One of the biggest mistakes I see in real estate is waiting too long to get in. Especially in coastal California.
MOST POPULAR INCORRECT MINDSET
~~~1st is the 20% down misconception~~~
Many clients spark their first conversation with me planning for a very distant purchase timeline thinking they have to, or, are better off waiting till they have 20% down to buy a home. This is totally incorrect - most buyers can get into their 1st home with between 0-5% down. Take a look at my other blog post about common loan programs for first time home buyers (FTHB’s). We will discuss this one below.
CASE SCENARIOS ~~~ Waiting for 20% down
Lets play out scenario # 1 in what I see as a common scenario for a first time home buyer in southern california.
Fictional client profile:
> Linda - Recent graduate nurse - makes approx 95,000/year.
> Age 30
> Currently she rents for 2750 in a desirable part of town
> Currently has 20,000 in savings. Between her rent, car payment, and student loan payments she's able to save approximately 1000 per month. Her monthly budget looks something like this.
> Linda has good credit 741 mid score
> Linda has NOT been in the military
Gross income:
95,000 / year = 7916/mo
Net income = 7916 x 70% = 5541/mo
Monthly Budget:
5541/mo take home income
- 2750/mo rent
- 450/mo car payment
-120/mo car insurance
-400/mo student loan + credit card debt
-65/mo phone
-200/mo internet and utilities
-500/mo food
*** Leaves us with about 1000/mo to put toward savings for a down payment
Client wants:
She would like to buy something in the 450,000 range to get started.
20% of 450,000 is 90,000
If she has 20,000 to start and can save 12,000/year it will take her 70 months (nearly 6 years) before she is able to achieve 90k in savings.
Meanwhile let's look at that 450,000 property over time.
Historically we have a 6-7% annual growth in California…. Many parts see higher but lets use the average:
Here is how that 450,000 property today looks like in 6 years (hypothetically - using the 6% average growth factor)
Year 1: 450,000
Year 2: 477,000
Year 3: 505,620
Year 4: 535,957
Year 5: 568,114
Year 6: 602,201
At year 6 - the new 20% down for the same property is 120,440 - so Linda is still many months away from achieving her goal.
If she had bought in year 1 - purchased with 5% down at a 5.500% interest rate she would be looking like this:
Here are some YEAR 1 v. YEAR 6 notable numbers
450,000 - year 1 purchase price
427,500 - year 1 total mortgage balance
387,692 - year 6 paying only the scheduled minimum monthly mortgage payment
602,201 - year 6 value
214,509 - Lindas net worth has grown by this much over the last 6 years …think about how long it would have taken her to save that kind of money! She can now use this equity to propel herself forward to a more desirable property by selling and cashing out or renting her current property and buying a new one if she was able to save for another 5% down payment.
Another very important factor is that Linda would be 6 years through a 30 year mortgage. Leaving only 24 years left on the mortgage timeline. She would be 36 at this point in time and her home would be paid completely off at age 60. Think about how far social security, retirement, and or savings would go if you didn't have a housing payment at age 60?!
If you are still in doubt ask yourself a couple logical questions;
1- Can I afford this payment?
2- Is my income stable / likely to continue?
3- Is rent likely to increase over the years?
4- If I have a 30 year fixed rate mortgage, is my monthly payment lilley to increase over the years?
3- How many wealthy people rent?
4- How many people in southern california that have owned a property over 10 years regret buying it?
Lets run Linda’s scenario the other way …as if she had remained a renter.
Assuming a very low inflation factor of 3% per year on rent.
Year 1 - 2750/mo x 12 month
s = 33,000
Year 2 - 2832/mo x 12 months = 33,990
Year 3 - 2917/mo x 12 months = 35.009
Year 4 - 3005/mo x 12 months = 36,059
Year 5 - 3095/mo x 12 months = 37,141
Year 6 - 3188/mo x 12 months = 38,256
TOTAL: 213,457 is what Linda would have spent on someone else's property making someone else's wealth grow and consuming a huge chunk of her hard earned money. She would be 36 at this age - and if she was to get a mortgage now it would put the payoff timeline at 66 now probably pushing back her retirement goals.
