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Hey there new home buyers. Jeremy Goodrich here. I am that guy. That guy that bought my first home many, many years ago and had no idea what I was getting into. I didn’t use a realtor. I didn’t have an inspection. I didn’t have a clue what documents I was signing, and I ended up, you guessed it, buying a beat up old house that I spent years fixing only to sell for way less than I bought it for. When it comes to home buying, I am the story of what not to do.
But that guy? That guy is not you. You are two times smarter, you’re three times more organized, and you’re ten times better looking than he was. You’re going to find the right home for the right price, and you’re going to have fun doing it. That process starts right here with the New Home Buyer’s Guide podcast. We’re glad you joined us.
Welcome new home buyers to episode two of the New Home Buyer’s Guide podcast. In this episode, we’re going to break down the question, “Should I buy a house?” Obvious first question, right? That is absolutely the first topic you should address in your home-buying journey. So it makes sense that we break that down right from the beginning.
But before we dig into that question, I want to offer a quick overview of the journey we’re embarking on and how it will transform your home buying experience.
I mentioned in the first episode how the New Home Buyer’s Guide came to be. So if you missed it, definitely head back over there and take a listen. What I could never have realized in 2015 when I created that first video is how many people we would truly help. Hundreds of thousands of first-time home buyers like you have watched our videos on YouTube and purchased our online course at NewHomeBuyersGuide.net.
What started as a way to answer simple questions for our insurance clients that were first-time home buyers has become a comprehensive nine-step approach to organizing and understanding the home buying process. And that’s what we’re going to continue to do with this show. In every episode we’ll talk through a specific question that you either have or you should have, then we’ll offer some quick and easy answers. Along the way, we’ll talk with experts and other first-time home buyers just like yourself.
In fact, if you’d like us to answer a specific question or even talk on the show, why don’t you head over to NewHomeBuyersGuide.net and share your question in the chat feature right there on site.
Okay. Let’s dig into our first official topic.
I’m willing to bet that in the last month you’ve been sitting on the couch scrolling Instagram and seen a friend celebrating the purchase of a new home. Or maybe you were at the fitness club running on a treadmill and imagining being able to have a workout space in your own home, and you thought to yourself, “I need to buy a house.”
Immediately after that thought, I bet other questions rolled into your head. Do I have enough money? Is it the right time to buy? Do I even know what to do? And that is the point where you say, “Oh, forget it! I have no idea what I’m doing and buying a house is totally stupid anyway.”
So who’s right? Did your Insta-friend make a smart decision? Or did they just tie a financial chain around their ankles for the next 30 years? Well, it could be either. So let’s dig into how you can tell the difference between the two.
All right, so let’s get into it. We’re going to dig into four questions that have to do with whether it’s the right time for you to buy a house. Let’s talk about each real quickly, and then we’ll dig in.
The first one is, does it make financial sense? Buying a house is not all about the money, but it is one of the biggest investments you might make over the course of your life. So it’s smart to think about money of course as a part of the conversation about whether you should purchase a home.
Is it the right time? There are right times and wrong times to buy a house. We’ll talk a little bit about that.
What if my life changes? We’ll talk a little bit about what parts of life are kind of the right times to buy and maybe when they aren’t so much.
And the finally, what are the hidden costs? Sometimes we get caught up in the surface of the home buying process, and there are definitely some hidden costs that I’ll uncover for you a little bit so that you can have a sense of what all is in there. Then finally, the fifth question that just might make you change your mind about the process, we’ll dig into that at the very end. So let’s get going.
Let’s start with money sense. Does it make sense to buy a house right now based purely on money? And I’m going to create a scenario for you that’ll just give you a sense. Obviously I don’t know what your particular scenario is, but let’s just say you were renting, and you’re renting for $1000 a month. I just pulled that out of my head and it’s very even and that’s nice. So $1000 a month. And let’s say you could buy a house and have a mortgage for exactly that same $1000 a month.
The nice thing about that scenario is no change in your monthly out-of-pocket, right? So let’s look at the differences and how they compare. Let’s start with renting. So you’re monthly rent, we already said it. $1000 a month. Easy. Okay. After five years you will have spent a whopping $60,000 renting your home, and after 10 years we’ll double that of course and it will be $120,000. So over 10 years, and that’s a super long time I realize, but it just gives you a sense. You’ll have spent $120,000 renting your home. Well worth it, you’ve lived in that home for 10 years. You’ve had a roof over your head and all those kinds of things. But you will have put that amount of money out.
So let’s look at what you got for that. Well, obviously you got a place to live. There’s a value to that, there’s no question. But did you get any equity? Did you gain any financial scenario because of that renting? Well no, you didn’t. You didn’t gain any equity at all. Did the value of your home increase over the course of time? If you buy a home for $150,000 right now, 10 years from now it’s probably going to be worth more than that. It depends on the market of course, but it can increase in value. And of course if you’re renting you would not have that.
