- Buying a home is a major financial decision that you shouldn't rush into.
- Warren Buffett waited to purchase a property until the down payment was 10% of his net worth.
You don't want to buy a home prematurely -- but is Buffett right about how long you should wait?
Buying a home before you are financially ready can be devastating. You could find yourself struggling to afford your mortgage payments and even face foreclosure. You may be unable to maintain the home properly due to costly maintenance and repairs. And you could find yourself unable to accomplish other important things, such as investing for your future or paying off credit card debt, if too much of your money is going toward your mortgage.
The good news is, you have a choice about when to become a homeowner. You just need to make the right one. There are lots of different ways to decide whether you're ready to purchase a property of your own, but billionaire investor Warren Buffett has one specific rule of thumb that may be worth following.
Warren Buffett says you're ready to buy a house when you've met this milestone
Although Warren Buffett is best known for his investing prowess, the billionaire has also offered lots of other financial advice over the years, and he also has a reputation for being frugal and using his money wisely.
When asked by a young audience member about the best time to buy a home, Buffett gave some great advice many would-be homeowners should seriously consider listening to. Buffett explained he personally didn't feel ready to buy a home when first getting married, despite having a good amount of money for a down payment. Instead, he waited to purchase a property until the down payment was around 10% of his net worth.
While Buffett was sharing his personal experience, his advice is likely worth following for anyone who is trying to decide when it's the right time to jump on the property ladder.
Why Buffett's advice about home buying is sound
Buffett's suggestion about buying a home after amassing a good amount of other assets is sound advice for a few key reasons.
First, buying a home isn't necessarily the best investment for most people. The return on investment (ROI) for real estate tends to be lower over time than the ROI on the stock market. And if you plan to live in the house for the long term, you aren't going to be cashing in your profits on the property anyway. As a result, you can't rely on the rising value of your house or the equity you've built to help you achieve financial independence.
A home is also an illiquid investment. It can be hard to sell a property -- especially during financial downturns when you may need the money the most. It takes a lot of time to find a buyer in some circumstances, and there are costs associated with the transaction.
What’s more, the costs of homeownership during the entire time you own the property can be quite high, especially when factoring in maintenance, property taxes, and insurance. As a result, many people don't even view their primary house as an investment, but rather as a liability.
Homeownership has benefits, but don't rush it
Now, homeownership undoubtedly can help you build wealth and ease your future financial situation since you can pay down your mortgage. Your home should rise in value, and hopefully someday you’ll end up with no house payment and a valuable asset. But Buffett's advice to make sure you have plenty of other assets before buying ensures you aren't going to be forced to sell the house at an inopportune time or end up house poor.
As Buffett explained, buying a house would have cleaned out his capital, leaving him "like a carpenter who's had his tools taken away for him." No would-be home buyer should put themselves in a situation where they tie up so much money in their property that they can't do other things -- so it's a good idea to consider heeding the Oracle of Omaha's advice and wait until you've built some wealth before purchasing a property of your own.
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