A Decade-Long Investment Strategy: Crafting A Path To Home Ownership

Investing in real estate is a great way to build up your wealth over time and, if you play your cards right, you could be in a position to buy a house in 10 years. There are several ways to invest in real estate, from buying rental properties to investing in real estate investment trusts (REITs).

If you're looking for a more hands-on approach, you could consider buying and managing rental properties. This option requires DIY skills and the ability to manage tenants and handle maintenance. While it can be time-consuming, it can also be lucrative, especially if you're able to acquire multiple income streams from multiple properties.

For a more passive investment strategy, you could look into REITs, which are similar to stocks and can be bought and sold on major exchanges. REITs allow you to invest in real estate without actually owning physical property. They tend to pay high dividends, making them a popular choice for retirement investing.

Another option is to use online real estate investing platforms, also known as real estate crowdfunding. These platforms allow you to pool your resources with other investors to finance larger commercial or residential projects. This option offers diversification into real estate without requiring a large upfront investment.

Keep in mind that building wealth through real estate takes time and there are risks involved. It's important to do your research and carefully consider which investment strategy best suits your goals and risk tolerance.

Calculate how much house you can afford

There are a few things to consider when calculating how much house you can afford. These include your monthly income, cash reserves to cover your down payment and closing costs, your monthly expenses, and your credit profile.

Monthly Income

This is the money you receive regularly, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.

Cash Reserves

This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments, or other sources for this.

Monthly Expenses

These include your monthly obligations such as credit card payments, car payments, student loans, groceries, utilities, insurance, etc.

Credit Profile

Your credit score and the amount of debt you owe will influence a lender's view of you as a borrower. These factors will help determine how much money you can borrow and the mortgage interest rate you'll earn.

Lenders will also look at your debt-to-income ratio (DTI) to determine how much house you can afford. Your DTI is the percentage of your pretax income that goes towards your mortgage and other debts. A good rule of thumb is to keep your DTI below 36% to have a comfortable cushion for other expenses.

You can calculate your DTI by dividing your total monthly debts (including your expected mortgage payment) by your monthly pre-tax income. For example, if your monthly debts are $1,260 and your monthly income is $4,500 before taxes, your DTI would be 28% ($1,260 / $4,500 = 0.28).

Lenders typically require a down payment of at least 3% of the home price, but a larger down payment of 20% can help lower your monthly payments and increase your affordability.

You can use an online mortgage calculator to estimate how much house you can afford based on your income, expenses, and down payment. These calculators can also help you determine your ideal housing budget and how much your monthly mortgage payments will be.

It's important to note that your mortgage interest rate will also impact your affordability. A lower interest rate will result in lower monthly payments, so it's worth shopping around for the best rate.

Understand the mortgage process

Understanding the mortgage process is a crucial step in buying a house. Here is a detailed breakdown of the steps involved:

Pre-Approval:

Before you start looking for properties, it is advisable to get pre-approved for a mortgage. This will give you an accurate idea of how much you can afford to pay. You can use a mortgage calculator to estimate the impact of different interest rates on your monthly payments. Approach mortgage lenders for pre-approval, who will assess your credit score and history. A pre-approval letter indicates to sellers that you are a serious buyer.

House Shopping:

With your pre-approval in hand, you can now start looking for properties within your budget. You can use online portals, buy at auctions, or look for off-market homes. When you find a suitable property, you will need to put in an offer, which your real estate agent can help with. At this stage, you will also put down "earnest money," a deposit indicating your serious interest, typically 1-2% of the sale price.

Mortgage Application:

After your offer is accepted, it's time to apply for a final mortgage. Approach the lender who gave you pre-approval and shop around for the best deal. The lender will require detailed information about your employment, income, assets, debts, and property. They will also pull your credit report.

Loan Processing:

The lender will then pull together all the information you've provided into a loan estimate, presenting the loan information in an easy-to-read format. You will get this within three business days, and it is valid for ten business days. If you accept the loan offer, the lender will start verifying the information you've provided, including employment verification, bank deposits, property inspection, and appraisal, and title search.

Underwriting:

Your application will then be assessed by underwriters, the key decision-makers in the mortgage approval process. They will check every aspect of your application and carry out further steps, such as ordering an appraisal of the property. Once they have assessed your application, they will give you their decision: accept, reject, or approve with conditions. If your application is approved, you will lock in your interest rate with the lender.

Closing:

If your mortgage application is approved, it's time for closing. You will be invited to a meeting where you will go through a stack of documents, including the closing disclosure form, which outlines the closing costs. Closing costs can range from 2-5% of the home's purchase price. If everything looks in order, you will sign the documents and receive the keys to your new home.

The mortgage process can be long and stressful, so it is important to carefully check all documents, understand the mortgage, and seek expert help if needed.

Weigh up the pros and cons of investing in real estate

Investing in real estate can be a great way to build wealth over time. However, as with any investment, there are pros and cons to consider before taking the plunge. Here are some key points to help you weigh up the advantages and disadvantages of investing in real estate:

Pros of Investing in Real Estate:

• Steady Income: One of the biggest advantages of investing in real estate is the potential for a steady stream of rental income. This provides a consistent cash flow that can cover expenses and even generate monthly profits.
• Appreciation: Historically, real estate values tend to increase over time, leading to long-term capital appreciation. This means that when it's time to sell, you're likely to make significant gains.
• Tax Benefits: Real estate investors can take advantage of various tax incentives and deductions, such as depreciation, mortgage interest deductions, and capital gains tax exemptions, reducing overall tax liability.
• Diversification: Real estate can add diversification to your investment portfolio. It often has a low correlation with stocks and bonds, providing a hedge against market volatility and enhancing portfolio stability.
• Control: Real estate investing gives you more control over your financial performance. You can actively search for deals, control costs, choose tenants, and decide when to sell, allowing you to have a hands-on approach to growing your wealth.

