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Buying Your First Home: A Great Investment!

Buying your first home? Consider this as a great investment. But which is better, first self-occupied home or home put on rent? Lots of people face this dilemma while making property investment. Few years back I had no home of my own. I used to live on a rented house. Recently I bought my first home and I can say it is indeed a great investment. It makes great economic sense to buy first home.

On one hand we see weakening currency. On other hand inflation rates are stubbornly high. In this situation, buying your first home can be a great investment option. Even if there are no financial crisis prevailing around, buying first home is a smart financial move. As a rule of thumb, the earlier one buys the first home the better.

Tired of reading? We will speak it for you…

Property is only getting costlier with time. We wait for our purchasing power to improve. For a common man, purchasing-power-growth-rate will never match the property-price-growth-rate. For example, if after five years our salary will get double. In the same time period property price appreciation will appreciate by 3 times. Though this is just an exemplification, but history also proves that property price has always beaten the purchasing power. Buying your first home will have long term advantages. But still people delay purchase of their first home. Why?

But what really works as a hindrance for first home buyers? The first challenge for first time home buyer is organizing money for down payment. Down payment amount is 20% of cost of property. If cost of home is $65,000 then its down payment will be $13,000. For a common man, down-payment of $13,000 is approximately 6 times of their monthly salary.

So if one has not planned in advance, organizing $13,000 in nick of time is impossible. Experts suggest that one should buy their first home at age of 30. It means they have at least 6 years (from start of job) to accumulate savings for down payment. A simple systematic investment plan (SIP) in equity linked mutual funds will work. A young man starting SIP of $150/month will accumulate $13,000 in 5 years. So idea is to plan in advance to arrange for the down payment. Buying your first home will become reality if you plan like this. For first home buyer, 20% down payment is necessary to apply for home loan. If one has not accumulated the savings for down payment, I will suggest approaching parents, relatives for help. Taking loan from parents and arranging the down payment for first home is a good idea.

[Note: To apply for the home loan, first time home buyer shall keep documents ready. Documents like bank statements, pay slips, asset list are few necessary ones. This will speed up the process of home loan sanction]

How to ensure that First Home Becomes a Good Investment?

Most people fantasize living in lavish homes. When people buy home for self, they spend beyond their means. This is one reason why majority crumbles under load of home loan EMI. To ensure that the first home becomes a good investment, careful selection of home is important. Value of first home shall match ones affordability. Careful analysis of income and expenses, will accurately quantify ones affordability of first home. When I did this analysis for myself, I understood that my EMI affordability is $500/month. This quantification helped me to understand that my first home cannot cost me more than $65,000 (loan tenure 20 years, interest 10.5% p.a.).

buying your first home

Once we are aware of our affordability, the next step is to look for a good real estate agent. In this case one wants to buy first home through a real estate agent then affordability further decreases. Agent will charge a commission which again becomes a extra cost. But identification of a good real estate agent can also save lots of money. Real estate agents do the job of buying/selling properties day-in-day-out. They can bargain and negotiate with the builders/owners and saves you lots of money. If by paying extra 1% to real estate agent can save you 5% on overall property then it is worth hiring one. These real estate owners also have access to key information about good properties. There are properties that are owned by banks or by eager-to-sell-homeowners. Both these type of sellers can be a good target for first time home buyer. These type of sellers are very eager to sell their holdings. The longer the house remains unsold the more cost they are incurring to manage the property (like mortgage, insurance, maintenance, property tax etc.). If a first time home buyer, by help of real estate agents, can locate such homes they can save handsomely.

How to know if First Home is a Good Investment?

How to quantify whether buying your first home deal has been value for money? Valuation of property can be done by calculating its rental yield. Generally most of us buy first home using home loan. This greatly reduces the rental yield [buying home without loan drastically improves the rental yield]. My method of calculating rental yield is slightly different. I use rental yield to quantify how much of EMI I can fund from monthly rental income. I personally consider rental yield of 50% as a indicator which can make first home a good investment.

Lets see how rental yield of my first home changes with increase in down payment amount. Cost of my home was $65,000.

SL Down payment EMI Rent/Month Yield (Rent/EMI)
1 20% $500 $200 40%
2 30% $450 $200 45%
3 40% $390 $200 50%
4 50% $320 $200 62%
5 55% $260 $200 75%

First home is considered as good investment when YIELD is more than 50%. In order to keep yield more than 50%, it is essential to pay 40% of cost of home as down payment. This will ensure that you buying your first home is a great investment venture. When yield is more than 50%, the house becomes VALUE FOR MONEY purchase. Moreover, first home also allows investors to save on income tax.



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Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.

About the Author

Mani
I am a Blogger with a passion for investment education. I started blogging in 2007-08. Blogging didn’t happened to me as a coincidence, it was a conscious decision. The idea with which I started blogging still stands true. In my starting days my finances remained tight. I was reading heavily about how to manage finance. One day I got hold of a book which my father gifted me in 2003. It was stacked below my graduation books. It was a small-thin book with its cover named "Rich Dad Poor Dad".....more

1 Comment on "Buying Your First Home: A Great Investment!"

  1. hi
    I have an ongoing home loan from religare
    I recently received an offer from http://www.loankuber.com , to port my home loan
    THe ROI they are offering is 2% lower than what I was paying earlier
    DO you think it is wise to port home loan?
    ALso what are the clauses that I need to be aware of before porting?
    THanks

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