How preparing now can help you afford a house in the future

Buying vs Renting

When thinking about buying a house one important factor to consider especially in this current economy is considering if it is cheaper to buy or rent.

This is a map showing whether it is cheaper to buy or rent in different counties in the United States. As you can see in most areas it is cheaper to rent than buy.

Sometimes when considering whether or not to buy a house it often makes more sense financially to just rent especially in the short term.

To figure out whether it is better to just buy or rent it takes some time doing the calculations to see if the mortgage payment plus all other expenses of owning a home is greater or less than rent would be in your area.

Here is a calculator to make the process a little bit easier Rent vs Buy calculator

Buying a home especially in desirable locations is often significantly more expensive than just renting. When considering whether to buy or rent you also want to think about the long-term pros and cons of owning your own home rather than renting from someone else.

Credit Score

A huge part of preparing early to buy a house is your credit score and credit history. If you are going to buy a house you are likely going to need a loan from the bank. Banks only want to lend to people who show they can pay back their loan otherwise it is too risky for the bank. Your credit score is one of the main factors in determining how qualified you are for a loan.

The higher your credit score the easier it is to get a loan and the better rate you can get on your loan. This is because if you have a high credit score you are a low-risk borrower so they don’t need to charge you extra interest.

To build up your credit score you need credit history, this is history showing that you can pay off loans and credit on time and in full every month. The easiest and most common way to start building good credit is by using a credit card. To build credit with a credit card you want to use less than 30% of your credit balance and pay back the card in full every single month.

Building up credit can take time and can be super frustrating when you are older and ready to start applying for a home loan or other loans. That is why it is super important to start building credit as soon as possible.

The day I turned 18 I applied for a credit card and had my parents add me to their own card as an authorized user. Now I have amazing credit especially for my age because I got started as soon as I could and being added to a card that already had years of good credit history also helped.

The lesson here is to become a responsible cardholder as soon as possible and if you can get added as an authorized user on a card with lots of history already you can set yourself up for success.

Saving

If you want to buy your own home you are likely going to need to save a lot of money for the down payment. The down payment can be anywhere from 1% to the majority of the house price, but a good rule of thumb is a 20% down payment. If you are buying a $400,000 house the down payment will be $80,000.

A good way to start saving for a home is by putting away the monthly cost of owning the home each month. For a $400,000 home with a 20% down payment, the costs could be roughly $2,600 a month. This will take roughly 2.5 years to save up for the down payment. This way of saving for a home also ensures you can actually afford the home.

If you can’t save the monthly payment for a home then you should probably either consider a cheaper home or consider not buying a home at all, at least until you are making more or can cut out more unnecessary expenses.

Start practicing saving while you are younger, I recommend saving 15%-30% of your income every paycheck. If you do this consistently saving to buy a home will be so much easier in the future.

House Hacking

House hacking is a way to make buying a home potentially much cheaper than it usually would be. The idea of House hacking is to buy a house with multiple living spaces or ADUs (Accessory Dwelling Units). The idea is to live in one portion of the home while renting out other portions to help pay the mortgage of the house.

House hacking takes a lot more understanding of the housing market in order to pull off, but is a great idea especially if you are interested in getting into real estate investing. If you are interested in learning more about house hacking you can click here to read an article about house hacking by Rocket Mortgage.

Summary

In summary, if you want to be able to afford a house when you are older it is key to start building good financial habits like saving while you are young. You also need to start building your credit ASAP so you do not have to delay buying a house because you can’t qualify for a loan or you get a bad interest rate on your loan. You can try to use other techniques to make buying a house more affordable by learning more about the real estate market and how it works.

Start saving/investing early, start building your credit ASAP, and research alternatives to buying a house outright.

Difference between an asset and a liability

Learning how to tell the difference between a real asset and a liability is key to getting an upper hand in life financially. Robert Kiyosakis's book “Rich Dad Poor Dad” summarizes the difference between an asset and a liability perfectly “An asset puts money into your pocket, a liability takes money out”.

Liabilities

• Your house

• Your car

• Clothing

• Food

• Bad debt

• Expenses

Assets

• Stocks

• Bonds

• Rental real estate

• Royalties

• Business

Accounting terms define assets and liabilities differently but for your personal life if it gives you money it is an asset and if it takes money it is a liability, and that is all you need to know.

Knowing the difference between assets and liabilities is key to building wealth. Many people make the mistake of thinking the home they are buying is an asset when it is in fact a liability if you are living in it and not renting it out. Knowing how to buy assets is how you can buy yourself financial freedom.

One asset that is not always apparent is knowledge or education. I’m not talking about traditional college or university. Anything that can increase your earning potential in the future is 100% an asset. In fact investing in yourself is the easiest way to get returns significantly greater than any stock could ever give you.

Summary

In summary, knowing the difference between a liability and an asset can help you make wise financial decisions and not waste money on things that will not further your financial journey. Always remember “Assets put money in your pocket while liabilities take money out”.

Spend your money buying assets and not liabilities you think are assets.

Ask Questions

If you have any questions you want answered about personal finance or investing please feel free to reach out and message me. I love interacting with my community and hearing your questions.

Important resources

• Webull Best for more active investing

• M1 Finance Best for more passive investing above $10,000

• Charles Schwab Best for custodial accounts (accounts for minors)

• Fundrise Best for buying alternative investments

• Yahoo Finance Best for economic news

• Finviz Best for stock analysis and screening

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