Okay, are you ready for Zach’s question?
Mhm. He says, “My wife and I are saving for our first home in an expensive state. Should we look for a starter home that we will outgrow, or should we stretch for a more expensive home that we know we can commit to for 10 plus years?”
That’s a hard one, right? That’s because I love that you’re thinking about efficiency, and I love that you’re thinking about the next 10 years. Maybe we’re going to start a family, or maybe our family’s going to grow, and we’re going to have different circumstances. So again, I want to begin with the end in mind. I want to buy a home that I think 10 years from now will still be the home that makes sense. And I like that. I think there is merit to that. But what makes me nervous is when you ask the question, “Should we stretch?” And I would really want to know, what do you mean by “stretch”? Does that mean if we were to buy a starter home, we’re going to be right around 25% of our gross income is going to go towards housing payments? But if we were to stretch to this nicer home, now we’re going to be at 35% or 40% of our gross pay. Then my Spidey senses start to go off, and I think that the reason most people start with starter homes is because they have to start with starter homes. That’s just kind of the way that the world works. You get into a home that makes sense for the next 5 to 7 years, because remember, real estate is supposed to be a long-term decision. But you understand that this home that we start in may not be the home that we are in forever. It may not be our forever home. And there’s nothing wrong with that. And I think that a lot of people, especially financial mutants, we get so caught up, and we want to make the absolute number one perfect best decision right now, today, forever. I think that you have to look at your situation. Okay, maybe a starter home, if that’s what we can afford, then we’re going to do that, and we’re going to keep saving. And if income increases and our savings increase, and maybe the house goes up in value and we pay down equity, it may be the stepping stone that allows us to go to the next home. I get nervous thinking about stretching too far too early to get into the dream house. Yeah, let’s put some analytics to this. I think you just nailed it in the fact that if the difference between the starter home and the stretch is just a small hop and a jump, so that you really are just maybe you’re going right outside of 25%, but you know next year’s pay raise is going to put you because you’ve got a big promotion coming and this is better than the Clark Griswold jelly of the month. You know that they really are going to get this pay raise. And that’s one thing. So that’s why I you kind of put it out there, is you’ve got to look ahead and plan accordingly, meaning that if this starter home, because you think about this as B shared, this is a 7 to 10-year decision when you buy a house. You need to ask, you look at your family, are you all going to be a growing family, so that this starter home is not going to be in the right school district, it’s not going to have enough bedrooms. Start figuring that stuff out. Whereas, but then after you say, “Yeah, well, man, now that blows up the starter home because yeah, we want to have a kid or start having a family in the next 2 to 3 years. Fast forward 5 years, are going to be in kindergarten, so we need to be in this school district.” And you go, “Whoa, that blows it up too.” And you’re like, “Man, maybe this…” Now you look at the stretch and go, “Holy cow, I need my income to double or triple to afford in this more expensive area.” That is because what I don’t want you to do is if the stretch goal is going to have so many ‘what ifs’ on what must happen for you to be able to afford this, you’re getting yourself into a very dangerous situation. So I don’t want that. That sounds like the stretch goal is a, instead of a hop and a jump, it’s actually a leap of faith with all these ‘what ifs’ of things that must happen. Then that problem that creates the issue where I would just pause and actually, and let me give you some grace on this. I don’t have the crystal ball. I don’t know what’s going to happen in the future, but I will tell you some things that I’ve observed about what’s going on in the real estate marketplace is that we just came through a very big inflationary period. And if you look back historically, these things typically come around every 30 or 40 years, where you’ll see like I remember I was a kid in the 70s and all of a sudden the houses that were 50, 60,000 now were 130,000. You’re like, “Oh, are they going to come back to 60?” No, they’re just going to stay at 130. But then they’re going to mope around 130 because they’re going to go back to historical norms of they’re going to grow at 2, 3% a year. They’re not going to go up 30, 40% over two years. And we just came through that period. It’s not uncommon over the last few years that your house might have appreciated 50, 60% if you were in one of these more expensive areas. And I’m not saying they’re going down, but I just don’t think they’re going to go up another 50, 60% over the next three years. What’s probably more likely to happen is that they’re going to start going up 2 to 3%, like historical, yeah, keep up with inflation. And then that allows you to hit pause and see if some of those ‘what ifs’ like the job promotion or you hit a lick with whatever business endeavor or some investment you’ve got, then if those things are no longer, you know, ‘what ifs’, they become, “Hey, that happened,” you can actually let your life grow into. So you’re not reaching out and then let these stretch goals actually come closer to what your affordability is. So you’re not, it’s not a hope and a prayer, it’s actually more a matter of time before this becomes reality. Because that’s what I think a lot of people, they base and that’s why we even came up with the 3D plan. You know, it doesn’t have to be starting a business, you need to put on your 3D glasses so you can figure out what is the holy cow, we’re going to be rich, this is the dream plan. Down to earth of what you think will happen. Then don’t forget to do the doodoo plan so that you can address it before you actually live it and actually have a good plan out.
