Starting Life on the Right Foot with Real Estate: A short story

Mo and Sarah worked very hard to buy a house. They saved money, they took care of their credit, and they took their time finding the right house. They were young and had their whole lives ahead of them but they did not want to waste their youth either. They also knew that the sooner they could invest the better. Now, it was much easier said than done as they never seemed to have a lot of extra money to invest.

The problem with investing as Mo saw it,  was that it took too long. Sure if he started now he would be better off when he was 50, but he was not that far out of college and 50 seemed like an eternity away. He had worked hard to save all he could He had a decent job at an insurance agency as an IT manager, but all the money he made seemed to be spent before he made it. Every time he came up with a plan to put money away an emergency arose that used up all of that money and then some.

He had managed to save a few thousand dollars but that seemed like nothing compared to what he needed and wanted out of life. A really good investment would make maybe 10% a year. That means his $3,000 would make $300 a year. That was nothing! Even if he kept saving $3,000 a year it would never add up to be much. He had to find a way to save more, make more, or invest better.

Sarah was not any better with her money. Sarah was not as conscious or worried about her savings. She knew she should save money but had no real plan to save any and was not upset when she didn’t. She figured things would work out in the end if she worked hard and was a good person. She told Mo over and over again he was doing better than most people his age, but that was not good enough for him.

How could they get ahead?

One thing that always bothered Mo was the rent he paid. He had a 2 bedroom apartment that was $1,200 a month. It was nothing fancy and he did not even know why he had 2 bedrooms. When he moved in, it was just him and he really did not need the space. The property manager had talked him into it because it was only a little more expensive than the 1 bedroom units.

He had nothing to show for renting. Every year or two the rent went up and he happily paid more. Over time, he realized he needed to look at what was smarter. To rent or to buy. He convinced Sarah to consider the choice as well.

They had done their research. They had looked at the pros and cons of renting verse buying. They heard a lot of people were now saying that buying a house was not a smart move even though he heard over and over again a life goal should be to buy a house when he was younger. Why did that goal change all of the sudden?

When they did the research they found that there was not much behind the “rent verse buy” argument.

The “rent verse buy” argument seemed to be more about arguing over whether a house is an asset or not, which made no sense. Who cared if a house was an asset or not, they cared if buying a house would be a good financial decision. They wanted to know if they would have more money in their pocket, in their checking account, or in net worth after buying a house or if they would be better off renting.

After doing the research it was clear to them that buying was the right move. They would have lower payments, more tax advantages, they would pay down the loan, and the house could go up in value. If they were smart they could even get a good deal and walk into equity as soon as they bought. They would have some maintenance and repair costs, but the house would also increase in value if they made repairs.

How to find a house

They knew they could find houses for sale on Zillow or Realtor.com but they were not sure how to tell if they were a good deal or not. They were not even sure what kind of house they wanted. They had looked online at a mortgage calculator to see how much house they could afford. It seemed like they could afford much more than they thought they could. It almost seemed like too much!

They quickly realized they were in over their heads. They had the idea that buying was better than renting, but they had no idea how to buy a house or what type of house to buy. They began their research again.

The first thing they agreed on was that they needed to find a good real estate agent. It would not cost them anything as the buyers to use an agent. A good agent could tell them all about the real estate market, home values, and connect them with a lender. They could also find a lender first and then an agent, but from what they had found out not all lenders are good, and not all agents are good. But a really good agent can help you find a really good lender. It can be much easier to decide if an agent is good or not than to know if a lender is any good until most of the way through the house buying process.

Sarah and Mo went in search of a great real estate agent to help them start their homeownership journey.

  • They went to open houses and talked to the agents.
  • They looked for the agents that had the most listings on Zillow.
  • They looked for agents with the best reviews on Zillow.
  • They talked to friends and family about the agents they used.

They had heard that one of the biggest mistakes homebuyers make is blindly using the first agent they find or blindly using a friend or family member who is a part-time agent and does not know what they are doing. It seemed a little awkward to avoid using a friend or family member who was an agent, but it also made sense. If you are making the biggest purchase of your life you do not want to screw up simply because you used whoever was available, not whoever was the best.

