If so, why did you regret it?
I have some friends who have their heart set on buying a house at full retail price in this crazy market and with how inflated prices are, I know they’re going to make a mistake.
It’s hard watching people do dumb things while I sit on the sidelines. I wish I could give them a better example of why they should wait.
When I first moved from California to Indianapolis, I had inherited a little chunk of money and used it as a 20% down payment on a single family residence.
This is probably one of the biggest regrets of my life (though I learned a lot from it, so there is definitely a silver lining).
At the time I didn’t really know the power of low (or no) money down options like the FHA loan.
I also didn’t really understand how powerful house-hacking is.
If I would have played my cards right I could have gotten a great 2-4 unit, that minimized my monthly mortgage payment… or possibly even got to live their essentially mortgage free (with the rents covering everything).
I actually made a couple of Youtube videos explaining some of this stuff:
The long and the short of it is, I’ll probably always house hack my primary residence in some form or fashion because it’s the smartest thing to do with your primary residence… at least from a financial perspective.
The triplex I’m living in now is my favorite property I’ve ever lived in so far!
@amybreen I’m curious to hear your thoughts on why it’s dumb to buy right now. Is it solely because prices are high?
What market are your friends buying in?
I wouldn’t necessarily say it’s a bad idea to buy right now, even though prices are high. The worst thing that you can do in my opinion is sit on the sidelines and try to time the market.
If they are buying in a market with strong population growth and solid job growth (especially within the tech and healthcare industries), I would argue that it would be silly to NOT buy right now leveraging these historically low interest rates. You can practically guarantee that you’ll be able to sell that house for more years down the road.
And even if they’re not in a market with strong appreciation potential, I would probably encourage them to buy anyways for two main reasons:
Low housing supply. Housing supply is low and will likely continue to be low due to the decline in homes built in the last decade.
Inflation. We printed trillions of dollars in relief funds in effort to stimulate the economy resulting increased prices for consumer goods.
Actually, I will add a third point that I already mentioned, just because I think it’s that important, low interest rates. And this applies to everyone, not only real estate investors.
I put a super simplified (yet realistic) example for you to show the difference in a $100k purchase price but a 2% interest rate spike. Your principal and interest payment will actually be over $100 more expensive at the lower price point because you’re borrowing money at a higher rate.
All that to say, I don’t know the financial situation that your friends are in or what their long-term plan is with this house but judging solely off “high” prices, I don’t think that should prevent someone from buying.
@amybreen, when everyone seems to be doing something (e.g. buying increasingly expensive houses), it’s definitely a good idea to question whether it’s the right move, and then proceed thoughtfully.
My short answer is that I’d encourage your friends not to buy a house unless they meet at least 2 of the following factors: 1) they’re fully prepared to live in it for at least 10 years, no matter what; 2) it would cashflow as a rental and they’re mentally prepared to be landlords if they needed to; 3) they can afford to put at least 20% down, and are okay with losing that money, if the local market turned south and they had to sell.
Longer answer / my story: I bought a condo in 2005 in one of the top 3 fastest appreciating markets in the country, at a time that real estate was exploding across the whole country, and a lot of very intelligent people in my area were saying things like, “If you don’t buy now, you could be priced out of this market forever.”
Only a few months later I moved out of state when a much better job opportunity arose, unexpectedly. At that point, on paper, the condo had already appreciated about 20% in only a few months, so we decided to hold it a bit longer and rent it to a former co-worker.
After just a few more months, with RE still booming nationally and feeling rich on paper, personally, due to the condo’s appreciation, I signed a contract to have a SFH built, new construction. I pulled together 10% down mostly from 0% credit card checks with preferable terms, which they were giving away like candy on Halloween back then, but my actual intention was to sell the condo well before the new house was finished and ready for closing. Things in the condo’s market had been selling so fast just 6 months before (same stories as today: multiple offers within 24 hours of being on MLS), so this felt like a very safe bet.
Somewhere around Jan 2006, with the former co-worker turned deadbeat tenant having stopped paying rent months before, I listed the condo for sale in line with the asking prices of directly comparable units in the same complex, about 40% above what we paid for it…and nothing happened. No offers, no showings, nothing. We waited a month or so and then started dropping the asking price…along with everyone else selling identical units in the complex, and comparable properties in the entire state of FL.
Six months later, we managed to close in the same week on the sale of our FL condo at a price about 6% above what we paid for it (so we broke even after realtor commission, not factoring in holding costs), and on the purchase of our newly built house. My intended down payment money from the condo, which only ever existed on paper, had completely evaporated. Rates for all credit scenarios had gone up significantly, relative to where they had been when I signed the purchase contract for construction months before; plus, with my now lower down payment (and credit card balance from having “temporarily” borrowed the down payment), I no longer qualified for the best rates available.
Instead of what was originally projected to be a $2,000 monthly mortgage payment, I ended up with a $3,000 per month payment from the builder’s “preferred lender” who I’d agreed to work with exclusively in exchange for builder’s upgrades. If I had anyone knowledgeable advising me, they would have certainly told me to at least shop around for lenders regardless of the supposed exclusivity agreement I had with the builder, and most likely would have told me not to move forward with the purchase at all, just forfeit the down payment and hope the builder didn’t sue me to enforce the contract (which they had the right to do). But instead I closed on the purchase, and then immediately started looking for refinance options.
I was able to get the mortgage payments down to $2,400 on a refi in late 2006, and within a year after that the value of that house, along with most of the real estate in the country, dropped significantly, to the point that I owed more than it was worth. I still own the house today and rent it out with positive cashflow. It didn’t appreciate back to my purchase cost until about 2 years ago – roughly 13 years after I purchase it.
Rarely anymore, but out of curiosity I occasionally check the value of the FL condo from time to to time. During the trough of the Great Recession and foreclosure tsunami, identical units were listed at 10% of the price I bought mine for – a 90% loss of value. Today, they’ve recovered back to the price that I sold my unit for in 2006, but haven’t re-appreciated above that, yet, so there could very well be some owners who purchased in late 2005 / early 2006 who are underwater to this day, relative to their purchase price.