Unfortunately, house prices are through the roof. If you buy today, you are most likely purchasing at the top of the market. So how do you prevent yourself from getting burned in the process?
My story. I bought a home at the top of the market in 2008. However, I didn’t prepare for the roller coaster of emotions that came with the purchase.
First, the housing market crashed immediately after my purchase. It took 12+ years for the price of my home to recover.
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Additionally, the rental market crashed simultaneously, so I couldn’t afford to rent the home when I received orders to South Carolina. This predicament led to living in South Carolina for two years without my family.
What I learned. We all make mistakes, but they serve a higher purpose if we learn from them. I am considering purchasing a small studio condo in San Diego, California, so I want to reflect on my past situation.
Here are the three major takeaways I have from my 2008 nightmare. Real Estate is a mindset, so if you prepare yourself mentally, you’ll have a much easier time managing your property.
- Have a five-year plan
- Focus on the rental market
- Pay down as much debt as possible
Have a five-year plan. When we purchase a new primary residence, we all think it will be our forever home. However, the average homeowner stays in the home for 5-7 years.
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When buying at the top of the market, think about where you could be in five years. Will your job move you (like the military)? Are you a remote worker who may get recalled to the office?
If you buy an expensive home and have to leave prematurely, you’ll be in a world of pain. I purchased my home in 2008 for $300,000 in Arizona.
I put $50,000 down, and it appraised for $340,000. In 2009, it appraised for $240,000. I had lost almost $100,000 in equity and “real money.”
This rapid turn of events kept me “house poor” for over ten years. I couldn’t sell without short-selling, and I couldn’t rent for my mortgage. I just had to “eat” the costs.
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Do not plan for any price appreciation or rent growth when looking five years ahead. Can you rent for what you are paying? Can you sell and break even?
Keeping this mindset will prevent you from making many upgrades and going into debt with your home. You want to stay as “lightweight” with your home as possible until the future becomes transparent with home prices and rent increases.
Focus on the rental market. I am a buy-and-hold investor. The best way to accumulate wealth is by focusing on cash flow and income, not capital gains.
When you focus on the rental market, you will make upgrades to your home that make sense long-term.
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We would love to spend $50,000 on a bathroom renovation, but a renter won’t appreciate this work like you. In fact, they will destroy your new whirlpool tub.
It’s easy to keep tabs on the rental market by tracking your home on Zillow. I have found Zillow rental estimates to be quite accurate.
By focusing on the rental market, you can prepare to transfer your home to property management and tenants. You’ll need to save at least 3-6 months of back rent in case things don’t go your way.
You should also save for the down payment on your next home. Your rent margins may be thin for the first couple of years (+$100 to $200), so don’t prepare to be a real estate tycoon out of the gates.
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Rents get better over time, which will help you build steadily increasing cash flow. I have never met someone who regretted holding on to their home.
I have met many individuals who regretted selling homes in California, Arizona, and Florida. Build the mindset of a landlord by reading books like “Build a Rental Property Empire.”
Pay down as much debt as possible. I know it’s tough to save for a down payment, but you also need to pay down debt.
The best way to buy an expensive home is to have as little debt as possible. I had no debt when I bought it in 2008.
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However, since the house note was expensive compared to my income, my wife and I accumulated a ton of debt.
At the time, we didn’t know how to form a reasonable budget (the 50/30/20 rule). Therefore, most of our money was going into mortgage payments and utilities.
Because we were young and wanted to travel to nearby locales like Las Vegas and San Diego, we slowly accumulated $77,000 in debt. The debt came from buying cars, using credit cards, and not spending wisely.
If you decide to buy an expensive home, make paying down debt your top priority. If I choose to buy the condo in California, I want to pay off my $17,000 car note.
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Your home will take up an unproportionate amount of your income; therefore, plan to balance your cash flow. I would consider installing a roommate or inviting a family member to stay.
It sucks to have someone in your house, but it sucks more to be house poor. Trust me; I have done it both ways, and I’d rather have an annoying roommate along with a large bank account.
Conclusion. I have bought an expensive house and lived through it going underwater. We kept this house and rode it back to safety. It took 14 years to recover.
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However, I didn’t have the mindset of an investor when I bought. It was more emotional than logical. In 2008, I should have bought a small 1,400 sq ft home, not a 2,300 sq ft home on three acres of land.
Look at the rental market when you buy. Can you charge higher rent over your mortgage on day one? If so, you are setting yourself up for success from the beginning.
I know emotions get involved in a primary residence but do your best to insert some logic. Enjoy your home, but also set yourself up for long-term rental success. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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