You’re out there kicking the tires. But rather than go all in, you dip your toes in a bit at a time, demanding perfection. You’re sitting pretty in your rental, where your monthly rent hasn’t gone up for the past couple of years. But is that really the best that you can do? Let’s weigh the options.
The Argument for Rentals
If you’ve moved recently, you probably received some sort of incentive, either free rent or the owner-paid broker’s commission. Rental properties have been “on sale.” And who doesn’t like a sale?
On the other hand, the starter home market has been on fire. The better listings have sold within days of hitting the market, often with bidding wars, and at prices well above ask. And this isn’t the first year of an overheated market like this.
Wonder why no one’s surprised by your lack of motivation? After all, why leave the financial comfort of your rental for the unknowns of home ownership?
The Argument for Buying
Why? Because home ownership is the path to financial security, and those Burning Man and SXSW tickets keep going up each year. (I would have written “path to building wealth,” but some millennials would have an allergic reaction.)
…And the Human Nature Caveat
Now it’s true; I often hear disappointment about what a dollar buys in an overheated market. No one wants a starter home; people everywhere want “move-in ready” and more condo than they can afford. If the budget is $600,000, you want a $700,000 home. For $600,000, of course. (Spoiler alert: It’s the same thing if your budget is $6,000,000; everyone wants more than they can afford or are willing to pay. It’s just human nature.) So instead of buying, you continue renting and saving for the larger down payment required for the larger and more perfect home. Saving, and watching HGTV.
The Real Deal in the Long Run: Start with a Starter Home
Waiting to afford more home doesn’t work in a seller’s market because the goalposts keep moving back. What you can purchase today will cost significantly more tomorrow. As my wise friend Ruthmarie Hicks wrote, nonbuyers are creating their own uphill climb: “As your money buys less, it will take a bigger down payment to purchase the same thing.” Interest rates seem to appear to be slowly rising, further decreasing purchasing power.
The truth about purchasing a starter home is that it will help build the equity needed to buy the desired dream home. Start small and then trade up. The only equity built by renting accrues to the benefit of your landlord. That’s a fancy way of saying that you make your landlord richer at your own expense, with absolutely nothing to show at the end of the days, or years or decades. Meh.
Learn from Emily
A perfect example is our client, Emily, a mature, motivated and entrepreneurial 25-year-old. Emily was disgusted with renting and committed to buying her first home. Last summer, we looked at $425,000 studios. Emily bid on a few but “refused to overpay.” She lost out on each because others either bid more, had larger down payments, or had stronger financials. Emily decided to take a break, renew her lease, continue to save, and buy something this year. Well, homes comparable to what Emily looked at last summer are on the market today for $475,000. Her additional savings will go straight to her increased down payment. Emily failed to get on with her life, putting things on hold because her living situation was unsettled. And Emily lost out on a year of appreciation. Double meh.
So, What’s a Millennial or a First-Time Buyer to Do?
- Above all, avoid getting priced out of the market.
- Compromise if need be. Set priorities, but consider settling for a less prestigious location, a slightly dated kitchen, or a more modest view.
- When you find your home to buy, invest in City Windows if need be, and
- Renovate the bath yourself. (It works for the buyers on HGTV!)
As Hicks says, “Increasing home values is only bad news when you decide to continue renting. Once you’re a homeowner, it’s all good.”
In short, take the plunge. Just Do It! C’mon in, my millennial friends. The water’s fine!
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