Vol. 4 - Should I buy a house?
In this episode, we are looking at the housing market and impending market correction. We cover:
How much of your gross/net pay your mortgage should be.
How having liquid savings to decreases your chances of defaulting
Getting creative in your purchases by investing in house hacks vs multi-family residences
Proposition 13 and the impact on tax reductions
Borrowing from retirement funds for down payments
Where to hold your short term savings while home shopping
Plans to increase housing inventory
Downpayment and homebuying assistant program
Savings/investing apps everyone should use
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TRANSCRIPT:
Jason Hamilton (02:13): All right, so I'm back again guys with my good friend Naseema here and we want to talk about home purchases and home buying. We're both in California, so I think our conversation is going to relate a lot more to California and not really the Midwest with these, you know where home prices are still relatively reasonable besides where Californians are going and jacking up all the prices, right? So besides those places, but Naseema and I are kind of both in similar situation right now where it's like, yeah, we kind of want to buy a house. It would be nice, but when you look at the all in costs, what the market is doing what you get with money, it's just really hard to make sense of what's going on right now. So I dunno, Naseema, you want to kind of share some of the things that you were talking about before we gonna dig in?
Naseema McElroy (02:55): Yeah, sure. So I am in a position where I'm renting right now, currently in Oakland, California and we've been looking at buying houses just because you know that's what you should be doing, right? The American dream, right? And we're kind of coming up with difficult decisions that we have to make because we are actually in a good position where we're renting my, like for example, me and my partner keep our finances separate. So my rent right now is like not even my take home pay. And we have a house where we have the ability to house hack and lower some of our costs. And so, when we're looking at places to buy, we're kind of trying to stay within that range, which we're finding impossible, like trying to keep our expenses as low as possible. And then we were also like offered by the landlord to buy this house. Now keep in mind, my landlord bought this house in 2009 during the housing crisis for cash, like a hundred and something thousand dollars and then, but she's right now it will be on the market for like high sixes, sevens.
Naseema McElroy (04:06): And so when you look at paying for a house in that magnitude, I used to have a house that was like $620,000 my mortgage with that, with PMI and everything was 40 like you know, $4,000 and so I'm just like, okay, so I'm going to go from a rent that you know is substantially lower to paying that. Plus now having to pay for taxes and having to pay for any kind of upgrades that we want to do because for a house that we want to buy, we don't want it to be in a certain condition. And we would have to do substantial work to get this house up to that condition. And so that's kind of what I've been struggling with in Northern California. Jason, I know in your Orange County, which is super expensive too. Housing prices are similar.
Jason Hamilton (04:52): Yeah. I have to say, you know, at least in like San Jose, San Francisco even probably, Oakland, I think they're a little crazier. Like they're taking less sense of what they do here. 'Cause At least here you can drive to the beach within 10-15 minutes. Over there, you know, a lot of neighborhoods that I saw was just up there over the holiday and there's just, the homeless problem is out of control. I mean there's just homeless everywhere and it's like, you know, you're going to spend 7, 8, $900,000 on a home and then you drive out of your neighborhood and there's a homeless camp. It's like how does it, you know, it doesn't make a lot of sense, but just even from a financial perspective, we're dealing with the same thing. Right? We have, you know, when I look at the same cost for like a similar home or similar, if you're looking at a condo versus apartment, it's probably going to cost an extra thousand to $1,500 more to have, you know, for your all in costs including your taxes, interest, things like that, let alone home repairs.
Jason Hamilton (05:42): For us it's a, you know, we're really busy, you know, and when I look at things and thinking about like home repairs, it's like right now since we're renting, if I have a problem, I put in an email. Within 24 hours, someone's there responding and coming out and it's fixed. That's nothing out of my pocket. And so a lot of people think like, and this is really this kind of middle class mentality where it's like you have to have a home. It's all about buying a home. And I think where that has come from, one, it's kind of a, a lie in a sense to where you know, everybody needs to own a home. And it's like, I think it can be a good idea. And what were, some of the statistics come from is they look at people's level of wealth and they find that, you know, the people who own homes have a higher level of wealth because ended up having some equity.
Jason Hamilton (06:24): But in reality, if you just have, you know, financial control and you can actually save and invest money. That changes everything. And the thing with the home is it's kind of like a forced savings, right? For a lot of people. Because people don't have financial behaviors in place to save and invest money. But if I were looking at the exact same situation and if I'm saving, investing $1,500 a month over the next 10 years versus buying a home and paying that extra, you know, obviously it depends. Right? But there's a good chance I'm gonna come out ahead, especially with home prices being at the top of the market, you know, as high as they've ever have been over the last decade. You know, you look at California's history and I'm not saying this is going to happen, but look at California's history and every 10 to 15 years, there tends to be a correction, right?
