by Dave Van Horn
As a real estate agent for close to 30 years, I realized early on that many people make their biggest mistakes with real estate between the ages of 25 to 35 years old. Our working years really take place between 25 and 65 years old, and I believe the decisions we make in the beginning towards home ownership often dictate our future financial outcome as we sprint forward towards retirement.
What Happened to My Down Payment & Closing Costs?
If you think about it, most young people first try to rent as much property as possible, and then they try to buy as much property as possible. Is it the overachiever in each of us, or are we just trying to impress our family and friends? Maybe we simply feel we deserve it.
Next, we often listen to our real estate agent when it comes time to moving up to our next home. They may encourage you to sell the first home, saying that you can’t afford two mortgages, but they may be squeezing you into as much home as possible on the next purchase. After all, we all have to keep up with the Joneses. Keep in mind, most real estate agents aren’t accountants or financial advisors.
If things are going well for a nice couple, after they’re in their second or third home, their accountant might tell them it’s time for a rental property or a beach home. The accountant might say that they could use more write-offs; they’re making too much earned income, and they could use more deductions.
But what’s really wrong with this picture? Do you see where the real estate mistakes were made early on?
Against the Herd: A Different Approach
Let’s say you took a different approach, like I did when I was young. I didn’t even realize what I was doing until much later, and I majored in accounting in school. I took a more conservative approach after graduation.
First, I lived at home for two years to save up some money. Then I rented the most affordable apartment I could so I can save more money for my first house. I didn’t really care what my friends or family thought; I was on a mission, and time was of the essence.
Then I bought my first duplex, owner-occupied, and it needed fixing up. But here’s the real difference: When it was time to move to the next property, I kept it. There were no stressful moving days for me. And guess what I did when I moved the next two times? I kept them as rentals, too. Now, let’s look at the real impact of doing that.
Advantages of Keeping Your Primary Residences
First of all, I had lower down payments and more favorable interest rates because I purchased these homes owner-occupied. I also purchased properties, which I could rent out for more than my mortgage payment. So now, I never really lost my down payment and closing costs because I kept them all. Most people forget about this real money that they spent to acquire a home. Seems like they just look at the monthly payment, much like they do when buying a car.
Another thing that’s overlooked is the time spent in the property, paying towards a 30 year mortgage before it becomes a rental. My first property I lived in for five years, my second property was two years, and my third property was 13 years. That was 13 years of payments towards my 30-year loan. Today, my mortgage payments are mostly principal, and my tenants are buying them for me.
Sure, it took a little more time to save money between moving up with my primary residences, but it was well worth the wait. My properties enabled me to build additional wealth, and they’re almost paid off now. They not only give me depreciation and write-offs to offset earned income, but they can pay for things like college and weddings, and they provide a nice, passive cash flow in retirement.
As you can see, this has been one of the best investing strategies that I’ve taken in my entire life. It makes you wonder why this strategy is not taught more or is not more popular with young people starting out.
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