What about your upkeep expenses though? Did you have to replace the roof? Did you have to replace the furnace? Did you have to repaint the house? No. You didn’t have to do any of that stuff. That’s part of the positive to renting, right? And that also costs you zero. So that’s a really good thing.
So you didn’t gain any equity. The value of your home that you owned didn’t increase, that’s another type of equity, and you didn’t have to pay any upkeep expenses either.
Let’s look at buying. Let’s say you’re going to buy a $150,000 house. I looked at this, I tried to figure out okay, well what could we get to $1000 a month? What’s realistic? And so a $150,000 house with a 30-year, 5% fixed-rate mortgage. Now there’s a lot in that and I’m not going to dig into it right now, but that’s a pretty common type of mortgage. So if you got that mortgage and you paid $7500 down payment, then that would add up to about a $1000 a month payment. So that would give you a sense of exactly what you can get for that $1000 a month. About a $150,000 house if you get the right loan.
Your monthly mortgage would be $1000. Over the course of five years you will have spent exactly $60,000, the same as renting, and over the course of 10 years you will have spent $120,000. So the out-of-pocket costs on the surface are exactly the same as renting. You’ll have spent the same amount of money.
What would your equity be? Well, I looked it up and I looked at what that basically would add up to, and just paying $1000 a month down on a 30-year mortgage, you’d have about $13,000 of equity after five years. So that’s pretty good, right?
Now your house is likely going to increase in value as well. I’ve chosen a very low 2% increase value. It’s possible that it could go up by more than that, but this is a safe number. If it increased in value by 2% per year, you would have another $15,000 that you had made off of your investment in your own home. So there’s $28,000 more there after five years than you had before.
You’d also have upkeep expenses though. And when I looked at really the details of it, I figured $2000 a year is … it might even be low guess really, but let’s just use that $2000 a year. You would have spent $10,000 on upkeep expenses. After 10 years, we would do the same thing and we would just basically double those. Now you’ve got $62,000 of equity that you would not have had if you had rented the house. $62,000. But you also have upkeep expenses at $20,000.
So after 10 years with these very conservative numbers that I’m making up, you would have $42,000 of equity, essentially, in this property. Then that means if you wanted after 10 years to sell your house, you likely could make $42,000 off of it. Now you could of course make a tons more, and if things went wrong you could make tons less. But this basic premise gives you a sense of what the value of owning a home is. You’re going to grow that equity and the value of your home is probably going to go up, and so you increase that value as well. And with this very conservative look after 10 years, you could have $40,000 in your pocket that you would not have had if you were renting. That’s just a way to look at it.
So renting, you gained zero dollars over the course of that time. In buying, you gained up to $18,000 … that’s after five years I would think. Then after 10 years, you know, the same. Renting you don’t have any equity at all, buying you have about $42,000. Again, I feel like I need to say this is based off of generalized numbers that I came up with, but based off of what I see in the market, what I see in growth. In fact, I think these are super conservative numbers, and that you could make a lot more money off of your house over the course of 10 years than $42,000. But you could make less as well obviously, depending on the market.
So does it make money sense? Well, buying definitely has the potential to be a lot better for you over the course of time than renting. Because when you’re renting, you cannot grow that equity. On the other side, renting you don’t have any of the risk. You don’t have any of the expenses, and so there are some things there too.
But I think in general buying a home, if you can do it, and if all the things I’m going to talk about after this line up, then it does make money sense to own your home rather than renting your home. There’s a reason tons of people have investment properties that they want to rent to you. Because owning that home is valuable, and they can make money off it and they’ve realized that.
If you own your own home, then you get in on that investment capacity and ability. You get to make money too instead of having someone else make money off of your rent. So it does make money sense, assuming those basic premises that I just created.
So the first topic in answering the question should I buy a house was, does it make financial sense? And I laid out that, yeah. Most of the time it probably does. The next question has to be, is now the right time to buy?
I wanted to go back to an ancient Chinese proverb that … When is the best time to plant a tree? The best time to plant a tree is 10 years ago. I just showed you. If you had bought a house 10 years ago, it’s very likely that you would have equity up to $40-$50,000 in the house that you owned. But when’s the next best time to plant that tree? Well it’s obvious, and that’s today.
If all these other pieces make sense. If it all lines up for you right now. If your finances are right, if the market is right, then today is a great time to buy. If it works for you. If it makes sense, then today is a better time to buy than five years down the road, because you want to start building that equity and you want to get that increased value in your home as soon as possible. Does that make sense?
