Home ownership is both exciting and stressful at the same time. I write a lot about real estate and home ownership because it’s the biggest financial purchase most people will make in their lifetime. And since we all need a place to live, it’s important to know what you signing up for with home ownership before you sign the papers. Here are my top 10 things you should know before you buy a house. They are not in any order of importance.
What’s the motivation behind your purchase?
A home is so much more than just an investment. It’s a place to raise your family, creating memories, and yes it also provides the most basic human need; shelter. But taking on a mortgage requires you to understand what’s the true motivate behind your desire to buy a home. Seeking shelter doesn’t require you to take a mortgage. Therefore, I feel it’s important you understand why you want to purchase a home. Identifying your motivation will allow you to stay focus and avoid falling for any emotional trap you might otherwise fall for if you don’t understand what’s motivating you to purchase.
Are you feeling pressured to buy? Is everyone around you buying a house and you feel like you’re missing out? Feeling pressured by your parents? Do you want to start a family? Whatever is behind your buying motive, it’s not for me to pass judgment but rather for you to be honest about what’s motivating you to want to take on a mortgage. Honesty and emotional balance are keys to a successful home purchase.
Know your budget before you even start to looking
Before you even call a realtor or a mortgage broker, figure out what you can comfortably afford as a monthly mortgage payment. Aim for a payment that doesn’t take more than 42% of your gross monthly income, that’s before taxes.
Don’t tell your real estate agent what you can truly afford
When we bought our house I didn’t tell my real estate agent what we could really afford. Why? Well, to be honest, there are some lazy real estate agents out there. They simply want a quick sale and first time home buyers are an easy pick. First time home buyers are unprepared, emotional, and lack the proper knowledge. So, if you tell a real estate agent who is lazy what you’ve been approved for by the bank, the agent will only show you houses at the top of your price range, even if there are cheaper housing that might fit your needs.
They do this because they know most first time home buyer will naturally fall in love with high-priced houses and feel the need to buy the house even though it’s not something they can truly afford. Remember it’s in the realtor’s interest for a quick sale at the highest possible price you can afford. I’m not saying all realtor are like this because I know great ones. But it is important to understand what’s motivating each of the parties that will be helping you throughout your home purchase.
This isn’t a race, take all the time you need
Pressure. It’s something you will feel as you begin to look for your house. You will be told you have to make a quick offer, offer above asking price or have no subjects. Basically, if you don’t act quickly when you see something you like it will be gone! To be fair, that’s something that could happen. But here’s what you also need to realize. It’s far easier to make an offer on something you can’t afford than it is to actually pay for something for the next 25 years that you can’t afford.
It’s important you think of the home purchase process like a marathon. You shouldn’t try and sprint through the process. Rather, you want to find a pace that suits you best in order to avoid financial disaster. When my wife and I were looking for a place we took several breaks. Sometimes they were up to a month. Don’t be afraid to take a break if you don’t see what you like or if things are not fitting your budget. If the process starts to feel stressful or you feel you are starting to cave to pressure, take a break. Stop looking until you feel you’re ready to start the process again.
Apply for insurance once you start looking
Insurance is often the last thing on people’s mind when they are looking for a house. But you really should start this process once you’ve started the mortgage application process. Why is this important? Well, if you get a house for say $400, 000.00 and can’t get life insurance this might be a deal breaker. Therefore, it’s best to start this process right when you start looking for a house. I recommend you go with an insurance broker and look for a term life insurance that matches the same number of years as your mortgage.
Lastly, don’t forget to also look for home insurance. It’s not just life insurance but also insurance for the content in your home and overall property.
Is it a home or an investment you’re buying?
A home is a place of comfort and security. Somewhere along the way home ownership became an investment. Here’s the thing about investment; the vast majority of the time it’s based on past performance and past performance do not necessarily repeat again. If you’re overextending yourself because you believe it will be a good investment in the long term, please understand that real estate like any investment has ups and downs and there is no guarantee it will work out the way you hope. Do yourself a favor, buy a house that you can comfortably afford and avoid trying to overextend yourself in the name of it’s “good future investment”.
