Hi friends- as promised, here’s the kickoff to my series on profitable home ownership! No, this is not a gateway to some amazing product I’m offering you. No, I’m not a realtor, and yes, this is a totally-free, non-monetized blog that is literally just a dumping ground for all the inner workings of my mind. But this particular topic is one that is very dear to my heart as a person with a family, and especially as a family living on a budget with the intention of one day being able to retire. As I’ve said in the past, in the past six years, we’ve bought and sold 5 homes and move out of states and across the country multiple times, and each time, except for the first horrible real-life nightmare lesson, we did so at a considerable profit. We’ve gotten it down to a science, or maybe more of a very refined art, and I want to share with you some of the key pieces I’ve learned that have helped us avoid pitfalls and grow our investment again and again in a short amount of time.
For background- I have a degree in Finance and Economics, but I am not a financial planner. I am not a realtor. But I am a very savvy businesswoman and it doesn’t take much for me to learn from my mistakes- and believe me, I’ve made some. I’m hoping the things I’ve learned- from both mistakes and successes- can help you avoid some of the pitfalls and enjoy some of the rewards of successful home ownership. Here’s what to expect in this series:
- Part One: Getting started…Ground rules of home buying and my steps to making the most out of the house-hunting process
- Part Two: Once you own the home…Prioritizing projects and choosing what to hire out and what to DIY
- Part Three: Getting ready to sell and how to leverage your real estate agent
- Part Four: My method for low-stress (or lower stress) moving, with or without kids
I hope you’ll join me- and feel free to laugh and cry with me at the fact that all these lessons have been learned in my actual life. So let’s get started, shall we?
When I bought my first house, it wasn’t because I was making a lifelong investment or commitment to home ownership. It was because a mortgage on a very nice $110,000 house in my area would cost me less per month than a not-so-nice 3 bedroom apartment with noisy neighbors and uncovered parking. I started a home search three months before my lease expired, and my conditions were that I wanted a house that was nice by my standards- not fancy or showy, but nice enough for me to feel comfortable in- in the right school zone for my daughters, and close to my work and the grocery store. I found an adorable house that absolutely fit the bill to a tee. It was SO CUTE. And it had all the right things- it was being sold by its original owner, a single woman moving to a 55+ community who had taken immaculate care of the house. It was PERFECT for me. And here’s the lesson:
When I researched the house, I looked at comps in the neighborhood- sale prices of the houses along the same street with the same features. I looked at tax assessment and appraisal values of other homes nearby. And I made an offer that was $12,500 below asking price. The homeowner made me a counteroffer (I think she offered to leave the fridge and the drapes and a few other small appliances), but essentially stated that she needed to sell the house at her exact asking price in order to be able to close on her new home. You guys…I should have walked away. Or threatened to walk away. But I didn’t. I felt bad. How could I let this older woman on her own, like me, on a fixed income, not have enough money to close on her new home? I was a sucker. And I don’t think she was swindling me, I just think I got sucked into a bad decision for all the wrong reasons.
Wanna guess what happened? Well, first off I was very happy there in my sweet little house and it was absolutely perfect for me and my little family. We made sweet little memories and my house payment was much more manageable than rent would have been. But…when I got transferred out of state and had to sell it, I found out just how bad my mistake really was. First off, if I would have spent more time chatting with the kind Vietnamese gentleman across the street from me, I would have learned that he was helping his family members buy every house on our street as it went for sale and that they were using them as rental properties. He knew better than I did- he was a tough negotiator. He bought one home at the end of the street as a foreclosure and another as its owners were facing foreclosure. And before I knew it my street had gone from 80% homeowners and 20% renters to 50% renters, and by the time I actually sold my home, almost every home on the block was being marketed as a rental. I should have tried to negotiate with my neighbor to buy my house early, but instead, because I waited, he knew he could get a better deal than what I needed to come out of my mortgage on top. So I had no choice. I rented out my house for over a year (which at least allowed me to get more equity in the house and spread the loss out over time). At that point I was married and getting transferred again for work, and this time we decided to wash our hands of the house and get a clean slate. And yep- I sold it to a relative of that neighbor, for him to use as a rental property. You guys, I sold it at a loss and I wrote a check to the bank at closing. I swore to myself that day that I would never be in that position again. That from that moment on, I would be that unassuming, kind Vietnamese gentleman who is really a shrewd businessman and tough negotiator hiding underneath that peaceful demeanor. He taught me the best lesson I could have learned in home ownership: the first goal of being a homeowner is to own and manage a valuable investment. And I’ve never looked at home ownership as anything different since.
Now that you know my sad starter story, are you ready for the ground rules that help me never, repeat, never make the same mistake again? Before I share those you should know the guiding principle here. It’s the most basic line from Economics 101, but it rings true for me every single day and keeps me out of trouble more than any other piece of advice:
Debt for investment is good; debt for consumption is bad.