They found an agent they liked. He answered his phone, he got back to them quickly, he knew property values, he knew a great lender or two, and he was available. He could show them houses quickly.

How much would they need?

One of the big “aha” moments for Mo and Sarah that made a lot of sense to them was that they did not need to buy the most expensive house they could qualify for. The lender and the agent both told them that it was smart to buy a less expensive home so you could save money or even buy another home as an investment later on.

They also learned they could come pretty close to buying a $200,000 house for the same price that Mo was paying for his 2 bedroom apartment. Mo and Sarah were planning to move in together. She was paying to rent an apartment as well. Together they could afford much more but they wanted to be smart, not just go with the flow.

If they got a $200,000 mortgage at a 3.5% interest rate, their principal and interest payment would be $898 a month. They would also have taxes and insurance to pay as well which might add a couple of hundred dollars per month. If they got a low-money down owner-occupied loan they would have mortgage insurance to pay as well.

If Mo and Sarah put all their money together they could easily afford a $400,000 house but that would make it so much harder to save money and get ahead in life. Their plan was to find a decent house, something they could be happy in, but they didn’t need to win the biggest house of their social circle contest.

If they bought a $200,000 house the amount they would need down would vary greatly based on the type of loan they got. If they were to get an investor loan it would take at least 20% down with a conventional bank. They would also need tp pay closing costs as well. The closing costs include loan fees like an appraisal, origination fee, recording fees, prepaid insurance, pre-paid interest, and closing costs for the title company or attorney. The closing costs will typically come to about 2 to 4% of the purchase price when using a loan.

If Mo and Sarah were to get an owner occupant loan like FHA, they would only have to put down 3.5%. However, they would also need to pay mortgage insurance, which might add $150 to $200 a month to their payment. They would also have some upfront costs with FHA as well for mortgage insurance.

Had Mo or Sarah been in the military or were still in the military, they would qualify for a VA loan which has a $0 down payment and no mortgage insurance! There are also USDA loans, which have no mortgage insurance but can only be used in small towns or rural locations.

Conventional loans can also be used for owner-occupied houses as well. A lot of people think that all conventional loans require at least 20% down, but that is not the case. Owner-occupant conventional loans can be obtained with as little as 3% down, yes even less than FHA! Conventional owner-occupant loans also come with mortgage insurance that can be more or less than FHA loans.

One of the big advantages of conventional owner-occupant loans is that the mortgage insurance can be removed in some cases. The mortgage insurance stays with the FHA loan for the life of the loan.

Mo and Sarah had a lot of choices when it came to picking a loan. There were also options that could be used with these loans to decrease the money they would need even more.

Their state had a down payment assistance program which meant they could use an FHA loan not have to come up with the full 3.5% down payment themselves. The down payment assistance would help with that. Their agent had also told them that they could ask the seller of a house to pay for some or all of their closing costs as well. Instead of needing $10,000 to $15,000 to buy a house, they would only need a few thousand dollars.

However, the down payment assistance money and the seller pay the closing costs were not free money given to them. It wasn’t really a gift, but a transfer of the down payment to the loan. They would have a bigger loan and have to pay more for the house they wanted to buy, but need less cash. Still, if it meant the difference between buying a house and not buying a house these options were quite appealing.

What kind of house would they buy?

Mo and Sarah wanted to get the best house they could afford but they knew getting the best and most expensive house they could afford was not a good idea. They wanted a house they would both enjoy and they wanted a good deal.

In their research and after talking to their real estate agent they discovered just how advantageous it was to get a good deal!

When Mo started his research he thought he might save a little money because he would be paying off the loan every month and not paying off the loan for his landlord. During his research, Mo discovered so many more advantages to buying a house. He was surprised to discover that with low-interest rates, buying was actually cheaper than renting. Even with mortgage insurance, taxes, homeowners insurance, and some money left over for maintenance, it was cheaper to buy than rent!

