The smartest strategy when buying a house is an often-requested topic. Saving to buy a house (or home) is one of the most common goals I hear when coaching individuals and families. Homeownership is embedded into the American dream. While there is this one common goal, there are a plethora of strategies to achieve it. So, I want to explore one of the options; the one I call The Smartest Strategy.

I love real estate. There is nothing like watching TV shows and YouTube videos where they rehab houses or decorate rooms or just go around showing off the most luxurious homes around the country. Watching the tiny house movement is my new pastime, mainly because of their vast variety of styles and intricacies. Many of these shows get my blood pumping as I dream of again owning a home.

By the way, I will use the terms House and Home interchangeably throughout this post. A home could be something other than a house, so don’t get triggered every time I use the word “house” if you desire to buy a condo, for instance.

Have you ever wanted something so badly to the point that you begin to lose the ability to use logic? This phenomenon, where your pulse begins to rise and you begin to have tunnel vision … everything around you seems to disappear, and your complete attention focuses on buying a house, is what I call having Personal House Fever.

The House Buying Trap

The definition of Housing Fever is described as “a popular term to describe an overheated housing market or housing price bubble” according to a research paper from Yale University. But, I have seen this “overheating” happen on an individual level with clients I have served, and in my own life.

This anxiousness results in overpaying and therefore having a “bubble” in one’s budget. When this personal bubble bursts, it creates a perfect storm, leaving your budget helpless. Living on more than you make ensues and ultimately this bad decision comes to foreclosure, bankruptcy, or at best being house poor.

I know this so well because it happened to me when I purchased my first home in my twenties. I felt the pressure to do and have everything my parents had achieved. Except I was trying to get there in half the time. Also, they had made mistakes that I could have learned from but ignored.

The first and most important part of the Smartest Strategy is not rushing into buying what might be the single most expensive thing you ever purchase in your life. You don’t “have to” have a house. Renting is not evil.

Renting is Not Evil

I’ve owned 2 houses, rented many apartments, and I rent right now. Firstly, renting is many times not more expensive than owning. Homebuyers get blinded and forget to include the hidden costs of buying a house.

Secondly, the amount of stress and problems that come with homeownership is more than most buyers anticipate. There is nothing like calling the landlord to fix the issue of the month. From leaks to HVAC challenges to mice to mold, I’ve seen it all. The cost of ownership is grossly underestimated.

Thirdly, after a house is purchased, you realize all the things you need to buy to make it your home. After the 23^rd trip to HomeGoods and Home Depot, you realize that the budget you created was not realistic. It is always a shock when you realize how many seemingly random decorations, accessories, and supplies you need once you have a house.

Believe me, waiting is worth it! Rent while you wait. But wait for how long, you may ask.

Buying a House with a Finished Financial Foundation

There is nothing like buying a house when you don’t have financial worries. You won’t have the many pressures that most people have during the process.

That means having a Zero-Based Budget is a priority. You must get in control of your Inflow and your Outgo. I work through the elements of a proper Zero-Based-Budget and ways you can Increase Your Inflow and Optimize your Outgo in the 4-Part series: Achieve Your Financial Goals Faster. Give it a read and put this advice into practice.

You need to get completely out of debt before buying a home. What!?! Yes, you heard me right. Payments are killing most families today. Eight out of ten of your neighbors are living beyond their means, but most of those others who can “handle” their debt-load are stressed out and overwhelmed. Debt equals risk, and risk equals anxiety. This is not a mindset you need when purchasing a six-figure item.

Trust me, you want to be debt-free, allowing your income to be unshackled and at your disposal. The borrower is truly a slave to the lender. If you are in any debt at all, meaning school loans, credit cards, personal loans, medical debt, IRS debt, auto loans, auto leases, mobile phone leases, etc., read this post after you are done with this one: Get Out of Debt FAST!

Be Prepared for the Unexpected

Lastly, you need an emergency fund. As you may know, I am a Ramsey Preferred Coach, and therefore follow the principles laid out in Dave Ramsey’s book The Total Money Makeover. In this book, he teaches you to have a starter emergency fund of $1000 while you are getting out of debt and then to fully fund it to 3-6 months of expenses after you are debt-free.

Well, I believe the smartest strategy would be to have at least a 10-month emergency fund when owning a house. The reason is because of the higher cost of everything. It will give you a peace of mind like you would not believe. Now when the furnace, the dishwasher and hot water tank all go out in a 3-month period, you can handle it no problem.

