Homebuying for Streamers
Homebuying has long been one of the expected steps in the American growing up process. You go to college, get a good job, get married, buy a home, have kids, etc. While I’d contend that not everyone needs to own their own home I understand the appeal. Today we’re going to look at the practical steps you should take when you plan to buy a home.
Homebuying Logistics
This is not a minor decision. Not only does it define where you live for the next several years to your life but it’s also the largest financial decision most Americans ever make. Take the time to do your due diligence and you’ll stave off a lot of future headaches. Just think of what a cool person future you will be and how you don’t want that cool person to suffer.
Defining the features you want
What makes a home besides 4 walls? Everyone is different. I have friends who wouldn’t consider a home that didn’t have space for a garden. Some want natural lighting. Others care about a view. My parents highly valued living in a place where their kids could safely play out in the front yard and street. You need to figure out what makes a house a home for you. I’d recommend keeping this top of mind as you visit friends and family.
For instance, I now know that I really like warm, earthy colors for a house because that’s how my grandparents decorate. Similarly, I love Spanish tile and perhaps a Catrina or two in the house. Do I are about a garden? Not really. Do I like skylights and natural lighting? For sure, and for good measure add in vaulted ceilings!
The more you know about what you want the more you can pinpoint the right house for you and estimate cost. It’ll also help your realtor know what to show you so you’re happier and they make an easier sale.
Location
As the saying goes, the three most important factors in homebuying are location, location, and location. Where do you want to live? If you’re in the San Francisco area you can expect to pay 3-4 times as much as in most of the Midwest. There are benefits to hot markets like potential home appreciation, a higher tax base for better schools, and a general ability to sell the home more easily in the future. However, there are also downsides. First and most obviously is the cost. You need to save more money for a down payment, pay more in taxes and insurance, and pay higher closing costs. The second is the opportunity cost. If you’re buying an expensive home then you’re not using your money for other things, like reinvesting in your stream.
What if you don’t live in San Francisco or another hot market? You still need to consider location based factors. How close are you to major services and restaurants? How’s the view? Do you get extra land if you go further away from the nearest city center? Are you more likely to suffer floods or tornadoes? Before, you defined the features you wanted in the house but you also need to define the features you want in a location. And I haven’t yet touched on the most important!
Schools
You must consider the quality of the local schools. If you have kids today it’s highly relevant to your family. You want your kids to get a great education. If you don’t yet have kids it will be relevant to your family. At some point, you will want your kids to get a great education. If you never plan to have kids its highly relevant to the majority of home purchasers so it drives cost and the ability to later sell the house. Potential buyers want their kids to get a good education. See a pattern? All else equal, a home in a better school district will command a significantly higher price.
So how do you know how good the local school district is? Sites like Niche or Schooldigger help compile data from government sources and survey responses. Additionally, if you’re working with a realtor (which I’d recommend) then they should have some insights. Finally, you can look at sites for the cities you’re considering to see how they rank their schools.
Extra costs over renting
Owning a home is more expensive than renting. You are responsible for every possible thing that could go wrong with the house, or insuring against those things. As a homeowner, you’re also responsible for the property taxes that support your local government and school. Let’s dive in to some of the details to make sure you’re prepared for the extra expenses.
Down payment
First, you need to buy the home! This means you first need to save up enough for the down payment, or the initial cash you spend to secure the property. Unless you have access to a special program through the government, you should plan on a 20% down payment. That means if you’re buying a $250k home you should expect to first save up $50k. This helps you avoid private mortgage insurance (PMI) which is the extra expense a lender charges you if you’re only making a small down payment. It could be hundreds per month!
You’re charged PMI if your loan to value (LTV) is less than 80%. It’s also known as debt to equity and it compares what you owe (debt) to what you own (equity). You calculate your LTV by dividing your current loan balance by the current price of the home. If your LTV goes below 80% you can ask your lender to get rid of PMI. Keep an eye on that number since you’re consistently paying down the loan and prices on average rise slightly!
However, it’s possible to put down less if you qualify for some special programs. Bankrate has a nice list here but the two most prominent are the Federal Housing Administration (FHA) program for first time buyers and the Veteran’s Affairs program. The FHA program can require as little as 3.5% down ($8,750 on a $250k home) though it still does require PMI. The VA program is only available if you’re a veteran but it has a 0% down and no PMI requirement.
Mortgage
You finance the rest of the house with a mortgage, or loan from a bank/mortgage company. Your typical mortgage lasts for 30 years though it is possible to get a shorter term. Mortgage payments come with two main components: principal and interest. Principal is the amount you borrowed. If you put a $50k down payment on a $250k home then you’d have a mortgage with a $200k principal.
Interest is the expense you get charged for borrowing the money. It’s how the lender makes a profit. Without question it’s better to have a lower interest rate, when possible. Mortgages are structured so that you pay more in interest early on and later you pay down more of the principal. You can often secure a lower interest rate by choosing a shorter mortgage term. Lenders value getting their money back quickly since it reduces the window of time in which things could go wrong and they could lose money.
Finally, there are two main types of mortgage: fixed and variable. Fixed rate mortgages have the same interest rate throughout the lifetime of the loan. Variable loans have interest rates that, wait for it, vary over time. In general, I am a fan of fixed rate loans as I view a home as a long-term purchase. When dealing with the long term I put a high premium on predictability. However, variable loans do tend to secure you a lower initial interest rate. If you’re not planning on staying in the home for a long time or have plans to refinance your loan after a couple of years then a variable loan can make sense. Just make sure you know all of the rules!
