First Home Buying 101: Features, Factors and Future Use Considerations

Buying your first home is one of life’s most exciting milestones. It’s been almost 18 years since Beth and I purchased our first home, and I still remember going to the final walkthrough and saying to myself, “Wow, this is going to be ours in about an hour!”

The property ended up being a great investment, and was a perfect fit for our lifestyle at the time. We were in our early 20’s. It was just the two of us and our miniature dachshund, and we traveled quite a bit. Condo life was great. But truthfully, we lucked out — because in retrospect, I don’t think we gave much thought to our search criteria or the impact that buying a home has on one’s lifestyle.

While it’s surely something to celebrate, buying your first home is also one of the largest financial investments you’ll ever make. Don’t do what we did and leave it to luck. Instead, I’d encourage you to take the following factors into consideration as you’re establishing your search criteria. Use them as a guide to decide which homes are worth the look, and which are not.

What do you want your life to look like as a new homeowner?

This one is a biggie. Do you want to spend weekends gardening and mowing the lawn, or would you rather be able to travel? Are you more likely to entertain at home once you have your own place, or would you rather enjoy nights out on the town? Are you willing to stretch your budget to get the perfect place, or would you rather buy under budget to reserve cash for other investments and discretionary spending?

The answers to these questions should serve as a guide for your search. It’s okay to eliminate properties that may be in the location you want, and are in your price range, but that aren’t going to provide the lifestyle you’re pursuing.

Consider this carefully, because unlike a property that you sign a year lease on, you’re not going to have the same flexibility to pick up and move if you have a change of heart. Make sure your new home is going to be a good lifestyle fit for at least the next five to seven years.

Are you willing to take on a fixer-upper now in order to have more equity later?

In any market, homes in top shape also command top dollar. Conversely, in all but the most competitive markets, homes that are more outdated and maybe even in need of more significant updates can often be had at a discount. Buying a fixer-upper as a first home can be a great opportunity for you to build more equity than you might by buying a newly-renovated home.

But before you take on this kind of project, consider the following:

• Are you handy enough to take on a fixer-upper and build some sweat equity?
• Do you have reliable help from friends or family?
• Aside from your transaction costs to buy the home, do you have money available to make the immediately necessary fixes?
• How will the costs of all the other projects you will want to do (beyond the initial/necessary fixes) fit into your budget?

Be careful not to put yourself into a financial bind by taking on more than you are capable of fixing and financially prepared to do, but if those factors are not a deterrent for you, fixer-uppers can make excellent first buys.

Have you considered owning investment property? Make your first home the first one!

Over the years, we’ve helped a number of clients purchase first properties that they had the intention of retaining for the long term — well after they were done living there personally. Owning and managing investment real estate is a great way to begin building long-term wealth if you’re up to the management tasks involved.

One of the advantages to buying a property as a primary residence first and converting it to an investment property years later is that you’ll take advantage of the terms of owner occupant financing terms. Generally, this means you’re obtaining a more favorable interest rate with a lower down payment. If you think your first buy is going to become your first rental property, you’ll also want to analyze the rental market at the time of purchase.

Some questions to ask about the rental/investment prospectus:

• What is the current market value for rent?
• What is your total mortgage payment going to be?
  Out of the gate, would it produce cash flow?
• Assuming an average rental rate increase of 3% per year, which is a rough market average, will it produce cash flow by the time you plan to vacate and rent it out for the first time?

There is no written rule that having positive cash flow is the one factor that makes a property a good investment. Maybe you’re buying something that will not have positive cash flow for a long time, but it has great appreciation potential. That’s okay too — it all comes down to your individual investment objectives.

Need more guidance in your search for your first home? Start here.