Plus, you can raise your deductible on your homeowner’s insurance which will lower your premium. This frees up more available cash to buy all the stuff you never knew you needed until you owned a home

Buying a Home You Can Afford

I believe you should rent until you have saved up enough to buy the house in cash. Remember this is the smartest plan, and the smartest way is 100% down. First, I will explain why this is the smartest way, then I will show you how you can do it.

When you have no payments, meaning principal and interest, you have more of your income to use for all those other costs you didn’t account for. Plus, there are other big goals to save up for, like retirement, large charitable gifts, cars, vacations, etc.

I have never had anyone tell me that they rather have payments. The main reason why mortgages are used is because of a lack of knowledge or plan to do otherwise. I love how Dave Ramsey says, “If you hate not having a mortgage, you can always go get one after you buy the house.”

Do the Math

Just do the math. How much interest do you think is paid on an average priced house in America over a 30-year mortgage? The average home price in 2020 is $284,600. A 30-year fixed-rate, at the time of this writing, is 3.79% APR. So, when you get that deed in the mail, and you finally own your home free and clear, you would have paid $192,218 in interest. No one signed up for a mortgage because they wanted to throw a couple hundred grand down the drain.

I’ve heard all the “great” reasons to have a mortgage from nerds (like me) who think they can outperform their mortgage rate. The facts show that most people buying a home don’t have the cash upfront because they don’t have a strategy to do so (I’ll show you the strategy in a moment). Also, those who have the money and plan to invest it, never quite out-earn the risk of debt. I won’t get into all the numbers here, but you can always set up a call with me if you would like to discuss the true cost of debt.

The number that means the most is the amount of money you can make at the buy. Cash buyers can get great deals. When you are patient and you have the cash saved up, you can buy a home for 10 to 20 percent less than someone who needs to secure a mortgage. That means you have made a wise investment. Try that with your get-a-mortgage-and-invest-the-cash strategy.

How to Save Up the Cash for Buying a House

Choose a starter house. In a national Realtor Association article “How long do homeowners stay in their homes?”, the research shows averages are all over the place. But the range is between 8-13 years. The bottom line is, you will move. This is not going to be your “forever home”.

Save up fast by living far below your means. Don’t worry; it gets better as you move through the process. Currently, rent will be taking up some of your income. My 25-year-old son can rent for $1000 per month and he is able to stash away $2000 per month. For 5 years he will add that money to a growth-stock mutual fund each month so that when he turns 30 it will be about $163,000 in the account.

No Love At First Sight

After suffering for 5 years (not really), my son is 30 years old and much wiser than he was a 25. He goes out to find a deal for a cute starter home for his family of three. He finds someone who needs to get out of their house fast because of a job relocation. They are asking for $175,000. He tells them that he has $150,000 cash and can close immediately with no appraisal, no mortgage approval, no hassle.

NOTE: Don’t fall in love with any one property. Be willing to walk away and go find the next one. There are plenty of properties out there. When you don’t have the pressure to buy and you have cash at the ready, you are in control of the buying process.

After my son buys this home, his family can furnish and fix it up with $10,000 of the remaining money. He keeps the $3,000 invested and continues to add $2000 per month because it has become automatic at this point. The best part is since they are not renting anymore, the $1000 rent payment is no longer, and they can increase several categories of their budget. Vacation here we come!

No Such Thing As a “Forever Home”

Like clockwork, 8 years later they decide to move. They have 3 kids, and they need the room. At 38 years old he is about to enter the prime of his career! They have gotten a few raises along the way and have been consistently investing in their retirement funds and college funds along the way.

How much house do you think they can afford now? I’ll let you take a minute to think about it.

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Well, the house fund has grown to $327,000; the house they are in, originally valued at $175,000, is now worth $230,000. So, they can have $557,000 in cash upon the sale of their current house. Since they know how to house shop for a deal, they could buy up to a $600,000 home, but that is way more than they want or need. And of course, they are going to put 100% down.

Oh, by the way, they will most likely be millionaires before the age of 40 if they never used credit and have been investing for retirement along the way.

I know what you are thinking: “But I’m not 25 years old!” Well, this is the plan that I’m doing starting at 45 years old, which means that I still retire a millionaire at 59 ½! Even, if you are further along your life’s journey, it is never too late. Get out of debt and start saving. That’s the smartest strategy for buying a house.