Over at a new found site called ” The Writer’s Coin,” the 28 year old personal finance writer questions whether he should buy this house if he only has 13% down. Mind you, he has been giving personal finance advice for a couple years now, and is even a guest poster on mega-site Wisebread, which Financial Samurai may one day contribute to. Honestly, I felt like I was watching one of those Holiday Inn commercials reading his post. A guy would provide some great advice and become a medical doctor because of his one night stay at the hotel chain. But what about the next night when he has to sleep at home?
WC’s question got me thinking. If someone who has been disciplined enough to write about money matters still can’t see the fallacy of buying a house with only 13% down, why are we so weak when it comes to housing? Do people just blindly fall in love with something and disregard every financial principal? Doesn’t seem like WC has much more saved up than 13%, because who says “13% down” anyway? Why not 10%, 15%, or 20%? Heck, back in the good old old days, people paid 100% down.
How did we come to this pitifully low downpayment standard in America? Probable explanation #1) It’s the Madoff Syndrome aka greed! “I want this, and I want it now!” and #2) The Nesting Syndrome. There is a tendency for those in a long term relationship who want children to buy a place. I don’t even have to read WC’s about page to guess he’s planning on getting married or having kids. For the guy specifically, the itch seems to start at 30, if not sooner. The desire of owning our own castle and showing we’ve “arrived” is strong.
At the end of the day, if all you have in the world is not much more than 13% down to buy your place, FORGET ABOUT IT! You are too poor, or you are desiring too much. It’s that simple! If you get canned the day after you close escrow, you won’t have long to survive because of your lack of buffer. If you have more money than 13% down, this is a different matter. You may want to put 13% or even less down, depending on your borrowing costs, or your opportunity costs.
My rule for housing downpayment is simple. Before you even think about buying a property, you need at least 30% of the purchase priced saved. Let’s use a couple examples.
$1,000,000 house. 13% down including closing costs = $130,000. Left over money is let’s say $20,000. A 6% interest only loan on the remaining 87% costs $4,350/month. You basically have 2 months of payments coverage saved before you go start ruining your credit and entering the foreclosure process if you lose your job. Property taxes alone cost $11,000/year! If you only have $130,000 in savings to put for a downpayment, you cannot afford the house!
Instead, look at a lovely $500,000 house. Put 20% down or $100,000, and your remaining $50,000 (10% buffer) provides 22 months of coverage based on a 6% interest only payment on $400,000 ($2,000/month) and property tax of $5,600/year. If for some reason this $500,000 is not good enough for you, too bad! Rent happily. Renting is not flushing money down the drain as some perceive. You’re paying for a utility. Use your lack of savings and income as motivation to earn and save more! Don’t make yourself fit a desired lifestyle, make your lifestyle fit your financial reality!
If we’ve learned anything from the past 18 months, it’s that thousands of people in America leveraged up too much and blew themselves up. The irritating thing is that responsible renters and owners also got blown up in the process. We were collateral damage from the fall out! Hence, I implore WC, and all those who don’t have at least 30% of the value of the property in cash saved up, to not buy the place for all our sakes. Because it is we in the end, who suffer right along with you with our tax dollar bailouts and asset exposure. The safer the debtor you are, the better it is for the world.
WC, I like your site, and enjoy reading your background story. Please take my advice and wait until you gather a bigger nut. Property isn’t going to suddenly spike in price over the next 1-2 years. Property is like a stock, if you miss one, there will always be another one to buy.
Readers, what are your thoughts on how much to put down when it comes to property? Why do you think people make irrational property decisions?
Shop around for a mortgage: Mortgage rates have collapsed after Brexit, and US assets are aggressively being bought by foreigners due to our stability. Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Look into real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, are sick of dealing with bad tenants, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. If you study the asset allocation mix of college endowment funds and high net worth individuals, you’ll see real estate weightings of anywhere between 5% -25%. Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates around around 4% – 5% in San Francisco, but over 10% in the Midwest if you’re looking for strictly investing income returns. Check out my Fundrise review as well.
Updated for 2017 and beyond.