Something else Mo had never considered but had immediately realized once he thought about it was that the mortgage payment would stay relatively the same. Taxes and insurance might go up some over the year, but the mortgage payment would not. Mo’s rent had continued to climb and it would continue to climb as long as he was a renter. Not only was it cheaper to buy now, but every year that passes it would get even cheaper than renting as rents slowly increase over time.

There were also tax advantages and the idea that the loan would be slowly paid off over time, but another huge advantage that Mo learned about was that he could get a great deal and make money as soon as he bought the house. There were good deals popping up all the time. He might not be able to flip them like those guys on TV, but he could walk into a house with equity as soon as he bought it.

He could buy a house for $200,000 that needed a little work that would be worth $250,000 after some of that work was done. He couldn’t buy a house that needed a ton of work because his owner-occupant loan required the houses to be in livable condition. Sarah and he could still buy a house that needed some updating or paint or flooring and get the loan. Being young and ambitious Mo thought he could do a lot of the work himself to save money as well. He would be there with Sarah and be in no rush since he didn’t have to sell the home.

The plan was to find a decent house in the $150,000 to $200,000 price range that was a great deal. They were not looking for their dream home or a home that felt perfect or had the most amazing floor plan. They would be willing to settle for a house that was decent in order to catapult their finances forward.

Mo and Sarah’s perfect, but not so perfect house

Mo and Sarah looked for houses for a while before they made their first offer. They wanted to make sure they understood the market and prices. This was the biggest purchase that either one of them had made up to this point and they were not going to take it lightly. It was amazing to them how many people did take it lightly, or took college lightly, or took their lives lightly.

They looked at ranches (1 level homes) with and without basements. They looked at tri-levels and four-levels and they looked at 2 stories. They decided it did not matter what the style of the house was. What mattered was the deal they could get and how much money it would make them.

Their agent was a huge help and they were really happy they took their time finding a good one! He showed them many houses and while he was a not super-agent selling hundreds of homes a year, he knew what he was doing and he had time for them.

The first house they made an offer on was a tri-level that Mo loved. They got beat out by another buyer when they came in with a low offer. They also took their time making the offer and it probably would not have mattered if the offer was higher. The sellers were literally signing the other contract when they received Mo and Sarah’s offer.

The second house they made an offer on was a ranch with a basement. It was built in the 1960s and while it was not a looker it was a great deal!

The house had ugly carpet, but hardwood floors underneath that carpet. It had faded paint, an old kitchen, old windows, and outdated bathrooms. However, it could all be fixed pretty easily and since the home had working plumbing, working electricity, a decent HVAC system, a decent roof, and no major structural problems, they could get an owner-occupant loan.

They made an offer right after seeing the home the first time. After seeing so many houses they knew this was a great deal and their offer was accepted! They got the house under contract, conducted an inspection, completed the loan process, and ended up with their first house!

They paid $119,000 for the house and once they had fixed it up a little, it would be worth just under $200,000. They were able to buy much cheaper than they first thought which was saving them a ton of money and building them a ton of wealth. If Mo figured this right, he had just made more money buying a house to live in than he did in an entire year and he was saving money over renting.

Real estate appeared to be an amazing investment and he was just getting started.

Uncle Andy and Aunt Esther

Mo had an Uncle and Aunt that he loved to hang out with. He had been close with them since he was a kid and had idolized them his entire life. They were the cool members of the family as far as he was concerned. They never had any children, but they had fashion and a vibe that was hard to describe. The thing that Mo loved about them is they were fun and they paid attention to him! They went out of their way to talk to him and bring him presents when they went on exotic trips. They appeared to love life and seemed to be very happy.

They also seemed to have money and plenty of it, at least to Mo. Later in life, he learned that Andy and Esther did not have as much money as they put on. They were often asking to borrow money from Mo’s dad who was Andy’s brother. Mo’s dad did not talk much about it, but he did complain about it under his breath once in a while.

Mo’s parents were not rich, but they were able to provide for Mo and they owned a house. Mo did not think much of it when he was younger, but now it appeared as if owning houses had been a very good thing for his parents. They had bought a few houses over the years and took the approach of most Americans. They bought houses that they liked and fit them best, not great deals.

