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Wednesday, November 16, 2011

ARE YOU READY TO BUY A HOUSE? MsMoneyGuru’s Steps to Buying a House

A few weeks ago I posted an article in which I advised couples to avoid buying a house within the first year of marriage or commitment.  In that post I also promised “The MsMoneyGuru’s Steps to Buying a House”. 
Okay, first a little background. When I was a young professional starting out in my career, and single, I purchased an investment property.  This choice at such a young age proved to be a smart thing to do in the short term.  It forced me to get on a budget, gave me a huge responsibility, taught me about delaying gratification and saving, and gave me a head start on wealth building.  However, I failed to realize that I had purchased a home at a very unique time; it was at the beginning of one of the biggest real estate booms in recent history, and within two years I had “made” over $100k in equity. 

Like most booms, the bubble burst 4 years later, but not before I purchase two (YES TWO) additional properties!  This decision was based in part on the short term success I had experience during the first 4 years.  Of course being the over-achiever I am I did this the same year I got married!  As you can imagine, this did not proved to be the best decision, but like most, I failed to consider the risks before me.  I only considered the “up” side because I was limited by my own experience up ‘til then. 

Today, I no longer own those properties, and have focused my efforts on building wealth in a different way, but the important part is that I have come away with REAL LESSONS LEARNED from my experience.   
This list represents what I would do differently.  It also represents what I have learned from hearing countless stories from others who have gotten in over there head with real estate.   
So, here it is— 5 SIMPLE STEPS:
1)      Be debt free (including auto, student loans, and all credit cards)
2)      Save an Emergency Fund (3-6 months household expenses)
3)      Save for a Down Payment, enough to avoid PMI (Mortgage Insurance)
4)      Take out 1 mortgage only, do not do an 80/20 or 95/5 deal
5)      Your Payment on a fixed  interest rate mortgage should be  25% or less of your net income (gross-taxes)

**If you haven’t accomplished at least these 5 things, you are not ready to buy a house.  Remember your bank or real estate agent doesn’t always have your best interest in mind.  It’s YOUR responsibility to put the brakes on a situation that doesn’t work for you or your family.

Additional Tips:
1)   Homeownership is a long term decision (5+ years), not a short term one, so choose wisely…the longer you stay in a house the more of a benefit you get out of it. LEAVE FLIPPING TO THE PROFESSIONALS!
2)   Location, Location, Location…no matter what a house looks like, it will always be limited by the neighborhood it’s in.
3)   Don’t get emotional about house buying; there is a house on every corner.
4)   Estimate 25% of your annual carrying costs for repairs (in your budget).
5)   Consider a 15 year mortgage, they tend to have better terms. Why would you want to stay in debt for 30 years? Set a goal to pay off your home early, you will be richer in the long term.
6)   Never take out a second mortgage or HELOC; don’t borrow against your house to pay for ANYTHING, debt is never the answer to your problem.
7)   Never take out a variable rate (or balloon) mortgage; you can’t predict the future, and it’s a riskier way to go.
8)   The Deal is made at the PURCHASE (not the sale), don’t think you can “improve” your way out of a FULL PRICE Money Pit, you will lose money.
9)   Never finance an investment property or second home, buy it with CASH; this is the only way to maximize your return on investment—it’s unacceptable to have a negative cash flow.
10) Anyone who tells you to use “Other People’s Money” doesn’t understand that “The Borrower is Slave to the Lender” (Proverbs 22:7). Why would you want to be a slave?

What experiences have you had while buying or owning a property?
If you have had a negative experience, did you miss any of MsMoneyGuru’s steps?

Check back next time…MsMoneyGuru

1 comment:

  1. This is great advice and I agree 100%. So many of us have learned the hard way and the wrong way to invest in real property. This kind of before hand knowledge can save us from making the same mistakes later on in life. Thanks MsMoneyGuru for your very wise advice.

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