9 times out of 10 you should buy your first home, aka your starter home, in the ‘hood. Or to put it softer, an up and coming neighborhood.
We’ve seen this movie before in every major city across the country. NY, DC, Chicago, LA etc…Harlem is not the same Harlem. DC isn’t Chocolate City anymore.
The people who bought homes in the up and coming/hood parts of these cities have seen their home values 2-3X. Many of them have cashed out, drastically transforming these neighborhoods. We don’t blame them. Grandma may want to take that money and buy a house all cash in FL to retire peacefully!
Scenario – First Time Buyers
You saved up enough money for the down payment on a home. You’ve got your credit score up to a respectable level. You have your student loan debt…somewhat under control. Your children if you have any, are not in school yet. Take advantage of this moment in time to build wealth!
You probably can’t afford that big house in the great neighborhood. But maybe you can afford a good sized house in the ‘hood. How you define an up and coming neighborhood vs one that is going to be crime-ridden for a long time, is up to you. You know it when you see it. We’ll leave it at that.
Buying a house allows you to use leverage. In other words, a little bit of money gives you access to a whole lot more. In many financial assets with more volatility, such as stocks or crypto, playing with leverage is really not a good idea. Real estate is less volatile asset class, and more importantly, it pretty much always increases in value over time.
- Home Price: $350,000
- Down Payment: 3 to 5% = 10.5K to $17.5K. Note: As a first time homebuyer, you get incredible breaks on down payment requirements. Non first time buyers are putting down anywhere between 20-35%!
- Appreciation Rate (Avg 8%) = $374,500.
Now, this is a fairly reasonable estimate. There are thousands of markets across the country and everyone is different so we’re not going to get into specific numbers in every market. That’s outside the scope of this article.
What we will say is that you can reasonably assume that the appreciation rate of a home in an up and coming neighborhood is likely double that of an established one in your city.
Under that same scenario, you’re looking at a home value of
- $406,000 vs $374,5000.
- A difference of $$31,500!
Just for living there. And what’s the harm? You’re grown, you probably don’t need a fancy house (yet) and you don’t need to have your kid in the best school(yet).
Do Your Own Research
We want you to do a simple exercise. Look at your own city. You know the best neighborhoods with all the fancy restaurants, amazing schools and huge homes. No offense but you probably can’t afford to live there.
It doesn’t matter what city you’re in, you probably know a not-so-good area that is changing right before your very eyes. Not only can you probably afford to live there, but you can probably afford to buy a much bigger property there, instead of settling for some small condo.
Live there for 3-5 years and you’ll be amazed how a 10K investment can turn into $150,000 return! Try using this home appreciation calculator.
Compare the difference in appreciation rates of say, 5 vs 10%. 8% vs 12%, 8% vs 16%. These are real differences in appreciation rates in many cities.