Cup of Coffee vs Owning Real Estate
I used to spend on average $10 a day on oat and soy lattes. Then I discovered a french press and coffee grinder, and for less than I used to spend in a day I now buy two weeks worth of coffee beans.
Cutting down on take-out java is an excellent bucket for saving money. Here is some depressing math for us millennials:
On average, you work 250 days a year. At $10 a day for 5 years, your total coffee expense is $12,500. This is not a smart financial move. This sum is enough to cover real estate closing costs or can suffice to cover the down payment in some states. Even in the surrounding boroughs of NYC, you can still find real estate for less than 400k. With most lenders now requiring only 3% down, there goes your down payment.
The Rent Conundrum
What else is a big drain on your finances? Rent.
What people spend in their late 20s and early 30s on rent nowadays is absurd. The average price to rent a studio and a 1-bedroom apartment in NYC is $2,550 and $3,500 respectively.
After three years of renting a studio, you’ve spent a total of $91,800. That is a sizable downpayment, maybe not in Manhattan, but definitely enough for a co-op or condo just a few train stops away in one of the nearby boroughs.
It is understandable that you want to live alone. You want to experience that city life. But that feeling of exhilaration of living in the city is temporary. If you want to experience the city life, be a weekend tourist. The price tag of $2,550 per month to conveniently walk around Soho on a Sunday just isn’t worth it in the long run.
The 5 Lessons for Millennials
Owning real estate can be accomplished in your early 20s. Buying property is very attainable when you start early enough and make small sacrifices. Here are my 5 tips I have for millennials when it comes to real estate.
Live at home or find cheap rent
Rent takes a big chunk of paycheck every month. That money can be better geared towards savings. Bite the bullet by living at home for a few years or sacrifice an additional 45 minutes of your train ride and move to a borough with cheaper rent. Renting in New Jersey may also be an option. Rent a single room if need be.
Keep debt low
When you apply for a mortgage, the lender examines your monthly debt-to-income ratio. Suppose your minimum monthly credit card payments total $1,000. The lender will automatically deduct that sum from your net income to determine your monthly mortgage payment ability. For example, instead of qualifying for a $3,300 monthly mortgage payment, you now qualify for only $2,300 because of your credit card balances. You’ll need to put down a bigger down payment to lower the monthly payment or seek a cheaper home. Get rid of your credit card debt so you need less money to put down at closing.
Are you buying nonsense on Amazon every month totaling $300? Are you spending money on clothing but can be cut down by $100? Start doing the math.
You could be saving $400 a month by being on the frugal side. $400 x 12 months = $4,800. Do this for four years and you have an extra $19,200. That amount can make or break your downpayment, be applied towards renovation costs, or pay off your student loan debt.
Secure an interest free loan
Not everyone has this luxury but your parents can be a great financing resource. Having more money in the bank means having more buying power. If possible, take out a small loan from your parents. Remember that the money in your bank account needs to be seasoned meaning it has to stay there for 45 or more days.
Put down as much money as possible
The bigger your downpayment is, the lower your monthly mortgage will be. This is the best decision you can make on several fronts:
- Since your monthly payment on your mortgage will be relatively low, even if you lose your job, the payments are manageable if your next job requires a pay cut.
- You have more equity. You can use that equity towards another property and start collecting rental income.
- You save a substantial amount of money on interest over time.
There is no better feeling than being a millennial and a homeowner. My wife and I were fortunate enough to follow these rules early enough and snag our first property. This is very doable. Give yourself a 5 year plan to own a home. You can start small with a co-op or condo. As your family grows you can expand.
If you have any real estate questions feel free to email me at Garry@paperstreetrealestate.com, or give us a call at (646) 945-3727.