Okay. Building equity takes time, so the sooner the better if you’re going to buy. But, there are two things you got to get right first. You know, there’s a couple of things that you really do need to get right first.
The first one is your credit. It is not the right time to buy, in my opinion, if your credit is bad. If your credit is in bad shape … and look. We’re going to dig into your credit in the next couple of episodes. We’re going to really figure out what’s going on with your credit. And if it is a problem, we’re going to help you fix it. So don’t worry too much about it, but takes time. It takes time. And if your credit is bad right now, it just might not be the right time for you to buy. You can force it with bad credit. You can get a loan a lot of times and force yourself into a home ownership situation, but I see a lot of folks who don’t have good credit putting themselves in bad situations and ending up buying a house they shouldn’t have bought. Just wait. Wait a couple years. Get your credit right. Get yourself put together on the financial side, and then buy a house. It makes so much more sense.
On that same line, you got to start saving up for a down payment. 10% is awesome. 5% is really the minimum that you should put down. And most people don’t just have that money. I used that $7500 example earlier. I don’t have $7500 just sitting around. You probably don’t either. So it’s time now to start putting money aside. Put a little bit of money aside. Have it automatically withdrawn from your checking account and put into your savings account. Ask your parents if they can help out. Whatever your scenario is, having some down payment and money is going to make the purchase process way easier and way more profitable for you in the end, because you can get a better loan with a better interest rate, along with lots of other things.
These two things must be right. Your credit and your down payment have to be right.
Another reason it’s not the right time to buy is if you’re only going to be in this town for a couple of years. Investments take time. Building equity in a home takes time. And you have to have, I think, at least five years in the same place to really see value out of your purchase.
Now lots of people could talk about different ways that you could find value in a short-term purchase, and yeah those are possibilities, but they’re not as likely. If you’re going to be in a town for less than five years, and certainly less than three years, then it’s probably not the right time to buy. It’s probably the best time to rent, enjoy the space you have, wait until you’re in a little bit more stable situation so that you can buy a house and live there for five or 10 years, and find the equity like I talked about in the first part.
So to summarize this question, 10 years ago was the perfect time to buy. Right now is the next best time to buy, if it makes sense for you. Three pieces you need to think about in figuring out whether it is the right time for you are your credit and whether it’s good or not, down payment and whether you have some kind of way of getting 5-10% down on your purchase, and finally your longevity in the space that you’re in. If you know you’re moving to another town in two years, it just doesn’t make sense to buy a house right now.
All right. So it makes financial sense, your credit is right, you’ve got a down payment or you’re saving up for that down payment and you know you’re going to be in the same town for longer than a few years. All those things are lining up. So what other complications could there be, or things maybe I should think about?
Well the next one is very simple. It’s hidden costs associated with buying a house. So what are the hidden costs?
Well, there’s closing costs. The closing costs are really all about all the things that are costs as a part of buying a house. So that can be paying for the inspector who does the inspection during the process, the appraisal that the mortgage company asks you to do. It could be the insurance, it could be the property taxes. A lot of times insurance can be $1000 a year, $2000 a year, something like that. And taxes totally depend on the community and the tax make-up of the community, but it can be a huge chunk of money.
So when you’re in that buying process, or when you’re thinking about buying, you got to say okay, what types of taxes are associated with this property and what types of insurance, because you’re going to have to tack that on to your monthly. If you find out … You want to buy a house, you go out and you say all right, what are the taxes going to be? And you say well, in this town for this size house the taxes are probably going to be $2000 a year. And the insurance, let’s say the insurance is going to be $1000 a year. So we got $3000. We have to split that in 12, so that’s somewhere around $280. That’s going to affect your monthly mortgage payment by $280. So that’s something you’ve got to figure out and think about.
There’s lots of costs associated with buying a house. Now that’s not a problem if you own that house over a period of time because you’ll make that money back. But if it’s a short period of time, that’s one of the reasons why you just have to take into account those hidden costs.
Okay. So those are the hidden costs. And finally, I brought this up a little bit earlier, the upkeep expenses. You may need a new roof. That could be $7000 or $8000, or a furnace tends to be $4000 or $5000. Appliances can be a grand a piece. You know? Just mowing the lawn. I mean, maybe you go out and buy a $500 lawnmower and you mow your own lawn, which makes sense. Maybe you have someone come out, and that’s $20 every two weeks or whatever. That’s pretty low, but that’s what I charged when I was 15, so probably double that. It’s probably $40 a shot or something.
Those are all upkeep expenses that you’re going to have to deal with. And those are all costs that come after the fact. All these upkeep expenses, if you’re not prepared for them, can smack you in the face. We don’t want that, right? The whole point is to say, okay is it right time for me to buy a house? And you say, okay. Well, if I’m going to go out and look for a house, am I going to go out and look for a house that has a brand new roof, a brand new furnace, brand new appliances, so I know I don’t have to deal with any of these upkeep expenses? That’s one way to do it. Probably going to pay more money for the house in that scenario though.
