Too often, first time home buyers get caught up in emotional decisions, instead of sound financial decisions that allow them to have more freedom and a nice roof over their head. If you’re serious about building a lifestyle where you have more freedom, learn how to use money and real estate as key tools to live your ideal life. Just like every investment, real estate has its own risks that must be analyzed before every purchase. The following home buying tips can help you build wealth by leveraging real estate as a tool for financial security.
Home Buying Tips to Build Wealth
- Americans love revenue and talking about big numbers when the only thing that matters is your net income. Your net income is what you have left after taxes, healthcare, student loan payments, bills, and putting money into savings, etc. This is a key number to write down because it is the amount of money you truly have to pay towards your monthly home payment, aka mortgage payment. Take a moment to calculate your net income and write it down right now $_______________
- Create an excel spreadsheet that shows your monthly payment, including principal, interest, taxes, HOA, PMI, and other costs. See what you can truly afford versus what lenders will offer you. While you might rent out a room later on, only buy what you can afford in your worst case scenario so you can keep your home. What happens if you become ill or your partner can no longer work? Live below your means. And, don’t forget about property taxes that may increase year-over-year, putting you in a position where you’ll have to move after 5 years if you buy too high and don’t have the padding to weather the additional costs.
- Use other people’s money if it makes sense. Putting 20% down can be a smart thing to do, or it can be one of the worst things. Cash is king. Keeping enough cash on hand for emergencies and investing in other properties or wealth building resources like the stock market should be a consideration. In today’s low interest rate environment, money is being given away, almost for free! In scenarios like this, it may make sense to pay for mortgage insurance if you put 3% down to keep more cash on hand to get into the property you like, and can afford. Knowing how to use cash is key to building wealth.
- Make double payments on your mortgage to pay your loan off sooner, and lower the total interest amount you will pay if you let your loan drag out for 30 years. It’s a smart move to get a 30 year loan at the lowest interest rate possible, because you have more flexibility if something were to happen all of a sudden, instead of being tied to a 10 year loan with a higher monthly payment. Most loans do not have pre-payment penalties, so you can do this to pay off your loan sooner and reduce the money you’re shelling over to the bank in the form of interest. Run payment scenarios online or with your lender to see how this works.
- Know when to sell your real estate and when to leverage the equity in your property to buy additional real estate. Can you imagine if you held onto your parent’s property in San Francisco that was purchased for $50,000 in 1970 and is worth $2 million today? You would be in the driver’s seat with numerous options. You could sell your property, you could rent your property, or you could leverage the equity to do a lot of things.
Buying a home can be one of the best decisions in your life or it can wreck you. Take the time to understand how to use money to build wealth, and how tools like real estate and alternatives like the stock market, can provide financial security throughout your lifetime. I also encourage you to consult with a financial advisor who has a portfolio you admire, so you can learn how to build wealth through real estate and other sound investment vehicles.
Have a tip on building wealth or lessons learned in real estate, feel free to share in the comments below ?
