Millennials have entered the homebuying realm in droves. In fact, they now surpass boomers as the largest share of homebuyers, at 38%, according to the National Association of Realtors. However, this generation still faces frustrations and mistakes in the process that can be solved with careful planning.
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Part of millennials’ problems in buying homes stems from poor, incorrect or uninformed savings habits, according to Katy Song, CFP, a financial planner at Domain Money. She explained some of the key mistakes millennials make when trying to save for a house.
They’re Falling Into One of Two Savings Habits
According to Song, millennials tend to fall into two groups of savers. “You have the supersavers and the freewheelers.”
The supersavers tend to live in smaller apartments than they can afford, Song explained. “Though they can afford more, they choose to not go big and instead focus intensely on not spending.”
She feels this tendency arises from the fact that many millennials came of age as adults when the economy was in challenging times, leading them to be fearful.
On the flip side are the freewheelers, most of whom are making “good money,” she said. “They tend to spend a lot, they tend to go on bigger trips, they tend to get the apartment with an extra bedroom so that they can have a home office. They are not the spendthrifts — they are expanding their lifestyle because they feel that they can afford it.”
The freewheelers are usually banking on stock or equity compensation as being sufficient to fully fund what they might need to spend on a house or a down payment, Song explained, which can be a problem in and of itself, when and if those funds don’t come through as hoped for.
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Counting on Generational Wealth
Additionally, because many boomers pass on generational wealth to their millennial children in the form of substantial cash gifts, some millennials may be counting on such gifts to buy a house.
While the supersavers feel guilty about accepting such gifts, the freewheelers may be counting on it as another way they’ll purchase a house, which could lead to not saving enough, Song said.
Missing Opportunities To Grow Wealth
Millennials who are saving for a home more than three years out often miss out on opportunities to grow their money while saving it, Song said.
If a millennial’s savings goal is between five and seven years out to build the down payment on a house, she recommended clients put up to 60% of their potential savings in stocks, such as NVIDIA or other diversified low cost ETFs while they’re saving for a house.
“The reason for this is that housing prices are not really coming down significantly, and in fact, tend to go up around 5% every couple of years. So if you’re only keeping money in a high-yield savings account, earning less than 5%, you’re not keeping up with the inflation rate on housing.”
Saving Without a Clear Goal
Another issue Song encounters with millennial clients is a lack of clear savings goals. They’re not looking at key details of their numbers such as how much they can afford, the price range of a home that they should be looking at or their down payment goal.
Without knowing your down payment target goal, Song said, you’re going to be stressed and less likely to achieve your goal.
Additionally, savings goals related to a home can be affected by whether you have or plan to have kids, if you’ll be supporting your parents one day and other factors.
Not Saving Enough for All Housing Expenses
When it comes to saving for a house, Song said there is no such thing as saving too much, a mistake some millennials make.
“There are so many hidden costs when it comes to buying the house. Depending on where you live, there could be transfer taxes, there are closing costs, there’s moving costs, there’s furnishing your house. These are things that people don’t necessarily plan for. And this can range from $10,000 to $50,000.”
Not Prioritizing Cash Flow in Investment Properties
For every millennial who wants to buy a home, there’s another one who fears being tied down by a home to an area or a job, Song said. However, they may still want to buy investment properties. The problem is, they often forget to consider cash flow in an investment property.
“With high borrowing rates and the fact that real estate prices haven’t really come down, clients really have to make sure that any investment property will be cash flow positive or neutral,” she said.
Not Planning To Spend Enough Time in a Home
A final, and easy, mistake for any generation to make, Song said, is buying a home without the understanding that you really should plan to be there for at least five to seven years to make it worth your investment if you plan to sell one day.
“Housing bubbles tend to come in three-year cycles where you’ve got two years of decline, a year of stagnation, and then it starts rebounding. And the last thing you want to do is get caught at that bottom moment,” she said.
Most of these mistakes are surmountable with clear planning, Song said. If in doubt, you can always speak to a real estate or financial planning professional.
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This article originally appeared on GOBankingRates.com: 7 Mistakes Millennials Are Making When Saving For a House
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