In April of 2009 I was just shy of 11 months out of college, working in my very first engineering job. I had taken few business classes in college, and read a few books of real estate investing. Needless to say, I was itching to get started investing in real estate. At the time I was living in a 3 bedroom house with 5 guys and two bathrooms, commuting 35 miles each way to work, but only paying around $110 / month for rent. The hour long commute on a good day, 2 hrs on a bad day was killing me. I knew that if I moved closer to work and found an apartment, what 98% of my friends did out of college, I would be forking over around $800 – $1000 per month in rent, with no equity gained.
Finally after my first tax refund, and a couple more months of savings I was ready to buy, but just by the skin of my teeth. I found a great 1800 sf town home close to work with 3 bedrooms and two bathrooms. It was in great shape other than the wood floors and carpet which I knew would need replacing in the not too distant future. In addition I had two buddies ready to move in with me, and rent out the other two rooms. Here’s how I bought it:
- Purchase Price: $125,500
- Down Payment: 3.5%
- Mortgage Type: 30 year fixed rate FHA
- Interest Rate: 5%
- Monthly HOA Dues: $250
- Annual Insurance Premium: $600
After all was said and done my monthly mortgage payment, with interest, taxes, HOA dues, and insurance, came out to right about $1200 / month. And to cap this off my two friends living with me, paying $450 / month each, brought my out of pocket cost to $300 / month. After each monthly mortgage payment I was getting a little over $100 / month in equity. Not much, but better than 100% of my payment going to rent and into someone else’s pocket.
However, after moving in, paying my down payment, etc etc… my cash cushion wasn’t so cushiony. Around 3 months after moving in, July in Dallas, TX, when it was regularly breaking 100 degrees, my air conditioner went out. It got so hot in the house that I couldn’t even sleep there, I had to go sleep on a friend’s couch, and thankfully my roommates were also able to find somewhere to stay with working AC. By a random stroke of luck, I remembered I had inherited a home insurance policy with AHS. It was paid through the end of that month, and I had planned on letting it run out because I didn’t want to extra $45 bill / month. But after a phone call and small deductible payment I once again had a working AC. I don’t know what the repair would have cost me otherwise, I’m sure quite a bit more, so afterwards I decided to renew the policy until my cash cushion was back where it needed to be.
Going forward, I’ve since moved out of the house, across the country, and have it rented out to a nice young couple. They are paying $1300 / month in rent, giving me a small positive cash flow. I’ve been paying just a paying a small amount of extra principal every month and am now sitting at just over 12% equity. I hope to eventually pay off the house to begin pocketing the entire rent. My current short term goal is to raise my equity position to 20% so that I can drop the mortgage insurance premium.
Now onto the reflections. If could go back in time and talk to my 22 year old self what would I say?
- Save up your emergency fund first of 3-6 months of expenses.
- Don’t use your emergency fund as a down payment.
- Put paying off your student loans as priority #1
- Save up a 20% down payment
- Negotiate a little better and find a better deal
At the time my down payment was around 80-85% of my emergency fund, so after handing over that check my emergency was way too light. Exactly the opposite financial position you want to be in when saddling up the biggest financial liability of your life.
I’m still paying off those stupid student loans five years after college, I could have scrapped together a plan to pay them off in five.
The 20% down payment would have lowered my monthly mortgage payment and probably allowed me to live there with no cash out of pocket while I was renting out the other two rooms. Plus, at only 3.5% down and very little savings I would have been in pretty big trouble had you shit hit the fan. I was hired just before just as the 08 recession was kicking into high gear, in fact, I was told had I graduated one semester later I wouldn’t have been hired at all. I could have been laid off at any moment, with little to nothing to fall back on, thankfully I wasn’t. Then if things got really desperate and I had to sell the place with 6% real estate agents commission I would have had to get a loan just to hand the keys over to the new buyer.
And of course, A little bit lower purchase price via a few negotiation tactics would have made the situation a little lighter on my shoulders.
Are there any other suggestions you would pass onto my 22 year old self? Perhaps you or someone you know might be thinking about purchasing your first house. What do you plan to do different? I plan to keep the house as a rental for the foreseeable future, and other than working towards 20% equity to drop the MIP and then towards paying it off early, I don’t have many plans for this property. Any ideas on next steps? Please leave a comment and let me know your thoughts or questions.