As a Financial Planner, Here’s the No. 1 Tip I’d Tell Someone Who Wants to Buy a House

I’ve been entrenched in personal finance since around 2016, when as a reporter I talked to financial experts on a near-daily basis about best practices for building wealth. In 2020, after more than a year of rigorous study, I became a certified financial planner professional, which taught me to think critically about financial decisions. Turns out, buying a home is one of the most complicated.

Eighty-eight percent of Americans think buying a house is a good investment, according to a survey by the National Association of Realtors (NAR). If you take a “good investment” to mean earning a positive return, they’re mostly right. At least over the long haul.

Residential real estate values across the largest U.S. markets have gone up by $10,200 a year since 1990, according to NAR. If you bought a median-priced home in the early '90s, you would have apparently made a killing on your investment over 30 years.

Alas, that’s too simple a measurement to determine if buying a house is a good investment overall, let alone affordable. There’s much more that goes into the cost of homeownership than the down payment and the monthly mortgage payment.

There’s no shortage of online mortgage calculators that can help you estimate how much you can afford to spend on a house. What many miss, however, is the cost of upkeep. Truth is, you can only afford to buy a house if you can afford to be a homeowner.

Homeowners pay expected costs like their mortgage insurance premiums, utility bills, and property taxes, but they’re also shelling out thousands of dollars a year for “hidden” costs like improvements and repairs. Appliances go bust, roofs leak, and pipes burst -- and they don’t wait until you have the money to fix them. They’re only “hidden” costs because you don’t know when they’ll happen; but they will, at some point.

Too many homeowners don’t prepare for these costs and have to turn to credit cards or other expensive borrowing as a stopgap. Those short-term solutions can throw you off course, souring a potentially good -- or even great -- long-term investment.

So here’s my best advice: Don’t buy a house until you can comfortably maintain a dedicated home expense fund.

View the original article to see embedded media.

Homebuyers Need a Home Expense Fund

Angi, a home services network, surveyed homeowners and found that they spend an average of just over $3,000 a year on home projects. Nearly two-thirds of homeowners reported feeling sticker shock when getting a home repair estimate. 

Texas, Florida, and California are among the most expensive states to maintain a home, suggesting that inclement weather and natural disasters can really impact a homeowner’s budget.

How much cash you actually need in your home expense fund can vary, but the rule of thumb is expect to spend between 1% and 2% of the purchase price of your home every year.

I’d suggest strongly considering these factors too: the age and condition of your home, the size of your property, your geographic location, and honestly, your ability and willingness to DIY. If you can fix a toilet yourself, for example, you’re paying for a trip to the hardware store. Hiring a plumber can double or triple the bill. It’s a great idea to research service costs in your area to avoid that aforementioned sticker shock.

The best place to keep your home expense fund is in a high-yield savings account or money market account where it’s easy to get to. Ideally it’s also earning a solid interest rate. Avoid stock market investments or any financial product where your balance can fluctuate.

I know that may be a tough sell if you believe, or you’ve been taught, to loathe the opportunity cost of holding on to cash. But the goal, as a homeowner, isn’t to maximize your every dollar. It’s to minimize your risk.

The better prepared you are for all the financial costs of homeownership, the better chance you’ll end up with an investment worth your while.

The Takeaway: Home upkeep can take a massive toll on a homeowner’s budget. Plan for those costs by maintaining a home expense fund in a high-yield savings account, where your cash is accessible and earning a steady return.