A Millennial’s Guide to Buying Your First Home
Are you a millennial that is ready to dive in and make you first home purchase? Lauren Bowling, a millennial and award-winning blogger and editor behind the personal finance site “Financial Best Life,” recently took the dive into real estate investing and made many costly mistakes. In our recent conversation, she outline the mistakes she made and the lessons she learned, as well as provided a guide for first-time, millennial investors so that they can avoid falling into the same expensive and time consuming traps.
Do All The Research You Can Prior to Closing
Lauren’s first piece of advice for first homebuyers or investors is, “do all the research you can do, not only on just the purchase itself, but what you’re going to do after.” In order to explain why she provided this advice, I’ll provide some context – what happened on Lauren’s first deal?
Lauren’s first investment was a three-bed, two-bath property in an up-and-coming area in a southwest suburb of Atlanta, which she purchased for $65,000. Her business plan, she said, was to “really get a great deal, buy low, and eventually, in 5 to 10 years, sell high so I can really make my first home purchase make money for me.” After closing, Lauren put in $70,000 in renovations, lived in the property for 3 years, and then rented it out. Currently, the property rents for $1325 a month, which nets her $500 a month in profit.
$500 profit a month? Sounds like a 360-windmill slam-dunk, especially for a first deal! However, when we dig a little deeper, that doesn’t turn out to be the case.
“First of all, it was a complete gut job,” Lauren explained. “It was a massive renovation that I undertook, not only as a first time homebuyer, but also as a first time renovator. We’re talking stripping things down to the studs, which was just such a huge project to undertake. I was 26 years old. I was a young, single woman and I had no clue what I was doing, which was a prime opportunity for a lot of vendors to come in and take advantage of my inexperience and kind of present themselves as trusted advisors and then bait and switch me.”
After major renovations were completed, as well as $70,000 later, Lauren is still fixing things to this day. “It’s the gift that keeps on giving.” She also explained, after the major renovations were completed, “I had another contractor come in and bid some things. He said ‘you spent $70,000 for about $40,000 worth of work.’ The other $30,000 of stuff still needs to be done, not only as a landlord, but also if I want to eventually sell the house.”
The lessons that Lauren learned in order to avoid overpaying for renovations and finding the right contractor:
- Put in a contingency into your rehab budget,
- Research as much as you can to determine exactly what you’re going to do once you close the property
- Obtain multiple contractor bids to see if she’s getting price gouged
- Most importantly, ask TONS of questions. “I definitely could have asked a lot more questions … even if I already know the answer. I think the process of asking questions let’s people know you’re paying attention.”
For more on finding the right contractor:
- How to Find the Right Contractor for the Right Job
- How to Create a Win-Win Scenario with Your Contractors
- 4 Ways to Improve Your Odds of Hiring a Good Contractor
Which 203k Renovation Loan Should I Use?
To purchase the property and pay for the renovations, Lauren used a 203k-renovation loan. She said, in regards to a 203k-loan, “it’s a loan product where you can lump in your costs to renovate in with your mortgage so you’re making one payment every month. It’s a good program. It’s a great way for people to raise money to fix homes … especially as a first-time buyer. Maybe you have money saved up for a down payment, but not enough saved for the project and the fixes.”
For Lauren’s deal, the purchase price was $65,000 and her rehab costs were $70,000. So instead of getting a conventional loan for $65,000 and paying $70,000 out-of-pocket, she was able to get a loan for $135,000, which covered both expenses. That is an upfront cost difference, assuming a 3.5% down payment for an owner-occupied loan, of $67,550 ($72,275 – $4725).
When Lauren was pursuing the 203k-loan, she learned that there are two different types. “There’s the streamline 203k, which is less than $35,000, which is for more cosmetic fixes. Then there’s a full 203k-renovation loan, which is for those bigger projects like what I did.”
Which 203k-loan option does Lauren recommend for first-time homebuyers or investors? The streamline. “I definitely recommend for first-time buyers, only do a streamline 203k because that keeps you out of the bigger projects [so you won’t be] in over your head.” In other words, the 203k streamline forces the investor to keep renovations under $35,000 and to avoid risky projects that require major renovations since those are the homes that are more likely to result in budget creep.
Advice for Millennial Homebuyers
Lauren specifically focuses on providing financial advice to the millennial generation. Besides being a millennial herself, the main reason she focus on millennials, she said, is “I think given all the factors, [like] the recession and the student loan crisis, millennials are in a very interesting place financially so they need a different type of advice than what their parents got or even the generation that comes after is going to get.”
That being said, Lauren provided two, millennial specific pieces of advice:
- Get Student Debt Under Control:
- “You can’t really talk about buying a home as a millennial without first talking about how millennials can get debt, if they have it, under control… [So] first, it’s about getting your debt under control. Maybe not paying it off entirely, but to the point where you can accommodate both a mortgage and a loan payment.”
- For those unfamiliar with the student debt crisis: According to Student Loan Hero, Americans owe over $1.3 trillion in student loan debt, spread out among over 44 million borrowers. The median monthly student loan payment for borrowers between the ages of 20 and 30 is $351. The average Class of 2016 graduate has $37,172 in student debt, which is up six percent from the Class of 2015.
- Visit Lauren’s blog for more details on how to manage student loan debt: http://financialbestlife.com/blog/
- Shop Around for Interest Rates
- “The second thing I see a lot of millennials not doing is a lot of comparison shopping for different interest rates. I think a lot of millennials will go with whoever their parents told them to get a mortgage with or maybe a friendly recommendation, which is fine, but you lose out on a lot of money if you don’t shop for interest rates and take the lowest one.”
- “There’s lots of website where they can go, like Lending Tree is a place where you can just plug in your information and see the ballpark of what you’re qualifying for. Then, if you want to see what your home bank will offer you, [go in] and say ‘hey I got this offer from this other place,’ and do it that way just so you have in mind your credit score and what you’re looking at. If you go with just your first offer, you don’t know how much money you’re losing on the table.”
- For example, let’s say you are purchasing a $200,000 property. The difference between a 3.5% interest and 3.75% interest loan that is amortized over 30 years is over $10,000!
The lessons Lauren learned after spending $70,000 on $40,000 worth of renovations on her first investment property are:
- Put in a contingency into your rehab budget
- Research as much as you can prior to close
- Obtain multiple contractor bids
- Ask tons of questions to contractors, brokers, and lenders
Of the two 203k-renovation loan types, Lauren recommends using the streamline option, which covers renovations up to $35,000. This forces the investor to keep rehab costs under $35,000, so they will be less likely to take on riskier rehab projects.
For millennials who are looking to purchase their first home, either for personal or investment purposes, get your student debt under control and make sure you shop around for interest rates
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