Millennials are increasingly coming of home-buying age, and there are a few mistakes that I commonly see among this group. Here are the top three housing mistakes millennials make:
1. Long Term Renting With No Plan to Buy
I’ve heard the theory from many millenials that in today’s economy, it is better to rent long term than buy a home, because there is no way homes can continue to appreciate in any meaningful way. No one has a crystal ball, but looking back at historical trends for the past 50 years should give us a pretty reliable indicator of the future behavior of the market – and history tells us that the future likely holds a sometimes bumpy, but overall upward, trend of appreciation. Also, there are the tax deductions available only to homeowners, and the feeling of stability that comes with being one’s own landlord that I believe will always fuel the trend toward homeownership in the U.S.
Pro Tips: Beef up your down payment fund by practicing saving for home maintenance. You might think if you can get a mortgage for the same or cheaper than a comparable rental, that you’re saving money, but when you forget to save for maintenance costs (~1% of the value of the home annually), you are in danger of wrecking your budget. Instead, start to practice now by spreading out what you will eventually spend on annual home maintenance into monthly payments and transfer this amount to your house down payment fund. Cady North, CFP®, North Financial Advisors
The old adage goes, “How do you eat an elephant?” Answer: “One bite at a time.” The same holds true for saving or investing. Starting is typically the hardest part, so start with a dollar amount you can afford and slowly increase that number as you become more comfortable with your ability to save. The most important part is starting and never stopping. “Invert, Always Invert.” – Warren Buffett’s long-time business partner Charlie Munger says to think like this. Basically what this means is looking at a goal or challenge from a completely different perspective. So if you want to save money for a down payment on a house, use the date you want to have x dollars by and work backwards to see how much you need to save on a monthly basis. Paul R. Rossi, CFA, Rossi Financial Group
The biggest piece of advice I give to millennial homebuyers is creating systematic savings in a money market account outside their normal saving and checking account. By having auto savings each week and/or month it creates discipline and behavior momentum in watching a single account grow towards achieving their goal. There is no need to have the added risk of investing in stocks or bonds. Brennan Drew, Westpac Wealth Partners
Saving money is a battle of inches. Saving the amount required for a down payment on a south coast home is not a goal to be taken lightly and requires daily monitoring and focus. Set a daily goal for spending and track your spending every day. There are good programs for this such as YNAB. When I was the age of a millennial I used an excel spreadsheet to track every expense and to learn how every decision to spend effected my savings account. Tracking creates knowledge and knowledge is power! Joe Weiland CFP Managing Partner Arlington Financial Advisors
2. Waiting For the “Perfect” Home
For many first time homeowners, the most difficult hurdle to buying a home is saving the 20 percent down payment, plus closing costs. As home prices rise, this becomes more and more difficult. To play in the market, one must get in the market by buying (and hopefully getting a good deal on) a home that is within their immediate financial striking range. This is difficult for some, as they want the three bedroom/two bathroom home where they can envision raising their children. The problem is that by the time the‘ve saved the down payment to afford this house, it has appreciated to the point where it is now unaffordable. Had that same couple bought a two bedroom, one bath with potential, they would have ridden the wave of appreciation, had more equity in their home than they would likely be able to save over the same period of time and been able to sell and trade up to their perfect home a few years later.
Pro Tip: The first home you buy will not be your last (even though it may feel that way). Find a property that is within your budget (stick to it) and define the purpose this home will serve at this time in your life (starter home, expanding family, second home – step up). Even the best-laid plans can go astray because “life happens”. Ensure you have created an emergency savings fund (3 to 6 months of living expense) to protect your goal of saving for that first home. Leave the get rich quick strategies to your friends for accumulating enough money to buy your first home. Set up a realistic savings plan, stick to it, and see yourself steadily progress towards your goal of owning a home – all good things come in time (when done prudently). Sometimes we must take a step back (move home with our parents, live with 5 roommates, etc.) to take a meaningful leap forward. Don’t let that discourage you and keep in mind, most paths to one’s goals are not accomplished in a straight line. Brandon Bol, MSF, CFP®, Financial Planner & Associate Wealth Advisor at HoyleCohen, LLC
3. Not Paying Attention to Timing
We typically encounter clients whose number one goal is understandably getting a good deal on their home purchase. The advice that we give is to buy when fewer people are buying — Thanksgiving through Mid-January, or during the month of July, when a lot of people go on vacation and the buyer pool is smaller. A problem arises when buyers don’t pull the trigger on a good deal during this time, and instead wait for “more inventory” in the spring months. While there is absolutely more and better quality inventory during the spring, there are also many more buyers, and drastically less good deals for the buyer. Then, if the buyer doesn’t find the deal that they’re looking for during this hot season, the cycle starts again. The lesson is that if you’re truly prioritizing a good deal, you must be prepared to sift through reduced, less desirable inventory during an off time to find your great deal.
Other tips to consider
Determining Payment – If you would like to put down 10% for a downpayment or say $40,000, here are some things to consider:
- Geography & career path – always keep at the forefront – how can you align your personal & financial goals?
- Ensure your career path is aligned with your lifestyle, geography desires, and professional trajectory that suits your long-term needs and the ideas of raising a family as well as being a meaningful partner to your spouse.
- Solving the deposit – it’s important for you to educate and prepare yourself in advance;
- Get prequalified for a loan. Take a look at independent solutions like Upstart for quick and easy access to loans
- Figure out exactly how much you can save each month – once your monthly budget is scrubbed and compared to your income received you can target how aggressively you can save towards that $40,000 deposit goal!
- Determine a safe way to save these funds – such as CDs, short-term fixed income, and/or high-yield savings Corey Franco, CFS, President of NobleBridge Wealth and Asset Management Services
2. If saving for a down payment on a home, set a budget and save 20 – 25% of your pay, put it in a separate account that you will not raid for other expenses such as a savings account or money market account at an out of town institution. If you are hoping to purchase this house within 18 months do not invest in a mutual fund or stock as the market may take a downturn and your funds may reduce when needed. Michael L. Schwartz, RFC, CWS, CFS Schwartz Financial Services
3. In most places, a 20% down payment is well over $100,000, and simply cutting back on spending and saving the difference isn’t a viable strategy for most people. Instead, look to invest your month-to-month savings in quality stocks that pay high dividends over 7% and have a 12-36 month growth projection. Chad Schiel, Schiel Wealth Management
To avoid making one of these common homebuying mistakes, you should select an expert agent who can help you navigate through the difficult waters of your first home purchase.