Jason Hamilton (07:07): So when you know, and there's a lot actually a lot of research, I posted an article on my Facebook page with all the research around why buying a home in Northern Southern California right now, unless you're getting a deal, right? So I have to always put that disclaimer in if you're getting a deal, if you're buying below market because you're getting a deal and you're going to maybe fix it up or flip it. My brother is excellent. This is what he does. And he's, you know, he bought his home. By the time he's done fixing up, he's probably have three or $400,000 extra in equity because of the condition it's going to be in. So that's kind of a sidebar. But just standard home purchase, it's really hard to make sense of it unless you can afford it. Right? And the thing is, I want to put that disclaimer and if you can, you know, buy the home and ideally, right, so this is coming from like a CFP perspective.
Jason Hamilton (07:47): This is what a traditional proper amount of home purchase is. 28% of your gross or less should be your home price. That that's out to probably somewhere about 25-ish, 24%. In California, I'm a little more lenient and it's like, okay, if you want to go to 30% or at most 35% but you have good career prospects, right? If you don't have good career prospects where that 35% can become that 25% or 28% in the next three to five years, then I really kind of lean against doing something like that because you know, this is what I see a lot and this is actually happening in many families that I deal, through my family's right and my history is like if you have too high of a home price, you cannot have money to save. You don't have money to give. Right? So you don't, you know, giving is I think a really important part of financial health by security, you know, religious organizations, whatever your thing is.
Jason Hamilton (08:35): But being able to give is actually part of the cycle of wealth that keeps things flowing properly 'cause if you're just, you know, holding everything in tight all the time, then it really stops the flow of that. So if you have no money to give no money to save, but you have a house and you're essentially just house poor and I don't really see that as being a good quality of life and that's happens to a lot of low, moderate income families when they're trying to get out of that situation and get into home ownership. I mean, what are your thoughts on that?
Naseema McElroy (09:01): Yeah. And so I think it, a 100% agree. And just to bring it back a little bit, so the title of this live is that's "your home isn't an investment". And I think we just need to really understand that because we're sold this thing and this dream in America that you know, your home is an asset and that you know it's your biggest investment and you can't really classify your personal home as an investment unless you actually did buy it as an investment, which most people don't. But I 100% agree that a lot of times people go into home ownership and end up house poor because looking at it as like this thing where you know, because society tells them that this is what you're supposed to have. And like you said, it's poorest savings that they buy a lot higher than they can actually afford.
Naseema McElroy (09:53): And so kinda just to bring it all back, I want to talk about how you should be looking at your home purchase. If you're looking to purchase a home right now, what are some things that we can really, what are some rules, some guidelines that we should all be going by? I know we're in California, so you know, our real estate is off the hook and it's super unique. And you did say that it should be 35 at the very top percent of your, and you said gross. I would actually say take home pay. It should be part of your take home pay. So whatever. If you bring it home, you know, $10,000 a month, it shouldn't be more than your mortgage interest, your mortgage principal interest. Any PMI payments shouldn't be more than $3,500 a month, which is what like that's like a $500,000 house in California. Right? Like if you really do the math. So what are some other things that people should consider besides like the take home pay factor? I know we talked about or down payment and how much down payment they should be considering when purchasing a home.
Jason Hamilton (11:01): Yeah, good question. So here's what's interesting around down payment. I was just reading an article that did a study and I should mention, I think our conversation here is really for first time home buyers, right? Like I already own a home and you could be buying another home when you have like equity or flipping off. This is really a rough first time home buyers. So I think you know that is kind of where the focus should be of our conversation should be at. But the JP Morgan Institute recently did a study right and they actually found out that there's something really important when it comes to actually keeping your home and maintain your home long term and not defaulting on the loan. And a lot of people feel like they should put a big down payment. And I think a big down payment if you have it is can be a great idea.
Jason Hamilton (11:38): But the majority of people that are pushing the first time in California are probably going to do more of the FHA three and a half percent down or the conforming 5% down, maybe 10% very few are going to be putting 20% down on a 607 $800,000 home for their first purchase. If you're going to do that, then you know, wonderful. But I think we're talking to the normal people here that are just trying to start out in their career. And something you mentioned about $10,000 of take home pay. You know, that's actually a pretty high income. You know, most people do not take home $10,000 because in California with our, you know, 10% date tax and on anything above $45,000 and then on, you know, the government, you probably need to be in a neighborhood about $15,000-ish a month of income to be able to take home 10, right?
