Don’t Buy a House!

home-1353389_640Obviously I am not a real estate agent or broker, because you probably wouldn’t hear that sentiment from your friendly neighborhood Realtor.  The reason for this “buck the trend” statement of “Don’t Buy a House!” is to hopefully enlighten those who desperately want the American Dream but inevitably end up with, the more common, American Nightmare.

Of course, owning a home is not all bad.  I mean, I am a homeowner and I enjoy the benefits.  But the right circumstances must exist in your financial life before you take the plunge.  Specifically, understand your financial goals and have a long term approach towards the wonderful world of homeownership.

My reference to the American Nightmare looks something like this…  A young person or couple finally saves up enough for a down payment for their first house.  They can’t afford to buy a home in their “dream neighborhood” but want a to own a “starter home”.  They purchase the maximum home they can afford (or qualify for) in a neighborhood that is not necessarily a dream, but will work.  After they move in, buy furniture and make a few improvements, they are nearly out of cash and/or have racked up some credit debt.  Also, since they purchased the maximum house they could qualify for, they are spending most every dollar they make to pay for the mortgage, insurance, taxes, maintenance, etc.  Meaning, they do not have any money left over to put into savings or invest.

The best case scenario for this person or couple would be that they luckily purchased the home in an upward moving market with declining interest rates and are able to profit from appreciation over a 3 to 5-year period.  However, they would still need to do the right thing at that point.  Meaning, complete a cash out refinance, keep their mortgage payment at roughly the same amount, and put some money into savings or an investment.  Once they build a nest egg for retirement, they could then look to move into their “dream neighborhood”.

Unfortunately, the more common nightmare scenarios are:

  1. The property goes up in value and they sell it. At that point they immediately use the profits to move into their “dream neighborhood”.  Although they are in their “dream neighborhood”, they are still spending every dollar they make on their house, and still don’t have any savings or investments…hence…nightmare.
  2. Or the property goes down in value and they are stuck in the home for much longer than they anticipated, they have little or no equity after several years, and again don’t have any savings or investments…double nightmare.

So how do you avoid these common tales of woe and accomplish the American Dream?

The good news is it is fairly simple; but the bad news is it takes some discipline, a bit of time, and a little sacrifice. Man…that sounds horrible, right?  Not necessarily.

So here is one strategy for the American Dream.  As for discipline, you won’t be buying a house until you can afford it and still have money left over to save and invest.  As for time, it’s at least a 5 to 7-year commitment.  And as for sacrifice, you will have to lower your expectations on where and how you live for a while, meaning no “dream neighborhood” anytime soon.

When you are a first time homebuyer, you can take advantage of FHA financing (google it), but you can only utilize this once.  Also, you can use this financing to purchase a 2 to 4-unit residential property instead of a single-family home.  Which brings me to the sacrifice… instead of buying a home you will be buying a 2 to 4-unit residential property, and you will be living in it for at least 1 year (FHA requirements) but probably more.

Why buy a 2 to 4-unit as opposed to a house?

  1. You will be able to qualify for a more valuable property since you can utilize the rental income, from the units you do not live in, as part of your qualifying income. Meaning, your tenants help you qualify and pay for your mortgage, taxes, insurance, etc.
  2. FHA loan limits for 2 to 4-unit properties are significantly higher than for single-family homes. Approximately $625,500 for SFRs versus approximately $1,200,000+ for a 4-unit.  So again, you will be able to purchase a more valuable property.
  3. You can depreciate the “rental” portion of the improvements and write it off as an expense on your taxes (passive income).
  4. The most important part. Over time (I mentioned time before, remember?), as the rents increase with inflation, you will have a multitude of options at your disposal.  Also, you will have created an additional source of income (think retirement plan).  Here are a few options you will have after 5-years plus or minus:

A. Move out of the 2 to 4-unit, and use the profits to rent a home in your “dream neighborhood”.
B. Save the monthly rental profits for a down payment on a home in your “dream neighborhood”. Of course you will want to keep the 2 to 4-unit as an investment to help you pay for your home’s mortgage, taxes, etc.
C. Sell the 2 to 4-unit and exchange the proceeds into a larger income property that produces a larger cash-flow. Wait a bit longer until the larger property stabilizes.  Then use the even bigger profits to rent or buy a home in your “dream neighborhood”, or even rent or buy a home in your “I can’t believe I live here neighborhood”.

So just mix up a recipe with a little discipline and sacrifice, let it simmer for a bit, and BAM!  American Dream…

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