This is where I would say two things, 1. "Be careful who you listen to" and 2. "Follow the money".
The Investors Secret
Investors wouldn't rent the property to you if it didn't make them money. When you follow the money, you realize that you need to be careful who you listen too.
So Rent or Buy?
The answer is a personal choice like no other, and I want to share something with you about how my decision made a difference in my life. When I was a kid in the 1970's, I was amazed that my parents didn't buy more houses to rent out and make money. 14% increases in prices annually, and peak interest rates of 18%, it just made sense. My parents told me I was young and that real estate was a bad investment. I listened.
At 18 years old I was in the military, and rented a small apartment, and rented out a room so I could live in a slightly nicer place and drive a nicer car. One of the guys I worked with was driving an old crappy VW beetle. I was driving a new VW Rabbit Diesel with payments. Another friend in college bought a two bedroom condo, rented out a room and drove a 70's Maverick.
In 1989, the real estate itch was getting stronger, so I started taking real estate classes at Century 21. I learned here that a lot of agents don't own a house. I figured my parents must be right if agents don't even buy homes. It seemed odd though, can you imagine a car salesman without a car? A TV salesman without a TV? A cell phone salesman without a cell phone? It was looking more and more that my parents might just be right, and that houses were different.
I kept renting until 1998, when I couldn't resist any more and jumped in head first. Instead of starting with a condo like my friend or a small house, I bought the biggest house I could afford. Even then I was right at the limit to the penny for getting the loan. When I bought that first home, my buddy with the VW beetle had just "retired" and pulled up in his new Ferrari to congratulate me. My buddy that bought the condo also retired. We were only 28 years old, and I was late to the party.
Better Late Than Never
The guy in the VW, Bob, had a small business on the side painting houses. He was always saying you have to own a business to succeed. The painting business gave him connections to buy commercial buildings at good prices that needed work. It wasn't a full time job and a painting business on the side that let him retire, it was the commercial real estate he bought at good prices.
The guy in the condo, Dan, kept buying units in the same complex. In 1998 he owned 14, in 2004, he owned all 40 units in the complex and sold the entire place as a high end apartment building. He flipped the money into a great home for himself and another dozen homes that he used for rentals and income.
So why did Bob show up to congratulate me? He wasn't there because I bought my first house, he was there because I bought it right, I bought it like an investor. There are some things that investors and agents don't want you to know, and I because I knew Bob and Dan I used these "secrets" to get a great deal. I bought the model home in a new high end tract for 30% less than anyone else in the neighborhood paid. I had an instant 25% equity after paying all of the fees. On paper, I had just made more money in one transaction than I had made in any one year.
So, do I think you should buy your first house now? Absolutely, and here is one thing that I wish I had known when I was 18.
When you rent, you are buying the landlord a house. If the landlord had a 30 year loan, and every tenant moved out every two years, he only had to deal with 15 tenants and he owns a house. Then when he rents it out and he has free money. Warren Buffet calls this infinite returns. Someone else bought the investor the house, and he keeps making money forever. In fact it is better than free because you get business tax deductions if you are an "active investor"*. Why wouldn't you do this?
If you buy a house, you might have a bigger payment for the first few years, until rents catch up, but here is the part I didn't get early enough. If you rent a house for $2000 per month, that is $2000 you have to make after taxes. If you buy a house at 3% interest and pay $2500 per month, $1250 is interest that is tax deductible. That means half of your payment is reducing your tax bill in many cases. At the end of the year, they might end up costing you the same amount.
A small part of your payment is for insurance, and the rest is principle. Principle is like a savings account. Even if your house doesn't go up in value, about $1000 per month is paying down the loan. If you stay in your house just 24 months and you sell it for the same price as you paid, even after paying all the fees, you get a check.
When was the last time your landlord gave you a bigger check than you gave him? So lets take a simple example, a $200,000 house, that you buy for $200,000. The 4% interest 30 year loan gives you a payment about $1000 per month including interest and insurance. When you sell, there is $12,000 equity that you can get as a check. How is that for a deposit refund?
What if it goes up just 5% per year? After 12 months it is worth $210,000 and $220,500 after 24 months. Many homes are available for 0% or 3% down, but lets say you put 10% down. You put in $20,000 plus $24,000 in payments for a total of $44,000. Selling the house, you would get back your original $20,000 plus the $20,500 it went up and the $12,000 in principle you put into the house.
Add that up and you are $52,500 on the good side. Take out the 8% for real estate fees and escrow of $17,600 and you get $34,860. So you put in $44,000, and you get back $34,860. Living in a house for two years and it only cost you $9,140. Or you could have paid $24,000 in rent. So which one is the better deal?
What If The Price Of The House Drops?
Historically there have been several "flat" periods where house prices remained relatively level and a couple of short periods where home prices dropped. The key is to do your homework, buy right and make sure you don't buy more than you can afford. Even if you buy at the top of the market, as long as you can afford the payments, you will make it out the other side just fine. If you look at the number of homes that sold at a loss during the most recent price drop, it is actually very small. The media made it look a lot worse than it was.
Buying Smart
In 1998 I bought my first home. Following the slow path to making money in real estate, I moved into a slightly smaller house 24 months later, buying a VA repo for zero down. 24 months later we did it again, and 24 months later we did it again. In 2004 I lost a little faith and sold them all thinking the market had peaked.
After the crash in 2006, not one of the houses I used to own fell back to the price I sold them for in 2004. While the 2006-2007 crash looked bad on paper, for investors who weren't over leveraged it was a windfall. All of the people that were handing their homes back to the banks still needed a place to live, the rental market grew as the housing market crashed.
While I was out of the rental market for a short while, I was never out of the real estate game completely. In 2004 I bought some great rural land with a small home that I fixed up and sold in 2006 for a nice profit. I bought an estate foreclosure in 2006 when the market peaked, and sold it for a nice profit in 2010. I had to stretch my 24 month plan just 24 more months to pocket a tidy profit. The people who panicked sold everything, rented and lost big.
So are you ready to buy your first house? I hope so, and I would like to help you, even if you aren't buying in Orange County Ca where my office is. Let me know what you want to know. I am putting together a book that will include the top ten things your real estate agent doesn't want you to know (or doesn't know) about buying your first home.
What else would you like to know to buy your first house?
* Check with your tax advisor about the tax benefits of buying a home, this article is not meant to provide tax advice.
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