If you’re like many people who just moved to a new area, or decided you’d like to stop making your landlord rich & start building some real wealth for your family, you may be getting excited about buying a home. You’ve got a lot of things to consider before you jump into a car & start looking at something you saw online.
Firstly, are you qualified to complete a purchase? If you haven’t spoken with a mortgage lender yet, you may be getting excited for nothing. Do you know what your credit score is, do you know what credit score you’ll need to secure a decent loan? How about a good loan? There are many ways to get an idea of your credit score & credit history if you’re just getting started. The easiest is by using a site such as CreditKarma.com. Keep in mind, nothing is truly free, your credit information is provided to you here in exchange for the ads offering you credit cards & other loans. Provided you can avoid any temptation to to get a card you don’t need (which may actually temporarily hurt your score, depending on your situation) you may be well served to keep an eye on your score & find ways to improve it before making a large purchase such as a home.
Once you know where your creditworthiness lies, it’s time to think about down payments & closing costs. Yes, you may be able to get an FHA loan with very little money down. Again, nothing is free, since March of 2013 this now comes with a PMI (private mortgage insurance) monthly fee that will now stay on your loan until it is paid off or refinanced. That being said, if you can get into a property in an area where appreciation will result in your equity growing substantially over the next few years, your ability to refinance out of the FHA into a conventional loan may happen more quickly than if you were just paying down 20% of what you bought it for.
For example, I buy a $100,000.00 house with 3.5% down My loan would be for $96,500.00 . In the first few years, most of your monthly payments are going to interest, not paying down the principle much. However if in a few years, appreciation has been good in the area, maybe my home is now worth $120,000.00. 80% of 120,000.00 is $96,000.00 . In a few years, I will have paid $500.00 off my principle & be able to refinance out of needing the PMI (which only benefits your lender’s risk, not your families’ wealth.)
If your credit is ok, & you’re looking to start saving now to amass the funds needed for down payment, remember you’ll also have closing costs which can range around 2-5% of the purchase price . Of course, you’ll have moving expenses, maybe new furniture, paint & remodeling expenses… the list goes on. The thing is, real estate can be a phenomenal wealth generator for you & your family. Maybe buying something when you can afford to close, but need to wait a few years to repaint the exterior is not a bad idea.
Maybe you’re looking at other ways OWNING something can benefit your bottom line.. You were renting for years, putting money in your landlord’s pocket. Now you can be the landlord! Maybe you’re thinking of buying a duplex & renting out the other half? Maybe buying both halves will mean you get to live in one of them for 80% less than it would cost had you only bought one half. This is a concept referred to as ‘House Hacking’ & it’s commonly referenced on sites such as BiggerPockets.com, a place I’m personally going to learn more about real estate investing all the time.
You don’t need to buy a duplex or a fourplex to save money while your tenants or room mates pay down your mortgage for you though, maybe you get the concept & find a home you love that has a nice size casita you can get $500.00/ month for. If your Mortgage is only $1,200/month then you’re living for $700 & you get the whole house, your tenant has only the casita!
The best part about house hacking is the money you save. Here’s why. Let’s say you own your primary residence & you’re looking to start buying investment property. Every dollar you’re able to save while living a comparable lifestyle to the one you currently enjoy, is another $1.(your tax bracket+[your tax bracket x your tax bracket]) that you would have to earn. Meaning if your tax bracket is 25%, every dollar you could go out & earn in a second job would only net you $0.75. Or every dollar you’re able to save is another $1.33 you’d have to go earn in a 25% tax bracket ([.25x.25=.0625]+1.25=1.33).
See why saving is hugely more effective than just earning more? Look at the example above, That $500/month is $6000/year multiply that out by the tax saving of 1.33 & it’s like you just got a $7,980.00/year raise before taxes. Live frugally, it doesn’t mean you can’t enjoy your life, just start saving & have fun doing it. Look for creative ways to do so. It becomes a fun game & the more you do it, the easier it gets to do more. I saved up $4000.00 for a rainy day fund. Then I took the deductibles on my wife’s truck & my car & moved them from $500.00 to $2000.00. Now I’m saving $360/year on insurance premiums.
Though it’d been in my face all my life, I’ve never had a wholesale club membership, just didn’t think about it until i was looking for ways to save more money to invest in real estate. Now, I spend my previous weekly grocery budget & get 3 weeks worth of better quality food. I also make one trip every three weeks & spend less time shopping & more time with my family. My $60 Costco membership will save me $4,000.00 per year on gas & groceries. What’s $4000.00 x 1.33? $5,320.00 . It’s like i just got a good raise, or a part time job doing nothing.. my lifestyle is the same or better & it doesn’t up my taxes due.
All this is not to say that picking up a side hustle and earning more money is a bad thing, especially if instead of going on vacation with that money or buying shoes, you are working your plan on your additional income from the saving side as well. That’s actually one of the reasons I decided to sell real estate & write this blog. I got excited when I started learning the secrets of how money really works, the power of compounding returns, & the advantages of frugal living. It’s some of the most powerful knowledge I’ve accumulated in my life & I can’t believe it’s not taught in school. You have to self educate and as you learn, you’ll likely become as excited as I am about learning more. My goal is to share this knowledge with those I know & care about as well as anyone who’s ready to learn & take control of their financial future. I want to help others build net worth using frugal living and real estate as a powerful vehicle to enhance their sense of security and happiness.
Owning real estate provides unique benefits such as mortgage interest tax deductions, appreciation on 100% of your investment that you may have acquired control of for an investment of only 6% of it’s value (3.5% down + 2.5% closing costs). I’ll dive more into some of these items & looking at your home as an investment as well as a place to live in a future blog, so subscribe to my updates & I’ll do everything I can to pass along information. If you’re ready to talk about buying a home or an investment property, call me at 702-879-8502 & let’s get your life on track. Once we have an idea of your goals & situation, I have phenomenal mortgage agents who can help you choose the best options for leverage.
Here are a list of some of the best books I’ve read if you want more detailed information on the topics of building net worth.
The Millionaire Next Door by Thomas J. Stanley & William D. Danko,