'Be Pragmatic And Realistic': Kevin O'Leary Says You Should Do This Before Buying A House In The Current Market

It's a tough time to be house hunting.

Despite the Federal Reserve's aggressive rate hikes, home prices remain elevated. Meanwhile, rising mortgage rates further burden potential buyers, making monthly payments even more daunting for many.

In a recent interview with Fox News, "Shark Tank" star Kevin O'Leary acknowledged the challenges facing homebuyers. 

"Be pragmatic and realistic. These are the fastest rate hikes in decades. We've never seen anything like this. Terminal rate — still under 6% — is on its way there, which means mortgages will be 8%," he said.

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O'Leary expects at least two more rate hikes from the U.S. central bank. He said that Fed Chair Jerome Powell will "stay vigilant until inflation is at 2%."

The good news? O'Leary also offered some valuable pointers to potential homebuyers.

Tip No. 1

Considering that purchasing a home usually involves taking on a significant mortgage — a substantial debt burden — you'll probably want to get rid of high-interest rate debt before diving in.

"If you want to start a family, you want to buy a home, the first thing you have to do is eradicate both of your — you and your significant other's — credit card debt because that's costing you 20% to 22%. You got to get rid of that," O'Leary said.

Credit card debt has been rising in America. According to the Federal Reserve Bank of New York's latest quarterly report on household debt and credit, credit card balances surged $45 billion in the second quarter of 2023 to $1.03 trillion.

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The New York Fed said that it's the first time for America's credit card debt to surpass the $1 trillion mark.

This can be a financial strain on households. According to LendingTree, the average credit card interest rate in the U.S. now stands at 24.37%.

To avoid piling up credit card debt, you might want to adopt prudent spending habits and identify areas where expenses can be reduced.

"You got to stop buying stuff you don't need," O'Leary said.

Tip No. 2

O'Leary's second tip addresses the size of the house you should consider — in essence, how much you should spend on a home.

"You have to downsize your demand of a home until it only represents — full mortgage payments — one-third of your income," he said.

O'Leary explained that it's a calculation you can do "on the back of an envelope."

"Does it take more than one-third of our combined income to pay the mortgage? If it does, downsize the house. Make it smaller."

For example, if you have a combined family annual income of $120,000, your mortgage payments should be no more than $40,000 per year.

Why one-third? O'Leary said that if your mortgage payments take up more than a third of your income, you will have to "start cutting back on just living," and that's "very hard to do."

Invest In Real Estate Without Buying A House

While it's difficult for new homebuyers to enter the market, there are ways to invest in real estate without buying a house.

For instance, many real estate investment trusts (REITs) are trading on the stock market. You can think of REITs as giant landlords — they own income-producing real estate and collect rent from tenants.

REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends. This requirement makes them appealing to investors looking to earn a passive income.

Crowdfunding platforms provide another opportunity for people to invest in a wide array of properties. They typically have lower minimum investment requirements compared to traditional real estate investments.

Some platforms also allow investors to select specific properties and projects to invest in. For instance, if you are interested in single-family rentals, there are options to invest in rental properties with as little as $100 while staying completely hands-off.

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