Although homeownership may seem out of reach today, you’ll still need to know how to buy a home effectively.
Yes, there is a right way and a wrong way to buy a home. I own three houses, and my track record is spotty.
My first home was a financial disaster (score 20 of 100). My second house is a financial success (score 100 out of 100). And my final home is financially okay (score 55 out of 100).
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During this series, I will walk you through how to crunch the numbers, remove emotion, and save for a down payment. I’m sure there is more I will cover as time progresses, but for now, let’s get started.
It’s all about the numbers. The most crucial part of buying a home is the numbers. Life is a math game, and if you can figure it out, you’ll have massive success.
I understand that buying a home has a substantial emotional element, but for now, let’s push that to the side.
The most challenging part for couples buying a home is getting on the same page. You can watch HGTV and see how difficult it is to balance finances and emotions.
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Today I will talk about the numbers, and my next article will be about emotions. If you are not good with math, I suggest you get good at it.
How much do you make? How much money do you make every month? Does your family have one income or two? How much home can you afford?
Your home should be less than 25% of your total income. It may seem impossible in today’s investor-heavy housing market, but I assure you that you can achieve the 25% rule.
Let’s say you make $10,000 per month as a family. This means your home should cost around $2,500/month.
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With mortgage rates hovering around 7%, achieving these numbers in any market will take a lot of work. But we have some tricks up our sleeve.
Run it through my affordability test. The first step is finding a good market to pursue a home. Most of us have a dream city where we’d like to live—but be flexible.
Read my article “My Secret Formula to Determine Housing Affordability.” Inside, I discuss using the military housing calculator, Zillow rental estimates, and a mortgage calculator to see if you are in a good market.
We bought our first house in Yuma, Arizona, in 2008. We completely messed up the money, and it took 15 years to break even. To this day, it doesn’t pass my housing affordability test.
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Off the top of my head, Mississippi is a great place to start your search. Moving to a small town will be tough for many people, but at least consider the numbers.
I have a lot of friends in Southern California, and although they make a lot of money, they tell me it’s still tough to pay $7,000 monthly in mortgage costs.
Making your affordable house even more affordable. Now that you have found a good market, or at least a good area inside an expensive city, let’s make it even more affordable.
I need you to put on your critical thinking caps for the next potion. You want to generate at least 10% of your housing payment through additional income streams.
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Please read my article “Five Ways to Make Rental Income without Owning Rental Properties.” You can rent rooms, your car, or your land.
The most dangerous thing you can do is assume you are good—or “financially okay.” Owning a home is the most expensive thing in your life.
There is always something going wrong or an improvement to make. I’ll give you a simple rule of thumb for owning a home.
You’ll need to spend at least two extra mortgage payments yearly on maintenance or improvement costs.
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Therefore, if your house payment is $4,000, you’ll need at least $8,000 in your home maintenance budget. Please, don’t think I am joking; I own three homes, remember?
The cost of inflation. Inflation is the cost of being alive—you can’t run from it or avoid it. To put it simply, you’ll need to increase your income every year.
Housing inflation comes in many facets of ownership. First, it’ll be your property taxes, but eventually, those increases will slow down.
Today, getting insurance has become a major concern. Your insurance rates have been going wild if you live in an area prone to natural disasters.
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My house note went from $1,800 to $1,900/month, solely from a $100/month insurance jump (in Florida). You can’t avoid random events like this.
Another area of concern is maintenance costs. Using handypersons, electricians, and plumbers will all cost much more than you can imagine. The shopping prices at Home Depot and Lowe’s will increase every year.
Don’t forget you need someone to cut your yard, trim your trees, and remove your trash. Electricity prices and other utilities are on the rise as well.
Grace & Passive Income
It is very expensive to own a home. Remember when I said that buying a house is about the numbers? Initially, you’ll love the dream of owning a home; the home-buying process is very emotional.
However, when the dust settles, you’ll be left with lots of stress if you overspend. So, let’s quickly recap on how to prepare yourself financially.
Conclusion. Run the numbers through my affordability calculator. At any given moment, you want to be able to rent your home at a small profit. This gives you freedom of movement if something better may arise.
Reduce your monthly out-of-pocket costs by getting a roommate, renting your car, or leveraging your land. Do something outside your 9-5 job to bring in more income; you’ll need it.
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Prepare for the worse by saving two months of mortgage expenses in your housing maintenance fund. This can start as your overall emergency fund, but eventually, you’ll want to separate the two.
Always keep excellent records of expenses, improvements, warranties, and utility bills. Everyone will take a chance to get over on you.
Keep notes on everything because things break, repairs fail, and utility companies are not always perfect.
Although I sound sour on the experience, I love owning a home. This is the article I wish I had read in 2008. Learn from my ignorance and prepare yourself financially. Next, we will talk about controlling your emotions. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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