Buying a home is the American Dream and the dream of many people around the world. But, housing is costly and a bank won't give you a loan to make the purchase if you don't have some money to put in, a down payment.
Saving for a substantial down payment isn't easy - it takes persistence and focus, but the payoff is a home to call your own or an investment property that may generate income for you and your family for years to come.
1. Figure out how much of a down payment you'll need
The first step is always getting to our down payment goal - if you don't know how much you're going to need to save, you'll have a tough time getting there.
A lot of people start right away before doing a minimal amount of planning/prep work that's needed to articulate a goal properly. This occurs both in finance and in other aspects of life. It's not good to start things without goals - make sure to take the time to set an appropriate goal before you begin on any complex or challenging journey.
So, how do you figure out how much of a down payment you'll need? It's pretty easy with some basic math:
2. Figure out how much you'll need to save every month from reaching your down payment goal
Once you have the estimated/projected down payment number from Step 1, simply determine when you'd like to buy your house and calculate how much money you'll need to save each month from reaching that goal.
For example, let's us the $10,000 down payment from Step 1. If you want to buy your house in 2 years, you'd simply divide $10,000 by 24 months to get $416.67 per month. This is obviously a relatively small down payment goal - yours will probably be bigger, but simple round numbers are good for examples.
3. Decide where you'll park the savings until it is time to make your house purchase and put the actual down payment
The final planning step following Steps 1 and 2 is to determine where you'll keep your money. For the vast majority of cases, your money should be kept safe and sound in a savings account or some sort of liquid money market account. This is because most people will be looking to buy a house within a few years - at this time horizon, investing in stocks, bonds, commodities, crypto, or almost any other alternative asset is too risky.
If your home purchase goal is farther out, more options might be on the table. Say you want to buy a home in 5 years. In this case, you could expose your savings to some risk - you might be able to put it into a very safe and low-risk ETF or mutual fund that holds a large portion of the fund in low-risk securities or cash.
Another critical consideration is to store the money separately from other accounts. You'll want your down payment account to be separate and only for the down payment, nothing else. Don't mix it with your emergency fund, your kids' college funds, or your general wealth-building portfolio. By keeping it separate, you'll help to mitigate the risk of pulling that money out for other things (but not entirely).
4. Start saving!
To save more money, you'll need to do two key things:
Saving money is hard - most people are terrible at it, and it doesn't seem to be something most human minds are good at. However, it's possible to save a lot and enjoy doing so. The key is to find areas in your budget that can be cut out (e.g., restaurants and expensive memberships) while maintaining the discipline to actually put the saved money into saving (instead of spending it elsewhere).
To earn more money, there are many options in modern economics. Today the world has many side hustle opportunities available, most right from your smartphone. It'll take some energy and force you to spend some time away from friends and family, but if you do it for a short period of time, it can be well worth it. Six months to a year of intense side work can change your financial picture - it's not well paid, and it's not easy, but if you can muster the energy and the time, there's room to make some decent extra cash.
Extra cash is very beneficial to your down payment goals. Relying only on your current income might be enough, but getting some extra money every month can skyrocket your savings goals. For example, if you're able to save $1000 a month but also are able to side hustle and make another $1000 per month, you'll have cut your time to house purchase in half!
The evolving nature of homeownership in the modern world: A more-complex and expensive existence and the proliferation of boomerang children
The American Dream: Owning your own home
Buying a house is a critical step in most adults' lives in the western capitalist world. Still, we've seen a lot of changes related to homeownership and when homeownership happens over the last century. The way things are now from a home-buying perspective is not how they've always been. In fact, the way things are today is very different than they've ever been in human history.
Family life and real estate have changed after the Industrial Revolution
Before the Industrial Revolution, the world was very different than it is no. People lived in small communities, traveled very little, and interacted with less than a few hundred people over the course of their entire lives. A man leaving his home go out on his own would rarely have seemed like a prudent decision - how would he and his family survive without kin? A woman leaving her home alone to go out and make something of herself in the world? This was a non-starter in a non-capitalist and agricultural world when kinship and ancient communal ties kept you safe, fed, and busy.
In the 21st century, real estate traditions and family life evolved further: The rise of the boomerang child
Over the last century, as the western world (especially the US) modernized, it became typical for young men and women to leave their parents' home when they turned 18 - this usually coincided with the start of a college education. Not everyone had the opportunity or the desire to leave home in this way, but many did, and this phenomenon increased over time.
In the early 21st century, further shifts and refinements to this novel paradigm occurred. A combination of factors, including the following
In today's world, students leave at 18 for college, but typically either return home or need some extra support from their families even after they graduate. The idea of being able to leave home at 18 and have an economy that is able to provide enough income for you to do that in a separate housing unit is a bit wild - only economies that are growing substantially can support that sort of lifestyle. A more reasonable lifestyle is staying within the parental unit, at least in part, until you develop enough skills, income, and savings to be able to go out on your own and be a productive part of the global economy.
