Craft Apartment Locators Owner + Broker Drew Johnson lays out the many reasons as to why buying a home as a Millennial isn't always the smartest move. This commitment leads to the unpleasant "adulting" of extensive maintenance and repairs, is a major drain on your bank account, and can gravely hinder the freedom of your active lifestyle. While renting an apartment won't necessarily put you on the road to wealth, it'll likely contribute to less stress and a higher quality of life right now.
Don’t get me wrong: there are some great financial benefits to owning a house, and if you don’t mind the pain points listed here and have the cash, you should invest in your local real estate market. In fact, I have made the argument in favor of homeownership many times. However, in this blog post we’ll examine the pain points of buying a home as a Millennial, whether you’re an Austinite or not. If you’re not ready for the “adulting” of maintenance and yard work, not financially able to pull it off comfortably, or the logistics aren’t right, you may want to think twice and keep renting. If renting is on your agenda, Craft Apartment Locators is here to help you crush your Austin apartment hunt.
1. Don’t Buy a House if “Adulting” Hinders Your Active Lifestyle.
Okay, so what does “Adulting” actually mean? This vague term seems to be half-sarcastically assigned to everything from cleaning your apartment to closing on a home. However, you’ll be adulting in the worst sense of the word when your weekends go from lock-and-leave to bagging leaves.
As a recent homeowner myself, here’s a list of what you’ll have in store when it comes to yard work: mowing the lawn, pruning plants and trees, treating for bugs and pests, keeping the grass healthy, landscaping, bagging leaves in the Fall, fence maintenance, and irrigation.
The actual house is a whole ‘nother story, especially if the one you’ve bought has some age to it. You’ve got potential issues with the foundation, electrical, plumbing, HVAC, roof, water intrusion and damage, pests, termites, a suite of appliances prone to breaking, and leaks. There are walls to paint, smart home devices to subscribe to, and windows to wash. Make sure to be stocked up on air filters and that your toilets don’t leak! Oh, and be ready to pay an exorbitant amount in property taxes and homeowners insurance. Renters insurance is less than $20/month, by the way.
So, there's the maintenance side. But what about being utterly blindsided when things start breaking and need to be replaced by old age?! Gone are the days of calling up the landlord for costly cash outlays. According to this great article from Forbes, the professionals interviewed have suggested to set aside about 2% of the home's value for repair costs. This is why I recommend purchasing a new construction home if possible - you'll cut that number down significantly, and you can snag a beautiful new construction home for less than a resale in many cases - though you typically sacrifice location and yard size.
Regarding the 2% rule: If you're purchasing a $350,000 starter home in Austin, that's $7k/year, or an extra $583/month. Fun! Keep in mind you'll likely not be paying this every month, but when you have to drop $10k on a new roof after a few years then you'll see why this average makes sense. I've had to replace an HVAC condenser before, and the $5k price tag did not make for a happy time. As you can see, this point could very easily have been in the next section about being house poor, so make sure you have a big financial cushion if you choose to buy!
Finally, you need to expect the unexpected. Roof leaks, flooding, underground pipe breaks (especially in old homes with cast iron pipes), malfunctioning toilet flappers (cost me $700 in my first house on the water bill due to a 2 dollar piece of rubber), and things like refrigerators going out tend to rear their ugly heads when you least expect them to...especially in the resale homes of decades past that first-time homebuyers typically gobble up in the quest to get in to the local housing market game.
I love my house, but I hate how it hinders my lifestyle of being a single 31 year old in Austin. Too many times I’ve had to skip fun plans because there’s house work to do or something needing to be fixed. If you value your free time and want to really enjoy Austin, it’s probably best to rent an apartment where you can just call the management desk if any issues should arise.
2. Don’t Buy a House If You’ll Be House Poor.
We see it all the time. Young Millennials save up about $30k and are ready to throw down a 5% down payment to buy a house. Great! Well, it’s not so great if you put most of your cash in to one solitary investment, especially if it’s an illiquid asset like a house. This means that if you need money for an emergency, life event, or to do something like start a business, you’re unable to take cash out of your house without considerable expenditures of time and money. This is counter to having money in the stock market/mutual funds, which you can easily cash out.
Another thing to consider is the monthly payment is going to be much more than rent for the same home, or at least on the surface. For example, you can rent a 1/1 condo in Austin at The 360, a swanky but reasonably-priced Downtown Austin high-rise (at least for Downtown), for $2100. This same condo would sell for $425k. Using Zillow’s mortgage calculator app (the best one on the market), we can see that with a 5% down payment and current market interest rates, your monthly payment is a whopping $3,456 per month. Wow.