Over time they paid down the loans and the houses slowly went up in value. When they decided they wanted to buy a new home they had tens of thousands of dollars in their current house that they could use as a down payment on the next house they wanted. The really cool thing about buying owner-occupied houses in the United States is that the profit is usually tax-free if you live in the home for at least 2 out of the last 5 years you own it. Most people who buy owner-occupied homes never pay taxes on the profit unless they move in less than 2 years, make more than $250,000 on the sale as an individual or $500,000 as a couple, or use the home as a business or rental.

Over the years they built more and more equity and one of Mo’s dad’s proudest moments was when he paid off his house. His parents had that goal for many years and while Mo did not have that goal, it was really cool to see his parents so happy.

Andy and Esther were not in the same position. They had rented all of their lives because: “they didn’t want to be tied down to one place for too long”. They had rented small eccentric houses, elaborate apartments, and even a houseboat over the years. If there was one constant with them it was that they were never stationary, they were always moving and changing.

Mo learned that that was not always their choice to be moving and changing. They often had a tough time paying for rent and a tougher time finding new places to rent because their credit was not the greatest. They gave off the impression that everything was perfect but that was far from reality.

Mo could not help but wonder how their lives would be different if they had bought houses instead of renting. Those cute little houses they used to rent for $500 a month they could have bought for $50,000 20 years ago, maybe even less. Some of those houses are in the trendy part of town now and worth $300,000 or even $400,000!

One reason that Esther and Andy struggle so much is that those trendy areas of town are so expensive now. They are paying a minimum of $2,000 a month for a tiny place and much more for the eccentric interesting places. They could have owned one of those houses and made hundreds of thousands of dollars over the years. Instead, they paid hundreds of thousands of dollars in rent for decades and had nothing to show for it.

They said they wanted freedom, but Mo thought to himself it would have been pretty easy to rent an eccentric cute little house whenever they wanted to get away. Renting the place could have even made them some extra money.

Mo knew that his house would not hold him back from living life. If he wanted to get away he could rent it or sell it pretty quickly. The loan documents he had signed said he had to live in the house for 1 year, that was it. After the year was up he could rent the house. He also learned that if his job transferred him or there was an emergency he could move out of the house sooner as well. He could also sell the house if he had to. He had plenty of equity and he could sell it pretty quick and make a lot of money. The house had not tied him down at all.

More opportunities than he could imagine

Something that Mo had not considered until he had owned the house for a bit was that the house could help him do so many things that he could not do renting. He eventually fixed up the house and while it was not huge or overly impressive to his friends. It was a moneymaker! He had paid $119,000 and spent maybe $5,000 in materials while he supplied most of the labor to paint, put in flooring, replace fixtures and do some other rehab on the property.

The house was worth close to $200,000 after he had fixed it up. He did not have to make it fancy and he did not make it fancy. The neighborhood would not support a fancy house so he was happy to keep it simple. He had paid his loan down a little bit but not much. He still had almost $80,000 in equity in the home! He could not believe it. While some would think that is dead equity until the house sells, that is not the case. It is pretty simple to refinance a house which means you replace the old loan with a new one. In the process, you can complete a cash-out refinance which means the new loan is more than the old one and you get cash for the difference minus closing costs!

He could also get a line of credit which leaves his original loan in place but adds another loan. A line of credit allows you to take out money when you need it and pay it back when you don’t need it. You only pay interest on the money you have borrowed. Mo and Sarah could get a line of credit up to 95% of the value of the home or a refinance up to 80% of the value of the home. That means they could take out from $40,000 to $70,000!

That is a lot of money that they would not have had if they were renting. That money could be used to travel, to take time off from work, to help people, or to invest. Mo’s plan was to invest it and invest it in real estate. Mo did not get excited easily, but real estate was one thing that he could not wait to get more of. He had big plans and buying a house to live in was just the start of it!

 

This short story was written by Mark Ferguson. He has written 9 books on real estate including “Buying into Success“, which is a full-length book about Mo and his journey getting started with real estate. The book has much more detail on the ins and outs of real estate and how to actually buy a house to live in, investment property, or both! You can find the book on Amazon as an eBook or paperback.

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