How to Buy Your Dream Home Without a lot of Money

Last Updated on March 29, 2023 by Mark Ferguson

For most people buying a house is the most expensive purchase they will ever make. While there are government programs that help people get into houses without a lot of money, houses are still expensive. Many people believe buying their dream home is not within the realm of possibility, because of the costs associated with houses and life in general.

Real estate is an incredible way to build wealth thanks to the ability to buy real estate below market value and the United States tax code. Even someone with a modest salary can buy their dream home if they make some sacrifices and plan their real estate purchases well. I am not saying you should sacrifice what you think your dream home should be; I think it is vitally important to dream big. It will take time and hard work to get to a place where you can buy your dream home.

I own more than 20 rental properties, fix and flip 15-30 homes a year and own a real estate brokerage. I have learned many tricks over the years that can be used to build wealth through real estate and you do not have to have a lot of money to get started!

Cash needed to buy a house

There are many ways to buy a house, but most people will get a loan from a traditional bank or lender. If you are buying as an owner occupant you can put no money down with some loans like VA. Other loans will allow buyers to put 3.5 percent or 5 percent down as an owner occupant. When you get a loan, you will have to pay closing costs which consist of an origination fee to the lender, pre-paid insurance, taxes, appraisal, and a few other costs. Closing costs can range from 2 to 6 percent of the loan amount depending on what loan you use and who the lender is. On most loans 3 percent is a common amount for the loan costs on a low down payment owner occupant loan. Here is the cost break down on a 5 percent down loan for a $200,000 home.

• Down payment: $10,000
• Closing costs:      $6,000
• Total:                    $16,000

You can lower these costs by asking the seller to pay some or all of the closing costs or using a loan that has a smaller down payment. The amount needed to buy a home will also vary based on the purchase price. You may also have some more costs like an inspection that could run from $300 to $600. Remember you will also have to be able to qualify for the loan by having decent credit and a steady income.

Start small with a great deal

A $200,000 house may not be your dream house, and in many markets, $200,000 may not get you even a starter home. Most people will not be able to buy their dream house when they buy their first house. It will take time and hard work to build yourself into a position to buy your dream home. One way to buy your dream home is to make more money, but this article will focus on doing it strictly with real estate.

One reason I love real estate is that you can buy houses below market value. With the stock market and most products, you buy them at market value. Houses can be bought below market value because they are not easy to value, they may need work or the seller may need to sell the house quickly. I buy all of my houses below market value and that is how I am able to make so much money on my rentals and fix and flips.

If I were in the market for a $200,000 home that would be my personal residence, I would want to buy that house for at least 20 percent below market value. If it was a fix and flip, I would want to buy it for even more below market. I would buy the home for $160,000 assuming it needed no repairs and if it needed work, I would want to buy it even cheaper. It is not easy to buy homes this far below market, but it is possible.

How can the tax code help?

The United States tax code is very favorable to people who buy owner-occupied homes or investment properties. Investment properties are treated as a business and even if you make money on your rental houses, because of depreciation, they could show a loss on your taxes. The great part about owning a house as an owner occupant is that you may not pay any capital gain taxes when you sell the home. You have to live in the home for 2 out of the last 5 years to qualify for this tax treatment. Your interest payments on the mortgage for the home are also tax-deductible as an owner occupant. If I buy a home for $160,000, live in it for 2 years and then sell the home for $200,000 I would not pay any taxes on the $40,000 I made. Please note I am not an accountant, make sure you talk to one for all the details.

While you were living in that house for two years it may have even gone up in value or you could have made repairs or improvements that added more value. I bought a personal residence in 2008 for a little over $200,000 and ended up selling it five years later for over $300,000 and paid no taxes on that profit. While you are living in the home you are also slowly paying your loan off and increasing your equity in the home.

There is a good chance the home I would buy for $160,000 could be worth as much as $220,000 two years later. I would have some costs into the houses as I would probably spend money on maintenance and some repairs. Here is the cost breakdown when I sell the home:

• Sales price:      $220,000
• Selling Costs:      $15,000 (paying a real estate agent and other costs)
• Repairs:                 $5,000
• Loan Payoff:      $149,000
• Total cash:      $51,000

After selling the home you would have $51,000 in cash leftover, but you paid a down payment and possibly closing costs when you bought the home so that is not all profit.

Next, buy a more expensive house

After selling the first house, you have $51,000 to buy another house plus any money you have saved up. You may be able to qualify for a larger home than you first bought if your income has gone up or your debts have gone down (I don’t think it is smart to buy the most house you can qualify for if you want to invest in rental properties). If you can now get a loan for $200,000 that means you can buy a much nicer home than your first home. With your next home, you want to buy a $300,000 house that is also bought below market. You will purchase the house for $240,000 and you can now put $50,000 or more into the home for the down payment. Your new loan is under $200,000 even if you have to pay closing costs and you can sell the house again in two years.

After two more years here are what the numbers look like:

• Sales price:       $340,000
• Selling costs:       $25,000
• Repairs:                  $5,000
• Loan payoff:      $188,000
• Total cash:    $122,000

For the next house, you buy you will have an even bigger down payment, you will be able to buy a more expensive home and make even more money on the next sale. This process can continue to be repeated over and over until you buy your dream home.

Is putting all of your money into your dream home a good idea?

Buying houses this way will build wealth and help you buy your dream home. The tax advantages of an owner-occupied buyer in the United States are a huge advantage, but I don’t use this strategy. I try to buy my personal houses below market value, but I don’t move every two years and I don’t spend all my money on a personal house. I like to save money and invest it in rental properties that provide long-term cash flow. There are also some dangers like the prices could decrease instead of increase, but that is a risk whenever you buy a home or invest in anything. I also think it is very hard to save money if you buy the most expensive house you can qualify for. If your main goal is to buy your dream home and you are not as worried about saving and investing, this can be a great strategy to build wealth.