Owning a Home

Buying your first primary residence can be a great start to your financial freedom.

Questions to Consider

#1. Buying vs Renting?

(There may be other factors that play into this, but timing can be a big factor. How long do you plan to stay at this residence?)

  • More than 5 years - Then buying may be a better option as you might be able to recoup the closing and moving costs and weather any volatility the real estate market may face.

  • Less than 3 years - Then renting might be the better option.

  • In between (~ 4-5 years) - Buying may be okay but do your research so you don’t get stuck in a house you owe more on than what it is worth, say if the economy were to go down for some reason and you had to sell. It’s hard to build wealth if you are upside down in something and have to sell at a loss.

#2. Are You Ready to Buy

  • Are you out of debt?

  • Do you have an emergency fund of at least 3-6 months? Check out the Make a Plan or Savings page for tips to know if 3 months is sufficient for you, or if you should have more.

  • Do you have a good strong down payment? (20% is preferable to avoid PMI but could be less if a first-time home buyer, however, you will have to pay PMI if you put down less than 20%.)

#3. What is the Purpose of the Real Estate?

  • If you plan to buy for money reasons, then put more time into researching to get the best deal.

  • If you plan to buy for memories, then do not try to time the market and buy what fits your needs best.

Own Your Home - Don’t Let It Own You

Other Tips When Buying Real Estate

  • Location is most important as this is something you cannot (or is much harder to) change.

  • Plan/budget for about 1% of the home’s value per year for upkeep and repairs.

  • DO NOT forgo inspections. No matter what! You don’t want your dream home to become your nightmare. At a bare minimum, ask for a pass/fail inspection.

  • Ask yourself what is the smallest amount you can pay for a house that will meet your needs and wants so you can focus on investing toward your financial freedom.

  • Stick with fixed-rate mortgages, but IF you choose an adjustable-rate mortgage (ARM), then plan to pay off your entire mortgage within the teaser timeframe (When the interest rate is fixed/non-adjusting. Usually within the first 5 years.)

  • Aim to keep mortgage payments under 25% of your gross income. This should include principal, interest, taxes, insurance, and any HOA fees. Some suggest to also include utilities in this as well as that will help afford you the ability to invest more.

    Bonus Tip: Remember you will need to review your home insurance policy every few years and update it if needed. Home values fluctuate, and sometimes they can fluctuate rapidly. Review and potentially update your home insurance policy at least every couple of years to make sure you will have sufficient coverage should you need it.

    • Check out this video by Dave Ramsey on why reviewing home insurance policies regularly is important.

House Hacking

Best of Both Worlds

This is a popular tool used by the F.I.R.E. Community.

House Hacking is when you buy a residence (say a duplex, other multi-living unit, or even a house), and you live in part and rent out the other part.

This income can help you pay the mortgage, allowing you to either save and invest more or pay down the mortgage faster. This can be a great way to gain financial freedom more quickly.

Note: Do your research as not all places allow multi-family living.

(This is something I wish I would have known at a much younger age)

Paying Off Your House vs. Investing

First, you need to understand your mortgage interest rate and potential investment gains. You should also understand your comfort and risk tolerance level.

Option 1: Focus on investing. Some say that having the ability to pay off a mortgage, is just as good as having a paid-off mortgage. This means you have enough money in investments that you could pay off your mortgage if needed. For this option to be worth it, your investments should make higher returns than you would be paying in interest on your mortgage. Prioritizing investing lets you take advantage of the higher gains your dollars can make by being invested in the market, and this could help you pay off your mortgage faster. This means you only pay the regular monthly payments to your mortgage, and the extra money you would have paid to your mortgage would get invested instead. Then, later in life, you could sell some of your investments to pay off your mortgage.

Option 2: Focus on paying off your primary residence. Investments can be volatile, and no one knows exactly what the markets will do. Having your primary residence paid in full can help ensure you will not become homeless if the bottom falls out of everything. On average, a recession happens every 6-8 years. Usually, a time of recession is when job loss is higher, and you will not want to be forced to cash in assets when the values are down. This can make paying off your primary residence appealing. It can give you peace of mind knowing you could better handle any downturns in the economy.

(Age will also play a factor in this as the older you are (say 50’s or more), the more you will want to prioritize paying off your mortgage, even if it is a low-interest loan.)

Mortgages on investment properties can be seen differently. If they are cash-flowing investment properties, then some might consider this good debt and will be okay holding a mortgage on these. This is because they want to maximize any return on investments they receive. (If looking at investment properties, be sure to learn how to set them up correctly in LLCs or business accounts, so your primary residence will not be affected by any unforeseen circumstances.)

Both of these can be good options depending on your money strategy and risk tolerance. I suggest choosing the option that will help you sleep better at night as stress is not good for anyone’s health.