My first home

Posted: Oct 11, 2006 10:44 AM
My first home

Everyone who owns a house has started with buying the first one, which hopefully worked better than mine. My first house was an experience. . . a real experience that I hope you did not have to go through. I was newly engaged to be married and out to get my first house (alone). Not a good idea, for no other reason than the fact that four eyes are better than two. Nevertheless, after a lot of looking, I found "the house" and made an offer, which was quickly accepted. I called my wife to be, and at that point realized my first error.

She asked how many bedrooms it had, and believe it or not – I didn't know (no one could make this up)! In fact, I am not sure I even looked. It turned out to be three. Whew!

We didn't have home inspections in those days, or at least my broker didn't mention it to me, so the next step was the financing. I didn't have a clue, because I was a young stockbroker at the time and knew nothing about real estate. The house was $37,000 and I needed to come up with 20% down. I decided upon 100% financing instead, so my broker arranged a second of 10% and I borrowed the remaining 10% down payment from a client; thus nothing down. That isn't how we do it today.

This wasn't the house I wanted, and it turned out to be the worst purchase I ever made in my life, because as little as I knew, my broker knew less. I didn't know that for a number of years until I was ready to sell and found out he had left the business because of serious personal problems. I found another broker who had sold a neighbor’s house in a week and she was as good as they got, representing me for the next 20 years.

I had purchased a home on a problem street. Had I purchased one block away – either way – the difference would have been dramatic to the upside. I had purchased less than I could have afforded, but didn't take advantage of the financing to pay down the house quicker and build my equity faster. I didn't know loans and didn't know anyone who did, so I just kept muddling along.

At that time, if someone had told me that real estate was going to be my life, my passion, and the way I would create my wealth, I don't know whether I would have laughed or cried. The only thing I really understood about real estate is that you could borrow against it, and that I did. I initially came up with about $4,000 (I paid my client back over a year) and 6 years later I sold and walked away with about $600. I was lucky to get that much.

With my next house, I assumed a loan and came up with just a little down, which is about all I had, and at that point I decided to start learning something about real estate.

I did, and the rest is history. Why am I telling you all of this? Because I have been where you have been and probably did it a little worse than you did. So I decided to learn and then help others avoid my errors. This metamorphosis has been going on now for over 30 years and I am still discovering things I didn't know.

Now that you have heard my story it is time to begin your story. When is the best time to buy a house, especially your first house? If you are planning on living in it, now is the best time. Now is always the best time. Why? Because, first and foremost, you are going to live in it. Everyone needs a place to live, and there isn't anything like your own house (actually yours and the bank's). You are going to get some tax benefits from the deductibility of the mortgage interest and the property taxes, you’re going to be paying down your mortgage (at least in most cases), and if the house goes up in value, so much the better. Consider it icing on the cake and do not worry about it.

If it is a second home or investment property, then you need to watch your timing a little more. A second home is even better than a first home in my opinion, because it is a place to go and relax and enjoy the area for what it is. It generally becomes more than a dream as you reach the apex of your primary home, the end of the mortgage, or when your current income reaches a point that the payment on the second home is no more difficult than the first has been. Most second homes are in recreational areas and have the potential to be partially like an investment property because they usually can be rented to other vacationers for income.

When an investment property is the consideration, it is all about the numbers, not the brick and mortar. I had a tax attorney who always warned me "don't fall in love with love" as that is what can doom your investment. The property must be considered as an economic unit that has to produce a return for you to be successful, and nothing else. As in most investments it is best to buy when the economy looks poor and best to sell when it is booming. Investment properties, for the most part, must have positive cash flow or they aren't investments, they are speculations. There are many exceptions, especially if you are buying and rehabilitating the property, but you should be extremely cautious about having a positive cash flow after the fix up.

Financing is the key to all real estate and I have written many columns on that subject. Please check out: "Before You Spend a Dollar on Real Estate" from 9/22/06, "Why Would You Take a Variable Rate Mortgage" from 9/14/06, "The Half Life of a Mortgage Loan" from 9/9/06, and "Why Do They Get the Good Stuff" from 8/01/06. These articles should help you understand your options and get you going in the right direction.

Real Estate is and will continue to be my life. I didn't plan it, never thought about it, and aside from the fact that I grew up in a single-family residence, I really didn't know much about it. I studied finance in school, but the emphasis was on corporate finance and the stock market, and virtually nothing on real estate. I was told that most of the millionaires had made their money in land in those days (substitute billionaires and the stock market today) but that was it. I thought my fortune was coming in the stock market and I was really mistaken.

I am not anti-stock market. I am just pro-real estate. It is easy to get started in real estate and even easier to keep it going. Be careful that you understand the difference between investing and gambling, work the numbers as you prepare to increase your holdings, and be mindful of the financing, as it can make all the difference.

It is time to move forward with that first purchase. There are plenty of resources out there to help you get it right. Use all of them and you will be successful.