This newsletter is my process of writing a self-help book, tentatively titled How To Make Money: Financial Advice For Poets.
You should always buy your first house. And you should buy it as soon as possible.
There are exceptions, but the exceptions are few and almost not worth thinking about. The main exception is if you can't afford it. And by not being able to afford it I mean you can't make the monthly payments on your mortgage and other expenses that might come up.
But if you can make the monthly payments, and the bank is willing to give you a loan, then you should buy your first house. Especially now, when the interest rates are low.
The considerations are different between an investment property and a first home. You should buy the home you want to live in, and you should get as much of it as you can afford. In other words, if you can buy a $400,000 home then you probably should buy that instead of a $300,000 home. And if you live in New York or Miami or the West Coast you should buy a $700,000 home instead of a $600,000 home.
In many markets if you purchase a home but lose your job and can no longer pay the mortgage you will be able to rent the home for more than your payments, while you're living somewhere else. Or you'll be able to take in roommates for a little while.
In more expensive markets, where the mortgage is more than the equivalent rent, the rents will catch up. So if you buy a house in New York and the mortgage is more than your rent, that's OK, because in a few years the rents will be higher than your mortgage. Properties are priced high in these places in large part because they're expected to appreciate. And appreciation is actually where you make the most money in real estate.
A house is a repository of wealth. In extremely poor societies you'll often see houses with unfinished additions. The owners work on the houses over years, purchasing bricks and concrete when they are able. The house, in these societies, exists like a bank.
It's not any different in America. And I'm only talking about America. I don't know anything about buying a house in Australia, though I still think you should.
I don't really know anything about buying a house in America either. These are just my opinions. And it's well documented how often I'm wrong. But stories are how we understand the world, so I'm trying to write one. Recently I've been reading a lot of Raymond Carver, though I'm hoping to switch back to Roberto Bolano soon.
You should put the minimum amount of your own money into purchasing a house, and pay it off as slowly as possible, as long as you can get a loan at around 3%, and certainly as long as inflation is more than that.
For many people, maybe you, you can purchase a house with only 5% down. This is only true of the house that you are going to live in and it's because the federal government is essentially guaranteeing your loan. A commercial property (say a six flat) will require 25% down and have a higher interest rate that is variable, resetting every 5 years. And you might only get a 20 year amortization. Your primary residence will have a 30 year amortization and the interest rate will be fixed.
You'll never get a loan like the loan you take on your first house again. Though if you put down less than 20% you'll have to buy mortgage insurance, so that adds an expense. But in the grand scheme it's negligible.
Poor people, and most middle class people, think of money in terms of what they're making every month. We think of what we're able to spend, and save. But rich people don't think of money like that. Rich people only think in terms of net worth, and that's how you should think of money as well, if you're operating above subsistence.
Keep a spreadsheet, and calculate your net worth on the first day of every month. Your net worth is the value of what you own, and your liquid assets like cash and stock, minus your debts.
If you owe a lot of money, and you are breaking even after making your payments, your net worth will still increase as the debt is paid down every month. That's why it's better to owe a million dollars with flat cash flow than $100,000.
A real estate investor told me her goal was to owe $5,000,000.
A common saying in real estate is that you make your money on the purchase. And this is basically true for an investment property. But for your primary residence if you wait six months trying to find the best deal on a house then that's six months of paying rent, which is wasted money.
If two thirds of your rent was tax deductible and one third of your rent was deposited into a savings account that you would have access to in the future, that's what a mortgage is.
If you're able to get a house with 5% down and it goes up in value 2.5% per year then in two years you have made 100% of your money back.
If a house goes down in value it doesn't matter unless you're trying to sell it. But if you are living in it, or renting it for more than your mortgage payments, you can keep it forever.
The founder of Robinhood likes to say that stocks are a better investment than real estate, but it's an obvious lie. If you put $5,000 down on a $100,000 house and the house goes up 5% you have made $5,000, which is 100% return on your money. If you put $5,000 in stock and it goes up 25% that's still only $1,250. The stocks have risen in value quicker, but the house has 20x leverage.
That's why you want to get the most house you can reasonably afford. And also nurture your relationships, because it's harder to meet people the older you get, and you can't make new old friends.
What you can afford is a calculation that should be different for different people. If you can rent the property for more than the mortgage payment then you can afford it. If you can afford payments for 3 years even if you lost your job, then you can afford it. If the mortgage payments are more than you make a month, then maybe you can't afford it.
Things do go wrong when you own a house. You might have to replace the refrigerator. And eventually every house needs a roof. But you'll have insurance for disasters (the bank will make sure).
Also, principals are more important than politics. Keep your side of the street clean. Be wary of advice about removing toxic people from your life; you might be the toxic one.
Tend your garden, as Voltaire would say.
Inflation makes every real estate investor look like a genius, eventually.
p.s. If you are a paid subscriber and want advice on purchasing a home specific to your situation please send me an email.
p.s. 2 Please leave comments and also share on social media. Or just “like” this post. The like doesn’t really do anything but it makes me feel good. Comments and shares are the best though.
Inspiring me to finally get off my ass and buy a house! Thank you!
Excellent write-up, Steve!