5 Aug 2015
How To Prepare To Buy a Home While You Are Going To School
Many people find themselves renting a home and helping others get ahead financially. When the question of “why rent” is posed, the most common answer is the issue of not having a down payment. What is interesting is that the person could afford the monthly payments but simply does not have the down payment. Home ownership in North America is less than 70%. The US Census Bureau reports that the US homeownership rate fell to 63.4% in the second quarter. This is the lowest level since 1967. In comparison, home sales are doing very well in the USA. Home construction companies are doing a booming business. Cabinet maker American Woodmark (AMWD) stock price started the year at about $29 and has hit a high of $67 a share. US private equity firm The Blackstone Group (BX) is now the single largest homeowner in America. They rent homes to those who cannot buy. Put yourself in the position to buy.
How does one go about obtaining the down payment? First let’s look at the options once you get that down payment. You could buy a condo or a townhome and have a reasonable payment. A home might seem to be out of your price range but if you purchase a $600,000 home with a rental suite with 5% down your mortgage payments would be about $2,700 a month. Take this amount then consider the $1,100 you get for renting your basement suite and your portion of the mortgage is $1,600 a month. This makes it much more affordable. Then there is also the option of renting out rooms and sharing living space for a season for additional income.
The biggest reason one does not have the down payment is lack of planning and perhaps the lack of hope for ownership of a home. Let’s take the case of a teenager. They have a vision of owning a home by the time they are 23 years old, after they have completed their degree. Let’s call them Homeowner. Another teenager has a vision of driving a nice car. We will call them Car-owner. Homeowner works hard while getting their education. There is not a lot of time between work and school. They stay at home rent free while going to school but have to pay for their schooling. They invest what is left and over the next six years watch their investments grow.
Car-owner buys a nice car; interest on the car loan is only 1.9% so almost free money. Car payments are $500 a month, insurance is $200 a month and car owner decides he wants to live independently as a renter as it is only $500 a month. While going to school Car-owner decides to get student loan so he does not have to work as much. Car-owner finds he is spending $2,000 a month on living expenses.
At age 23 they both are out of school. Homeowner looks at their savings and sees it has grown to $120,000. With this as a down payment, they can purchase a home and rent out a portion to begin their journey as a Homeowner.
Car owner gets a good job after graduating from university. Student debt is at $50,000 and the car is getting old so it is sold and upgraded to another car with another loan. Then there is the question, “How am I supposed to get a down payment?”
This is very possible and the reason why it is imperative to start taking financial small steps one day at a time. Compound savings and consistent budgeting will prove to be very fruitful in just a few short years. I have personally seen young people taking the steps to save and invest while going to university and compiling a portfolio of investments that would give them a substantial down payment. This does require sacrifice. It is a wise soul who weighs the cost in their youth and moves toward establishing a healthy financial future. I look forward to seeing more of these young people moving towards purchasing their homes and establishing themselves early in their careers.