I’m currently in the process of selling my house. Not the one I live in, the one I bought at the ripe old age of 23. More on that below.
As the offers slowly trickle in, I review the details of each submission and the financing terms for the potential buyers. I’m curious.
The trend I’ve noticed so far? No one wants to put down the traditional 20% down payment. They either qualify for an FHA loan, or have some other deal worked out that doesn’t require 20% down.
Thought #1: this seems a bit troubling, and reminds me of the 2005-2007 era.
Thought #2: do these buyers even know what they’re signing up for?
Why do I worry for them? Because this was me 12 years ago.
Stumbling into Home Ownership
A short digression.
The summer after I graduated from college, I moved back home and into my parents’ house. I got my first “real” job at the end of the summer, and started making way more money than I had ever earned before.
After six or so months of co-habitating with my parents, I got the itch. I wanted to live on my own again. But instead of searching local apartment listings, I immediately went to the “homes for sale” section.
Buying is always better than renting, they said.
I found a real estate agent and started looking at houses. But this was 2006, and prices in my market were pretty high. Most single family homes in my target areas were $250,000 and higher. I couldn’t really afford that.
Real estate always appreciates in value, they said.
Well, okay. Maybe I should look deeper into this potential “investment.” But I’ve been working full time for less than a year, and I’ve only saved up a few thousand dollars for a down payment.
Alas! I was quickly told that I don’t need to save up 20% for a down payment. In fact, I could finance the deal 100% and make no down payment. Hell, I could even roll my closing costs into the loan!
And before I knew it, the deed was done. I bought a house I couldn’t afford with money I didn’t have, and even financed the closing costs of the transaction.
Oh yeah, and this is when I bought the house:
Good Debt vs Bad Debt
People often talk about “good debt” and “bad debt.” The general premise is that, in some circumstances, borrowing money as part of a transaction or ‘investment’ may be a prudent move.
Debt is a tool. If used wisely, it can be a means to drive outsize returns, which is the definition of leverage.
Examples of “good” debt:
- Borrowing money to cover a portion of startup costs for a business, assuming a sound business plan has been created.
- Taking out a student loan for a degree program which will result in a substantial increase in pay and a fast return on investment (ROI).
- Borrowing in order to scale a business, which directly increases volumes and thus revenues.
In other words, borrowing money that will demonstrably result in a new revenue stream and/or measurable return. Using money to make money.
Some examples of “bad” debt:
- Borrowing $60,000 to buy a Tesla, because they’re fuckin’ cool (side note: they are cool, not denying that).
- Aimlessly pursuing various degree programs and funding through student loans, without any plan to work in said fields.
- Using a credit card with the intent of carrying a month-to-month balance (at 24% interest!).
And one more: borrowing the 20% down payment (in addition to the other 80% mortgage balance) to buy an overpriced house because “I’m an adult now!”
In retrospect, I’m not sure what I was thinking at the time. I guess I was focused more on competitive drinking than getting my financial situation in order.
So why did I buy this house, effectively on margin, against any common sense analysis of the situation? I thought I was making an investment.
Which brings me back to the point of buying vs investing.
Buying vs “Investing”
Your primary residence is not an investment.
In case you somehow skipped that line, I’ll repeat it.
Your primary residence is not an investment.
Recently I heard someone say that if you buy real estate with the expectation of appreciation, you’re speculating. I like this view.
Sure, a home you purchase will mostly likely appreciate in value over time. If you happened to buy at a good time, in a good location, it may even see a substantial increase in value. Or it might not. Thinking you know the future for a particular real estate market is akin to thinking you know what stocks (or bonds, or gold) will do over the next 5 years.
You don’t know. Don’t speculate.
Back to Zero
Recently I signed into the Zillow to check my home’s listing and make sure that the statistics were correct. I noticed something funny when I was going over the listing. My Zestimate, the approximated value of the home, had finally reached the price I paid for it. After 12 years, I’m back to zero!
When you factor in the private mortgage insurance I’ve paid all this time, the higher interest rate incurred by 100% financing, and the horribly terrible timing of the purchase, I haven’t broken even. Maybe I never will.
But I learned from my mistakes. I now know how to analyze deals, and can judge whether the numbers align with my goals and expectations for any given opportunity.
Run the Numbers
Here’s the bottom line: analyze the situation before you dive into any major life event. Don’t get overanxious to pull the trigger and buy something you’ll regret. Don’t put in an offer because your agent tells you to hurry. And don’t borrow 96.5% of the financing costs because you can’t wait to save up the full down payment, or because you won’t be able to afford a house in another 3 months.
