Flash back to the spring of 2014. I just turned 24, was less than a year out of college, working a great ‘entry-level’ job, and about to close on my first home. This home was very much a ‘starter home’ and probably more house than I should have bought (more details to follow).
You Bought a House at 24?!?
Common question. “How the heck did you buy a house less than a year after graduating?”
Answer: 3 reasons. First, my parents allowed me to live rent free for a few months in the basement to save. Believe me. I did EVERYTHING I could to stock money away for a rainy day (please save your breath – I do not want to hear your bull shit complaints of how I had it easy).
Second, I had some serious side hustles. Most notably, I woke up every morning at 3:45AM…. Yes, I know I am crazy…. to drive this awesome high school guy to swim practice. He was not old enough to drive and his mother paid me ($200/week) to take him to and from practice. I lived off this income and saved my ‘9-5 paycheck’. As a side note, I used this time to work out or fire off work emails. Its amazing how productive you can be when no one is awake to distract you.
Third, and lastly, I had a respectable starting salary coupled with a low downpayment. How low? I used an FHA 3.5% down loan (we will get more into numbers later).
But…What were you thinking?!
l did not fully understand what I was doing but knew real estate belonged in my life. Oh, and who does know what they are doing on the first attempt? I viewed this as a trial run. Also, this property taught me a lot of what ‘to do’ and ‘not to do’. My investment thesis was based on the following:
- I do not want to waste money paying rent to someone.
- This provides a way to keep my cost of living affordable.
- I want to build equity.
- Real Estate is the best way to generate wealth creation PERIOD.
Diving a bit more into each of these points. Just like saving for FIRE (or retirement), I rather pay myself (first) than pay some landlord. You will never see your rent money again. A portion of your mortgage payment goes towards paying down the loan and the interest payments provide a bit of a tax benefit.
My monthly payment was fairly hefty (keep reading for the numbers) but I planned to house hack (see an example here) by renting out the extra rooms. The house had 3 bedrooms and 2 bathrooms and I planned to rent the extra two rooms to friends at below market rents (hint: this was one of the lessons I learned). Their rents would not cover my entire mortgage, however, I was ok with this. Why? The average 1 bedroom apartment in the DC area is well over $1,500. My logic was – Hey! I can own a home for a few hounded bucks a month? SIGN ME UP!!!
Owning a house is like having a piggy bank. Every month you stash a bit more equity into the property by paying down your mortgage. Think of this as putting loose change into the piggy bank. Also, if you are lucky, the property value stays the same… Or even better increases. This further increases the equity built up in the property. Double win.
As we all have (hopefully) learned, real estate prices do not always go up. Property values may actually GO DOWN! People get into trouble when they rob their piggy bank. This would be known as taking equity out of their house or using their house like a credit card. DO NOT DO THIS. Thankfully, I picked an area that was a bit undervalued and has some long term potential. According to Redfin, my property value has increased about 10.0% since I bought the home.
Lastly, wealth creation. I started my career underwriting commercial real estate loans (yawn!). This experience allowed me to see first hand how wealth was created and how some of the best names in real estate structured themselves. I was junior and did not understand everything. BUT! I knew these guys were doing something right and they had something that I wanted.
Finally, the part you have all been waiting for. I bought the house for $358,800.00 using an FHA loan with a 3.5% down payment ($12,558.00 downpayment for those of you are either bad with math or lazy).
Thankfully, my interest rate was only 3.75% (hope I see that again). My original monthly payment or PITI (principal, interest, tax & insurance) was $2,307.16. I refinanced out of this loan as quickly as possible; more on this later
This mortgage payment number may seem pretty high….. well, because it was. Part of that was because of the $386.26/month for PMI (Private Mortgage Insurance), which is one of the down sides of FHA. Additionally, I only put down 3.5% which means I had a large loan…. $346,242.00 to be exact.
My goal was to lower my monthly payment by getting rid of PMI. Guess what? I did and it significantly lowered my monthly mortgage payment (figure below… keep reading).
I refinanced my house after about six months. But….How did I do this after only six months?!?
Typically you need to have 20% equity or an 80% loan to value (LTV) to avoid PMI. However, my mortgage broker was very creative AND good at his job. I also benefited a bit from rising property values.
Start with the property values first – a few houses on my street sold after I bought my home. Each house sold for more than the previous (aka more demand for my neighborhood). As a side note, all the houses are cookie-cutter and nearly identical. What do these sales mean for me? This meant the appraiser had better sales comps to justify my property being worth more. It also meant someone would likely pay me more for my house if I wanted to sell it ( I don’t).
Now for the loan part. Over six months, I paid my loan down a bit and benefitted from a rising property value. However, I was still not at 80% LTV and I was stuck with PMI payments. BUT….. My mortgage broker recommends a 80/10/10 loan. This means that I have one loan at 80% LTV with no PMI (this is a conventional loan), a second loan at 10% LTV and 10% equity in the property. WINNING!
Let’s look at how this new loan structure lowered my monthly payment. I now had two loans which were $1,682.28/month and $203.17/month, respectively. My total PITI was now $1,885.45. Conclusion, I lowered my mortgage payment by $421.71!!!! This lower payment also meant I could rent the entire house and earn a profit every month (more on that later).
I moved out of my ‘starter home’ in late 2015. I came to the realization that I wanted to own more real estate… But more importantly, I wanted to own real estate that was CASH FLOW POSITIVE. I bought an old row home in DC and began renovating the building (I will talk on this more in another article).
I rented out my room while keeping my two other tenants. The entire house rented for $2,350.00 and my monthly PITI was $1,885.45. This meant I had $464.55/month ($5,574.60/year) in cash flow after paying my bills. Not bad for a property I never intended to have positive cash flow. This was a great trial run and gave me a ton of insight.
The house has been rented almost 100% of the time since I moved out. The rents have fluctuated a bit but nothing noteworthy.
I will continue renting this home for the foreseeable future. The returns are not amazing but I still have tenants paying down my mortgage.
I love this location, how walkable the neighborhood is, and the close proximity to biking/running trails. I might make this my FIRE home and moving back in once I ‘retire’. This house could serve as a great home base in between trips. Before moving back in, I want the house to be debt free. This will mean aggressively paying off my mortgage for a few years. I will not do this for other properties since I plan to retire with over $1 million of Debt.