Here is why I will never put down 20% on real estate, and why I always put 0–5% down
Here is why I will never put down 20% on a home, and why I always put 0–5% down:
TLDR; With Real Estate, I leverage up for greater returns because equity accelerates over fixed debt over time.
Please note, a down-payment number should be based on what you can afford to pay each month, all in. (The more money that you bring as a down-payment, the lower your monthly mortgage payment).
To figure out how much you can afford per month, you have to work backwards. To figure out how much you can afford, you should create a monthly budget that includes all of your basic expenses. (A budget is a plan that can help reduce unnecessary spending and prioritize where you put your money.)
You can then calculate your average income and expenses over the last 6 to 12 months, by checking bank statements and credit card statements. Once you figure out how much you can afford each month on housing, you can know the total price of a house you can afford.
I am a fan of putting down as little as 3.5% if you can afford the monthly payment. I say this, because in the time that it takes people to save up a 20% down-payment (which can be years for many), those are years that you can enjoy home price appreciation, which will increase your net worth (depending on the real estate market you are in). In my opinion, this outweighs paying PMI (and PMI is dropped once you reach 20% equity via payments or appreciation.)
Don’t miss out on the appreciation of a property, due to the time it takes to save for a 20% down-payment.
First time homeowners can put down as little as 3.5% or 0% if you served in the military.
Also, generalized advice is horrible. It’s called personal finance, because it is personal. Because everyone’s citation is different, there is no one size fits all approach.
For people who feel defeated by unattainable money rules, I say Financial Education is the key to building wealth, so learning financial literacy and good financial habits is necessary.
Also, in my opinion, when you rent, your money is solely being used to provide shelter. However, buying provides numerous benefits in addition to providing shelter. When you own, your monthly payments will be put toward (1) building equity in the residence, (2) you will also build additional equity over time though price appreciation in the property, (3) you will be able to leverage to equity in the home to take out loans, (4) you can generate cash flow if you “house hack” by renting a room or floor in your home, (5) there are tax incentives with home ownership such as the interest paid on a mortgage being a tax deduction, (6) as well as many people being able to write off a portion of their home used as an office due to starting a business or side hustle and how common remote working has become during the pandemic. These are many excellent benefits that owning offers which renting does not , which can help you to build generational wealth over time. I like to think of money as a tool, and use my dollars to my advantage.
Creating a budget will help you visualize where you can cut back spending and where you can save money, and better track your money to help pay your mortgage. Not having a budget can make it difficult to know where you are spending your money, or difficult to have control over your spending in general.
Being frugal also helps tremendously. Being frugal and living below your means and spending less than you earn, means that you can contribute more money towards your mortgage. Many home-owners are able to maintain a mortgage, because they know how to keep their money, and not spend it on unnecessary things. Being frugal can help you pay a mortgage, because by being frugal you are being more resourceful with your money.
You can also increase your income by finding part-time work or a side-hustle. Due to technological advances, we are also living in a time where the “gig economy” and “side-hustle culture” is more popular than ever, and it has never been easier to pick up a “side hustle” to earn extra cash from the convenience of your own home.
Please advise me of any points I may have missed, or things that I stated, that could potentially hurt others financially. Thanks.
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