A lot of people, however, never develop the needed skills or the required savings and income to go out on their own. This is something that has been increasing. You can now easily find people in their late 20s living at home and even people well into their 30s. In 1950, if a 35-year-old man was living at home without a family of his own (and he came from a typical middle-class family), it would be a pretty big negative for him.
Maybe boomerang children aren't so bad? Towards a healthier perspective on modern real estate and modern family life.
Many people talk about the second shift (the one from leaving at 18 for good to the more complex current situation), but not a lot of people talk about the first. You won't see articles in the financial news and financial media talking about how interesting it is that society has changed so much. Still, you'll read about boomerang children and college-education coffee makers all the time on popular financial websites.
We've got to do a better job of putting things into perspective and understand that just because things were a certain way for a bit of time (maybe a few decades), doesn't mean that's how they've always been or how they should be. Perhaps it makes more sense for families to be tighter knit from a financial perspective. Maybe it doesn't. Either way, assuming something without taking a broader perspective is both narrow-minded and will prevent you from making some interesting and potentially useful insights.
Some of these insights might include the following:
Economic recoveries and bull markets move slowly; recessions and downturns move fast. So, be prepared...
Do you think that once a recession looms on the horizon, you'll be able to make preparatory moves to sustain your financial investments and your portfolio? If so, you're probably wrong. You're taking on too much risk and not effectively managing the risk within your portfolio and your financial life if you naively think that pre-recession prep isn't necessary.
Recessions come too quickly for most people - it'll probably be the same for you
Too often, people fail to take prudent steps to prep for recessions, market corrections, or economic downturns - they think they'll see the signs close to it and will be able to make the needed financial adjustments. This is incredibly hard to do, however, and most people fail at it.
The main reason it's hard to do is that, unlike economic recoveries and expansions, recessions come quickly and don't tend to give warning signs until after things are already bad (so, they're not really warning signs in this case).
There's too much prep work to do pre-recession
There is too much to be done to prep for a recession, and there might not be enough time to do it if you wait for some sort of warning sign to begin. These things may include the following:
The above items are essential if you want to both protect your financial and non-financial worlds during a recession. It's also important if you're going to thrive post-recession because of recessions, market corrections, and economic downturns bring asset prices down. The smartest investors are those who are eagerly awaiting a recession with a list of quality firms and other assets to buy up at low prices.
It's hard to find great firms at any time
Generally, quality firms are those who have healthy balance sheets, strong and growing earnings, proper management, and are engaged in businesses that are not readily open to competitive entrants. This is an entire field of study, however, and there isn't enough room in a single article to even begin to delve into this topic.
One of the most significant risks related to house flipping is holding period market risk - it's the risk that during the time in which you're holding the property you intend to "flip," the property value will decline.
The decline in property value can be caused by a variety of reasons (macro recessions, localized events, etc.), but that's not the point of this short piece. The point being made here is that house flipping exposes the "flippers" to significant market risk.
Not taking this real estate market risk to which you're exposed to when pursuing a house flipping strategy into proper account and consideration may have some serious negative consequences. The negative consequences are rare - they only arise in market downturns, which happen once every number of years. But, although the chances of the risk coming to fruition are small, the severity of the negative consequences (should there be a real estate market decline) are severe. The consequences can be severe enough to wipe out investors that are not well-capitalized and in positions of strong liquidity.
This is pretty easy to see if we think about a hypothetical example. Let's say you're doing house flipping and you buy a $200,000 property. The timeline might look something like this:
The risk exposure continues until you sell the house. So, in the above example with the relatively rapid renovation and resale (likely in a good real estate market; very unlikely in a real estate downturn), the investor or flipper would be exposed to market risk arising from adverse moves in the real estate market for at least a few months. If the investor is new, inexperienced, or doesn't have a lot of capital/liquidity in reserve, things might be over in one serious real estate or economic downturn.
If you're holding a property that's worth less than you bought it for -- even with the improvements you made or might make -- you'll have to (1) either accept a loss on this investment or (2) you'll have to continue making mortgage payments on the note until the market recovers.
In the first case, you'd lose real money - you'd possibly lose your entire down payment and in the worst scenarios you might be so underwater that you'd have to add additional funds to be able to get rid of it. This isn't far-fetched. Many people all across the United States experienced this during the Great Recession that started in 2007/8.
In the second case, you'd avoid having a severe capital loss, but you'd have to outlay money every month to keep the mortgage note current. This can be costly, especially if this is done for many months or even many years.
Of course, you might have bought the house in cash - in that case, you still may experience a severe loss (you'll just never be underwater on the mortgage). Renting might also help mitigate the risk - if there's a downturn, you might abandon your initial house flipping strategy and put a tenant(s) in the property for several months or years to help with the mortgage payments.