Jason Hamilton (12:23): So that's $180,000 a year. Nurses, which I guess who this is really designed for, I think that's potential, right? There's potential for those be there, but the average person is really not doing that. They might be taking home, you know, make an 80 or 90 or a hundred thousand a year with two jobs, you know, maybe 120 with two jobs. And then they're trying to buy 6 or $700,000 house. And that's where we're getting into this 45% of income's really high. So now he's back to the study. What they found is actually more important for, you know, to reduce the default rate. It was more important for you to have liquid savings after the loan closes, right? So after you purchase the home, because what they found is if you have one month of liquid savings versus six, there's a five times higher likelihood that you are going to default on your home loan.
Jason Hamilton (13:10): Right? A lot of people are just, I mean they're squeezing everything they can out to get this down payment and then they're going into the home with no cash and no money set aside. And what you have to realize when you own a home is things break. You want to fix things up. There's always problems going on. And this is why I say like, we're talking about single family residents, single family residents are not an investment. That is a cost. That is a liability because all it is, it's just money going out and there's no money coming in. So where I'm looking at right now and what I think young people should really be considering is looking at something that has more than one door. Right? So if you're going to be buying a home, you know, looking at something where you can have a duplex or triplex, a fourplex because you could still qualify for these first time home buyer interest rates and loans up to four doors.
Naseema McElroy (14:01): Also, I know in Northern California in particular, they're incentivizing places with ADU or additional dwelling units. So it doesn't have to be an additional door per se, for example like my downstairs is its own total separate unit, but it's considered a single family and a lot of people are doing stuff with their garages, converting their garages. But I think talking about buying a home as a house hack, like where you are kind of supplementing your housing payment with somebody else's payment on top is a good way to get into a home. So yeah.
Jason Hamilton (14:35): Yeah, I do think it's actually good discussion. I was actually having a little Facebook conversation, you know, battle or whatever with one of my friends who's in Northern California who's a real estate agent. You know, that's kind of what he teaches people to do, right, is buy a home and then get it with some property of some sort so that you can put one or two ADUs on it and generate some income. But it's like when you think about that from a like a lifestyle perspective, you don't want a tiny home in your backyard, right? It's like, you know, for me that's really tough, you know? Or like you said, changing your garage and having somebody living that close in proximity to you just so you can own a home. You know, it's really hard for me to say like, Oh yeah, you know, and we found a big property and you're not going to be disrupting people.
Jason Hamilton (15:19): But at least with things like a duplex or triplex, there is that built in segregation between the units generally and it's somewhat private, but just drop in, you know, filling up your garage with another unit or putting something in your backyard. Definitely can be a good idea, but I think having some source of additional cashflow coming in, then now we're talking about going to the investment category, right? Because you are generating some income off of that and it's not all outgoing, but you might be given up a lot to do something like that. I don't know,
Naseema McElroy (15:45): I mean I think to each his own. I am a big fan of house hacking actually, that's, I told you guys about, well I mentioned to you Jason, but when I had my five bedroom house that was like 40 minutes outside of Oakland, that's actually one of the ways that I was able to get on top financially and pay off a lot of my debt is that I did house hack. So I bought a five bedroom five bath house for me and my daughter, like I did not need all that space. So I ended up renting one of the rooms. So the downstairs room was totally separate, had its own bath. Every room had its own bathroom, but it's just right by the front door to one of my coworkers because a lot of nurses come from different areas to work. And so she, that's supplemented part of my mortgage payments.
Naseema McElroy (16:24): And then I had two other rooms. And so I ended up renting one of my other rooms out more longterm to someone. And so, you know, it wasn't uncomfortable for me and that's me being a single mom with baby, a very small baby in the house. But it helped me be able to pay off one ass of amount of debt. So you know, for some people, yeah, it's really uncomfortable. But I think when it comes to being able to afford a house, especially like in the Bay Area, are in California in general, you have to be kind of creative about your strategy. And like I said, that's when we're going into looking at a house as an investment versus you know, just a commodity that you're buying.
Jason Hamilton (17:03): So, and I think if people are open to that and how they want to do it, then I think that could be a great idea. But it's like I think about my situation and you know, I work at home a lot. You know, I go to the office some days, but I work at home a lot and I just think about like having some roommate there banging and clanging around in the kitchen when I'm trying to get some work done and it's like, Oh, this is kinda like, it hurts my stomach. I have to think about that. So it's just a, it's a really tough conversation right now in California. A couple of things that really stand out to me when you're looking at this particular time for buying, which is where I really lean. And again, if you're going to be house hacking and doing some things like that and this kind of is a different situation and they're going to be buying multifamily, that's a different situation.
Jason Hamilton (17:40): I still think you can do well there. When you look at the housing shortage right now, the government here is talking about adding another three and a half million homes to the state. That's what their goal is, right? So what does that mean? There's going to be more supply, right? The reason why home prices go up because supply is low. So it's a supply and demand thing. So our real estate price is going to be climbing with the way they have been these last few years over the next five to 10 years. I highly doubt it actually. You know, I actually don't think that's really going to be happening quite the same way unless you're in these high interest areas. Maybe like a San Francisco, you know, things like that downtown LA because it's just so much demand and that can be the case. But the majority people are not in those areas.
