Maybe you’ve wondered how to buy a house by the time you turn 25, I know I have. However, if you’ve ever spent time existing, you’ve probably noticed that housing prices are getting more expensive than ever before. According to the US Census Bureau the median selling price for a home was $433,500 and the average was $505,700 (www.census.gov).
Searching for housing feels a lot more like a luxury than a basic consumer need. “Yes, allow me to grab my phone and swipe through Zillow the same way I watch a Batman save the city.” Yeah- It’s a fiction to want to be a homeowner. You’re telling me that I need to afford a half a million dollars house for my starter home? Maybe the million-dollar house isn’t as far away as I thought.
While Batman, unfortunately, is fictional, homeownership shouldn’t be and for me I don’t think it is. What can be done to save for a house? Do I have to cancel all subscriptions? Stop buying coffee? Sell all my furniture and start a wildly profitable business out of my garage? (Honestly, if you could do that last one – you probably should.)
Let’s look at an analysis of the average college graduate’s situation and if they can own a home, and then we will look at my plan to purchase my first home by 25 (and maybe before) and solve the question of how to buy a house by 25.
The Analysis Basics
While it’s hard to perfectly calculate, taking a 4-year degree estimate from NACE data, we can assume that the average college graduate with a 4 year degree will earn $65,000 proceeding college. Not a bad chunk of change when you’re used to working an internship.
Home pricing trends are difficult to predict, but let’s assume a 4% increase in home prices year-over-year.
To keep calculations simple, we will assume that your salary keeps pace with inflation and increases 3% (minimum) each year.
To recap:
- Earnings $65,000 (3% raise year over year)
- After-tax monthly earnings $4,202
- Housing price $433,500 (4% increase year over year)
- Age of graduation 22 years old
With these parameters in mind, is it possible for the average college graduate to purchase a home within a reasonable timeline after graduating?
Can the Average Graduate Afford a House?
Perhaps the simple answer is no, but is the simple answer actually correct? Let’s look at the math.
It’s common personal finance wisdom that an individual shouldn’t spend more than 33% of their earnings on housing expenses. That means if we take our monthly after-tax earnings and multiply it times 0.33, we will receive the amount that can be allotted to mortgage payments monthly. This amount is $1,386.66 each month for our mortgage.
It doesn’t take a mathematician to realize this math isn’t going to add up.
The median house price of $433,500 equates to a monthly payment of $2,657 assuming a 20% down payment (a total of $86,700) at a 6% interest rate on a 30-year fixed mortgage.
We only have 50% of what we need… That’s what I like to call a dream killer. This means that the simple answer was correct. Immediately graduating college, it’s nearly impossible to buy the median home (even worse if it’s the average).
If we wait just 3 more years the median home price would be $468,873.6 (4% yoy growth), and our 3% raises couldn’t keep up. Making this dream even more distant.
Is it Possible to Buy a Home by 25?
With the daunting outcome of the mathematical analysis, (chill, it’s simple multiplication and addition; finance majors, am I right?) it may seem impossible to buy a home, but with enough creativity and willingness to work hard and find a good deal, it is possible to own a home by 25.
The first thing we must do is lower our purchasing criteria. The median house may cost $433,500 but we aren’t the median consumer. Most individuals buying homes are middle-aged consumers with more developed careers (sometimes even married with multiple incomes).
What if you were able to find a $300,000 house (maybe it needs a little work). Maybe even get it at a little discount. Good living conditions in good neighborhoods can be found like this in most places, you just need to be diligent in your search.
Here is a list of the ideal circumstances:
- Purchase price $300,000
- Down payment 20% or $60,000
- Saved $18,000 year 1 (living with family or roommates)
- Saved $19,000 year 2 (living with family or roommates)
- Saved $23,000 year 3 (Those 3% raises have really been helping)
- 6% interest rate (I hope rates drop in three years)
- Monthly payment $1,439 (32.6% of your after-tax monthly earnings of $4,414)
So, as you can see, it is possible to afford a home by 25. However, it may take some sacrifices in the short run. Living with family or roommates can save money but isn’t always easy. Saving money and living like you are broke can be hard, but I guarantee you that homelessness is harder. “Way to take it to the extreme.”
If you are of proactive mind, you may be asking, “How can I speed this up?” And there are a few ways that you can speed up the purchasing process. The first way is earning more money, and the second way is saving more money.
Earning more money could mean working more hours, asking for more promotions, or changing jobs every year and a half or so. It could also mean starting a business on the side, picking up a part-time job, or freelancing after work hours.
Saving more money looks like a large cut in spending. That could mean no more buying coffees, starting to pack your own lunches, or canceling some of those unnecessary subscriptions (heck read a book instead, or watch YouTube for free). But your largest expense while saving for a home will ironically be housing… “This has to be a joke.”
