I purchased my first home in my early 20’s. It was a single family, 3-bedroom, 2.5 bath home in Boston with a somewhat finished basement and a history I knew to every detail. I knew everything from the roof timeline to the reason for each crack. I knew which windows would be most drafty and that the appliances were as old as I could remember. I’d grown up in that house.
Despite this, I didn’t expect or get a deal on the property, and my purchase was fraught with decision points and weighted outcomes. I expected that there would be things I’d have to do, but the decision to purchase had to be one that included as many variables as I could muster.
As others approach me with thoughts about buying their first home, I always advocate a complete evaluation before decision making.
Rent vs Buy is About More Than the Numbers
First, I had to thoroughly think about the rent vs buy decision. But after crunching the numbers to determine whether the purchase is the most financially advantageous move (or if renting puts you in a better position over time) I needed to consider a few other things.
Lifestyle. What kind of home is my lifestyle most conducive to maintaining, and what are the rental opportunities for that specific kind of home? For example, I have a Great Dane and not only require a home with a decent amount of outdoor space, but I also prefer a home with a decent amount of living space. Further, I expected to spend a decent amount of time at home, so the space required good lighting and a separate office/study that was separate from the other living spaces.
Responsibility & maintenance. Homes come with responsibilities of ownership. Not only would I have to be prepared to cover insurance and other costs, but I would have to be prepared to hire and manage my own renovations and repairs. This means owning involves the investment of time, energy and money towards the maintenance of a home—maintenance which is otherwise covered by another individual in a rental. As a result, I needed to evaluate how much of each of these things I was prepared to put into my living space.
Community. Community looks different in varying living circumstances. In a home that’s built like an apartment, you have built-in neighbors with whom you cross paths in common areas and elevators. In townhomes, you may have similar common areas or community activity spaces (ie, a clubhouse, mailboxes, or an Equestrian Center), and in a single-family home, you may or may not have greater physical and programmatic distance between you and your neighbors. That is, you may need to build your own relationships if your community fails to hold neighborhood events or have HOA meetings. Additionally, more urban spaces tend to offer greater opportunities for intersection, while more rural properties tend to harbor residents in greater isolation. How do you expect your location to help or hinder your expectations for (and active building of) community?
Length of stay. How long do you intend to stay in this home as a resident? Do you intend to rent it out when you leave or are you intending to sell it? Are you anticipating house-hacking while you’re there? I ask this for tax purposes (the IRS has rules that have various indications for your taxes depending on how long you live in the home), and your long term plans to sell or rent could influence the anticipated profit from the home.
If you are like I was—unmarried and without children—and you intend to change one or both of those things, it may be worth considering how your needs are likely to grow and change with you. For those who are not single but are still interested in purchasing a home, I offer a word of caution: it’s always best (read: less messy) to avoid purchasing property with someone you are not married to.
Comfort. I created (and recommend creating) a list of must-haves, like-to-haves, and deal-breakers to guide your search. As you recognize the shifting nature of your needs, what are the ways you can adjust what you’re looking for to better suit your current and long-term vision? While you may not be able to anticipate the needs of your future family, you may be able to adjust what you’re willing to live with to better suit future rental/investment needs. For example, if your price point allows you to purchase a duplex or triplex rather than a single-family home, you may be able to rent out the other side to pay part (or all) of your mortgage, and when space no longer suits you, you can rent both sides out for profit. Of course, this would mean that your first property is an investment property that you live in, but to be honest, many view this as the smartest way to think about and purchase the property. I tend to believe there’s a balance, though, between investment property and the comfort that comes with purchasing your personal residence, so I leave the framing and decision making to you.
Local programs and assistance. Finally, I cannot highlight enough the significance of first-time homeowner programs. These can exist with your lender, with your city, county, and state. There may also be neighborhood revitalization programs that exist for the particular area in which you’re looking. I seriously recommend talking to a realtor and spending some time researching your space for programs that can assist you. Reach out to your local city or town hall and give a call to your county to find out what’s available. There are some programs that pay the entire down payment for a home you’re intending to live in. Often times, these programs require that you live in the home for a specific amount of time (2 years, 5 years, etc.) in order for the program to be in full effect. If the guidelines align with your intentions, it’s worth considering.
On this note, though, I suggest avoiding loan programs that are a low down payment (it’ll increase your mortgage), but sometimes local first-time homebuyer programs or city revitalization programs will offer loans that forgive over time if you follow specific guidelines. This might be provided you live in the property for 5 years, or that you renovate the property. Sometimes these programs offer down payment assistance if you spend a day or two in an educational seminar. Check them out—they can definitely be worth the time investment!
No matter what, there are always rules
I don’t know about you, but I hate living by another person’s rules. I mean, I get that we all live by the rule of law, and when you live and own property in a city, town, municipality, or even county, you also have certain rules and regulations that are designed to keep the peace maintain safety (i.e., building codes and quiet hours). If I purchase a property, though, I expect that I will have control over what I do with it, when and how. Unfortunately, this expectation isn’t always in alignment with reality.
Condo vs Townhome vs Single Family. In a condo, the HOA determines rules for use of your box in the sky, governs all things external from what door you can choose, what color you can have that door painted, what you put on a balcony, your pets, and the length of stay of any guests you might have. If you intend to rent your property out in the long term, your HOA can approve or deny this reality, require any tenants to undergo additional steps in order to gain access to the property, or otherwise have the ultimate say on the use of your property. These things grow and change over time, as the HOA can change its rules by vote at any point.