Jason Hamilton (18:16): And then it's like, you know, do you have the money to do it? You know, that's the other side, you know, of the coin. And then on top of that, there's a lot of talk and I guess this was going on for awhile, but I think there's some serious talk now about repealing prop 13 which what that means is if we repeal prop 13 then taxes are going to be going up for a lot of people, right? So again, you know when you add the prop 13 and then you add the new tax cuts and jobs act where they've reduced the amount of home interest you can write off. So your, it's called salt. So sales and local taxes is capped at $10,000 that you can write off. So your home interest. So you can't really write up more than that. And then on top of that, you have a standard deduction now of $12,000. I think 200 per household.
Jason Hamilton (18:57): You know, writing off your home interest is not happening for a lot of people. And then on top of that, the most you can even write off is on a loan up to $750,000. So sure, that is probably an average place, but many, many homes, especially in Southern California Bay area are now hitting eight, nine, over $1 million. In San Jose, I was just there, but the neighborhood I grew up in, just basic neighborhood where it's just kind of basic single family homes, kind of three bedroom, two bath, decent neighborhood, decent schools. They're going for 1.3 to 1.5 so if you're taking a jumbo loan that's above that, you're not even gonna be able to write off all that interest anyway. When you look at the actual numbers of it, it's really hard to make sense for me from a financial perspective. That's how I always think first.
Jason Hamilton (19:36): I'm not emotional and I think that's where people get a lot of times around home buying. They get very emotional because they want somewhere that they own and place to live. But I think to me the has to be second when it comes to finances. Right? It doesn't make a lot of sense currently. Again, unless you are getting these numbers proper, like we said, so you know, ideally 28% are low and if you want to be more conservative of your net then I think that's even better. But are the majority of people actually taking home $10,000 a month? It's even afford a basic home of about five 50 I think is where you'd end up being with all the taxes, everything like that. That's not the case for most people. You know? It's kinda tough here. So I mean, you know, what are people around you are like, what would you advise people, like let's say that they're nurses, like what's an average nurse making, let's say five years out of school, you know, probably looking for their first home. What are they making on average in income and bringing home after taxes probably?
Naseema McElroy (20:25): So probably, most nurses are making in the like 150 range that are working, you know, one full time job by at least five years out of school that would leave them bringing home about seven to $8,000 a month depending on how much they're contributing to their pretax accounts at work. So let's just say $7,000 a month. So you know, if we look at keeping that under, you know, 28% or 30%... Now you have me doing complicated math...
Jason Hamilton (20:58): Right about two grand.
Naseema McElroy (20:58): Yeah. So their housing payments should be with everything, that's $2,100 a month. And that's if you're just looking at one single income of course. And so yeah, that's less than basically any, every Bay Area nurse can only afford on their own. Like a four or $500,000 house. And then the thing is a lot of people don't have savings put away when they buy the house. So most people I know do, if they go in and they borrow against their 401k or their 403B for their down payment and then yeah, and then they don't have any cash reserves if something were to break or you know, if they have any major repairs because everybody wants a HGTV home. And so they go in and they have all these grand plans on remodeling the house and so, you know, then they take out more loans to do that. And so not only are they buying way above what they can afford, so like I said, like with that income, you should only be buying like a $500,000 house max. But most people are buying million, one point up to $1.3 million houses and then they're doing remodeling and they're taking out loans from their jobs and just personal loans just to be able to buy a house to afford a house.
Jason Hamilton (22:11): I mean 100% agree with all of that. Like if you're making 150 as a single person, you're in a 24% tax bracket, federal, right? These you are probably paying over 9% whatever percent about 10% state in California as well on the top. Anything above 140 or that should be anything about 45 and it's like so 30 you know, 28%, 30% of that money is going to be gone off the top right? And let alone trying to save money for the future. But let's talk about borrowing from a 401k or 403B for a housing payment 'cause this is what a lot of people are doing, okay? Here's what a lot of people don't understand. When you borrow from your 401k, people say, well I'm paying myself back the interest and you could probably get like 4% or whatever you're paying yourself back.
Jason Hamilton (22:52): But what people don't realize is you're paying that money back with after tax money, right? 'Cause That's going to come out of your paycheck that you're taking home. Okay? So you're going to pay tax on the money you borrowed, you're going to pay it back after tax money today, and then when you eventually get it back, hopefully at some point, then you're gonna pay tax again in retirement when you go to take that money out. Right? Double tax on that money. And that just really doesn't make a lot of sense. And then I'm also seeing people actually taking distributions, you know, like such taking loan and taking distribution. So they're paying their top tax rate today. You do not get, there is no exception for 401ks for first time home purchase. There is an exception from an IRA for up to $10,000 we don't pay a penalty, but for 401ks there's not.
