A First Time Homebuyer's Guide to Charleston
Updated: Nov 14, 2019
Last Spring, I took part in a panel discussion on Housing Attainability in Charleston. The takeaway from the discussion was that home prices are rising in the area and making it difficult for first time home buyers to afford homes. Since then, I’ve had discussions with countless people, mainly millennials, who are really feeling the squeeze of the housing market.
So what’s the problem? And what can we do to fix it?
Home prices are on the rise here for several reasons, one of which is the area’s growth and simultaneous shortage of housing. To be clear, our metro is only growing at around 2% per year, which is healthy. The real problem has been the lack of housing being built, especially housing that’s affordable to someone making $50K per year. While there are organizations putting pressure on local governments to alleviate this problem, it still doesn’t help those who need housing now.
What Can Potential Homeowners do Today to Help Themselves Purchase Their First Homes and Start Building Equity?
Set forth reasonable expectations. It’s intimidating to see that homes near your apartment in Mount Pleasant are selling for $700K, and it seems that everywhere you look homes are selling for more and more. This is definitely the case, but here’s the secret: Those homes are not really meant to be homes for first (or even second) time homebuyers.
I have noticed a lot of people my age stand aghast at home prices without considering the types of homes selling at those price points. Often times these are homes located in well established neighborhoods and upwards of 3,000 square feet. They may remind you of the homes that you grew up in, but I can almost guarantee that your parents first homes were NOT like these. These homes are being bought by people who are further along in their careers and who have spent years building equity in previous homes. That leads me to my next point.
It’s Called a Starter Home for a Reason
Qualities of a starter home : Small, older home, maybe a fixer upper, probably not the neighborhood you want to live in forever, good chance it’s a little ugly.
Benefits of the starter home: This helps get you to your next home!
Buying at a lower price point with a low down payment is something you can make happen. Pay off a little extra, or make some improvements. Do what you can to create equity. Hopefully, the market will rise at the same time. In 5 years, you have your 15-20% downpayment for a larger, nicer home in a more desirable area. You’ll probably have gotten a raise by then too, increasing the amount you can spend on a monthly housing payment. Magic.
Save for That Downpayment
This is probably the least fun and most intimidating part about buying a home. Saving up thousands of dollars is no easy feat, especially with rental rates increasing the way they are. Keep in mind though that you are not required to make a downpayment of 20% on a home. Most loans can be granted with a 5% downpayment, and there are a lot of programs out there that even allow for a downpayment of 3% or less. It may take a year or two, but do yourself a favor and start saving.
If there’s one thing my generation knows how to do, it’s hustle. Find a way to make a little income on the side and add that to your savings. It’s incredibly easy to earn an extra $500 per month these days. Sell clothes online, dogsit, pick up catering shifts! It may seem like a drag now, but that extra $6,000 in one year will make you a homeowner. Not to mention that you’ll create much more wealth for yourself in the long run.
House Hacking 101
In case you’re new to this concept, house hacking is when you buy a property and rent out part of it to offset the costs of ownership. This makes sense for a lot of people who already live with roommates. Just because you own a house doesn’t mean that you HAVE to live alone.
Consider this: You buy a townhome on James Island and rent out the 2 extra rooms.
Purchase Price: $225,000
Downpayment (5%): $11,250
Monthly Payment (including taxes & insurance): $1450
Roommate #1 pays: $600
Roommate #2 pays: $600
You pay: $250
You just SAVED yourself a ton of money on your monthly housing expense, and your roommates are still getting a very fair rental rate. What are you going to do with all of the extra money you have now? Think of the possibilities: you can pay down the principle on your mortgage to create more equity, or save towards a downpayment on an investment property, or travel to places you’ve always wanted to go. The point is, you just put yourself in a stronger financial position than you were before.
Don’t wait to buy
It’s true that home prices and interest rates are both increasing, and this makes for a challenging task for those looking to buy their first home. Don’t make the mistake of thinking that you can wait until the next recession to catch a deal. What happened in the last recession was an anomaly. Real Estate prices rarely go down. Certainly, the economy will go up and down, but real estate values remain relatively level in times of economic recession. Once the economy recovers, prices start going up again.
Waiting for the next recession could end up costing you a lot of money. Home prices and interest rates will both be higher than they are today, and your rent will continue to go up in the meantime.