I received another request that is all too common of concern in expensive areas such as Los Angeles, San Francisco, and New York. The dreaded savings for the down payment. Below is the question asked of me:
How the heck do we start to save in this time?! – Julie
This is a difficult question to answer as everyone has different financial backgrounds and circumstances. It would be best to speak with a financial adviser on the topic. However, coming from personal experience, there are ways of getting into a home sooner than you think. Here are five tips to consider when you want to start the home search:
- House Hack: One of my favorite aspects of real estate is the concept of house hacking. Utilize part of your home as a rental to compensate for the higher payments. This means renting out a room, set up for vacation rentals, or legally converted basement, or converted garage. When I bought my condo, I rented out the second bedroom which covered more than half my bills! You also don’t have to rent out that room forever. Once my roommate moved out (I did my job and helped him buy a condo), I chose to live by myself and utilize the second bedroom as an office. I was in a better financial position where I didn’t need to have it rented out. The same goes for you. It doesn’t have to be forever. On my home with the Accessory Dwelling Unit, if all goes as planned, it will drop our house bills by over 30%!
- Not tied to putting 20% down: I wrote an article about this a few years ago titled 20% Down Payment is Not the Law! You do not have to put 20% down. There are conventional programs where you only must put down as low as 3% down. On a $350,000 condo, that is only $10,500. Yes, there is most likely private mortgage insurance and with the higher principal means higher overall payments, but if you factor in the House Hack, then numbers may make more sense. Take the following below as an example for a purchase price of $300,000:
| Down Payment | Interest Rate | Down Payment | Monthly Obligations with Taxes and Insurance |
| 20% | 4.5% | $60,000 | $1,769.79 |
| 3% | 4.5% | $9,000 | $2,072.83 |
| Difference | $303.04 |
Do you think you could rent out that room for at least $303.04/month? I would hope so in high priced areas where people are getting excited to pay $1,000/month for a spare bedroom. When my fiancé and I were looking to buy a house versus a second condo, we ran the numbers and with the Accessory Dwelling Unit, our monthly obligations would be about the same. One recommendation is to run the numbers at various down payments (3%, 5%, 10%) and see how much that would affect your monthly payments and see where you are comfortable with.
- Don’t buy your dream home quite yet: I understand the appeal of buying your dream home, but that doesn’t have to be today. Start small and work your way up. Buy a condo, and later you can rent it out or sell. You have more flexibility in the long run. Or, if pricing permits, consider multifamily such as a duplex. Some lenders will consider the projected rents of the other units to help you qualify.
- Buy just outside of a desirable area: Consider neighborhoods that are just outside where you want to be. As the desired area gets priced out, buyers and renters will have to go to the next neighborhood. My condo had appreciated in the double digits in just a few short years because of this.
- It’s not a race, it’s your home: Real estate by nature is designed for the long haul. There are people who have become millionaires just by living in their homes for long enough. Even if you buy today and values drop, it doesn’t matter if you plan on continuing to own it. You could afford it then and if you continue with the payments, your life doesn’t change. In the future, you can consider refinancing the loan to get lower payments (I did it twice in under 6 months for my condo and now I’m locked in a 3.375% interest rate).
I know this may not be what Julie was directly asking, but this can help in planning for that first home. I hope this helped you as it did me when I first started.
Have any questions? Reach out and ask away!
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[…] monthly payments are nominal and can be made up through house hacking (I wrote about house hacking here), even with the private mortgage insurance. For conventional loans, you can put as little as 3% […]