What Do You Wish You Would Have Known Before You Bought Your First House?

Nice CTA, I haven't bought a house yet but have strongly been considering making my first home purchase a 4 unit multiplex to take advantage of the ability to buy it as a personal residence. I would stay there for a year and then move into a single family home. This seems like the best way to get a starter rental property because you can take advantage of some of the programs you mentioned as well as avoid the investment property requirements for the loan. This is one of those things that seems intuitive to me, but often people that I discuss it with tell me it is a bad idea, and explain how bad it is to "own property, deal with tenants etc." even when they have no experience with it. Why does it seem as though people are against this sort of investment opportunity. Is it genuine concern, jealousy, or their own excuses for not taking a financial risk? Anyway great post, bookmarking it to come back to later!

Something you might not know: if you live in your house for 2 years out of 5, you are excused from paying federal capital gains taxes should you choose to sell it.

This tax holiday is subject to an exclusion limit of a $250,000 capital gain for single tax payers and $500,000 for married tax payers. So, if your capital gain exceeds the exclusion limit, you would still need to pay taxes on the gain in excess of the limit. For most people, the exclusion limit isn't an issue unless they are selling a home that they've owned for a number of years.

Joshua, I think you meant not buying overpriced homes. Average house price that is far above historical standards. Number 10 is out of wack.
"10. Don’t Buy In a Neighborhood Where the Median Household Income to Average Home Price Is Far Above Historical Standards"

Buy smaller, and live in apartments, if you don't enjoy working the gardens and doing housechores. First time home buyers should always buy smaller, and wait for their equity to build up, and then move on to buy a bigger house to fit their growing family in 8 years time or so. As you get wealthier, go ahead and sell and buy a bigger one. It is similar to buying a smaller car, and upgrade to a bigger as you get wealthier. Don't go and max out your first purchase. Things change, job changes, nothing is every certain, so, with a smaller home, and lower price, it is easier to sell at a fair price or to rent it out just in case you have to move for another job. Leave some flexibility and breathing space for yourself.

Ff your mortgage is $1,000, save up another $200 in a separate savings or fixed deposit account. Life is never predictable. These savings are to offset the taxes, insurance, that you will have to pay throughout the year. And you might have a leaking pipe or roof that needs repairing. So, that extra savings acts as a buffer for any unforeseen house repair. Really, owning a house has lots of side costs. And you should always be prepared for them. These costs are quite predictable anyway.

My opinion is gradually moving toward the idea that a residential house is for your own stay. If you want to invest, go for commercial or industrial property.

Thanks for catching that, I had inverted the title. Yes, I would look at the median household income relative to average home price. If it was significantly above average, I would be worried. How worried would depend on how much of the market was funded by maturities of less than 30-year fixed rate mortgages.

Whatever the US does, the world follow, inflationary and rising home prices are the only commonality between all countries. Its everywhere in Asia, Australia. The greatest problem is low interest rates, like gravity it makes everything expensive. Its great for people who bought 10-20 years back as interest rates were much higher, as the house they are living in rises in price even with very little maintenance done for the past 20 years. Prices has quadrupled for such houses. If the houses were fixed up, houses can be sold for 6 times its price, if the financing can be found, but bankers usually give a mortgage which is 70% of the house value. In many cases, bankers are not allowing refinancing above 70% of the their current value. And current value is always far lower than asking prices. In a way, the bankers are really prudent.

Having a friend that is a contractor for residential housing, the cost of building materials has not risen for the past 10 years. I can imagine that there are plenty of substitute materials for high rises apartment. But it would be harder landed homes especially in the place you are living where wood is a big chunk of the house price. Designs are changing rapidly in cities, where glasses replaces most of the bricks and sands. Usage of wood is reduced rapidly by concrete. And cheap steels and aluminium are produced in numerous form to replace previous more expensive building materials.

Certainly, I believe buying beats renting. But that is only a guide. Not a rule. Many people believed that dogma and house price has risen considerably due to such dogma. Considering where our parents came from, where lending rates were falling since world war 2 from 12% all the way to 3%, it made sense for them. Rentals were high, sometimes higher than mortgage itself. Getting a 25% down-payment takes a long time, and was difficult, therefore for most part of our parent's life, they had to rent while they save up for the down-payment But things are remarkably different now. Some homes are selling for only 5% down-payment and no bank interest during the 3 years construction period. Lending rates are at record lows. Our parents were used to fixed rates mortgages. But as interest falls, and home price increases, many have sold their home to lock in the profit, or have refinanced into the current model of variable rates. Most loans are variable rates where as you mentioned, the market risk has been transferred to home owners instead. as interest rates are low, and rising home prices continues to go up, we'll get that situation where every home buyer is right. And they should have bought bigger and more expensive homes instead to get an even large profit, considering that they only paid 5%, which is like a call option on the residential market. Rentals are $33,600 per year for $1.4m landed house. The house is beautiful but the price gets so out of wack that it makes me wonder how my relatives hope to get any returns from it. Lending rates may continue to fall and negative lending rates may be common in the future. But the probability of rising interest rate for the next 30 years is much higher, or at least that's we can think of. None have lived in ever falling negative interest rates yet, but it could happen. But I don't think so.

