5 Ways to Avoid Becoming House Rich and Cash Poor in a Seller’s Market

5 Ways to Avoid Becoming House Rich and Cash Poor in a Seller's Market

It’s home buying season! If you’re looking for a house right now, this very well could be one of the most difficult times to buy real estate. The amount of available homes is super low and prices have skyrocketed. In metro Detroit where I live, available homes have dropped 38% from last year to this year and prices have increased 9% already. As I googled other real estate in major metro areas, a similar story of low inventory and high prices spanned the country.

If you’re going to take the plunge this year and buy a home in this tough market, realize that this commitment may very well be the largest purchase you’ll ever make. You want to make sure that you’re not setting yourself up to become house rich and cash poor (or life poor for that matter). Having a nice home in a beautiful neighborhood can make you feel incredible, but it can also put a 100 pound weight on your back if the money is tight.

Here are some suggestions that my wife and I adhered to when we bought our home in 2013. It helped us to find our forever home and not feel strapped for cash each month.

5 Ways to Avoid Becoming House Rich and Cash Poor

1. Have an Emergency Fund

Before buying a house, I recommend setting up an emergency fund. This is a separate savings account outside of your checking account that you use for the unexpected occurrences of life. Even with a stellar inspection, this new home is bound to need upkeep that you weren’t planning for.

In the first year of owning our “fully updated home”, we had to replace our roof, repair our AC unit and replace a cracked bathroom sink due to our 3-year old dropping a heavy glass inside of it. Life happens! These “whoops moments” weren’t that big of a deal for us because we had a decent emergency savings in place.

I’d recommend 3 months of living expenses set aside in the savings account. This could cover a big mishap, multiple little issues or even three months of job loss. If you don’t have an emergency fund yet, start factoring it into your monthly budget today.

2. Avoid Private Mortgage Insurance (PMI)

A larger down payment on your home might seem like a lot of money now, but the investment is totally worth it in the long run. If you put down at least 20% on your home, you will avoid Private Mortgage Insurance (PMI) with most mortgage lenders. PMI is an insurance for the mortgage company that YOU pay for on THEIR behalf. It is insuring them in case you default on your mortgage. Remember 2009?

Since PMI can add another 1% to your mortgage, it should be avoided at all costs. For example, if you’re getting a $100,000 mortgage, you’d be paying an additional $1,000 per year or $83.33 per month of unnecessary costs. Go for at least 20% down and you’re golden.

3. Keep Your Mortgage Payments to Less Than 25% of Your Income

Having manageable monthly payments is crucial when buying a new home. Whichever type of mortgage you choose (here’s my case for a 15-year fixed), calculate how much of a down payment you’ll need to keep your payments to less than 25% of your monthly income. At this percentage, you’ll still be able to pay your bills, save for retirement, go on family trips and, overall, just enjoy life.

If your mortgage takes up 50% of your income, there’s not much money left over for all of life’s other important expenses. You’ll have an awesome house, but you might not be able have anyone over to enjoy it because you can’t afford to entertain or furnish the place.

4. Consider the Cost to Update and Furnish Your New Home

Make sure to budget the amount of money you’ll need to buy furniture, update paint colors and decorate. This can add up fast depending on your taste, style and overall family situation. For example, are you moving from a 900 square foot apartment to a 2,000 square foot home? Your budget could be quite higher than someone who is downsizing. Factor in how many beds, couches, tables and chairs you might need. There’s a whole lot of wall space in a bigger home. Consider the pictures, art and mirrors too.

You don’t need to go crazy here. It’s not required that you buy all new stuff. Craigslist and Facebook Marketplace have some excellent gently used items to make your new house feel like a home.

Note to Self: Always allow for decorating money or marriage will suffer. Happy wife, happy life.

5. Have Patience and Buy When the Time is Right

Since this could be the largest purchase you’ll ever make, take your time and don’t rush. It’s easy for me to say! I know! All I’m saying is go with your gut. If the price doesn’t feel right or you’re not excited about the home, then don’t force yourself to buy something you may regret later.

To curb some of the anxiety, be sure to always get an appraisal. Prices are crazy high right now and sellers are taking advantage of it. Make sure you get an independent expert that confirms the pricing is in line with the neighborhood.

Also, be sure to get an inspection before committing to your final purchase. A smart licensed real estate agent will help guide you through important strategies like this. Do your research and interview a few agents to make sure they are the right partner for you. This big purchase requires the best partners.

That agent should also help you to not make ill-advised purchases like buying a home that is overbuilt for the neighborhood. You know what I’m taking about … the home that looks like a 3-story castle amongst a sea of 1-story ranches. Stay away!

And you may not want to hear it, but renting is not the end of the world. Depending on your financial situation and the available homes in your desired neighborhood, renting a home until you have enough cash saved up could be your best option.

Happy hunting everyone!! I hope you land your dream home and it’s everything you’ve always wanted. There’s no place like home.


Who’s looking for a home right now in this crazy market?


 

Author: Andy Hill

Andy Hill, a mid-30’s father of two living in the metro Detroit area, pens the MarriageKidsandMoney.com (MKM) blog taking you through the trials and tribulations of being a young parent and husband who is planning for his family’s future and winning with money.

2 thoughts on “5 Ways to Avoid Becoming House Rich and Cash Poor in a Seller’s Market”

  1. Allowing for extra money for basic updates and decorating is essential. I was so glad I set aside an extra few thousand dollars after our most recent home purchase so that we could get some extra furniture, new curtains, rugs, etc. A new place just requires a few extra things and it all adds up!

    1. If we didn’t set aside money, my marriage would be in dire straits, Kathryn. And you’re right. When your new place looks good and is furnished well, you enjoy it more!

Leave a Reply