Can you handle the cash flow restriction?
A home can be a good long-term investment and possibly a good hedge against inflation. However, mortgage payments take up a considerable amount of your cash flow. If you’re under 30, this a major concern as the money you put in the house could restrict your monthly cash flow and other opportunities you could pursue. If you’re under 30, chances are you’re just starting your career and perhaps thinking about a family or perhaps marriage. At this point of your life cash flow is key and if you purchase a home too early in your life you can tie up significant cash flow that could prevent you from planning and saving towards other things you are soon to want such as; family, wedding, or travel. But on a more practically level, it prevents you from putting away money to ensure you stay liquid for opportunities and life’s challenges.
Housing isn’t very liquid
There are two ways you access money from a home. You can sell the house and take the proceed of the sale after all your expenses are covered. If you do not want to sell and have some equity built up, wait for it, borrow money from the bank against your house. So basically, you can move or you can borrow more money against your house to access the money you’ve put towards it. That’s a pretty terrible choice if you ask me. The reality is having a million dollar property means nothing if you’re not willing to act on the information and transfer that into cash.
Location is extremely important but even more if you’re purchasing a townhouse or condo
A starter home is something I tried to avoid in my first home. Since home prices are so expensive in cities, most of us can only afford townhouses or condos. The problem at least from my point of view with townhouses and condos is that they will forever be more of them coming on. Remember basic supply and demand rule. When there’s an oversupply of something prices have to drop to get rid of the over-supply of inventory. Therefore, if you’re buying a townhouse and condo, it’s extremely important you keep the location in mind. This will be your saving grace as people will generally pay more to be closer to all amenities they need. You shouldn’t avoid townhouse or condo rather just be mindful of demand and supply basics.
And if you’re buying a detached home the supply and demand rule still applies to you. However, since most people are not able to afford a detached home there tends to less inventory and prices tend to be higher. For detached home, the land is critical to be mindful of. Ensure you’ve bought in a good place with good land value for the area. Remember it’s local but local location is what’s really important, so buy in an area people want to move to.
Understand the true cost of home ownership
Housing cost a made up of two components; one-time cost and on-going cost. Most people are familiar with the one-time cost, which are costs that occur once during the home purchase process. Realtor fees, lawyer fees and inspection fee are examples of one-time fee. On-going cost are things such as mortgage payments, hydro, strata, property taxes, garbage, water, home insurance, and general maintenance. Most people only think of the mortgage payment as their on-going cost. To be able to afford a home you not only have to be able to afford the one-time cost but you also have to be able to afford the on-going cost of owning the house. Failure to truly understands a house’s on-going cost could mean financial disaster.
Like any investment, think long term
I view investment such as stocks and bonds the same as real estate investment. They both carry the same level of risk and ultimately to be successful with either it’s best to think long term. When it comes to home purchase you should be thinking long term about the house you’re purchasing. Look for a house you can stay in for a long time, somewhere around 15 to 20 plus years. The less moving you do the better. Don’t have kids now? What if you did, would this house still work? Purchasing a townhouse or condo, you should look into strata bylaw with respect to renting. Can you rent this house out perhaps in the future? Bottom line, don’t just buy a house for what you need today. You have to think long term about what you could do with the property today and also in the future.
Read The Wealthy Renter Book
I’ve read a lot of books on the topic of home ownership and real estate Alex Avery, author of The Wealthy Renter : How to Choose Housing That Will Make You Rich, is by far one of the best books with a focus on the Canadian housing market. If you truly want to be successful at home ownership you must read this book! If you own a property you must read this book! And if you’re a millennial or younger this book is not a choice but rather mandatory!
There are so many things to know about real estate and I hope those 10 tips put you on the right path to buying a home you can afford and create memories for your family.