By the way, ask any of your real estate agent friends if now is a good time to buy. Surprisingly, they will tell you “yes” 100% of the time, regardless of market conditions. Think about that.
So my best advice is to always run the numbers. Understand how much you are borrowing, and the cost of that borrowing in terms of interest, PMI, as well as the opportunity cost. Look at the impact on your cash flow, and whether it will put a strain on your financial situation going forward. Don’t plan for appreciation, because you might not get it.
Use leverage as a tool to boost your returns, and don’t bury yourself in debt.
How about you, readers. Have you made any poor debt moves? Bought too much house, or bought at market highs? Let me know in the comments.
One final note: the house that I have referred to in this post happens to be a multi-family home. The details of my purchase and financing were still awful, but the fact that I house-hacked my way through my 20s and early 30s actually made it an OK decision overall. Maybe I’ll do a deep dive on the whole experience after the house sells.
Update: here’s my postmortem on the rental property and 13 years of landlording
Ugh house pain I know about! I bought in Reno, NV in 2007….yikes at least we bought a short sale (at $210k) BUT all the money put into actually making it livable I lost…about $100k. Lesson learned, I have to just move ahead, and am trying to be ultra careful on my next investment property.
Glad to hear I’m not the only one that bought at the wrong time! I definitely learned a lot from my experience as well, and that’s all you can do.
i’ve been pounding the table on just what you’ve laid out here. your house is not an investment. it’s a place to live! sure, in most cases you’re buying the freedom to do what you want with the place. paint it purple if you want. get 14 dogs to live there, etc. it’s the same for non-necessary improvements. kitchen overhaul = not investment. it’s nice to have but i ask folks to understand the difference.
there is value in the lesson you learned with this property. drinking your height in busch light is a helluva’n accomplishment too. i know you’ll put the proceeds to good work with the QQQ.
14 dogs in a house is an anti-investment! I can proudly say that I’ve drunk my height in Busch Light at least 3 times, that I can remember.
Even when doing “value-enhancing” home improvement projects, the return on your investment is almost always <100%, which means it's not an investment.
Well said from start to finish. Your brand of tell-it-like-it-is common sense is something we need more of in the personal finance world.
One could argue our poor debt move, depending on your perspective, was our $500k student loan debt. I think it will end up being a good move in the long run, but I think the argument could easily be made that we’re wrong.
I’d be very interested in your deep dive on the multi-family should you find the desire to put it together.
I think I will probably write up a case study on the multi-family. I’m interested myself in finding out whether it worked out to be a better move than renting or buying a small SFH during the same time period.
In your situation, the fact that you’re generating tons of monthly cash flow can be an argument that dental school and the debt was worth it. Could another, lower-debt path have worked? Sure. But it’s not like you’ll be drowning in student loan debt for much longer.
Your primary residence is not an investment.
This needs to be hammered in to people. (There could be exceptions however, as with most things, when one buys a multi-family property which serves as primary residence as well renting other parts out.)
The distinction between assets and investments is one that a lot of people miss.
Wrote about this a while ago at https://networthanonymous.com/2018/06/14/no-we-dont/
Completely agree with your post. I like making the distinction of assets vs investments. And I like that you mentioned that cars should not even be considered assets. I always wonder why people do that on their net worth calculations. Your car is depreciating to zero, why would it be considered in your wealth at all?
We bought in 2011, so the VERY bottom of the market. I also grew up in a construction family, so I think I’ve always had a different perspective on home buying than most. That said, buying what we did is the #1 reason we can save a lot in our HCOL area on median salaries.
That’s great timing. I’m thankful that my poor purchase decision (and timing) didn’t cripple me financially, because it easily could have if the circumstances were slightly different.
I live in NYC, and real estate is a popular cocktail party topic, and everyone loves to brag about how NYC real estate always goes up. But that isn’t true, so love how your post is a reminder about how rules of thumb and common advice can still be wrong depending on your situation. Glad you turned your purchase into a lesson and some house hacking experience. Yes, your primary home isn’t an investment while you’re living there but can be turned into one if you house hack, turn it into a rental, cash-out refinance it and invest the proceeds into investments, etc.
That’s definitely true, that it can ‘become’ an investment. It certainly wasn’t the case of buying an oversized SFH with no prospect of turning it into an income generating asset. More than anything, I think it taught me that timing (sometimes) can be very important. If I had bought the house +/- a year or so, it definitely would have worked out better.