Buying your first home is the largest and most important financial investment one could ever make. For many people, owning their homes is the ultimate dream. However, the prices for houses – whether it is a condominium, duplex, or stand-alone townhouse – continue to rise, forcing people to apply for home loans and other financial plans.
Understanding the current real estate industry
The corona-virus disease 2019 (COVID-19) pandemic has tremendously impacted the real estate industry today, including how consumers buy and invest in properties. The outbreak forced businesses and enterprises worldwide to pause, sending the world in a global recession or negative economic growth that will likely last indefinitely. In real estate, it means that prices for properties may remain steady in the next few years,except for those located in central business districts (CBDs).
Despite the global recession, real estate is still a sure investment, according to many financial advisers and investment experts, as homes and buildings are better investment options than stocks. With real estate, home-buyers can leverage many strategies to get a return of investment (ROI).
- Rent it out- Renting is a passive way of making money out of a real estate investment. The monthly rental income can significantly add to current cash flow and help diversify financial portfolios. You can rent out your real estate assets to individuals, starter families, or even multiple tenants.
- Fix and flip the property- Some home-buyers buy a fixer-upper or a house that needs extensive repairs and modernization at a lower price. They will then renovate the property into something that real estate investors would buy and sell at a profitable price.
- Convert it into accommodation property- Accommodation properties are those that you see in popular sites such as Airbnb. These properties operate as guesthouses or hotel-like accommodations that accept reservations and bookings from travelers or people on business trips. This strategy can also be an excellent way to make money out of one’s property.
- Wholesaling- Real estate wholesaling allows investors to buy properties without the responsibility of owning them. To gain profit, the investor assigns the contracts to buyers for higher rates than the costs of acquiring them.
How to build a budget to buy your new home or property?
Despite the ongoing pandemic, financial advisers assert now is the best time to go into real estate investment because of the low prices. These prices do not come around again unless we go through another pandemic or a wide-scale disaster that may affect the global economy.
Before the pandemic, the real estate market predicted that the majority of home-buyers would be millennials. Millennials in their mid-20s to late 30s are motivated to buy their first home and properties that they can pay off before or by the time they retire. Whether you belong to this demographic or are someone who has finally decided to purchase their own home or property as a means of investing in real estate, here are some ways on building a budget early:
1. Calculate your monthly income- As simple as it sounds, determining your monthly earnings is a vital step in financial management. You may have multiple sources of income, including salary from your office job, online business sales, or freelance work earnings. Calculate how much money you get from these sources, excluding taxes and other deductions.
The next step is to pick a budgeting method to enable you to organize your finances systematically. One of the most widely used budgeting methods is the 50/30/20 rule: 50 percent of your income is for needs and expenses such as groceries and monthly bills payments; 30 percent goes to your wants such as travel, dinners out, and entertainment; and 20 percent goes to savings and debt repayment.
Once you have portioned your monthly income, follow it up with these steps:
- Make a list of all monthly household expenses- Write out all your monthly expenses such as bills, utilities, insurance, groceries, and the like. Aside from giving you an idea of how much you are spending every month for these essential items, it will also help you calculate your budget because you get an accurate picture of how much you need to keep for other expenses and save.
- Know where to cut back- After listing all of your expenses, you will see which areas you can cut back on. Are you spending more on eating out or paying for services that you no longer use, such as a gym membership or subscription to a newspaper or magazine that you no longer read? Make adjustments as you go along with your budget to save as much money as possible for your new home.
2. Check your credit- Getting a mortgage or loan requires having a good credit score. Start by paying off debts such as your credit card balances. Try to stop using these for a few months before applying for a mortgage to improve your credit score significantly.
3. Save cash for the down payment and other expenses- Prepare some money for down payment fees and additional costs, including costs for closing. Many property developers require at least a 20% deposit. Aside from this, you’ll need to account for other expenses such as real estate taxes, property insurance, and documentation.
4. Choose a property that you can afford- As first-time home-buyers, it is tempting to buy a house that has everything you are looking for. However, this may not be possible in the real world. It is incredibly impossible to find a home with all of the things you want without going overboard with your budget. Otherwise, you will find yourself house-rich but cash-poor, which can give you potential financial woes.
5. Prepare important documents- When you finally have the house of your dreams at the price you can afford, you will need to prepare the necessary documents to finalize your property purchase. Make sure you allot a budget for obtaining the required documents to avoid delaying the process.
If you are applying for a mortgage, you will need a pre-approval letter from your chosen lender. You will also need to provide the lender with your financial records to show your financial standing. Other documents that home-buyers typically prepare also include:
* Loan estimate
* Offer to buy to the seller or developer
* Home inspection report
* Home appraisal or the property’s value in the current real estate market
* Title search
* Closing disclosure
* Homeowners insurance declaration
* Property survey
Buying your first home is overwhelming. Whether you plan on investing in a piece of land, a house, or a condominium unit, real estate properties are solid investments because they afford a sense of security to anyone who wants to buy them. Investing is a significant financial endeavor with multiple factors to consider, as it involves spending your hard-earned money. Know what is important to you, what you plan to do with your investment, and how you can make it work for you.