Buying a home is the quintessential American dream.
When my parents purchased their house back in the 1980s, it cost $55,000. My parents pinched pennies to save a down payment. Trying that same approach today requires a miracle.
According to the U.S. Census Bureau’s 2013-2017 American Community Survey Five-year Estimates, the median value of a house was $217,600 in 2017 (the most recent data available). Home values have increased 4x since my parents bought. Meanwhile, today’s average hourly wage has about the same purchasing power it did for my parents 40 years ago, according to an analysis by the Pew Research Center.
Amid this sobering reality, there’s a beacon of hope: make your money work for you through investments. It’s how I bought my first home, and you can, too.
Identify what you need
The first step is to determine the minimum criteria required to meet your needs for a home (in terms of number of bedrooms, baths, square footage and location).
By identifying this criteria, you can research prices to determine how much you’ll need for that down payment. When I bought my first property, I was single and tired of throwing my money away on rent. So all I needed was a one-bedroom condo. It’s not a mansion (although it has a killer view of downtown Los Angeles), but you have to start somewhere.
In fact, it’s critical to tame expectations for your first house. Perhaps your ideal location is too expensive; then look elsewhere. By limiting that first property to the absolute minimum required, you can achieve your goal faster, and set the stage to buy a better house in the future. (That’s why the first is called a starter home.)
Time plays a key role
After you know how much you’ll need, start building your nest egg. I did it with stocks. There’s a ton of great advice on this site to help you here, so I will focus on just a few key items.
Timing is critical, especially when looking at property. You can’t predict when that house meeting your needs at a great price appears on the market. There are other uncontrollable factors as well, such as interest rate increases and when home prices go up.
As a result, grow your nest egg in a steady manner. This requires selling stock once it hits your target price. Don’t let tax implications or your desire to sell at the peak cloud your judgment.
Of course, if you’re in a great position with a stock, you may be able to wait and cash out when needed. That requires recognizing when a stock is undervalued.
For example, I bought Walt Disney (DIS) stock at such a low price during the Great Recession that I can wait until I need the funds. Today the stock is worth more than 3x my investment. Should the price dip, I can still sell at a profit.
You can also apply a hybrid approach. I did this for my first home. Buy and sell stock to steadily build funds while holding onto any bought for a bargain price to cash in as needed, which can happen during the home buying journey. (It did to me; read on.)
One last note: Investigate if your employer offers benefits related to the purchase of company stock. If yes, take advantage to accelerate your savings. My company offered a 3% discount, which meant I was assured a 3% gain by buying and selling immediately.
Factor in fees
When building your nest egg, keep in mind that there are many fees on top of the purchase price. For instance, you have to pay taxes and closing costs. These fees mean you’ll need thousands of dollars more than what’s required for the down payment.
I bought my condo right as the real estate bubble bloomed. The asking price was at its peak. No problem, I thought, confident that I had built up the funds. Then I realized I didn’t sell enough shares to cover these additional fees. So, I ended up selling more stock than intended. Learn from my mistake and factor in these additional costs.
Even with stock investments, you might have trouble closing the gap for your first home purchase. Explore all options. There are programs for first-time home buyers. An FHA loan might be the way to go. Find a real estate agent willing to put in the time to work with you.
So what happens after buying that first house? If you kept your criteria modest, you’ll eventually want to move to a home that enhances your life further. Maybe you’d like a pool or an extra bedroom. Just keep investing. Besides, that house you just bought may need renovations.
After I purchased my first property with stocks, I did it again. Because I was able to use stock gains for the next purchase, I didn’t have to sell my first home. Now, my condo generates income as a rental. But that’s a story for another day.
Robert “Izzy” Izquierdo was inculcated into the church of finance by his investor father (who achieved millionaire status through stocks). Izzy has bought and sold stocks for decades. As a technologist who has worked at Silicon Valley companies to tech startups, Izzy pursues his dual passions as digital domain expert by day and Wall Street wanderer by night.