Why I’m Never Going To Afford A Home

What's up you guys! It's Graham here.

So put yourself in this position: you've graduated from college, you have $332,000 in student loan debt, and you are eventually able to land a job at $65,000. But over the next few years, the reality sets in: you'll never be able to afford a house. You miss the opportunity to buy when the market was down, and even if you saved for the next 15 years, by the time you're ready to finally pull the trigger on something, prices will have doubled. You'll be no closer to the goal of home ownership than when you first started. If you can relate to that in any way, that's because it basically sums up about half the population here in the United States.

After reading a thread on Reddit from someone in that exact situation who is frustrated that he would never be able to afford a three-bedroom, two-bath home in his area without a crazy high salary or a dual income, I wanted to share my thoughts. I come from the perspective of a real estate agent, a real estate investor, and somebody who's obsessed with all things personal finance. Let's see if we can come up with a solution, because this is something that needs to be discussed.

As frustrating as it could be right now to try to buy a house, there are ways of making this happen. I'll be sharing everything I have learned along my own journey—whether you're looking to buy a house immediately, or whether it's a goal where one day you want to own your own place and never have a landlord ever again.

But before we start, if you find this video helpful in any way, just do me a quick favor and hit the like button or comment anything down below for the YouTube algorithm. Just a little gesture like that makes a huge difference for the entire channel. Also, consider subscribing if you haven't already. I post three times a week—every Monday, Wednesday, and Friday. Thank you guys so much; it really means a lot!

With that said, let's begin.

So in terms of what we're working with here: story time! A 32-year-old, single, no kids, makes $65,000 a year, and now a house in his area costs $400,000, which he says is 75% higher than it was just one year ago.

Now, I think what makes this so relatable is that there's nothing unusual here that stands out. That's why I think so many people understand what he's going through. He's making a decent income, he wasn't able to get a well-paying job until a few years ago, he's contributing to a 401k, and he has $155,000 in his savings. But that's just not enough to be able to afford to buy a basic home, and it becomes almost like chasing a carrot on a treadmill that's just always barely out of reach.

Well, first of all, it's really important to understand why the housing market is going up at such an unprecedented rate. Right now, the market is absolutely working against you. First, we have record low interest rates. This just means the cost of your monthly mortgage goes down, allowing you to qualify for an even bigger loan, which coincidentally drives up the price of real estate to the point where your payment stays exactly the same.

For example, if you go and buy a $300,000 home at a 4% interest rate, your payment is going to be $1,432 a month. But if interest rates drop to 3%, then all that extra demand pushes the market value of the home up to $340,000. Well, congratulations! You just played yourself because your monthly payment is literally going to stay the exact same. So even if you think low interest rates help, they can—but only if prices don't go up accordingly, which they are.

Second, when it comes to this, you also have record low inventory. No surprise, the pandemic changed the entire landscape of real estate. People decided to work remotely, move to a different area, or just hold off from selling because they don't want to move. Combined with low interest rates and eager buyers willing to scoop up whatever they can regardless of the cost, that further perpetuates a limited supply of inventory, which further pushes up pricing.

And then third, you also have the increased cost of building materials. In the last year, lumber prices have increased 200%, adding on roughly $36,000 to the cost of buying a new home. So what winds up happening is that all that extra cost gets passed on to you as the customer. I say all of this because, in all reality, these conditions cannot last indefinitely.

At some point, interest rates will probably go back up. At some point, it's going to be a buyer's market again. At some point, the cost of building materials has to come down. Whether that happens in a few months or a few years is all speculation, but the fact remains it's not always going to be such a crazy market. When you're thrown off from such high pricing, just know that a little patience is going to go a long way.

Plus, the market is largely outside of your control. So I wouldn't be trying to time things perfectly, but instead, you can do a few things that are going to give you a way better chance at eventually owning a house.

Number one: look at what you could afford. One of the biggest cheat codes when it comes to real estate is that you could speak with a mortgage broker, a bank, or a local credit union ahead of time to see how much of a loan you'd be able to qualify for. In order to do this, you're going to be looking through the last two years of your tax returns, evaluating your expenses, and then giving you a reasonable budget as to how much they're going to lend.

Generally, they're going to take a look at what's called your debt-to-income ratio—which is another word for how much money you make, how much you spend, and how much you have left over. For the most part, banks are not going to want your debt-to-income ratio to exceed 45%. If you find yourself higher than that, you're probably going to have to pay down your debt first before you do anything else.

Don't be discouraged at this point if your debt-to-income ratio is too high or if they qualify you for an amount that barely buys you a shed. All of this is really just meant to be a baseline for me to work from.

And second, you got to save for a down payment. The nice thing when it comes to mortgages is that there's a wide variety of options to choose from, ranging anywhere from 20% down with a conventional loan to as low as 3% and 1/2% down if you qualify for an FHA loan. Your lender is going to be able to tell you which ones you'll qualify for, but I'll cover the two most common that the majority of people fall into.