Or, you can buy an older house and know that you’re going to have a whole bunch of costs associated with this stuff. And if you’re smart about your finances, you’re smart about the situation, then you build that into what you know it’s going to cost to own a home. And it can be absolutely worth it. You just have to understand it. There’s a huge difference between knowing the costs associated with owning a home and getting smacked in the face by them.
When I bought my first home it was beat up, I barely had enough money to buy the house itself, and I didn’t think about any of this stuff. And I just got smacked in the face by one thing, smacked in the face by another thing. And it just felt like, oh my gosh. I’m spending all this money on this house. I didn’t think about this $8000 roof I was going to have to deal with. Oh my gosh, now my furnace isn’t working. And then I turned around and tried to sell it, and I didn’t make … I sold it for less than I put into it by a long shot.
It was simply because I didn’t get it. I didn’t understand. You’re not going to be in that situation because you do get it and you do understand, but you got to be thinking about these types of things. So the last hidden cost is those upkeep expenses.
All right. Let’s get to the bonus. What’s the fifth question? Is investing in that house worth it?
If your finances in your life moment say yes, you still need to buy smart. Again, I did not do this well because … You’ll go out and look at houses. And if you work with a realtor, they’ll take you to some different houses. They’ll be in your price range. And you’ll see one has all new appliances and all this kind of stuff, but the square footage and maybe the look of it and the vibe of it just are not really what you want. But it’s in your financial scenario, right? It’s right at the amount of money you want to spend.
And then they’ll take you to another one where it’s the same price and you get all this additional square footage, and it has character and it’s older. It’s cool and you walk around and you’re like, “Oh I could just fix that thing and that thing.” You just get sucked into it because older houses are cool. And there’s nothing wrong with an older house. Don’t get me wrong. There’s nothing wrong with an older house, but especially when you get into those scenarios, you’ve got to be super careful because you’ve got to realize if it has an old roof. You’ve got to realize if it has old appliances. You got to realize if it’s a money pit and you’re going to end up spending tens of thousands of dollars. You may turn that house into the most beautiful thing you’ve ever seen and live in it for 30 years and have a wonderful life and make lots of memories. And in the end, make lots of money off of it too. That might be okay, but you got to be careful.
Is investing in that house worth it? Sometimes the houses that have the most character are also the ones that are going to sap your pocketbook the most. Doesn’t mean you shouldn’t buy an older house or a house with character at all. It just means you have to be smart and make sense of that purchase and not buy just on your heart … Of course you’re going to buy on your heart. It’s your home. It’s the place you’re going to be living. But don’t buy just on your heart. Buy on your finances too, and buy it based on the information from a smart realtor who’s telling you what’s really going on.
And that inspection. Get an inspection. If the inspection just has tons of problems, that might be a reason to back off because investing in that house may not be worth it.
All right. Wow. We made it. So let’s review. The question of this episode was, should I buy a house? Obviously one of the most important questions we should ask before going into the process.
And I asked you to consider four things when answering that question. The first, is buying a house actually a smart financial move? The second was, am I in the right financial position? Is my credit right? Do I have a down payment saved, or do I have a way to save for that down payment? The third, is my life settled for at least three to five years? Am I going to be in the same place for a long enough period of time to be able to make a profit off of the house? Do I understand the hidden costs? The closing costs, insurance, property taxes, some of the maintenance, things that you’ll need to take care of as a part of owning a house?
Then we threw out a bonus. Is this house right for me? As I’m looking at houses, am I balancing the idea of character and that vibe that I want to make my life happy and the feeling of my home to be awesome with the profitability of the home? Is it something I can sell again down the road for a profit? Do I have a lot of money I have to put in? Is it a money pit, or a lot of the thing taken care of already? So that was the bonus.
All right. So it’s time for some action steps. We want to hear from you. Are you ready to buy a house? What are the things you’re hung up on? Or the things that you checked off as you listened to us talk about it through the process? Head over to Instagram and comment on our episode two post. Share your thoughts. Share your love. Share a little hate. If there was something that you totally disagree with, we can handle it and we are ready for it.
Also, if you want a comprehensive online course that walks you all the way through the home buying process, we have created it for you. There are checklists and videos, and a private group just for members. You can find all of this at NewHomeBuyersGuide.net. If it isn’t the best bit of home buying advice you’ve ever experienced, we will gladly refund your money. But really, when you see the price, even a third of the information we provide and the community that is behind that pay wall, would be 100% worth it.
All right. Until the next time, happy home buying.