Start With Budget First

SPEAKER_01 0:00

Welcome back to the First Time Homebuyer Pros podcast. Most people start the home buying process by asking a lender, how much can I qualify for? Today we're starting with a different question. What's the right budget for my first house? And we're answering that from a financial planner's perspective, not just a lending one.

How A Financial Planner Builds Budget

SPEAKER_01 0:20

So that's why I brought on my friend Richard Reva, a wealth advisor here in Newport, who helps people make smart financial decisions before they take on long-term commitments like buying a home. So, Richard, when someone comes to you and says, I want to buy my first house, how do you start thinking about their budget?

SPEAKER_00 0:39

Well, thank you. Thank you, Def, for having me here today. And, you know, I'm excited about this topic uh simply because it's not something that most people think about. So yeah, when people come to us, we really look at what sources of income stability they might have, uh, whether there's going to be a shift in that, reviewing cash flow, understanding a spending budget as well as a savings budget. And then obviously considering goals and timelines. So that's primarily where we start. Right.

SPEAKER_01 1:08

So before the house, you're really evaluating whether the budget works for the person, not just the purchase, right? Right. Yes. That's a key component. So yes, good point.

Percent Rules Versus Real Life

SPEAKER_00 1:18

Thank you.

SPEAKER_01 1:18

Yep. So there's a lot of rules out there, you know, percentages, racials, approval. I mean, most people tend to see debts to income ratio from a lender's perspective. But more importantly, from your perspective, Richard, what does a healthy budget for a first-time homebuyer actually look like? I get this all the time. It's like, what should I budget for my first house?

SPEAKER_00 1:38

So if I said from my perspective, what a healthy budget for a first-time buyer looks like is typically around 20 to 30 percent of gross. But I don't think that's realistic, especially in the area that we live. Newport Beach is probably, you know, twice that on the seaboards. So comparing that to the middle of the country, maybe that's a safe number. But how here, you know, that's really, really tough. So we want to look at what's the savings rate, what's the budget, what's the spending budget, and really be looking at probably somewhere of a 30% or more for housing out here as a realistic number.

SPEAKER_01 2:15

Right, right. And for myself, I mean, here, most loan programs will allow you to go up to 50%, right? But that doesn't mean you should definitely max that out. Just because a bank says yes, doesn't mean you should go for it, you know. And most of the time I say keep it around, you know, 40% to be safe, but everyone's scenario is a little different. As you know, some people might have a high income, but they like to spend because of their lifestyle and they can't give that up. Some people can definitely stretch their budget because they're good at managing their money as well. So everyone's a little bit different. So a good budget, I would say, is one that's sustainable, uh, not just approved.

SPEAKER_00 2:51

Yes.

Why Cash Flow Beats Purchase Price

SPEAKER_01 2:52

So a lot of first-time buyers focus on purchase price instead of the monthly impact, Richard. We talked about this all the time. Why is cash flow such a big deal from a financial planning standpoint? Yeah.

SPEAKER_00 3:04

So cash flow is how you support your spending policy, right? Right. And if your cash flow is stable or increasing versus decreasing, obviously your spending policy has to align with that. So I look at it as a goal, right? What's the goal? What are we trying to do? Are we saving for a house? So that means that in the spending policy, a certain percentage, not 5%, but maybe 40%, gets put into a bucket for saving, and then we look at what we're spending money on. Yeah, it's a sacrifice for a short period of time, but cash flow really, really does play into you know how well you live, uh, what you can acquire, what your stress levels are, and you know, house really shouldn't limit your future opportunities. You shouldn't be strapped to it. Right. So the payment is what you live with, not the price tag, right, Richard? Right, right. That's a key component. And I think a lot of listeners really need to be looking at what is that payment in the cash flow and what you can come up with. And there's there's a lot to consider in that. Right.

Hidden Costs Buyers Forget

SPEAKER_01 4:12

So when you're helping people plan for their first house, what expenses do you see them underestimate?

SPEAKER_00 4:19

Yeah, yeah, they don't think about the cell phone or the maintenance of the property or the you know, the the gardener, uh, the property taxes. Uh, you know, if you're in California, you know, insurance adjustments, then utilities and HOA fees. So right there's a lot going on just in the property, let alone lifestyle change, because things do change when you have a house, right? There's a lot of a lot of other considerations. So your lifestyle after that really does change.

SPEAKER_01 4:47

And and most importantly, too, right? Like how much are you able to save after as well, you know?

SPEAKER_00 4:53

Yes, yeah, that's that's a clear, yeah, clear point. People don't maintain that. And you really want to try to budget for at least a 5% savings rate for the next 30 years, 40 years, and you've got to be able to do that afterwards. If you can't, then you've got to bracket that to a 10% later or a 15% later, or you know, it just keeps going up and up and up. So when we do financial plans, we model out 20 years, 30 years, right? Not just today.