Cons of Investing in Real Estate:

• High Initial Costs: Investing in real estate typically requires a significant amount of upfront capital, including the down payment, closing costs, and potential renovation expenses.
• Illiquidity: Real estate is not a liquid asset, meaning it can take time to sell a property. This lack of liquidity can be a disadvantage if you need quick access to funds in an emergency.
• Property Management: Being a landlord or property manager can be demanding and time-consuming. Dealing with tenants, maintenance issues, and the day-to-day management of the property can be challenging and may require hiring additional help.
• Market Volatility: While real estate is generally less volatile than the stock market, it is still susceptible to market fluctuations and economic downturns. This can lead to decreased property values and increased vacancies, impacting your rental income and overall return on investment.
• Tenant Risks: Finding and retaining reliable tenants can be challenging. Bad tenants can cause property damage, miss rent payments, or lead to eviction expenses.

Remember, before investing in real estate, it's essential to carefully consider your financial situation, conduct thorough research, and assess your risk tolerance. While real estate investing offers potential for steady income and long-term growth, it's not without its challenges and risks.

Save for a down payment

Saving for a down payment on a house can feel daunting, but it is possible. Here are some tips to help you save for a down payment in 10 years:

• Assess your current financial situation: Figure out where you stand financially. Determine your income, expenses, and debt to understand how much house you can afford and how much you need to save for the down payment and closing costs.
• Set a clear savings goal: Use the 28/36 rule to determine the maximum amount of debt you should carry relative to your income. Calculate your maximum monthly mortgage payment and other housing expenses to set a realistic savings goal for the down payment.
• Develop a savings plan: Consider setting up a separate high-interest savings account dedicated to your down payment fund. Automate your savings by setting up direct deposits or automatic transfers to this account.
• Cut back on expenses: Reduce or eliminate unnecessary expenses such as dining out, entertainment, and subscriptions. Negotiate lower rates on essential services like insurance, cable, and internet.
• Increase your income: Explore additional sources of income, such as side hustles, freelance work, or a higher-paying job.
• Explore down payment assistance programs: Look into first-time homebuyer programs, grants, or other forms of financial assistance offered by local, state, or federal housing authorities.
• Save windfalls and extra income: Commit to saving any unexpected income, such as tax refunds, bonuses, or gifts, towards your down payment fund.
• Monitor and adjust your savings plan: Regularly review your progress and make adjustments as needed to stay on track. Celebrate your savings milestones to stay motivated.

Research low down-payment loans

A down payment is a percentage of the total purchase price of a home that a buyer pays upfront. The larger the down payment, the less the buyer will need to borrow to complete the transaction, and the lower their monthly payments and long-term interest payments will be.

For those looking to buy a house in 10 years, it's important to know that there are options for low down-payment loans. Here are some of the options available:

Government-Backed Loans

• VA loans: Backed by the Department of Veterans Affairs, these loans are available to active-duty service members, military veterans, and their families. VA loans require no down payment and offer benefits such as a cap on closing costs and no broker fees or mortgage insurance. To qualify, individuals must meet specific service requirements and have a credit score of at least 580.
• USDA loans: Guaranteed by the US Department of Agriculture, these loans are designed to help low-income buyers in rural areas. USDA loans require no down payment and have lower fees than other loan types. To qualify, the property must be in an eligible rural or suburban area, and the household income must not exceed 115% of the median income in that area.
• FHA loans: Backed by the Federal Housing Administration, these loans are aimed at low- to moderate-income families. FHA loans require a minimum down payment of 3.5% and offer more flexible credit requirements. To qualify, borrowers must have a credit score of at least 580 and a debt-to-income ratio of no more than 50%.

Conventional Loans

• Fannie Mae's HomeReady Mortgage program: Allows a down payment as low as 3% and offers flexible credit requirements. It's designed for low- to moderate-income borrowers and provides a loan-level price adjustment credit of up to 1% of the loan amount. To qualify, borrowers must have a credit score of at least 620 and must not own any other homes in the US.
• Freddie Mac's Home Possible Mortgage program: Similar to HomeReady, this program offers a 3% minimum down payment and a credit of up to 1% of the loan amount. It requires a minimum credit score of 660 and allows for flexible sources of funds for the down payment and closing costs.
• ONE+ by Rocket Mortgage: Allows a down payment as low as 1% while providing a 2% grant from the lender. To qualify, borrowers must have an income of no more than 80% of the median income in the area and a credit score of at least 620. The maximum loan amount is $350,000.
• Freddie Mac BorrowSmart Access: Offers a $3,000 credit towards the down payment for eligible borrowers in certain metropolitan areas, including Atlanta, Chicago, Houston, and Philadelphia. To qualify, borrowers must have a down payment of at least 3%, a credit score of 620 or higher, and an income of no more than 140% of the area median.

In addition to these options, it's worth noting that many states and local housing authorities offer down payment assistance programs, grants, and loans to help first-time homebuyers. These programs can provide valuable financial support and make homeownership more accessible.

Frequently asked questions