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Updated on Tuesday, March 10, 2015
About once a month, someone walks up my driveway and rings the doorbell. Sometimes it’s a representative from some sort of home repair company that’s fixing up the house down the street, telling all the neighbors that they might also want to consider updating this or that. Other times it’s a realtor passing out business cards. Occasionally it’s kids from local schools selling stuff for a fundraiser.
No matter who it is, though — from fellow Gen Yer installing the neighbor’s new windows to some sort of salesperson blatantly ignoring the community’s “no soliciting sign” — when I open the door I’m usually greeted with the same question:
“Hi there! Is there a parent at home I can speak with?”
I’m 25. I’ve held a college degree and maintained an actual, grown-up career for four years now. I run a business. I’ve opened multiple retirement accounts. I do all sorts of grown-up stuff. And still: are your parents at home?
Annoying, although I get it. I do look young — especially considering that I also happen to own the door that people knock on.
Jumping into Home Ownership as Soon as Possible
I was 22 and one year out of college when I bought my first house. Yes, I was in a hurry and for good reason: the housing market finally found the bottom but was slowly recovering.
Buying early meant the potential to get in at the bottom – and then selling at the top (or at least, considerably higher than what it cost me to get into the market). In other words, I was looking at making an investment. That’s the biggest reason I bought a home and why I encourage other millennials to think about doing the same before they enter their 30s.
As it turns out, buying my house ended up as a good investment. Three years after closing on that first home I’m about to close on it again, but as the seller this time. It was on the market for about 10 days and sold for $40,000 more than the price I paid.
In my experience, home ownership has been a positive thing. It enabled me to leverage my assets in order to grow wealth.
Buying a house won’t be right for everyone. But I urge you to consider home ownership, in some form or fashion, by age 30. Real estate can be an amazing tool to boost your wealth when you’re young if the right situation presents itself.
Advantages of Home Ownership
One of the biggest current advantages of home ownership: crazy-low interest rates. Our parents paid 10% in interest on their home loans when they bought their first houses back in the 70s and 80s. Today, millennials with good credit scores can secure interest rates as low as 3.5%.
This is a wonderful opportunity if you know you want to stay in a particular area for the next few years. This allows you to leverage your assets – in this case, cash for a down payment – to finance a larger asset for an extremely low fee. (The interest rate on the mortgage is the fee you pay for borrowing the money.)
This allows you to maintain a place to live while freeing up the rest of the cash you earn each month for investments that will more than make up for the cost of the interest on the loan. Here’s what taking out a mortgage to finance a home purchase allowed me to do in my early twenties, with my low income:
- Provided me with a place to live for less than the cost of renting a home or an apartment in the same area.
- Allowed me to possess a large asset for a relatively low cost.
- Freed up cash flow: I could take money left over after living expenses were paid each month and invest it in the market to continue to grow wealth. (The interest rate on my first mortgage was 3.7%. I earned about 18% on the cash I invested in the stock market over the last year.)
- Gave me an opportunity to continue leveraging assets to grow wealth: I put $16,500 cash down on my first home and I’m walking away from the sale of that house with about $45,000 in cash. That’s what’s left from the sale after paying off the mortgage and paying the realtor’s commissions.
There are other major benefits of homeownership. Homeowners who sell their properties and make a profit get an enormous tax break; if you’ve owned and lived in a house for at least two out of the last five years you receive a capital gains tax exemption. You can also write off mortgage interest on your taxes each year.
Under the right circumstances, buying a home can allow millennials to accelerate the rate at which they build wealth. Of course, there are cons to buying a house too. It’s important that you think about these and understand how they can impact you before starting a home search. Here are some of the most common cons for Gen Y:
- More debt may be the last thing someone with tens of thousands of dollars worth of student debt wants to take on. A mortgage becomes an added financial obligation that may just be too much.
- Real estate is costly to buy and sell. Closing costs and realtor commissions alone can be tens of thousands of dollars when all is said and done. Understand what the costs will be before you look into buying a home or securing a mortgage.
- In normal markets, you need to hold on to your property for 5 to 7 years before seeing a return on your investment. There are exceptions to this, but it’s a good general rule of thumb to keep in mind.
- You’re the only person responsible for maintaining your home and making repairs.
- Property taxes can increase, making cost of ownership more expensive than you planned on when you bought.
When It Makes Sense to Buy a Home
I believe buying a home in your 20s can pay off if the conditions are right. It helps to start in a low cost-of-living area, where both real estate prices and annual property taxes are relatively inexpensive when compared to other regions. The South and Midwest may provide 20-somethings with the best financial shot at home ownership.
Before buying, you should check out the local rental market. Selling real estate isn’t always easy, it’s never cheap, and it might be a long process. If the rental market in the area is strong, becoming a landlord is a smart backup plan should you ever want to relocate to a new city, travel full-time, or ease the financial burden of carrying a mortgage. There’s also the option of buying a home with the sole purpose of renting it out to tenants.
And of course, you want to consider the housing market in general. If you’re local to the area, it will be easier for you to spot and correctly identify trends and changes. You may see potential in a nearby neighborhood before real estate prices reflect increasing popularity.
Do your research and due diligence. It makes sense to consider buying a home if you can reasonably assume the value of the home will steadily rise over the next few years. And it only makes sense if you can actually afford the home you want to purchase.
Your housing expenses should not exceed about 30% of your income. Ideally, they should be less. Think long and hard about getting into a house generating monthly expenses that will cost you more than 30% of what you make monthly.
Do You Need to Buy a Home?
Let’s face it: you need someplace to live and call home. Does it need to be a home you own? No, it’s not necessary.
But it is an option that more Gen Yers should consider as they pay down student loan debts and start investing money to build wealth. If you’re interested in homeownership at a young age, approach the situation from a purely financial standpoint and leave your emotions at the door.
Most people can’t afford their dream home in their 20s, and that’s okay. Consider resale value and rental opportunities when you consider buying a home before 30 to make sure it’s a smart choice. If the numbers don’t work out in your favor, keep looking.
The only time you “need” to buy a home by 30 if it fits within your financial game plan. Do your research, ensure your costs are manageable, and have a backup plan.