I can tell you from first hand experience. Being a first time home buyer is not easy. Before I bought my first home, I was overwhelmed with a deluge of options. What neighborhood do I want to live? What style of house do I want? Do I buy something that needs work or a home that is truly turn key? These are just a few of the possibly hundreds of variables that go into buying a house.
Before your head explodes, take a moment to congratulate yourself. You have just made the decision which satisfies the first prerequisite for building long term wealth. According to the Federal Reserve 2004 Survey of Consumer Finances, the average net worth of a renter was $33,700. That same year, the survey noted that the average net worth of a homeowner was $87,300! Renters are worth 38% of what homeowners are. This information probably does not help you any better in choosing which home you will buy, so I do apologize. However, it is a little tid bit to keep in the back of your mind as you shop, to keep you motivated and to encourage you that whatever decision you make, you are putting yourself on the right track! In the paragraphs that follow, I offer a few pieces of advice that I use to coach the many first time home buyers that I work with. My essential suggestion to them is: "Make No Compromises!"
What I mean by this is very simple, when you buy your first home, buy something that you can see yourself living very happily with for at least 5 years. This applies especially for the Rochester, NY real estate market. Our area is pretty boring when it comes to real estate appreciation. It generally follows inflation at approximately 3% per year on average. The great part of this "Steady Eddy" market is that there are no volatile gyrations in our marketplace, as you see in other parts of the country.
Another note to take in is the fact that mortgages are front loaded with interest. Of course, tax deductible mortgage interest is one of the chief benefits of owning a home (Rent is not tax deductible.) Bu
t the fact of the matter is that during the first couple of years, the proportion of payment going to principle (which adds to your equity position in the property) is negligible. Virtually all of it is going to interest. The table to the right is an amortization schedule illustrating this phenomena. This assumes if you have a mortgage balance of $100,000. Notice that the principal balance increases only by 3% over the first two years, not even enough to cover brokerage fees.
t the fact of the matter is that during the first couple of years, the proportion of payment going to principle (which adds to your equity position in the property) is negligible. Virtually all of it is going to interest. The table to the right is an amortization schedule illustrating this phenomena. This assumes if you have a mortgage balance of $100,000. Notice that the principal balance increases only by 3% over the first two years, not even enough to cover brokerage fees.Taking all of this into consideration, the last thing I want to happen is my client to buy a house and then call me 6 months to a year later and want to sell because it doesn't fit their needs anymore. Goodbye equity. This situation does not put a client into the best financial position. In a nutshell, when you go shopping, do not adopt the mentality of wanting to shop for a "Starter House." Take the time and think, "Can I see myself living here for the next five years?"
For your first home, make sure you have more than enough space to work with. 1000 square feet may work for you in the very short term, but you will fill it beyond capacity in a year or so. In response to this you may ask, more square footage means more money, right? What if I cannot afford a larger home? This is a very valid point. However, homes that need updating but are mechanically sound sell at a steep discount to those that are completely updated and turn key. In response to this claim, you may ask, "But I thought you said, 'Make no compromises?'" You would be right, but let me clarify. I meant make no compromises on features that you cannot change. Carpets, light fixtures, paint, kitchens, and baths are interchangeable. Another note: when looking at homes that are smaller, do not bank on additions. Home additions have some of the worst returns on investment of any home improvement. Additions usually throw a homes floor plan out of proportion; hurting resale value.
Many first time home buyers have the propensity for wanting to buy a "Starter House." Hypothetically, the starter house is something not too dissimilar from what t
he client's apartment is like; 800 square feet, 1 bath, not too much privacy, no yard. Why would any renter want to buy something similar to their apartment? The reason is that they are still thinking like a renter and not a homeowner. Some think of a mortgage payment like they do a rental payment. A rental payment is money that you never see again. What do you get after paying rent for 10 years? A shoe box full of rent receipts! A tasteless joke used often in the real estate business. When you buy a house, you have the right to all of the equity and all of the appreciation! So you have to go into this knowing that what you buy is a real hard asset with resale value.
he client's apartment is like; 800 square feet, 1 bath, not too much privacy, no yard. Why would any renter want to buy something similar to their apartment? The reason is that they are still thinking like a renter and not a homeowner. Some think of a mortgage payment like they do a rental payment. A rental payment is money that you never see again. What do you get after paying rent for 10 years? A shoe box full of rent receipts! A tasteless joke used often in the real estate business. When you buy a house, you have the right to all of the equity and all of the appreciation! So you have to go into this knowing that what you buy is a real hard asset with resale value.Please do not construe these comments as a suggestion to live beyond your means. I am a big fan of financial stewardship and would never encourage anyone to bring themselves to bankruptcy over their desire to buy a "dream house" for their first purchase. Believe me, my dream house is a 4000 square foot Tudor on Canandaigua lake. I am not poor, but in the mean time I have to be realistic. This is precisely why I first bought a four family house and lived in one of the units. I didn't have enough sticks of furniture to even fill a small single family house. However, I knew that when the time was right, I could rent my unit out and keep the four family as a rental property and keep building equity. Multifamily apartment houses may be another option for your first home. This way, you don't have to sell if you decide to upgrade to a bigger better house before the five year mark.
In closing, let me reiterate, think 5 years of ownership for your first home. Picture all of the equity and appreciation you can look forward to earning over that time. The wealth accumulated over that period will bring you one step closer to buying your "dream house" in the future.
