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Home Finance Buying Your First Home? Think Like an Investor
Finance

Buying Your First Home? Think Like an Investor

by Jessica Weisman-Pitts

By Min Alexander, CEO and Co-Founder, PunchListUSA

For most, buying a home is an emotional experience. This is a good thing; it speaks to the importance of homeownership in our daily lives and, more broadly, to achieving the American dream. But, as mortgage rates rise, first-time buyers may need to take an investment-first approach to enter the market and ensure their long-term financial success. Here are four tips to help first-time buyers think, act – and win – like real estate investors.

1) Focus on cash flow: Understand the fully-loaded costs of homeownership

When calculating affordability, most new buyers focus on the upfront costs associated with lender approval: down payment, closing costs, and fixed monthly mortgage payments. In addition to these costs, it’s very important to consider the ongoing and increasing homeownership costs that will impact your monthly cash flow. For instance, you’ll want to factor in routine maintenance, repair, and home improvement needs, which will increase as your home ages and can add up to 3% of your home’s value each year. When you add these costs to your other monthly expenses –home insurance, property taxes, homeowner association (HOA) dues, and utilities – you’ll have a more accurate view of what you can comfortably afford month-to-month when evaluating different price points for homes. Your lender will focus on what you can afford today. As an investor, you need to assume that taxes, insurance, HOA dues, home repair and maintenance costs will increase over the period of ownership and make sure your current and future cash flow can accommodate these requirements.

2) Location, location, location: Become an expert on local market trends

Buying your first home has many benefits: stability, community, and wealth creation. Land is the only asset that does not depreciate, and, if you do your homework, you will be able to invest in an area where your property value can grow to build wealth.

At a local level, you’ll want to understand net migration patterns, unemployment rates, rental vacancy rates, and new emerging trends– companies and industries moving into or out of the area. At a neighborhood level, you’ll want to consider crime rates, proximity to public transit, entertainment, and highly-rated schools – even if you don’t have children. Livability is as important as affordability for both buying and renting.

As the adage goes, you can change the home – but not the location. Make sure you’re purchasing in an area where homes will continue to be in high demand when you are ready to sell or rent to tenants.

3) Remember it’s a property ladder: Take smart steps toward your dream home

For many, the American dream evokes images of picket fences, green lawns, and backyard barbecues.

But, depending on your budget, a detached home may not be attainable right away. This doesn’t mean you can’t start building real estate wealth today as a stepping-stone toward your end goal. My first home purchase was a townhouse in Cambridge, MA in 2002. It was the most “home” I could afford at the time. While I was enjoying my townhouse, I was learning more about the neighborhood and getting better at being a homeowner (there was a lot of learning through trial and error). Within two years, I was able to rent the property to tenants and move up the property ladder to my first detached single-family home. I still own my first townhouse as a rental property.

Consider building equity now by purchasing a condo or townhome. If you stay in your home for the long term, you’ll enjoy your home while you build equity. If and when you decide it’s time to upgrade, you’ll have the option to rent out your property to achieve financial growth through both passive income and equity appreciation.

It’s win-win.

4: Make your own decisions but trust professionals for data: Always get an inspection

It’s a bit of crazy time for home buying and many buyers are being pressured to waive mortgage and inspection contingencies. While all prospective buyers want to “win” the property, it’s important to keep your eyes wide open. Even if you waive an inspection contingency, any owner should always understand the condition of their investment to budget appropriately for necessary repairs, especially ones to prevent damage or involving major systems. Remember: a home purchase will be the largest investment most Americans will make in their lifetime. No one would think of buying a pre-owned car without an inspection.

We recently analyzed nearly 50,000 home repair estimates we created for homebuyers from their home inspections. The average repair cost was nearly $5,000 to address emergency, code, and major system requirements. While this cost may not be material for some home buyers, most buyers will need to know what needs to be repaired, in order of priority to prevent damage, save money long-term and preserve your home’s value.

Buying your first home is a major milestone that takes research, planning and courage. As a 20-year real estate professional, having managed over 500,000 single-family home sales and over 2 million home inspections, I still get excited about home buying. I also understand how easy it is to make emotional decisions during the buying process.

By considering the factors above and partnering with industry professionals, including REALTORS and licensed inspectors, you’ll make better-informed decisions to ensure your success as a homeowner and accelerate your path to real estate wealth.

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