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Is it Worth Putting Money into Buying A House? (6 Tips to Avoid Making Mistakes)

For a lot of people, their house is their biggest investment.

But whether you’re putting down 20% or paying cash for a new home, you need to know what you can afford before buying your dream home.

Robert Johnson, a finance professor at Creighton University, suggests putting your money into stocks and funding your 401(k) with a matching employer contribution.

So, diversifying might not be a bad idea.

Also, when it comes to purchasing a home, consider your cash flow and monthly expenses to see if you can afford to purchase a house now, or if you should do it later.  

So, is it Worth Putting Money into Buying A House?

You can buy a house to live in and/or invest in. Also, if done correctly, buying a house or other types of properties can give you a nice ROI (return on investment). So, in this article, I’ll give you tips to avoid making mistakes whether you’re buying a house as your primary residence, investing in it, or just refinancing. You can also learn about buying a home in a hot market. However, you should always consider your financial situation before buying a house, no matter what the reason. Make sure you always have adequate savings left over for any emergencies too.  

Below are tips you should follow when buying, refinancing or investing in a home:

Investing in cash flowing home

Putting down 20%

Refinancing

Downsizing

Buying a home in a hot market

Buying a home in a down market

1. Investing in Cash Flowing Home

Finding properties with a positive cash flow can be challenging in today’s real estate market.

Since these properties usually aren’t on the market long, if at all, because a lot of them will be purchased before they ever even get listed.

Also, these properties are more likely to come in a bear market - like the subprime crisis - when property values have plummeted, and unfortunately, many people face foreclosure.

Because of this, rental values stayed strong – this meant a positive cash flow for most landlords.

A lot of retirees often seek cash-flowing rental properties because they provide income that helps with their retirement lifestyle and can also pay for other things like unforeseen medical bills.

Rental properties can yield a cash flow of $100 to $300 per month.

However, specific types of properties are usually more likely to lend themselves to being income properties than others.

Some investors prefer fixer-uppers because they can often buy them for a low price and then fix them to generate instant equity and often cash flow too.

So, no matter what type of property you go with, I think you’re better off investing in a cash-flowing one instead of just a high-priced house you live in, that takes cash away rather than giving any!

Also, if you’re a new real estate investor, learn to analyze cash flow real estate investment opportunities.

That way you know you’re getting a good deal and also that you’re offering good deals to other investors that you might sell to.

After all, your homebuyer clients may eventually become future investing partners.

You should be familiar with your local rental market too and look for single-family homes with three bedrooms and two baths, that are less than 50 years old if possible.

Also, if you happen to go the commercial property route, you will need to know what a cap rate is since that’s how you will determine its value.

Which, the capitalization rate is basically a simple equation that tells you how much your investment property will yield in a year.

So, simply put, it’s a ratio expressing how much cash it will bring in for the year in relation to the purchase price, after expenses, but before debt service, in other words, as if you paid cash.

Now, for a quick & simple example, if you wanted to buy a five-unit and the asking price was $500,000 & the NOI (Net Operating Income) was $50,000, that would be a 10% cap rate.

So, you take the fifty-thousand-dollar net operating income and divide it by the five hundred thousand dollar asking price, and that gives you 0.1 or 10%.

That would be a cap rate of 10% or a 10 cap.

2. Putting Down 20%

Is it Worth Putting Money into Buying A House? (6 Tips to Avoid Making Mistakes)

When purchasing a home for the first time, you might be tempted to make a down payment that’s more than 20%.

However, this will tie up your money more than you need to.

Now I’m not saying that you should invest in stocks, but the stock market has historically returned around ten percent per year, not accounting for inflation.

So, the fact that you can put down a smaller down payment may allow you to diversify your investments, instead of having everything tied up in one property.

Also, putting down 20% is a pretty traditional down payment and is usually acceptable to most real estate agents and home sellers.  

Another thing, by putting 20% down on your house you can avoid paying PMI (private mortgage insurance), which can cost thousands of dollars a year depending on the price of the house you’re buying.

Now, while putting down a larger down payment may give you the best chance of getting the deal, it isn’t required.

So, even if you have more than 20% of the purchase price saved up, it’s recommended that you have some extra money available for emergencies.

Also, as I just mentioned, it’s not essential to put down that much cash, and if you end up needing that money back in hurry, it can sometimes be difficult or even cost you a lot of money to get it.

So, in my opinion, it’s better to put down less and save some money for other investments and/or emergency purposes.

3. Refinancing

https://youtu.be/D5CoazPkF-E?t=21

Now, I know refinancing isn’t exactly pertinent as far as buying a house goes.

But it is possible to refinance and shorten the length of your new mortgage or even get some cash-out, that can be used to help purchase a second house, or even a rental house, that is if you already have a house to refinance.

So, I thought I would include a little bit about refinancing in this article.