Jason Hamilton (23:37): So you're going to pay your tax rate plus a 10% hit on the amount that you take out for a penalty. So at the end of the year, when you have to go to pay taxes, about 40 to 50% of what you took out of the 401k or 403B is going to have to be paid back in taxes. So you're paying, you know, 50% tax on that. If you borrow now you're paying, you know, 20%, 30% tax today and you're going to pay, you know, maybe 20%, 30% tax in the future on that. So it just doesn't make a lot of sense to do that. And I really advise against that if you are going to be purchasing a home, I think it's better to be patient, be diligent, put money aside, wait another year or two and then use cash that you are, you know, putting aside to do this. So we can talk about where to keep that money if you are going to be purchasing a home.
Naseema McElroy (24:23): Yeah. So if we're going to purchase a home in the next five years and under, where would we keep the cash for that?
Jason Hamilton (24:30): Yeah. So the prudent answer is to any money that you're going to need in five years or less, you want to keep that out of the market. Right? So high interest savings accounts, you got to get away from these major banks 'cause you're paying like 0.0002% interest. You know, some of the highest interest I'm seeing, you know, general good banks are ally, but a lot of these FinTech companies like Betterment right now I think is paying 1.86, Wealthfront, 1.26. You know these online savings accounts are probably one of the best places you keep money. Less than 2% but it's not a lot, but it's something. But you know this, here's where I get challenged because I don't think that's good. I would rather keep my money in the market in a sense, at least a little bit of it.
Jason Hamilton (25:14): So I can break mine up where I keep about 60% of it very safe, you know, something like that. But about 40% I'm going to be throwing that into a diversified portfolio because I want to get, you know, better overall interest. But that is very high risk and you could see a 50% downturn at the time that you want to buy a home. But it kinda hurts my stomach to be thinking about getting 1 or 2%. So I'm a very high risk type of, I mean that's not super high risk, but I'm relatively high risk when it comes to these type of things. But at 2% is basically like, you know, nothing there. But I think that's probably the first place most people should be keeping their money.
Naseema McElroy (25:48): For most people, the thing is that most people are just having their money in bank accounts that are like 0.01% and so that's a big adjustment. But the other thing people are always asking me about is kind of like CDs, like putting their money in CDs as well. What are your thoughts around that?
Jason Hamilton (26:06): I mean, so you're going to go from 1.8 to 2 right? So it's like 0.2% like it's something, but if you're starting at zero, right? And you already have $5,000 or whatever, you know, amount of money, like okay, so $5,000 you know 1% of that would be what? 50 bucks a year. So if you're getting 0.2% actually getting $10 more right on something like that, but then your money's locked up, right? So your term of like, you know, maybe six to get any sort of decent interest, you need to keep it there at least a year. So for me it's like whoa, what if you have an opportunity that comes up and you need to get to that money 'cause you find a deal, like what you're talking about, the person you are renting from wants to give you a good price on the house. It's below market for example.
Jason Hamilton (26:50): Then you're looking at paying a penalty. So are you really going to actually get that 2% you know, per year. So CDs for me right now are pretty tough unless you know it's a long term, like I've seen some longer term CDs that are closer to 3% I don't know. You know, it's just, it's not like when our parents grew up and CDs were paying 10, 12% CDs were a good investment back in those days. Now it's really not. So I think you're better off, you know, keeping the money liquid in something like an online savings giving up that 0.2% but they'd being ready for a deal with no limitations when you can have that cash ready. That's my thought. I don't know. What do you think?
Naseema McElroy (27:27): I agree. I'm not a big fan of CDs right now because I feel like the interest difference is so minimal or something. I've even seen online savings accounts with higher interest rates and CDs, so I'm kind of not a fan and I am not a fan of that money being tied up when you need it, if opportunity does come about. Can we talk about like the amount of money you think people should have saved?
Jason Hamilton (27:47): Yeah. So you know, like this study showed, right? If you don't have enough savings, put aside after you purchase a home to put a down payment and have reserves. Right? So here's how I kind of think about reserves. Everyone says three to six months and they say, Oh, it's [inaudible] situation, blah blah, blah. So, you know, I thought it was a really cool way they explain it when I was kind of studying for the CFP tests a little while ago, and the way they put it is if you have one income, right? So if you're a single income household, then you need six months of reserves, right? But if you have a two income household, so like if one person lost their job, you'll still have another source of income, then probably closer to three months is probably okay. If you're self employed, then obviously you want to be higher, you want to be probably six months or even nine months because there's fluctuations sometimes with that.