SPEAKER_01 5:24

Right. So the mortgage payment, everybody, is just one part of the budget. Okay. So I just want to remind everyone

Avoid House Rich Cash Poor

SPEAKER_01 5:31

that. So from a wealth advisor's perspective, Richard, how should a first house fit into someone's overall financial plan?

SPEAKER_00 5:39

Well, depending on where they are in the lifestyle, right? This stage in life. If they're an early accumulator, and that's typically a younger person, but let's say early 20s or through your 20s, you know, you're an early accumulator, and in that time frame, your income usually doesn't meet your spending policy. So you're you're typically spending more. So the smart person, if you will, starts off in that early stage with a lot less comfort, if you will, right? Right. Right. Because they have a they're striking a chord of saying, oh, at 3536, I want to buy my first house. It's typically not happening at 25 anymore, right? And that's because of the amount of money down. So a house is just part of the plan, it's not the whole plan. You've got to pin it to where you're at that stage, wherever that stage is. So if you're in your 20s, pin it for your 30s. If you're in your 30s and you haven't saved, okay, pin it for your 40s. Whenever that makes sense and make sure you're building that plan. So if you're, let's say you're gonna buy in your 30s, you're gonna have that house until you're in your 60s, maybe you trade up or whatever, whatever happens. But you shoot for that 30-year item and you basically want to try to avoid becoming house rich and cash poor, right? So you want to continue savings and investing, you want to defer your 401ks, you want to, there's a lot of things to consider. Hey, listen, Americans across the country, you know, a lot of their wealth is in their house and should be, right? We're leveraging it to acquire that, but it doesn't have to be there forever, right? So you have to build that into the plan. Yeah.

SPEAKER_01 7:20

So it sounds to me, everything you said, real estate is a long-term financial plan, right? Is it from what it sounds like? Right.

SPEAKER_00 7:29

Yeah, very true, very true.

SPEAKER_01 7:31

Yeah, yeah. So it's a long game.

SPEAKER_00 7:33

Yeah, it's it is a long game. Even for the guys that do flips, they realize that it takes several of them over time to really do well, and they hit it on one or two, right? So flipping houses does not make you rich unless it is what you're gonna do for the next 10 years. Right, right, right.

SPEAKER_01 7:54

So, to wrap this all up, if you can give first-time homebuyers one budgeting rule before buying their first house, what would it be?

Build A Spending Plan You Keep

SPEAKER_00 8:04

Yeah, you know, I would say take a breath, right? Know that you can build a plan to make it happen. Don't stress out on it, just don't go overboard in that sense. Be realistic about how you're living and what you want to do, like you know, go to Paris every weekend is probably not gonna help, right? And then build a spending budget, not just a budget, right? The budgets to me and to my clients usually are restrictive. And when we talk about what you can spend, you've made a conscious decision. I'm gonna buy coffee every day at well, X, you know, at five bucks a cup. I'm gonna do that. That's my spending, uh, that's my joy. Okay, great. Just know what that three or four hundred dollars or that three or four thousand or whatever does to the plan, right? So build a spending budget you can live with and still save and still be comfortable. And uh, listen, it's a challenge, and it's not something in our view where you set it and forget it. These are living, breathing plans, if you will, and they should be modeled out as things change, as your job changes, as your income changes, as your goals change, right? You need to remodel and reforecast. So work with a planner to make this happen, and I think you'll be a lot happier. Don't just use a you know uh program or Excel spreadsheet. Right. Work with a planner that can give you some additional insights. I think that's really important.

SPEAKER_01 9:22

Right. That that's awesome.

Free Planning Tools And Final Question

SPEAKER_01 9:24

So before we wrap up, let everyone know where they can find you and the tools you offer, Richard.

SPEAKER_00 9:29

Yeah, thank you. Yes, my company is Wealth Management Solutions, and you can find us on the web at www.wms-lc.com, or just put in my name in the uh browser and you'll find our firm. And the listeners here, if you reference this podcast, I'll give you a link to the planning software where you can set up a budget and I will provide you an initial modeling and review for free. So uh take advantage of it, yeah, and uh start up with a spending plan that helps you build out that model. And I think you'll be leagues ahead of your colleagues or your friends or your peers by having that knowledge.

SPEAKER_01 10:11

That's awesome, Richard. Thanks for providing that. And I want to leave off with this too. You know, we ask a lot of questions when we're speaking with someone who is buying the first house, you know, important questions like what's the price that you want, what's your income, you know, what area you want to buy in. But the most important question that we always ask is what's your budget? What's the maximum monthly budget that you feel comfortable with? And again, Richard, thanks for being on here. Thanks for providing the tools. That's something that everyone should definitely use. So if you're budgeting for your first house, remember this don't just ask what the bank will approve, ask what actually fits your life. If this episode helped, share with someone thinking about buying the first house. We'll see you on the next episode of the first time homebuyer pros.