Now, refinancing is not always an easy decision or guaranteed to be the best one. 

You should carefully evaluate the refinancing costs and terms before going thru with it.

Refinancing fees may include credit fees, loan origination fees, and other processing costs.

You should also try and find a mortgage broker who offers enhanced due diligence, which includes comparing interest rates with multiple available lenders and evaluating their terms and conditions.

Refinancing your house requires the lender to pull your credit history and make decisions based on the information provided by your credit report, this will ding your credit.

However, if you can have all the companies that you’re applying to pull your credit within a span of 30 to 45 days it will only have the same effect as doing it one time I think.

But don’t quote me on it…Ha-ha

The refinancing process can help you lower your monthly payment by paying off your existing mortgage and then refinancing at a lower amount and interest rate.

Also, if you can get a better interest rate, and you owe less than the present mortgage amount, you may be able to get a shorter term, in other words, fewer years on the mortgage, and still get a lower monthly payment.  

You can also usually skip a month or two without making payments while the lender processes your new loan.

So, refinancing your house is a significant decision.

It can make financial sense, especially if the new loan is a lower interest rate.

However, despite the many advantages, refinancing is not suitable for every homeowner.

4. Downsizing

If you have been thinking of downsizing, you might want to put more money into your current home in order to get a greater sales price.

You might want to consider creating a different layout or adding more amenities, such as a smart refrigerator or turning an extra room into a theater room. 

Also, just speaking of refinancing, it can sometimes be a handy way of paying for these updates and changes.

One more thing, in addition to freeing up valuable capital for investments, downsizing can also free up hundreds of dollars per month on housing expenses.

Now, even though moving to a smaller house can be time-consuming, it can be well worth it if you have other goals that downsizing can help you to achieve.

It may even make sense to move into a retirement community that includes services like home maintenance and transportation to events if you’re old enough to qualify.

Although downsizing can sometimes have its downsides…ha-ha, it can still be worth the hassle.

Since you should have fewer bills to worry about and more money to save or invest if so inclined.

5. Buying a Home in a Hot Market

Is it Worth Putting Money into Buying A House? (6 Tips to Avoid Making Mistakes)

Many sellers consider selling their homes in a hot real estate market.

They may think that buyers will jump at the chance to purchase a property and will even pay above the asking price.

In which, usually this is true.

But if you’re a buyer in a hot market, it’s not going to be so easy most of the time.      

Now, one of the most common mistakes homebuyers commit in a hot market is making an offer without being pre-qualified, unless you’re paying cash that is.

Because when a seller has lots of bids, they will usually put the ones that are cash and pre-qualified at the top of the stack.

So be sure to have all your ducks in a row before making an offer.

Also, be as flexible as possible, you can even attempt to purchase the home’s furniture to get the seller to accept your proposal.

Buyers often submit bids higher than the asking price in a hot real estate market.

So, sellers have all the power and usually get a price above the market because of it.

Just keep that in mind when buying in this type of market.  

Also, in addition to paying the total asking price or more, an all-cash offer is likely to get accepted quicker in most instances.

6. Buying a Home in a Down Market

The term “Down market” is kind of self-explanatory, it describes when the housing market slows down.

This doesn’t have to be in a recession, but it is still a period that’s not ideal for sellers.

Which means it’s a good time for buyers.

There will usually be more inventory (houses) on the market and sellers are probably more eager to sell. 

If interest rates are still low, this could prove to be a great time to purchase a home.

Another thing, when you’re just entering a down market, my advice is to wait at least a little while before buying.

That way you give the market time for the prices to drop. 

Also, as I mentioned earlier, unless you’re paying cash, even in a down market you should always have a pre-approval letter before making an offer.

Which is basically a formal document that reveals your financial position, and credit score, and lets the seller know that the financial institution you’re using is going to give you the loan.

One final point, if you’re planning on refinancing your mortgage, a down market could turn out to be a great time for that too.

As long as interest rates are low, again as I just mentioned. 

Video Version: Is it Worth Putting Money into Buying a House? 6 Mistake Avoiding Tips!

In Conclusion

Well to start with, if done right, purchasing a home or other types of properties can earn you an impressive return on investment. I think it’s much better than just keeping your money in a savings account. Besides, when you own a house, you can live in it or rent it out and its value usually increases over time. So, whether you plan to live in it, rent it or hopefully sell it for a profit later, there are several benefits to owning a house. These benefits will help you build your net worth and bank account. However, they do require maintenance and upkeep. But that doesn’t mean that you have to do it yourself. Also, if you intend to buy in a hot market, you will need to be patient and do your due diligence in order to find a good deal. At the same time, if you’re buying in a down market, good deals should be plenty. Finally, if you’ve owned your home long enough to build up equity, and interest rates are low enough, you should be able to refinance, get a shorter term and/or pull cash out & still have a reasonable monthly note.    

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