Jason Hamilton (28:30): But if you have a very steady job, you know, let's say you're a nurse working in the hospital, you're on a salary or you're earning over time and if you're married, probably three months additional beyond your down payment, you know, for down payment, when you really look at it, like if you're gonna put 20% down and save on PMI. So PMI stands for private mortgage insurance, which I think is in a neighborhood of like, I don't know, I think one and a half or 2% something like that. You know on a five or $600,000 home, about 300 bucks a month. That's what it comes down to. Maybe just half a percent, but anyways, that's about 300 bucks I think on a $500,000 home per month. If you can do 20% or more, then that's great. If you're not going to be hitting 20% then I think you should just put enough down to get your payment in a place that is reasonable based on percentage of income for what your household is bringing in. Right. So that, does that make sense? I'll explain that or should I clarify?
Naseema McElroy (29:20): No, that makes sense. But I also want to challenge people, this might not work as well in California, but there are programs that can give you a very low to no down payment with no PMI. In Northern California, we have a bank that will give you I think like a 3% down, like almost competitive to like a FHA with no PMI. So there are programs like that, but the bottom line is to make sure that you're looking at what's your payment is going to be when you're purchasing these homes.
Jason Hamilton (29:48): Yeah. And you know those programs can be good with the challenges. If we have a shift in the market, right? And you're sitting there paying for the next five years on a homeless, $300,000 under water because you put nothing down, you can't move, you can't take opportunities in another area, you might be trapped for a while. So I think that's dangerous. But actually that brings up a good thing because a lot of the work I do in a nonprofit space, there are a lot of programs to help you get a down payment. All right, so down payment assistance program. So those are things I think people should definitely be exploring is because, I think there's a challenge there, right? Because do you want to take, you know, free money from somewhere? Is it really free money? You know what I mean? But you know, I think there are a lot of good programs out there.
Jason Hamilton (30:31): Some of the banks I've seen in the last few years do programs like that and one that we are good friends with is like CIT bank I think is coming out with a program this year where I think they're going to do almost $30,000 that you can use towards a first time home purchase. That could be a wonderful addition to, you know, to get you started, I know Wells Fargo last year did something in Southern California where they were given away $25,000 for that. But there's also a lot of housing projects where what they're trying to do is if you are a low to moderate income buyer, you can actually get a below market rate on your home 'cause they're making these special programs. So generally in California, and I think Bay Area is a little higher, but in LA I think it's $105,000 above income or below, you're considered a low to moderate income buyer and then 99 or $98,000 in Orange County and below because they're low to moderate combined.
Jason Hamilton (31:17): I think in the Bay Area's like 120 and below you're considered a low to moderate income buyer. So if you are in that range, you may really want to look into what sort of special programs there are out there to help you get into a home to make it more affordable. And that could be a really good way to get started as well. But ideally, you know, you want to have, you know, here's the thing too, is I don't think people should be going to a home committing $0 of your own money because if you've had to save up, you know, 5% on a, let's say $700,000 home, there's about $35,000 if you save up at least $35,000, at least you've shown, and then plus another three to six months of liquid savings that's shown that you can be diligent and you have control of your finances.
Jason Hamilton (31:59): You know how to set a budget and stick to that and have surplus each month. If you just go on and buy a home because somebody gives you a down payment and there's nothing out of your pocket that's required, then you haven't really shown that financial discipline to be able to be ready for such a large purchase. And that I think is, you know, and I'm not looking at research or anything right now, but in my experience, if you don't have those habits in place and that diligence in place, you're setting yourself up for a potentially bad situation if you were to have any sort of job loss, market change, anything like that. I dunno. I mean that's my thought. What are your thoughts on that?
Naseema McElroy (32:32): I think that that's kind of what happened when the market crash way back. But I'm just saying like, I think if you can find a program that can reduce how much you have to pay down and you not pay PMI, then that's a good thing. So that's more along the lines of laminate, like you should have the best interest in your house. Yes, I 100% agree.
Jason Hamilton (32:50): Yeah, I agree. And I think, you know, this is specific for people. I think Cathay bank is a bank that has 3% down, no PMI. I know that they have a program for that. And then there's also a lot of credit unions as well that have similar types of programs. So these are things that as you're looking to purchase a home, you really want really want to do some research because if you can say PMI and we're talking 300 bucks, 400 bucks a month, that's thousands of dollars a year. But it takes some research and so don't just walk into, you know, whatever online lender or whatever bank is local, do your research and set yourself up for the best possible scenario. But again, you know, don't overbuy just because you can be approved. That's what the message I want to drive home. Even, you know, you get approved up to 45% of debt to income.
