Flashback to the spring of 2014. I just turned 24, was less than a year out of college, and working a great ‘entry-level’ job.
Also, I was 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. Many millennial’s have this opportunity but few take full advantage of it.
Second, I had some serious side hustles. Most notably, I woke up every morning at 3: 45 AM… Yes, I know I am crazy…. to drive this awesome high school kid 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 other side hustle income while saving my ‘9-5 paycheck’.
As a side note, I used this time to workout or fire off work emails. It’s 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 loan that required a 3.5% down payment (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. 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.
- Find 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 by renting out the extra rooms.
The house had 3 bedrooms and 2 bathrooms. My plan included renting 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.
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 as 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 by 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 down payment for those of you are either lazy or bad with math).
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.
My roommates paid $750/month each which meant I collected $1,500/month. This also meant I needed to come up with about $800/month on my own for a mortgage. Pretty good deal considering the average 1 bedroom apartment was over $1,500 at the time.
This mortgage payment number may seem pretty high. Well, because it was.
The monthly payment included $386.26/month for PMI (Private Mortgage Insurance), which is one of the downsides 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.
This 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.
First, let’s start with the property value. After I bought my home, multiple houses on my street sold. Each house sold for more than the previous (aka more demand for my neighborhood).
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 ( 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 an 80/10/10 loan. This means that I have one loan at 80% LTV with no PMI (this is a conventional loan), the 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).
My roommates were still paying $750/each for a total of $1,500 a month. I was responsible for $355.45/month for my mortgage. This was a bargain. I was sold on house hacking and loved that I was able to keep my cost of living low. This allowed me to save most of my income.
I moved out of my ‘starter home’ in late 2015 when I realized that I wanted to own more real estate. More importantly, I wanted to own real estate that was CASH FLOW POSITIVE.
This lead to the purchase of an old row home (The Fixer-Upper) in DC.
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 move 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.