In townhomes, these things are often less regulated but are still governed by an HOA. You may have rules on how presentable to keep the front of your townhome and the standards to which your property will be held. Still, the way you use your backyard is mostly up to you. In both condos and townhomes, you may have access to community amenities such as elevators or security staff, snow removal, community event space, gyms, activities, security staff, and more. Because you have access to those things, you may have a greater likelihood of interacting with your neighbors, and likewise, you all pay into a community fund to cover the costs of these amenities. These things come with a price, though—fees paid to the HOA to staff and maintain these spaces, and to maintain the grounds altogether. These HOAs are subject to change over time, so be sure that any HOA fee associated with your property is not only included in your budget but also has room to grow (despite your mortgage staying the same over time).
In single family homes, you generally don’t have an HOA and therefore don’t have rules or fees. Newer communities can be an exception to this rule, but older, rural and urban communities generally do not incorporate an HOA. In these non-HOA communities, you are responsible for your property’s aesthetic choices and use, only governed by local laws and guidelines.
Neighbors. Whether you have an HOA or not, people will always have opinions. While your neighborhood may not have a formal HOA, the community will still have norms and expectations. Sometimes, those norms and expectations are vocalized more than others, but if you paint your house lime green and your neighborhood is primarily composed of houses painted in neutral colors, or if you opt to run a bed and breakfast through your suburban estate (licensed or otherwise), you may become subject of neighborhood gossip or even a community petition to address your use or change. For example, some of my neighbors had opinions when we painted the door teal, despite not having an HOA. If I were to AirBnB part of my home or develop a small urban farm in my backyard (beyond my typical gardening), I’m sure they would also have thoughts despite that use being within my rights as a homeowner.
How do you get there?
If you decide to buy, I highly suggest starting with an honest look at your finances by inspecting your budget. How much are you currently paying in rent and living expenses? Are you already out of debt and if not is the end of that debt in sight (or can it be)? How much are you saving? How much can you afford to set aside for your housing costs each month? My recommendation is to keep your mortgage as low as possible—a quarter to a third of your take-home pay each month so that you can afford to live freely and continue to save. What are your must-haves, your nice-to-haves, and your deal breakers? It’s worth identifying your points for a compromise ahead of your hunt to help you establish your target home. Do you have a down payment saved up, and if so, is it at least 20% of what you’d expect to spend on a home separate from your emergency fund, and have you taken closing costs into account? Do some market research on this one and determine the price range you’d like to stay in to find a reasonable home in an acceptable neighborhood. Are you willing to do some work to get the home to where you’d like it to be? If so, this can help you get the most for your money. If your down payment isn’t large enough to cover 20% of your target home plus closing costs, consider waiting until it is!
-Consider going through the financial steps in advance of your target purchase date and paying yourself your mortgage for a year ahead of when you want to buy. This will allow you to get a feel for what it will be like to pay a mortgage and assist you in setting savings aside for your new home.
What I deliberately left out
Location. If you are purchasing for yourself, you’ll gravitate to a neighborhood in which you feel best. Usually, you’ll be able to find one that also suits your finances and otherwise meets your personal requirements. If you’re also thinking of renting your property (now or later), I recommend looking at a neighborhood that suits tenants: are there areas that are developing faster than others, or are there certain areas demanding higher rent (or attracting tenants) than others? Is there an area that attracts the specific type of tenants you’d like to attract? As you find specific properties, how are the schools ranked and evaluated across the district, and is this important to your future tenants?
Credit. Is your credit in shape? If you still have credit cards open, have had recent debt, or otherwise have a credit score, you should check on this well in advance of the time at which you’d like to buy! Leave yourself at least six months to work on this, but really, it may take about a year.
Manual Underwriting. If you don’t have credit (literally, a score of zero), that’s okay! Call around to find a mortgage company that does manual underwriting! You can still get a mortgage.
Profitability. There are a few things you can do to ensure your first home is one that will be profitable. If this is your first home, are you interested in house hacking? If so, think about whether a duplex or triplex might be to your advantage. You’ll have some cash flow from the other units in your property which will help to offset your mortgage, but you’ll be a landlord. Think about what that means for your time and for your money. If you do go this route, consider getting a property that meets the 1% rule, where the potential rent equals or exceeds 1% of the purchase costs (price, closing costs, renovations, etc.). This is the basic level at which your property will generate passive income for you.
Secure the Dollars
So, you’ve saved your 20% down payment, closing costs, and identified your price range. Now, let’s secure your financing! You’ll benefit most from shopping around for a mortgage pre-approval. Gather all of your bank statements and pay stubs for the last six months, as well as your taxes from last year. You can have several pre-approvals run so long as they’re run within a 60-day period, as it will be clear to those checking your credit that you’re shopping for a mortgage. Beyond that point, though, you’re better off to pick a company to go through this process with you.
Now for the hunt!
You can manage much of the search process on your own through sites like Redfin or Realtor.com. These sites allow you to narrow your choices by the area in which you’d like to live. I will be clear, though, that it’s always best to have a licensed realtor of your own to manage negotiations for you and to gain access to homes without Open Houses scheduled. In some states, the realtor with whom you first visit a home is the realtor you must use throughout the process. Never share a realtor with the seller! One of you will end up losing out in the end, and you don’t want that to be you.
Once you’ve found your space, make an offer and set up the appropriate inspections. Develop your offer so that there’s a bit of room to negotiate, and keep any renovations you’d like to make in mind. Secret: also keep in mind the market value (and trends in that market value) of the property within its neighborhood context. Once an offer is accepted, HURRAH! If you’re thinking about a rental property (either in a duplex or triplex), these inspections may include a walk-through with a contractor who is used to working with investors to help you gain a better idea of what work (if any) can or should be done prior to renting the property out.
Finally, sign on the dotted line!
What do you find important when buying a personal residence?