This isn’t just the principal and interest of the loan: It’s also the Private Mortgage Insurance (PMI) of $256/month (standard on really any loan with less than 20% down), a stellar interest rate of 3.75%, property taxes of 2.25% per year (or $797/month), HOA dues of $450/month (a realistic estimate for this building), and homeowners insurance of $83/month. Principal and interest on the loan together is $1,870 - this is almost as much as rent for the unit itself!
So, this $3,456 monthly payment is the worst case scenario with a meager 5% down payment. But things don’t get all that much better when we put more money down. By dedicating an extra $22k to get to 10% down, you’re still looking at a monthly payment of $3,290. 20% down with this great interest rate eliminates the PMI is a little more reasonable at $2,905. However, that still puts you $800/month in the red if you choose to rent it out, and that’s not even considering maintenance and vacancy, which we can conservatively estimate as being 10% off the top of revenue.
This is a rather extreme example due to it being a downtown condo in the Austin market, but you’re guaranteed to pay more per month on any home worth living in within the Austin, TX city limits should you choose to rent it out with a mortgage of 20% down or less.
We aren’t considering the fact that you have equity and appreciation on your side in the long term when you own. These are what make it worth it to buy, but just ask homeowners in the recession of 2008 if endless property value appreciation is guaranteed. Luckily, the odds of sustained appreciation in Austin, Texas are pretty darn good.
Keep in mind that your monthly housing cost isn’t “locked in” when you own. Property taxes increase each year! The homestead exemption is nice in that it caps the increases by 10% annually, but that still means you’re likely to pay close to 10% more each year in your monthly payments due to escalating property taxes based on the appraised value each year. This can lead to triple digit increases in your monthly mortgage statement!
There are ways to invest in the surging real estate market without buying a house. There are plenty of real estate investment trusts, or REITs, to invest in. There are apps like Crowdstreet and Fundrise that take smaller investments and crowdfund them to support certain real estate investments that you choose to be apart of. You can also invest equity in multifamily apartment buildings and homebuilders. While the latter plays require knowing the right people, it typically isn't hard to get online and find these investment groups that will gladly borrow your money to make real estate projects happen. Just be sure to do your due diligence. Basically, you can still invest in real estate while continuing to rent your residence and enjoy your freedom.
3. Don’t Buy a House if the Logistics Don’t Make Sense.
If you are set on living in an amazing location, are moving to a new town, or may move to a different city, you ought to think twice about making this huge financial commitment.
Location, location, location. It’s really difficult to afford to buy a home that’s centrally located in most major cities. The homes that are truly doable tend to be a little further out, which means rough neighborhoods, no walkability, more driving, and costlier Uber fares. It can also hinder you from meeting up with friends downtown because you don’t want to undergo the voyage to get there. On the contrary, there are plenty of affordable apartments in Austin that are walkable to the finest things our city has to offer.
Sometimes, young couples try to rush things by purchasing a home together before they are married. This is a grave mistake. We have helped young couple clients buy houses in the burbs just to help them sell at a net loss a year later because they broke up and wanted to rent apartments back in the action of Austin’s urban core.
If you’re moving to a new city, it’s far and away a better idea to rent for at least your first year. This is so you can feel out the different parts of town to make an educated decision on where to buy, as well as so you can have much more time to analyze the market and gradually look at homes in the 3-4 months leading up to your lease expiration so that you don’t make a hasty decision under the gun. You’ll also be making friends and establishing your routine, so you’ll have a much better idea of the right Austin neighborhood for you.
We highly discourage buying a house in Austin if there’s a chance you may move to another city within three years. It’s never a good idea to sell within your first three years of homeownership, as the closing costs for listing a house and moving typically come out to 7-8% of the entire value of the home. Yikes. You could rent it out, of course, but you’ll likely be cash flow negative...and you’ll have to manage this money pit of an asset from afar.
Investing in real estate is a get-rich-slow strategy. While we do recommend making real estate apart of your investment portfolio if you have the necessary funds and are ready for the lifestyle change of homeownership, there is an opportunity cost to tying a ton of your cash up in illiquid property. This means that you won’t have the money to invest in things with higher upside (that also tend to carry higher risk). So, when your zany friend’s sock subscription company starts taking off, you’ll be sad that you didn’t have $10k laying around to help fund it and realize awesome returns.