Insurance
You absolutely need to insure your home against damages and disaster. While you should get renter’s insurance when renting homeowner’s insurance is a totally different beast. Renter’s insurance insures your stuff, homeowner’s insurance insures your stuff, potential medical costs for home based accidents, and the actual structure you live in. One important note: you only insure the structure, not the land. That means if you live somewhere expensive you could end up insuring a lot less than what you paid for the place. After all, you could have the same exact house in San Francisco or Madison, WI but spend way more for the land in the SF Bay Area.
So, what should you consider when insuring the home? First, consider how much it would cost to replace your stuff. If you lost everything in a fire, how much would you pay for furniture, entertainment equipment, kitchen items etc? You don’t have to inventory everything you own and how much it would cost to replace, you can just estimate.
The big question is: what would it cost to replace the structure? This includes raw materials as well as labor. You should cover the full replacement cost but you certainly need to cover at least 80% of the replacement cost to avoid penalties. Remember, this isn’t counting the cost of the land. If your $250k home cost $50k for the land and $200k for the structure then you only insure $200k.
If you’re somewhere that is prone to flooding or earthquakes you should also consider flood and/or earthquake coverage. Those are separate policies.
One final note: odds are you want an HO-3 type of policy. If you see that your insurer is offering you a different type reach out to me to make sure it makes sense for you.
Taxes
As a homeowner you owe property taxes. You should check with your state, county, and city to get a combined rate before you buy the house. It varies wildly in different parts of the country.
Sometimes your lender will require you to pay more on your monthly mortgage payments to help cover the cost of property taxes. After all, they don’t want you to lose the house and stop paying because you didn’t pay taxes. If you are paying through your mortgage payments it’ll go into an escrow account.
Closing Costs
Closing costs are the transaction costs you pay when buying a home. Zillow has a great article on it here. You can expect your closing costs to be 2-5% of your purchase price. Going back to our $250k house that’s another $5k-$12.5k in expense you need to save for! This isn’t an exhaustive list of all of the costs involved with purchasing a house, so be wary that it may cost even more!
Saving for the inevitable
Homes wear down over time and as the homeowner you’re responsible for repairs. Much like with healthcare, it’s cheaper to take care of a problem as soon as you see it than it is to wait for it to turn in to a disaster. Out of respect for not making this a 5,000-word article I won’t list all of the things that can go wrong with a house but know that the list is substantial. For instance, ordinary wear and tear, pest damage, pet damage, and mold are not covered by homeowner’s insurance. You are on the hook. One notable thing to save for is roof repair and replacement. Every 20-30 or so years you will need to replace your roof and that’s not cheap.
So how do you cover all of these costs? A rough rule of thumb is that your home will cost approximately 1% of the price per year to repair. Using our $250k home means you should expect $2.5k/year in costs, or just over $200/month. Make sure you’re saving that extra into a dedicated bank account!
How to compare rent vs buy
There are a ton of factors that go in to whether it makes sense to rent or buy. I’d highly recommend using the New York Times calculator; they did a really good job. They also have some good discussion on the various factors and while they’re important. Overall, the lower your purchase cost and interest rate, the longer you plan to live in the home, and the lower your tax + maintenance cost expectations the better buying looks. Beyond the financial costs you should also consider how important home ownership is to you. If it’s something you always dreamed of then that tips the scale towards buying. If you never cared about it that tips the scale towards renting. Ultimately, it’s on you to decide.
How to save for a home
Unless you’re making an incredible amount of money or have been saving for a long time it takes a while to save up for a house. Remember, not only are you saving the 20% down payment but you’re also saving for closing costs and to cover taxes + repair in year one. For our $250k house that means you’re saving $50k + $12.5k + $2.5k (tax) + $2.5k (repair) + $1k (insurance) = $68.5k you need to save. That’s a lot of money and it grows quickly if your home costs more!
My recommendation is to set up a savings plan. By when do you want to buy a house? How much will it cost? You can use those factors to determine what you need to save each month. If you don’t have the monthly free cash to save that amount then you may need to look at a less expensive home or a longer buying timeframe.
Here’s the rub- if you want to buy a house in 5 years home prices will likely have increased over that time. Don’t forget to factor in that growth with your savings plan! I’d suggest looking up average home price growth for the cities you’re targeting. Once you do that, check out the tools page for a handy calculator I made. If you’re struggling to find the cash to save, try reverse budgeting.
I recommend putting your home savings in cash. If you’re looking at buying a home 10-15 years from now it could make sense to invest it. However, my opinion is that it’s better to have a guaranteed cash amount instead of an investment that can fluctuate right as you need it. Create a specific account and just let the cash sit.
Special considerations for streamers
There are some unique factors you should consider when buying a home as a streamer. First, moving in to and setting up a house takes more time than moving apartments. This means less time live which means less income. You can help offset this by having overlap between housing situations to ensure you have continuity but even that costs a bit more.
Next, it adds some more factors to your search. You depend on a strong, stable connection and good audio. How’s the internet where you’re looking to buy? Who are the providers? Also, does it have space for an in-home studio? Since you work from home you should consider spending a little more to get the dedicated space.
With that dedicated space comes a nice break. It should qualify as a home office for IRS purposes. You should check out this article on what spaces qualify for the home office deduction and this article for what you can deduct. Generally, if you use the space exclusively as your primary business place then you can deduct a percent of your total household cost.
Conclusion
Buying a home is a complex process with a lot to consider but you absolutely can do it. Just make sure you’re doing it correctly! Consider the overall cost of the home, local schools, what you’re need to get in mortgage, insurance, repair, and the factors specific to being a streamer before buying. You’ll make your life a lot easier if you prepare before diving right in and you’ll help your realtor as well.
If you want to talk with someone to help sort through all of the relevant factors, shoot me an email or schedule a free call.