Jason Hamilton (33:32): It doesn't mean that you should. Okay. You know, so be smart. You know, buying a home I think is a good thing on the over the long term. But if you're getting started out in your career and you have no money and you're just getting in because someone says you can get him a zero down, I don't think that's going to be the right way to set yourself up for the longterm. You're potentially setting yourself for a lot of pain. If we do have a market shift, in all honesty in the housing market, to me it looks like there's going to be a shift in the next couple of years here. So I think you should be either looking at multifamily or something like an ADU where you can add some income streams on there or just be waiting until you can buy something that is in the right percentages of your overall income. Those sort of three situations by today, if not continue just to save, save, save, save, save and be ready to jump on that deal when it's the right time. That's where I'm at on.
Naseema McElroy (34:16): Right. 100% agree. And so just to summarize, I think we're saying, you know, make sure that your payment is less than 28, 30% to make the numbers round of your, you said gross. And I say net, of your, take home pay
Jason Hamilton (34:32): Little more conservative. But if you're willing to think about it, very few people are bringing home $10,000 a month. I mean, I'm just being, you know, and we have to be honest, like just very few people, right? The average income in California's about $70,000 household, $72,000 that's average. We have a lot of people that are making hundreds of thousands, if not millions of dollars here that are skewing this. So there are a ton of families that are still, you know, they're lucky to make 50 or $60,000 a year because they're working in normal jobs like restaurant jobs, retail jobs, those types of things that just don't pay quite that high. So, you know, if you are making $72,000 as your household income gross, your net is probably going to be about $4,000 a month. So to be at, you know, 30% net, that's $400 I mean, it's not going to happen.
Jason Hamilton (35:14): There's no, I mean literally, I mean, unless you're living in like a tiny home on, you know, in the mountains or something, somewhere like on a farm land in the middle of central California, Bakersfield, you know, in those areas, central California, I think you can find things. But you know, Bay Area, Southern California, I just don't think that's reasonable. So that's why I have a little more flexible saying, Hey, at least gross. That's kind of top. But if I say 28% gross, then you're probably looking at like 35% net. Right? I mean, so, to average out in that range as the tip at the top.
Naseema McElroy (35:42): So I mean like, and we're talking to nurses here and I think we can safely say on average, nurses in California all up and down California on average will bring homes $100,000 a year. And so if we're looking at that, then you know that's still in that range of like, you know, your house payment being about $3,500 a month. So we're looking at that and making sure that your housing payments are affordable so you're not house poor, making sure that you have adequate savings in your account when you're even going to look at buying a house. And those savings should be in high yield accounts. And Jason, even if you have a little bit more, if you're a little bit risky or can have it in the market through a brokerage account. And I know that I've seen you use a strategy of diversified funds that you probably would recommend people have.
Naseema McElroy (36:30): But I'm an index fund investor so I'm pretty straight forward. So if I was to up 40% of my funds, I would just put it in a brokerage account with index fund. And then we're looking at having people look at ways that they can have down payment assistance if they do qualify. And there's a lot of credit unions and Cathay bank. And I think CIT is another bank that you mentioned has it, I know that there are some credit unions locally that have programs either for down payment assistance or to buy houses with lower down payments without penalty, without the PMI.
Jason Hamilton (37:06): The program is like its own program and then the bank subscribed to these programs after that. So when you're going to look, you know, get in contact with many, many banks and then find out who has the best down payment assistance program. I think most people like, you know, a couple apps I think everybody should download and use is the first one is Digit, right? So Digit is like, to me the most amazing thing. I think Digit, it basically wipes out the need for like a lot of financial advisors helping young people if you just don't ever touch it 'cause Digit is so smart. And basically what it does is it studies your savings and spending and it pulls out little bits of money and puts it in a side account and actually you will save thousands and thousands of dollars. My wife put away over $20,000 without even feeling it using Digit because it just takes a little bit of money out of your account every day and you don't even feel it. But over time it really adds up.
Jason Hamilton (37:56): The second app I think people should use is, let me pull it, actually, I use it myself. Let me pull up my phone. It is called Acorns. I mean if you're just getting started with investing, I don't think you need anything beyond Acorns. Acorns, it puts you in a diversified portfolio of index ETFs. And I think for the average person, that's what they need. And what Acorns does is it basically keeps a change, right? So every time you spend money, it will round up to the dollar and keep the change and add up. So if you hook up to a digit, you hook up to acorns and then you set yourself a particular savings goal that you can meet on your own each month after doing your budget. So, do your budget and you look at what you should be spending.
Jason Hamilton (38:31): Unless you can put away, I don't know, two, three, four, 500 bucks a month, set that to auto deposit in something, you know even like a Acorns or like a Betterment, Wealthfront, that type of thing where it's just automatically invested for you or even at Vanguard and one of their all in one funds, something super easy. Then sign up for Acorns. Sign up for digit, put those, they have a feature called Boost where it will like take extra amounts of money out and then just put your nose to the grindstone, work, work, work, put as much money as you can in your accounts. Let these accounts save the money for you and then just check in on it every six months or so on all your accounts to see where you're at. And then once you're at that place where you hit that three to six months and have your down payment and then maybe it's the right time to buy.