Yes. That’s it. And what are the largest debts any of us typically carry? Student loans (I know, I’m carrying that millennial hallmark too) and, maybe notsomuch for millennials, a mortgage. And in keeping with that super basic economic principle, if those debts are good debts, they should be paying off right? They should be earning money for us. And while I won’t pontificate on whether or not your or my student loans are generating a sufficient ROI here, I will definitely dig a bit into how to make a home investment generate a good return. So…back to the ground rules.
- Get a good solid budget number and keep yourself accountable to it. Start with how much of your monthly income you want to invest in your housing. We have very little other debt, and we do very few things outside the home, so we’re comfortable spending more per month on housing than say, someone who wants money for vacations or shopping trips, or who has car payments or large daycare investments. BUT…remember that home ownership also includes TONS of unexpected costs- you’ll realize you need gutter guards or a more efficient water heater or to have your driveway repaved or those trees taken out- and you don’t want to be stuck choosing between those projects and buying your groceries. You also don’t want to get sucked into the creep- you know, when you say you won’t spend more than 30% of your monthly income on your housing but you wind up somehow agreeing to spend 60%? It happens to the best of us. Once you find your number, do yourself a favor and stick to it.
- Understand what you want to get out of your house financially. Because this affects a lot- including what type of loan you choose. Our first home as a married couple was purchased when we had two incomes, but had been living off of just one. We bought at the low end of our budget and sunk a lot of money into it through a 15-year fixed rate mortgage. That basically earned us enough to make great downpayments on other subsequent homes without dipping into our savings. Now that we move every two years, we opt for a 5/1 ARM- a 5 year adjustable rate mortgage, which gives us a super low interest rate for a few years but will jump at year 5- not a big deal since we sell before then anyway. That lets us grow our equity quickly without making enormous payments the way we would with a 15-year fixed. An ARM loan is not a great idea if you plan on staying in the same place for a long time (unless you are betting that interest rates will go down- but that’s outside the scope of this post, finance geeks). A good lender will be able to chat with you about all of these options, but you’ll need to be able to speak to whether you’re buying your forever home or just a crash pad to get started building equity.
- Figure out your non-negotiables. Good investment or no, unless you’re buying a house solely as a rental property, chances are you plan to live there, and there is a sufficient return (at least to you) in having a home that meets your needs and wants as a domicile. (Did you hear me say that in a fancy voice? I said it in a fancy voice.) My non-negotiables are a garage, more than 1 bathroom, close to my husband’s job, with limited needs in terms of structural or mechanical work, and preferably with some character or uniqueness about it. Be prepared that if you are hashing this out with a spouse, you may hate one another for the duration of the process. You may even suggest that spouse may have better luck house-hunting with his or her next spouse. Not that this has ever happened in my own experience.
- Pick your general location, then pick a realtor from that area. I cannot convey to you enough how important this is. In our house-hunt in Salt Lake City, our realtor (who was from the suburbs) tried her best to talk us out of what was an absolute gold mine location in an absolute gold mine house, because “people smoke marijuana in that park across the street.” It was true. The park reeked of weed. But that park was Liberty Park, and that neighborhood in SLC exploded while we were there. We bought at an extremely low price for the area, and we were able to sell high. We made an absolute killing on that house- but because we sold it using a realtor whose office was at the posh 9th and 9th district up the street. We benefited that the house was sold to us by not one but two realtors who had no idea the value of what they were selling- but because of their lack of knowledge, we nearly missed out.
- Recognize red flags, and don’t get distracted by shiny objects. Repeat after me: paint colors and old appliances can be changed out, highway noise and bad floor plans cannot. Okay, so technically you can change out bad floor plans, but not easily, and definitely not cheaply. Unless you’ve found a home in an absolute dream location at a steal of a price, a house whose only kitchen is in the basement is not a great choice when it comes to resale. We’ve seen tons of homes that flippers have outfitted meticulously and made to shine like true HGTV dream homes, but with major issues like backing up to the highway, bedrooms that were so long and narrow you couldn’t fit furniture in them, or with the master suite in the basement away from every other part of the house. No amount of Wolf appliances or built-in smart technology can overcome that for me. Some other major red flags on my list:
- Wood rot/moldy siding or eaves. This is usually indicative of an even bigger problem, and even if the problem is superficial, the work to correct it is time consuming if you do it yourself and expensive if you hire it out, and you’re unlikely to see it returned in resale value.
- Signs of water damage. I’m amazed at how often inspectors overlook water damage in basements and bathrooms. Be tedious and look for bubbling of drywall, warped wood, or brown stains on ceilings/ceiling tiles, trim, and flooring.
- Lots of tear-downs. I LOVE hot locations. I feel like I have a knack for identifying great spots to live and hang. But nothing says a bubble is about to burst like row after row of tear-downs. We looked at a hot neighborhood in Michigan whose houses were selling as soon as they hit the market- lots of quaint but teeny 1950s cottages that were being leveled in favor of modern McMansions on those same teeny lots. It was SO tempting to buy one of those under construction and have tons of custom-built space in a fun little historic downtown setting…but a little more digging revealed that those homes were all being bought by developers. And there’s a huge potential there to be the one homeowner in a street full of vacant luxury homes that wind up selling at closeout prices, which will hurt your comps and make it tough to recoup your money at resale. That’s not always the case…but buyer beware. Definitely be the last and not the first to buy on the block if you go that route.
