When I bought my first house, it was 2009, and I was 25 years old. Admittedly, I didn’t know what I was doing at the time. I didn’t have an investor or entrepreneurial mindset back then. Rather, I was two years out of college and had a stable job, and I assumed that buying a home was the next stage of adulthood.
Fast forward to today, and my outlook on real estate has completely changed. After my wife and I talked about what we wanted our financial future to look like for our family, we began investing in real estate. So, in 2019 we bought our first investment property and acquired a couple more properties about every six to seven months.
At its core, it all came down to mindset. Once I switched my thinking from “I can’t” to “How can I?” my way of thinking has never been the same again. If someone had told me 15 years ago that I would own multiple rental properties, invest in different states, and that real estate would contribute to at least half of my net worth, I would have never believed it.
Like many things, hindsight is 20/20. And, if I knew what I know now, I would do things differently. So, here are the four mistakes first-time homebuyers make:
Not Understanding Their Buying Potential
Before first-time homebuyers start browsing online real estate marketplaces, they must understand their “buying potential.” Knowing how much they can spend can easily filter properties outside their price range and avoid falling in love with a house they can’t afford.
Typically, people purchase a property through bank financing. For this reason, I always recommend people first connect with a banker. Depending on one’s income and credit score, a banker can provide a buyer with a pre-approval letter estimating how much someone can borrow.
I prefer working with local banks or credit unions versus the “big name” banks. From my experience, local bankers have a little more flexibility and can be more creative regarding financing.
Assuming They’ll Buy a “Forever Home”
A common mistake first-time homebuyers make is buying a house assuming it will be the only house they will ever buy, calling it their “forever home.” However, according to the National Association of Realtors, homeowners stay in their homes on average 8 to 13 years.
So, first-time homebuyers should enter the market with the mindset of buying a “starter home.” Their goal shouldn’t be to buy the newest or biggest house with the top furnishings.
Instead, they should be open to purchasing a smaller house that provides shelter and allows them to build equity over time. Later, they can roll their equity into a bigger or upgraded home without drastically increasing their mortgage payment.
Not Doing Their Due Diligence
For most people, buying a house is their biggest purchase ever. Therefore, first-time homebuyers need to make sure to do their due diligence, especially after their offer gets accepted by the seller.
For example, hiring a home inspection company helps identify potential issues you may not have noticed during your walkthrough. And with a home inspection contingency as part of your offer, you can protect yourself further, allowing you to walk away or negotiate for better terms. I recommend working with a reputable real estate agent to help put together an offer letter that includes various contingencies.
Ignoring A Potential Investment Property
Becoming a landlord is most likely the last thing on first-time homebuyers’ minds. However, it’s an opportunity that many real estate investors would do differently if given the chance.
The reason is that non-owner occupied properties typically require a 20% to 25% down payment. In contrast, first-time homebuyers must only pay a 5% to 6% down payment for their property. So, although real estate investing is not meant for everyone, first-time homebuyers can still position themselves to become investors in the future.
However, not every house can be successfully turned into an investment property. Homebuyers should consider purchasing a property with a mortgage payment below the current market rent.
For example, the monthly mortgage payment is $1,300 a month, while the current market rent in the area is $1,600 monthly. The property can potentially cash flow $300 a month.