Jason Hamilton (39:10): But I think just doing those things automatically and then as a nurse, work your butt off, work over time, let do direct deposit and do direct contributions to things like your investment accounts. Set all that up on autopilot and then just forget about that money being there. Don't touch it. That's what I would do if I was a nurse today starting out making $100,000, $150,000 salary and I wanted to buy a house and then I would just check every six months. Once I met my goal, boom. Then it's time to buy. But outside of that, the zero down stuff, no money out of pocket, you know, not having a good budget in place, not understanding your cashflow. That's not the right time to buy even if you can because you can get approved because they're starting to again, give away what we call these Ninja and they were called Ninja loans back in 2008, no income, no job applications. Things like that are starting to come back again.
Jason Hamilton (39:55): And so we are beginning again to make stupid decisions like we were back before 2008 kind of like around 2005-ish is what we're seeing. So this is why I think in the next few years we're going to have a correction here along with the goal of adding over 3 million homes to California. I think home home prices are going to start evening out. So I wouldn't stress out too much right now. You know, forcing you to have to get into a home you can't afford cause you think it's just going to go up. So that's my thought. I don't know if anything you want to add before we wrap up.
Naseema McElroy (40:19): I think that's a great summary to the reason why we should be looking at the fact that your primary residence typically isn't an investment, but that doesn't mean that you shouldn't go into it equipped and smart and ready for the things that are going to come up, that come along with purchasing a home versus renting. Things are going to break. You have property taxes that you're responsible for. The cost is a lot higher. So the more that you know when you go into buying a home and making sure that you have the resources in place, the better off you're going to be. We're not going to see the numbers of home loss like we did, like when the market dropped before. So we just want people to be really conscious about the decisions that they're making, financial decisions that they're making. And I know that buying a home is one of the biggest mistakes that people make, not buying a home in itself, but the process that they use to go along in buying a home.
Naseema McElroy (41:13): Because it is a very emotional thing. Home shopping is a very emotional thing. You're told that you can afford a lot more house than you typically can't afford. But if you are aware of what you really need in place before you buy a home, I think you'll be in a better financial position overall. So I think thank you for all the tools, Digit and Acorns are some incredible apps to help people save and be on track with their savings goals. And that's just in general, even if it's not towards buying a house, if you're looking to like plan a vacation or any other thing, these are great apps and Acorns is a great app for people are intimidated by investing and don't know how to invest but are delaying it just because. I say at the very least open up an Acorns account and get started today. So yeah, these are all great things. Thank you so much, Jason, for sharing all your great advice. I think this is a very important conversation, a lot of takeaways, a lot of takeaways and I hope that people really find value even if they're not in the market for buying a house just in the way that they look at home purchases or if they know somebody who's in the process of buying a house. I feel like these are some helpful tips they can pass along.
Jason Hamilton (42:24): Yeah, absolutely. I appreciate that. So hopefully folks, my whole thing is like, I want this, you know, the millennials right now are in much worse shape overall financially than the previous generation. Right? So, but the other side of it is there's so much potential because there was no apps like Acorns help you invest. There's no apps like Digit help you save. But if people can make really good decisions now when they're young, you know, and not get themselves strapped and still, if they buy a home, they need to be able to save at least at 10 15% into the retirement accounts on top of that and still live it. If you can do that, you will probably be okay on the long term. But if you buy so much home, you can't save money. You don't have any money aside, you have no liquid assets and one problem caused the bottom of fall out of your life, then you're really not doing yourself any justice and you're not really helping yourself out in the long term.
Jason Hamilton (43:11): So be smart. Listen to what we said, you know, today, hopefully this will resonate with somebody. We want you to buy a home at some point. We wanted it to be established. We want you to be an owner of property, but you've got to do it the right way and put yourself in a good financial position. And patience, patience and diligence are two things. This generation is missing that the last generation really had that get that built in with the potential of what we can really do with things like online businesses and just so many other things that are out there and these high incomes that people are seeing these days. The next generation will be okay. It's just a matter of making smart decisions on the micro so that the macro comes out overall. So yup, that's all I gotta say. So wrap up for today. All right, have a great day. Hopefully you guys enjoyed this and if you enjoyed this, leave us a comment, leave us a question. We love to respond back to you. If you have any questions about anything we talked about today, you need some clarity. We always go back in and answer those if we get some time right. So have a great day. I'll talk to you guys next time. Bye.
Hey there I’m Naseema
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