“My friends are going to make fun of me for living in my mom’s basement.”
Maybe they will for a year or so, but who will be laughing when you are 25 with a nice single-family home in a good neighborhood as they still complain about how private equity companies make it impossible to buy a house?
However, the fastest way to reach this goal is to earn more money and save more money. The more streams you have flowing into your pool of housing funds the better. Ultimately, sacrifices need to be made to afford a house at a young age. Simply put, sacrifice your present or sacrifice your future.
So now that we have seen that it’s possible, how do I plan on affording a house by 25?
My Plan to Buy a House by 25
Everyone has a unique position when it comes to their search for homeownership. You may be in mountains of debts from college, or you may be making 6-figures the day you graduate. Of course, I don’t know your position, but I do know mine. That’s why I’ve created a plan to own a home by the age of 25.
Call it pride or call it confidence, but I believe that I will be earning more than the average college student when I graduate. This is a combination of the field I have chosen and my personal experience leading student organization, as well as my many internship experiences (I will be graduating with 3 internships under my belt).
I also will not have any student debt coming out of college, I’ve spent years building my credit score, and I’ve already started saving for a home.
“Wow, this guy likes to brag.”
With the extensive list above, let me explain and list the following assumptions I will be creating in my plan.
- Earning $70,000
- Living with parents to save money and spend time with family
- Side hustle will produce small amounts of side money
- Living in a low cost of living area ($300,000 will buy a decent home here)
- Plan to rent out a room or two to friends
The list is straightforward. I plan to be making $70,000 a year and plan on living with my parents to save on housing expenses. I believe that this will allow me to save 50% of my income, and eventually when purchasing a home, I plan to rent out a room or two to my friends at a low cost ($250-300) which would reduce my mortgage by $500-600 a month.
With two years of saving 50% of my income I will have over $70,000 saved plus the money I have already saved during college.
Now, I know that this plan could change, but regardless of the change in variables my goal will be the same. I want to own my own place, decorate my own place, host in my own place, and live in my own place.
The dream of buying a house and making it your own is alive and breathing. It may just be a lot more work than ever before.
Why Owning a Home is Important
I knocked on the door of my college friend’s freshly bought home. I was greeted with a huge smile, a couple of hugs, and the jubilant energy of my friend who said, “do you want a tour?” Of course I wanted a tour, that’s why I was there. Grinning from ear to ear he showed me the entire house. The spice rack in the kitchen was a big selling point and let’s not forget our 5-minute conversation about how interesting his coat hangers were.
He led me up the stairs to a bonus room loft and explained his plans to turn it into a library and art room. He showed me every bedroom, every nook, and every cranny. I couldn’t help but feel the joy he was experiencing.
It reminded me of the first time I had my own room. I got to pick where the desk went, I could change the layout of the books on my bookshelf, or I could completely change what I hung up on the walls.
I got a canvas art of Batman overseeing the city, and I just felt something…
The thing I felt was “mine.”
It was all mine. I had control over my room. That is the same feeling that the dream of owning a home has. You can organize your kitchen however you like, change the furniture layout, and tell all your friends about that cool trinket you picked up while thrifting.
Sure, I have the dream of being 35 years old, owning an 8,000 sq ft house, lifting on the back patio, and hopping in the swimming pool to cool off, but the reality is that I am 21 years old. 14 years is a long way down the road. I don’t need that right away.
The dream is the same, even if the size is different. It would be my place where I can control how I organize, decorate, and live.
From a financial perspective it becomes important because, while mortgage payments may be high, at least you are building equity in your home. While it’s a debate whether a home is an investment or not, it’s not debated that paying $1,500 on your own mortgage is better than paying $1,500 for someone else’s mortgage (aka renting).
I’d personally like to be able to get my money’s worth if I sell a property, rather than pay for some else’s property.
Don’t be Discouraged, Remember Your Dreams
To wrap everything up, remember these very important things. If you are just graduating, take some time to make a plan for how you will save for your home. Make a reasonable criteria within budget. Be willing to make short term sacrifices for your goals. But most importantly, don’t let your dream die because of big numbers and scary corporations.
So that’s my plan to buy a house by the time I am 25 years old, and I hope that this article has inspired you to make a plan and start saving aggressively for a home, because after all, that’s how to buy a house – save and increase income.
If you are a college student or high school student overwhelmed by the many responsibilities ahead, or maybe you haven’t considered the weight of finding a home, I hope that you use this as a building block to start your research and make your plan.
“Chasing a dream starts with a single step; idea without action automatically leads to failure.”
That’s all I have for you today.
Until the next article.