- Think twice before you get a fixer-upper. Here’s the truth from a person who’s been there: the price of a to-the-studs renovation is $100 per square foot. And that’s without your contractors finding anything else when they open it up. Go ahead and price out $100/sq. ft and then add between five and ten percent. And if you’re planning on doing it yourself, know how you’ll finance your improvements, because banks will typically want plans that have been pre-approved by your municipality before they will fund construction projects. Even if you’re funding with cash, know that you’ll want to comply with local building code or risk not getting credit for your work. Nothing hurts your investment like having a “non-conforming” basement apartment that you just sunk $50k into.
- Get a good feel for the neighborhood. This is huge. Not just because this is where you’re going to live, but because neighborhoods change. That first house I bought was on a street where most of my neighbors were civilian contractors on the military base in town. But when their company’s contract wasn’t renewed, many of them moved and sold out to the gentleman I mentioned earlier. He knew the neighborhood and capitalized on the shift, and I missed that whole thing. Our current neighborhood is established. I’ve mentioned before it was a family home- many of our neighbors were good friends of my husband’s grandparents. The neighborhood is full of people in that age bracket, because people move here and they never want to leave. And when houses are listed, they sell fast because people in this area know homes don’t turn over often. That’s about to change, given the age of our neighbors. So we’ll need to be mindful of what sales look like and keep it in mind as we create our own sell or hold strategy. Whether you’re buying or selling or just living in one location- make a habit of checking home sales in your area on Zillow to know what’s happening. Know what homes sell for, and what they look like at various price points. And get to know your neighbors- know who’s buying homes in your neighborhood so you’ll know who to sell to when you’re ready.
- Have the best amenities in your price range, but spend only along the median. What I mean is, don’t get caught having the most expensive house in your market, and know what your market is. Regardless of your income, if you live in a neighborhood where you out-earn the majority of home buyers and you have a home to match, chances are you’ll out-price the neighborhood at sale time, too. You’d be better off sinking that extra income into the mortgage on a better-equipped home in the middle of housing price range, and selling at the highest possible price for what you have. You’ll maximize your equity without reducing the amount of potential buyers. What does this mean at home purchase time? Again, know the neighborhood and buy with resale in mind.
- Ask yourself, “is this functional?” The hubs and I argued about whether or not the garage thing should stay a non-negotiable in Salt Lake City where it doesn’t get too terribly hot and where garages are genuinely not as commonplace as they are in Georgia or Michigan. And lo and behold, our first house-hunting trip was in a snowstorm with 11 inches of snow on the ground, and we saw person after person in front of their houses scraping snow and ice off their windshield. Functionality counts. No amount of potential return on investment will make up for you having to lug two kids up to a third floor walk-up after a long day at the office- it still has to work for you. Know what that looks like and be fair to yourself about it.
- But know that there’s no such thing as perfect. Maybe it’s out there…but I’d tell you chances are the absolute answer to everything on your list is probably not out there in one specific house. But you can definitely find a place that checks most of the boxes and lets you grow your investment over time if you do your homework and keep yourself from overspending up front.
And my last lesson, which goes completely against everything I’ve ever been taught but must be said because it is necessary in the home purchasing process:
when you’re buying a home, being respectful is important, but manners and good decorum are a poor man’s tool.
Okay that hurt me a lot to say. But it’s the truth. If I had been willing to be a hard negotiator in that first house, I wouldn’t have lost what, to me at the time, was a substantial amount of money. The worst that could have happened was that the original homeowner could have rejected my offer and we would have stopped negotiating. I learned from that situation friends, and years later, when we found the perfect home for our family- a farm with a homeschool room and space for five kids- we walked away –the week of closing- because we learned that a vote to allow a landfill to be built nearby was going to pass. You guys. That family had moved out of their home. We were going to buy it from them. It was awful. But it had to be done. If we had bought that house and that landfill had gone in, we would never have been able to sell it. We lost about $4000 in earnest money, which would have more than covered for that family to move back into their home (which, subsequently, they never re-listed), and it was the best $4000 I ever spent. I would spend it again to keep us from making another horrible investment. Our realtors really sent us on a guilt trip about how that just isn’t done, and it was going to be a really bad sign to that family and that realtor, but you guys…if we had bought that house, the only person losing money in that situation would have been us. The realtors would have gotten their commission, the homeowners would have gotten their payment, and we would have been the ones holding a $400k bill for a house that wouldn’t be worth half that if it was sitting just down the way from a landfill. Don’t let having good manners lead you into a terrible decision. Buying a home isn’t the same as buying a shirt. If it doesn’t fit, you don’t get to take it back. If it’s suddenly rendered horribly out of vogue, you can’t drop it off at Goodwill. And writing checks every single month on something that won’t pay you back in the long run is the antithesis of good homeownership. If your investment won’t pay you back with a good return- you’re better off renting and investing your money elsewhere. And that’s where I’ll leave it till next time.
Thanks for stopping by,