The first one, like I mentioned, is that conventional loan. Generally, these loans must meet a certain minimum requirement in order to qualify, like having a minimum credit score of 620 or a maximum debt-to-income ratio of 45%. On top of that, it's probably also going to require a 5% to 20% down payment. However, there are some opportunities as a first-time home buyer to put down as little as 3% when you go to buy a property.

Although you should be aware that when you put less than 20% down, you're going to be required to pay what's called PMI, which stands for private mortgage insurance. This is an additional cost on top of your mortgage to account for the fact that you don't have a lot of equity in your home in the event you don't make your payments. Overall, getting a conventional loan like this is by far the most straightforward way you could get a mortgage.

Then second, like I mentioned, we also have the FHA loan. These loans tend to be a lot more forgiving if you have a lower credit score, higher debt-to-income ratio, or maybe some shaky financial history. In addition to that, your closing costs can often be rolled into the value of your loan, and 3 and 1/2% down is all you need. However, if it sounds too good to be true, well, it can be!

That's because the house you buy must be verified through an FHA-approved appraiser. They also must approve the inspection report to make sure the home is free from issues, and you have to pay PMI. The other downside to this is that in a highly competitive market, FHA loans usually take longer to process and come with more complications. Usually, an FHA offer is seen as less competitive compared to a conventional offer.

So, it could work, but ideally you're probably best off getting your debt-to-income ratio down, your credit score up, getting a conventional loan, and actually increasing the odds of you getting the house.

The third: speaking of your credit, increase your credit score! Here's the thing: the lower your credit score is, the higher the risk you are to banks. Because of that, the higher the interest rate they'll charge you—which ends up costing you money. On the other hand, if your score is above 740, you're going to get the best rates possible. If your score is above 760, they're going to treat you like royalty.

So in order to get there, here's a few quick life hacks: one, you got to pay off your credit card balances. Now, this is honestly something that you should be doing anyway, because if you carry any amount of credit card debt, the amount you're paying in interest is stupid high. By working to pay off your balances in full, it's going to do a few things. One, it's going to end up increasing your credit score, and two, it's going to lower your debt-to-income ratio, allowing you to qualify for a larger loan.

The second thing: you got to dispute or remove any inaccurate information on your report. You would be surprised how many people have errors on their credit report that are bringing down their score without them even knowing. So go to annualcreditreport.com for free, review it to make sure everything is accurate, and if not, go ahead and dispute it.

The third: if you have any accounts in collections, negotiate that to get it removed. Generally, once an account goes into collections, it's more than 120 days late. At that point, the lender just writes it off as a total loss and sells that debt for pennies on the dollar. Sometimes, you're able to negotiate with these collection agencies to pay a smaller amount, and they will remove it from your report. There are plenty of resources online that walk you through exactly how to do this, so a quick Google search would go a long way.

And fourth: sometimes, you just need time. Your credit score is usually something that just gets better with age. So if your account is less than two years old, sometimes you just need to wait it out.

But then once you've done all this, assuming you know what you could qualify for, you paid off your debts, and you've increased your credit score, you'll need to go on to the next step of actually having enough money to go and buy a house.

Then we've got number four: you got to be relentless about saving. Now, generally, this is a two-part equation because you could be the best saver in the world, but it's still not enough.

As a solution to that, part one: you got to reduce your spending as much as you can. Take a look over your budget, track every single penny over the next few months, and then cut back on anything you don't absolutely need. Now, I know this all sounds like common sense, but the average American spends $188,000 a year in non-essential spending, and all of that is money that could be put towards a down payment.

But then next, of course, we've got part two, and that would be make more money. Yeah, I know, right—just make more money. It's easy! But seriously, the fact remains that if you're saving as much as you can and you've hit a wall in terms of what you could accomplish, the next logical step is to increase your income.

One of the most effective ways of doing this, statistically speaking, is to switch jobs. Studies have actually shown that people who stay with their employer for longer than two years earn, on average, 50% less than those who hop from one job to another. This allows you to start your new baseline salary at a much higher level than you would have gotten from your current employer getting a raise. So consider switching careers, and you could use your current job as leverage for negotiation. Who knows, you might end up making significantly more money in the process for doing the exact same work.

You could also take on gig work, rent out an unused bedroom in your house, flip items on eBay for a profit, do odd jobs on the weekend, or start an OnlyFans account. I promise you, once you start seeing those savings add up, it's going to be incredibly motivating for you to continue even further.

Next, number five: when it comes to looking, be realistic. Here's the thing: I hate to be that guy, but depending on your location, we might need to set the expectation that home ownership is not exactly feasible without a significant change to your income.

