Is buying a home a good long term investment?  Long term the data bears out that a home is one of the best long term investments possible.  Over 20,30 and 50 years – home prices have far outpaced inflation.

Before purchasing my first home in the early two thousands my biggest concern was my monthly payment.  At the time I had a steady job as a mortgage originator.  I had started in the mortgage business just at the end of the late nineties refinance boom.  At the time, we were still a year or two away for the refinance and home purchase boom that started around 2002.  In the early 2000’s the mortgage business had a boom or bust mentality.  During busy times mortgage companies would higher as fast as possible to fill as many seats as possible.  Once the market turned, even a little bit, big mortgage companies would reduce staff just as quickly.

Financially, I tend to be on the more conservative side.  I was concerned about the job security and thought a rent payment and a roommate was my best bet.  I didn’t realize at the time I started my search, that rents had  been rising for a few years.  During the same time period, property values were holding steady and even had fallen in some areas (after the internet 1.0 bubble burst and the stock market crashed).

In addition to property values holding steady, interest rates (although very high by today’s standards – were continuing to fall).  With interest rates falling, business picked up and I felt more confident.   to find a great apartment to rent.  I went to my local grocery store and picked up all the apartment finder magazines I could find.  Yes, this was the early 2000’s before you could find an apartment  on your phone or a Facebook post!

My roommate and I decided that we wanted two bedrooms and two baths.  Other than that we didn’t need much square footage or an impressive view!  We were looking for some amenities such as a pool and onsite gym.  After dialing in what we were looking for we started our search. I was quickly hit with total sticker shook!  Although I tried to start with realistic expectations I could not believe the amount of monthly rental prices.

In addition to the higher than expected monthly rent I was surprised by all the upfront costs.  Most of the properties required a security deposit and first and last month rent.  Add in the cost of hooking up cable (yes – you had to do this in the early ’00’s) and other upfront utilities – and I would be out-of-pocket a few thousand dollars.  Of course, it is totally understandable that a landlord requires a security deposit and upfront rent (and some of this does come back when you move out) – it was still totally unexpected to me as a newbie renter!

After the initial sticker shock wore off, I decided that I was going to pump the breaks and slow down my apartment search.  I was going to continue searching to see if the right place at the right price popped-up.  At the same time I would continue to build my savings so I would be ready for all the upfront costs.  Looking back, that slow down in my rental search greatly helped my net work over the past 25 years and set me on a clear path to retirement!

During the time that I was looking at monthly rents on a consistent basis for a few months – I started to notice something important.  Every day at work as a mortgage originator, I was quoting clients monthly payments on the homes they were purchasing or refinancing.  I noticed in many cases, total monthly housing payments (including principal & interest, taxes, insurance) was in some cases lower than monthly rents I was considering.

To be fair, the monthly total mortgage payment was sometimes higher than rental payments I was considering.  In those cases though the payments were not significantly higher.  I started to think that maybe purchasing a home was an option to consider.  Even if I wound up with a slightly higher overall monthly payment I would be building equity each month.  In addition I was able to take a tax deduction on my interest and property tax paid.

Factoring in the property tax and interest deduction, my net total payment often was less than any rent payment.  It sounds cliché  (and it was) but I started to make a Rent vs Buy Pro’s & Con’s List.  I put the net effective (after tax deductions factored in) housing payment in the Pro Home Purchase Column!  I worked the mortgage payment out in my head but in the Con Home Purchase Column was the down payment and closing costs associated with the transaction.

At work each day, in addition to noticing clients total monthly housing payments – I also started to focus on clients total out-of-pocket funds to close.  In the early 2000’s, there were loan options for First TIme Homebuyers to put as little as 3% down.  Three percent down payment loans for First Time Homebuyers still exist in today’s mortgage market.  In addition to the required down payment, I had to factor in closing costs (underwriting, title & recording fees) and any pre-paid property taxes and homeowners insurance fees required.

After I graduated college, and before I purchased my first home I had moved back in with my parents.  Before moving back home, I agreed that I would pay my parents monthly rent.  The rental amount they charged me was reasonable and well below market rents.  I had not complaints about my rent payment as I had a comfortable place to sleep and a home cooked diner on the regular!  I did not know at the time, my parents held onto the rent I paid.  They  gave the rent back to me to help with my down payment and closing costs.

First month – No Rent No Mortgage Payment

As a loan officer, I knew a great little fact – there is no mortgage payment due in the month after closing. How is this possible? A mortgage payment is always made in ‘arrears’. Arrears means that your principal & interest payment is always for the prior month. For example, I closed on my home in May. My first mortgage payment was due July 1st. The July 1st payment covered the principal and interest payment for June.

At a home purchase closing, interest is paid for the remainder of the month. To reduce the funds needed at closing – many purchase closings will occur in the last 10 days of the month. In the example of a May closing – the close date is May 25th. Five days of interest are paid at closing – the May interest. The June interest is made with the July 1st payment. Since all the interest is covered – there is no mortgage payment June 1st. I had the keys to my new home and was no longer a renter – so I also had no rent payment due in June.

I totaled up the money I had saved, the gift funds from my parents and my skipped rent/mortgage payment. I was a little short of all the funds needed for closing. I was not worried, though, knowing that I would have 2-3 more months of pay checks before closing. Unlike the current 2022 housing market, with historically low inventory, in 2000 it was a buyers market with plenty homes on the market. I estimated 30-60 days to find the right home and another 30-60 days from contract to close.

The roughly three month window was enough time to scrape together all the funds I needed for closing. I was ready to go. Remember, this was 2000 – there was no good way to search for homes online. I picked up the phone and called a realtor that I had worked with on a few client transactions in the past. We had a good repoire and knew she would be able to find me a great property.

Let’s Play Two

My realtor had a list of questions about what I was looking for in a property. After a detailed conversation about my wants, needs and dislikes – she was off and running. Within a day she was back to me with some properties to check out. The realtor had three properties that checked most of my list and one that she thought was at least worth taking a look at.

The first three properties were all single family properties. They each were within my price range and home some features that were appealing. All three of these properties also had a couple various drawbacks. It was already a long day, going through multiple properties. I thought that there was a good chance that I could make an offer on one of the three.

Tired and hungry, I was ready to cancel on the last showing. My realtor wasn’t having it and insisted that I see the last property. Begrudgingly, along I went. When we pulled up to the property, to my suprise, I noticed that it was a two unit. “You have got to be kidding me” I thought! Why does she want to show me a two unit – that wasn’t anywhere on my list.

I was again ready to call it quits but my realtor was very persuasive. We went through the first unit, which was vacant. The unit had three bedrooms. It needed some paint and some minor work. Most of the work, I knew I could handle myself.

We then went upstairs to the second unit. This unit was also in decent shape. The second apartment had two bedrooms and a nice sized kitchen. There were two tennants in the apartment when we walked though. That was when it hit me.

I did some quick, rough numbers in my head. The rent from the upstairs unit would cover about 60% of my total housing payment. WIth three units in the downstairs apartment, there was more than enough for my friend to move in and pay rent.

With my roommate, also paying rate, close to 90% of my total housing payment would be covered. My realtor was a genius for showing me this property. She saw the spark in my eye, as I did the calculations in my head. This house would be a great place for my to live and a great short and long term real estate investment. This house would truly be the first step in my real estate investing