Buying a House
Today's blog is on real estate investing. One of the best and easiest investments is your own home. Buying your own home, like getting a loan for your education, is an investment. You can never go wrong with real estate even if you pick a lousy location and even if there was an economic crash. Holding onto the real estate is key to not losing any money. And buying right to begin with is crucial.
Buying right means buying at the right price at the right time, in the right location and with the right type of loan. Getting the right type of loan means never getting a government backed loan. I honestly believe any government program designed for the lower class masses is bad. FHA and VA loans are designed for you to fail. How? Firstly, you don't ever want to finance closing costs like you don't ever want to finance sales tax and dealer fees into your car loan. That means you are borrowing more than the value of the property. Another negative is they require you to pay mortgage insurance to protect the bank. Why should you be paying to protect the bank? I want to pay for insurance that protects me, not someone else. These lenders make out like bandits when they foreclose on your property. They get paid 3 times over but to get into this is too long. Understand that they do benefit when they foreclose on an FHA or VA loan. The government pays them so they don't lose any money. Why should I pay this to protect them when I can use the money to pay for my taxes or my own insurance? On top of the mortgage insurance you have to pay, they force you to include taxes and homeowners insurance, rationalizing that they have to make sure you're never delinquent in those payments. Well guess what? This is included in your escrow and they can arbitrarily increase your payment based on the increased escrow demand. Yes I say arbitrary because they can use any excuse to increase escrow thus increasing your monthly payment. So you might have agreed to paying $1100 per month, and then down the road that $1100 becomes $1200 and $1300!
So I reject FHA and VA loans. Their rates are not all that great either. In fact, they are higher than a conventional loan. Compare the rates for a conventional loan versus an FHA or VA loan and I challenge anyone to show me I am wrong. I not only prefer conventional loans, I prefer interest only loans. You see, just like rich people lease cars, they buy million dollar property with an interest only loan. Just like you get more car with a lease you get more house with an interest only loan. Rich folks are not looking to pay down on the house. They are looking for an increase in equity. When you get a regular mortgage, only a tiny bit goes towards principal. So if you decide to sell your first home in 2 or 3 years, you would be surprised to see that the loan balance hasn't really gone down. Plus with an FHA or VA loan, the added closing costs and origination fees will eat up the increase in value of the house. So again with an interest only loan, your interest rate would be much cheaper. Your overall costs to buying your first house is less than any government backed loans and your net proceeds will be a lot more as well. Why? Because you will have put down 20% and none of the closing costs are added to the purchase price.
So when do you sell and achieve the highest benefit? When it is a seller's market. Sell high and buy low is not only for stocks but for real estate as well. To buy low would be to buy a foreclosed or auctioned property or a fixer upper. Most people want to buy a new subdivision that is a new build. Not a sound financial decision. First of all, these developers would qualify you with an 80/20 loan just to get you approved when you really can't afford the house. Their rates are not all that competitive and they don't have to be because they know they got you. On top of that, these subdivisions will have a homeowners' association that will subject you to so many rules and policies! Give me a regular house and a fixer upper any day. The beauty of a fixer upper is that you can now fix the house up the way you want it. You choose your own preference in flooring and paint etc. Believe me, by the time you spend the money in a fixer upper it will still be less than what you paid for a new build or one that is already remodeled. When you buy a fixer upper you have leverage with the seller not only in price decrease but in asking for seller to pay closing costs. Overall when you sell your fixer upper you will profit more.
Here's another tip. Do not buy a financed car before you buy a house. Wait until your purchase is done then buy your car. Unless you are way over qualified in income for your house, having a car note will be a disadvantage. You will not get the best rate or best terms. Do everything in your power to not give the lender an opportunity to deny you the best deal possible. Follow my guide in getting your credit score up in the 700s and your savings up to 20%. Then get a loan to buy your first house.
Why not rent? Some people would argue that renting is the best financial choice and I beg to differ. When you rent, your rent goes towards another person's investment, not yours. While it is true when you rent you do not have to spend money on repairs and maintenance but when you buy you do. Well, look at it this way. You maintain your car don't you? So if you maintain your car which provides transportation, why would you not maintain the roof over your head? Here is another way to look at it. After 5 years of paying rent, there is nothing to show for. After 5 years of paying on your own house, there is equity which in essence is savings. I preach SAVING, SAVING, SAVING! Guess what, buying a house is yet another form of forced savings isn't it? If you cannot save, this will force you to. If you are able to save a big portion of your income, a big portion of your tax refund and any other monies you come into, maybe you can pay cash for your first house. Don't! Why? One, your funds will be tied up and not "liquid". You want your funds to be accessible in case there are other potential investments you wish to make. Here is another thought. Instead of putting all your money into one property maybe you put it towards two properties. I would spend my cash on land or in the remodeling of a house that I would turn around and sell. Plus paying cash for a property gives you the least tax deduction, while an interest only loan gives you the most.
In summary, save up for a house, buy your first house that meets your financial capacity, and get an interest only loan. That is the start of building wealth. And when you multiply in the properties you buy that will then be passed down to your descendants, you will have moved towards building generational wealth. Happy planning to make this happen soon.
Until the next time, this is Dr. KnowItAli
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