If lending rates are to only increase by 1%, large amount of people are going to be affected with the current 50% of household income going toward paying debt. As home prices goes up, more and more people rush in to buy homes which are then left empty. Residential homes essentially becomes a commodity to be traded and to park spare cashes while betting it will continue to go up in price. And ever more high end pricier homes are built to accommodate buyers with large amount of wealth. And this causes increasing prices for first time home buyers who aspire to jump onto high end residential living as soon as they got married before their 30s.

For first time home buyers, buying a home is great as you build equity. But buy below your means. You are still building equity. And buy at a reasonable price. And by reasonable, Joshua's metric is a pretty good guide. What is the acceptable income to house price ratio at the moment?

But if yearly rental is only 2.5% of the total house price, the odds are you will be living better than if you have bought it yourself. Not to mention with large homes, larger costs of ownership is involved.

But if yearly rental is 8% of the total house price, you will be better off buying when current lending rates are at 4%.

Certainly buying a home is more emotional than rational. But purchase metrics must be used especially when you are just starting out to get rich.

No home or purchase transaction is equal, all home buyers must give every purchase a great deal of thought before committing. One purchase at a greatly inflated price could mean a lifelong disaster for many employed people. Home buying is one of the most important thing to get right. Just don't go crazy with it.

I know many people who own homes where every room is painted white; it's like walking through a hospital. And the kitchen, every appliance and pot and pan has a "garage" and all the sub zero frigs have wood paneling, so when you walk into the kitchen you can't even tell it's a kitchen. Needless to say they are lousy cooks. A kitchen should have all its pots and pans and appliances out in the open, for inspiration IMHO.

I noticed insurance rates going way up too. Don't know about whether flood insurance is needed, in our area, when a flood hit a few years ago, people who didn't have flood insurance were compensated by FEMA, including 100% of their house assessment if it was totaled. So why buy the insurance if the government is indirectly buying it for you with your tax money?

Simple...know all the hidden costs before you start shopping! When I bought my first condo, I thought I had enough cash for a 3% downpayment and the closing costs. Since my mortgage guy said the closing costs would be "about 1 months mortgage payment".

What he neglected to mention was that number didn't include all the pre-paid items such as taxes, interest, and the 1% transfer fee. So, that left me in the embarrassing position of having to go hat in hand to my folks and best friend to the tune of $4,000 2 days before closing when I got my GFE.

I can add something that you did somewhat touch.

Ugly, damaged, or run down does NOT EQUAL EXPENSIVE. Rotting does not equal expensive. Broken does not equal expensive.

Your first home is just that - your FIRST. Not your ONLY. People want to turn the key, walk in, and love what they see in a first home. So many people dont buy a house because they dont like the layout, or the look of a house. There's no logic in this. You want to rent an apartment you dont like, rather than own a house you only somewhat like? The thing is, in many areas (not all) you can buy for less than you pay in rent, PLUS have extra space to rent rooms to other people and cover a portion of your expenses - I cover all of my expenses. Don't buy what you like now; rather, buy what you LOVE later by living in something you can be content in now.

Buy something that has a physically unappealing interior. Everyone wants a turnkey, and you pay for it. You can have instant equity if you're willing to buy something that requires some work... So it needs paint? Do it on the weekends over the next 6 months!
So many things can be redone for almost nothing. I bought a house for 25% below market value because the paint was ugly, the carpet was gone (you'll replace it anyway), and the sheet vinyl was out (I put down tile). The cabinets were hideous (painted, $200) with holes in the doors (replaced, $1000). The counters were destroyed ($250, laminate that looks like granite). There were no closet doors ($50/room), and the wood siding on the outside was rotting out and had termites (stucco, $900). The exterior paint was peeling off ($1400). Every light fixture and most outlets in the house were broken or ripped off ($800).

Do you see how these "big problems" are really not big problems? I did 3/4 of the work myself, on the weekends or at night, before moving in. I have three bedrooms, and I rent two which covers the entire mortgage, and all my utilities. I pay NOTHING to live where I live. I have now gained enormous equity in under two years (nearly 50% increase from purchase). With new tax laws, I could sell with no capital gains tax.
The work I put into my house that is "too much" for most people to deal with panned out to equity equalling $500/hour relative to the time I invested. Would you work on your weekends for $500/hour, you make up the hours, and it's all tax free? If not, maybe you dont want to be successful.

This house is now key to the financing of the business I am preparing to open... for you, it may be key to the huge downpayment on your dream home.

Remember, ugly/damaged does not mean EXPENSIVE! It means CHEAP. Everyone wants a turn-key. Buy something else and reap the rewards.