A prudent house flipper or potential house flipper would take these risks into account. Everything is exposed to risk, so this article isn't attempting to say that real estate investing in general, or house flipping specifically, are imprudent investments or that there's undue risk in a house flipping strategy. The article simply attempts to highlight a particular type of risk that house flippers are and will be exposed to.
Cities vs. Nations - Cities have been and will continue to be the true drivers of economic growth and development in the 21st Century
Nations and countries are illusions at the most basic level of reality. Cities are too, but far less so. Where the idea of a nation like the United States exists only in our minds, the idea of a big city like NYC or Los Angeles exists both in our minds and in the immediate world around us.
Cities are were life and economics happen:
Cities are where stuff happens - countries have cities and benefit from them, but can you name things that happen economically in a country but that doesn't happen in a city? Asked differently, what can you point to that's economically beneficial that, at its core, is something that happens in a country but not in a city? It's hard to think of an answer because most economically beneficial activity happens within cities themselves - nations benefit, but it's not within the nation that these things originate. Think about this another way - if you're city was run by idiot monsters who made only bad decisions, what could the national government do to fix things? The answer - not much.
When news businesses are started, when new museums and coffee shops open up, when ideas are created and implemented, or when intelligent and driven entrepreneurs drive intense economic growth in an area, it's all city-based. Cities are the economic engine of the modern world and, therefore, way more focus should be placed on cities and far less focus should be placed on nations.
If people focused as much on mayoral and city council elections as they do on Presidential races, we'd start creating better cities. A city like Detroit, for example, will never be improved because of national decisions - more granular decisions at the city level (and by people who understand local dynamics) are required. People must take city life and the responsibilities that come with being part of an urban community far more seriously in the 21st century - through that, the nation will become great on its own.
Check out a UN Habitat piece on the economic role of cities here - it's an interesting piece on how cities are the driver of economic growth globally in today's world.
We're two decades into the 21st century and real estate transactions, at their core, are still as archaic as they have ever been. Any first time home or condo buyer will understand how ridiculous the process is - it's a process that involves:
The four steps to a real estate transaction, simplified a lot
In a general sense, the steps of a typical residential real estate transaction (or even a small retail real estate investment) are as follows:
Step 1 is easy, and Step 2 is relatively easy in practice in developed real estate markets like those in the United States and Canada. Step 1 is easy because the decision is binary, and only one party is involved (the buyer). The "buyer" might also include the buyer's family, but it's all one party when the binary decision needs to be made. Step 2 involves a real estate agent, but it's usually not overly complicated or unpleasant.
Unlike Step 1, Step 2 includes another person. But, this other person isn't truly an interested party to the agreement/transaction that's going to happen down the line. The real estate agent is simply someone helping the buyer with the process. A buyer's agent (as opposed to a seller's agent helping to sell the house) helps the buyer find a place while maintaining a responsibility to act in the buyer's best interests. You, in effect, have a knowledgeable real estate person in your corner -- that's what a buyer's agent is. It, therefore, makes a lot of sense that Step 2 isn't the bottleneck in the process – it's, in fact, the core part of the process itself; it's in Step 2 where the house buying actually takes place.
Once you pick a place, you need to fund the purchase somehow. If you've got the cash set aside, you can skip Step 3 and go directly to Step 4, which involves actually executing the transaction. If you skip Step 3, you also only have to contend with a 2-party sale instead of a 3-party transaction because the lender isn't in the picture.
For most of us, however, Step 3 is needed – we either don't have the money to buy a property outright, or we can't do such a thing more than once and need to use other people's money to obtain assets as we grow our real estate portfolios/businesses. In this case, we'll need a lender – this will almost surely add a ton of complexity to the process and prolong it.
Lender's due diligence adds a ton of complexity to real estate transactions
The primary reason using a lender adds so much complexity is because the lender faces a very significant amount of risk – they are giving you money to buy a house with most of the purchase being put up by them and only a small portion being put up by you (e.g., the down payment). With the lender financing 80% to close to 100% of the purchase price, they are exposed to significant credit risk and are prudent with not taking this lightly. A lender will require a ton of documentation from you so that they can perform the necessary due diligence to (1) understand, (2) mitigate, and/or (3) prevent unacceptable risks. These risks include the following:
All of these due diligence steps lenders take to provide themselves (and future buyers of the debt) with assurance over the quality of the credit risk they are taking on. This process can involve a lot of people – these may be people working at the actual firm lending the money and third-parties like appraisers, inspectors, insurance agents, and bankers.
If technology is to further assist in the real estate transaction process, it's in Step 3 where the most value can be added. An easier way for providing assurance over borrower quality and for determining title might help house buying and selling go a lot faster. If, for example, all property claims or titles were stored on a secure blockchain, title might be able to be ascertained far quicker than it is today.
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledger technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).