For example, if you're in West Los Angeles earning $65,000 a year, and the cheapest home is $1.2 million, the numbers flat out don't work. Even if you were able to save up $200,000 as a down payment, the mortgage, property taxes, and insurance alone would be more than you make in a year before taxes. So even though it's really good to have a goal, it might be worth looking in other areas which might be slightly more affordable.

For example, instead of buying a three-bedroom, two-bath home in the middle of the city for a single person, consider buying a two-bedroom home 20 minutes away for half the cost. Most likely, where you live, there are less desirable neighborhoods that happen to be more affordable. From my experience, give it time, and eventually those areas will become the new hub as everyone wants to move in. So if home ownership is a priority for you, look into other areas that you might not have otherwise considered.

You should also really evaluate how much space you need. Like, if you're a single person, do you really need 2,000 square feet and four bedrooms? All of these little tweaks between the bedrooms, the size, and the location could easily save you about 50%. There's no shame in getting a smaller place now in a less desirable location, and then over time building up to something else.

Now, six: you can also buy a multifamily building to save money. For some reason, this one is widely overlooked. People have this idea in their mind that they want this picturesque house with a white picket fence and a good school district. But if you want to be a property owner, save money, and qualify for a bigger mortgage, look into buying a 2 to 4 unit building.

Move into one of the units and then rent out the others. In my opinion, this is one of the easiest, most effective ways to begin building wealth in real estate for a few reasons. Number one: you have less competition.

From my experience, the majority of home buyers and families out there never think to go and look at a three-unit triplex because they don't want to share any common space, or maybe they just don't want to be a landlord. Of course, that's understandable, but if you're okay having a few tiny drawbacks, you'll usually have less competition when you're trying to buy a place.

The second reason: you could also get a much larger mortgage. That's because on established properties, lenders will take 75% of the gross rents and apply that to how much you could qualify for on a mortgage. For example, let's say you have a three-unit triplex where the market value of rent is $1,000 each, and then you move into one of the units, leaving you with $2,000 a month in income.

In that case, lenders will take 75% of that and apply $1,500 a month towards your mortgage. However, the downside to this is that if you get a conventional loan, they'll probably want you to put down anywhere from 15% to 20%. But I think if you're able to make that happen, it's entirely worth it.

And third, also by doing this, you could save a lot of money because you're becoming a landlord under the umbrella of buying a place for yourself. You get to use all of those rents to offset the cost of owning the building. Like, I did this myself when I purchased a duplex a few years ago. I moved myself into the smaller unit, and then after the rents I received from the other unit and tax write-offs, it was a free place for me to live.

With all of that extra money, you get to save in order to eventually level up to something more expensive, rent out your previous unit, and keep repeating the process over and over again. Lastly, you can also get a low interest rate as long as you move in as a primary residence. Lenders treat 2 to 4 unit buildings the exact same as if you're buying a house in terms of the interest rate you pay.

So not only are you able to get an owner-occupied loan at a really low interest rate, but you're also getting that interest rate on the portion of your home being used as an investment. I would strongly consider this to be an option—not only is this going to allow you to save more money, but also make more money long term.

Lastly, here's my advice for anyone who's in this situation—which seems to be a lot of people: the craziness we're seeing in the real estate market can't last forever. It would be impossible for prices to keep increasing 15% year over year without eventually something stabilizing.

If you're priced out of the market right now, use this as a time to continue saving, working on your credit score, and getting yourself in the best position possible when you are ready. Don't wait for the next crash either, because there's a chance real estate is not going to fall off a cliff like some people expect it to.

Instead, you should focus on finding the right house that you could see yourself owning for the next 7 to 10 years. Really, any difference in price between then is going to be negligible. Like a lot of these comments mentioned, don't get too hung up on finding the perfect house. Most likely, the first house you buy is going to be smaller, older, and smellier than you anticipate—and that's okay!

It's so much better when you buy something you could afford. You could fix it up over time, and then sit back, relax, and grow that equity. Another thing to consider is that if you get married and have a dual income, that goes a long way in purchasing a house—all of a sudden you could afford twice the property, keep your living expenses relatively the same, and save double the amount.

Melinda Gates is also newly single, so I'm just putting it out there that could be a good way to get started in real estate investing.

But no, in all seriousness, for something like this, it's easy to get discouraged. Just know that these current market conditions are not normal. It can't last forever, and eventually, things will begin to stabilize, and more inventory will come onto the market.

Take this as an opportunity to re-evaluate your spending, work on your credit, work to increase your income, look in other areas you didn't consider, and look into buying a multifamily property. Something like this is absolutely not going to happen overnight, but it absolutely can over the next few years.

So with that said, you guys, thank you so much for watching. I really appreciate it! As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram; I post pretty much daily. If you want to be a part of it there, feel free to add me there.

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Thank you again for watching, and until next time!