For many people, buying a home will be the biggest financial decision that they will make. As such, it should be treated with a tremendous amount of caution and rationality. Failure to do so could result in financial ruin and second order consequences such as strain on family and friend relationships, anxiety and depression, loss of stability and security etc. In order to prevent those consequences, you should gather the maximum amount of information about the future as possible to make the most informed decision today.
The goal of every investor should be to maximize their return on investment and minimize their capital at risk. In other words, an investor should be looking to make the most amount of money possible for the least amount of money invested. Most people focus on the former rather than the latter. For example, a letter in the mail, an ad on television or social or a friend may tell you about this great new stock that has the potential to earn up to 75% of its current value but what those parties don’t tell you is that you have a chance to lose 100% of your investment. If you had a 50/50 chance to earn either of those payouts, then over a long enough period, you would lose 25% of your money.
(75%*.5 - 100%*.5 = -25%)
When thinking about making an investment, you should focus on the expected return. The expected return is calculated by the probability of a good outcome multiplied by the return of that good outcome added to the probability of a negative outcome multiplied by the return of that negative outcome. When trying to arrive at that decision, the easiest way to think about it is by asking yourself the following questions: What are the odds of me winning? How much will I win if I do win? What are the odds of me losing? How much will I lose if I do not win? If you want to become wealthy, you need to maximize the chance of you winning and how much you will win while minimizing the chance of you losing and the amount that you lose.
When thinking about buying a home, the same basic framework should apply. You should be asking yourself; how can I make the highest return on my initial investment for the lowest amount of risk possible. While the question itself is incredibly simple, the answer can and should take a large amount of time, calculations and thought to answer. In this guide, I will walk you through a series of questions and some corresponding explanations to help you come to the most informed decision possible.
