yourself. That gives you a realistic idea of your market.

Mindy says the exercise can be a great way to screen agents as well. If they are unwilling to do this for you, cross them off the list. You should interview the agent before deciding to work with them, keeping in mind that their incentives are not necessarily aligned with yours. Find someone considerate of what you want.

The home seller is usually paying the commissions of both agents involved in the sale of a home, though for it’s usually very practical for a first-time homebuyer to have an agent represent them.

The next step in getting a good deal is waiting for the home you want to come on the market. Be pre-approved or pre-qualified for a loan and be ready to view the property as soon as it comes available and make an offer that night or the next day. It’s not a rush decision because you already pre-determined what you wanted to buy.

If you think through the exit strategies before buying your first home, you won’t feel trapped by your decision if something like a job opportunity in another city comes up.

In a hot real estate market, the fear of mission out can be real for first-time homebuyers. It’s a hot market right now, but it’s not going to continue forever. Make offers based on the numbers, not out of emotion.

Scott is currently renting because it’s a cheaper way to fund his lifestyle right now and there’s too much risk for him to assume with buying.

Other than student loan debt, a first home purchase may be the biggest financial decision you make. It’s worth spending a little time thinking about it.

Resources Mentioned In Today’s Conversation

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