As we start working after college we start to wonder about where we should put our money.
For the first time ever we find ourselves making real money.
I’m talking more than $10/hour.
If you find a decent job out of college you can be making much more money than you ever expected to earn.
This is the point where we start to ask our peers and family members for help.
We start to wonder about where to invest our money.
What investment advice are we usually given? Chances are that we’ll be informed that we should invest our money into real estate.
Real estate can be a great investment. But is buying a house a good investment? You could purchase a home in an area going through gentrification and maybe then watch the property appreciate in value over time while you enjoy living in the neighborhood.
There’s a major flaw to this investment strategy though. In my opinion you should never treat your primary residence solely as an investment. A rental property can be a decent investment. Your primary residence, however, will usually end up being a major expense.
I wanted to share a quick story about a friend of mine that got in over his head with a home purchase a few years ago…
An Investment Gone Wrong
My friend Alex met a girl, fell in love, and started dating her seriously. After a few months they knew that they wanted to live together. They wanted to jump into owning a condo right away because they didn’t want to spend money on rent.
After searching around for a few weeks they found a condo that was perfect for them. They decided to put their savings together as a down-payment for this property.
When it came time to close the condo deal, they were hit with a few unexpected expenses. They had to get into a little debt to cover these expenses along with the high costs associated with moving. Everything was amazing at first.
They were excited about the idea of spending all of their time together. Unfortunately, they soon realized that they had to work more hours in order to maintain the lifestyle. With more hours at work came less time together. Less time spent together really caused a strain on the relationship.
Long story short, their relationship didn’t last. The bills were coming in like crazy, they were both working crazy hours, and they were always fighting. The relationship ended and they needed to sell the place.
They ended up losing a ton of money because they needed to sell the place quickly. Both of them ended up miserable, living back at home, and in debt.
Why did this investment strategy go wrong?
No Investment Research Was Done
The new couple didn’t do any research. They didn’t factor in the costs of owning compared to renting. They didn’t think of the worst case scenario. They just blindly jumped into home ownership.
Emotions Were Used Over Logic When Buying the House
The couple thought that the honeymoon stage would last forever. Their decision was purely emotional. They didn’t attempt to logically work together to make the home purchase properly. It’s okay to be emotional sometimes in life. Just not when you’re buying a home.
I don’t want any of you to make the same mistakes. If you want to learn how to avoid this, then keep on reading.
How can you work on improving your real estate investment?
Should I Buy or Rent? Do Your Research!
You need to ensure that you understand what you’re getting yourself into. Do you understand what a serious commitment home ownership is? Are you ready to deal with all of the new expenses that will come your way?
You must speak with your parents and any peers that have recently gone through this process. Buying a home is a very common thing. Don’t be afraid to seek out help.
Ignore Your Gut and Run the Numbers
Buying a home is not about following your heart. You need to run all of the calculations so that you have the right amount of money saved up for your first home purchase. If you don’t run the numbers, you’ll get hit by the many expenses that come with home ownerships.
These expenses can easily add up and cripple your savings. If you don’t have the savings then you might have to get yourself into more debt.
Ensure that You’re Prepared When Buying a House
Are you prepared financially and emotionally? Emotionally prepared means that just because your heart skips a beat when you see your new partner it doesn’t mean that you guys will be together forever.
You need to be realistic about your relationship. Buying a home with a casual/new partner can have many negative consequences. Financially prepared means that you should have a steady income coming in, a beefed up savings account, and an emergency fund just in case.
You Can’t Expect a House to Be a Good Investment
Your primary residence isn’t the world’s greatest investment by any means. What kind of investment requires you to pay property taxes, requires daily work, and always needs more money? A home is a place to live and raise a family. You can’t treat your primary residence as some amazing investment.
Buying a home once you start working and making money is a very big and important decision. It can be one of your best investments. Sadly, it can also be the worst investment that you ever make. You need to understand what you’re getting yourself into.
This article is from MD of Studenomics and PIN. For further information on deciding if you should purchase a home or rent in your 20s, be sure to check out his eBook. Also, be sure to visit his blogs at Studenomics and PIN.
Image by That Canadian Grrl