But we are in this place where, like over the last three years, real estate has increased 45 percent in terms of the average home price. So people are having a hard time getting into homes. I’m curious, at Bigger Pockets, you said something a second ago. You said, “Hey, I think that the timeline is extending before the ownership thing makes sense. It used to be five to seven years, maybe it’s a little bit longer.” Are there other rules of thumb that you guys apply either to the buying decision or the renting decision, like in terms of…I mean, we talked about down payments a little bit, with down payments, the percentage of income that you can spend. What rules of thumb do you give folks, especially when everything is getting more expensive, to make sure they’re not getting out ahead of their skis when it comes to their primary residence?
Yeah, so I’ll use three sets of rules of thumb. One is the buyer’s/rent decision. Do the math and figure out what you have to believe for buying to be better than renting an equivalent lifestyle component. And don’t dismiss renting. I have rented for the last three years because I did that math for myself. And I own a real estate portfolio, and I’m the CEO of this real estate company, right? Because I did that math, because I didn’t want to live in that property necessarily. I want to live near a specific park and have a good time there for the next couple years. And then I just had a welcome to a new family member. Now it’s time to start thinking about a little bit more of a permanent place for me. That’s one.
The second set of rules is understanding your exit options. You have three fundamental exit options: You can live in the property, you can rent it out, or you can sell it for a profit. How do you maximize the odds of having all three of those options for the duration of your time or as much of that time as you’re living in that property as possible? That’s freedom. That’s flexibility. Don’t let your house be a trap that keeps you locked into your current lifestyle for a long period of time. That’s not what we want.
The third I think is around what are the financial requirements to buy a house and get yourself up ready to buy. So, this is getting a little bit more tactical, but I’m actually not a proponent of using a big down payment necessarily. You must have the down payment in cash, whether that’s zero percent if you’re using a VA loan in the military, five percent or three and a half percent if you’re using a VA or FHA or conventional loan. You need to have the closing costs, while you can wrap those into the mortgage, I think it’s you can’t always do that. And so, you need to account for those. And I think that even if you’re buying a property in good condition, you need to have ten to fifteen thousand dollars in cash set aside as a buffer for the things that go wrong. There’s a direct, I’m being facetious here, relationship between the amount of money that you have set aside for repairs and the amount of repairs you will have. If you don’t have any, you will have major expenses. You will call them a disaster. If you do have the money set aside, you’re going to call them capital expenditures, and you’re not going to have that disaster event.
One more thing that’s a little bit more qualitative, and this is a pet peeve of mine, is when people buy their first home or their second home, usually the first home, they do so kind of with this mentality, “My lease ends in June, therefore I need to buy a property by the end of May, right?” So that I have that timeline. Okay, you’ve just said the biggest financial decision of my life, which is $400-500,000 on average that I’m gonna make. I’m going to rush my timeline and create an artificial deadline in order to buy this $400-500,000 asset. That makes no sense to me. Call your landlord and say, ‘I’m gonna go month-to-month, pay the extra $200 a month or whatever it is, an increase in price, and get the timeline on your time right.’
Here’s one, and I’m going to keep going since you got me started here. But what you do is you don’t look at the properties that are for sale on the market right now because the properties that are currently listed are the ones that have been sitting for a long time disproportionately. There’s something wrong with them or they’re overpriced. What you do is you ground your search in what has sold actually in your market in the last 90 days, right? That’s what the price of the property is, or that you’re trying to buy, and you find… You keep whittling down your criteria until you have like five to ten that have sold in the last 90 to 180 days, and that’s how you get to five in the last 190 days. That’s one every 18 days or once every two and a half weeks. So now I’ve got my month-to-month rent, I’ve got myself prepared, and I’m going fishing. And when that property hits the market, I can react instantaneously, make an offer, and be good to go. That’s how you get a good deal in real, or at least a better deal in real estate. But if you go in with the ‘I’m going to buy a property before my lease expires, one’s going to pop on the market magically,’ you’re going to think your real estate agent’s a hero, and you’re going to close on it right away. And that your real estate agent is going to be a big, big fat commission check, and you’re not going to have done this intentionally on your own timeline. I love that what you did is you put the power back in the buyer’s court, right? I’m going to paraphrase what I just heard you say really.
When it comes time to make to buy, you gotta do the math, number one, on the rent versus buy decision. You have to understand your exit options, you kind of laid out those three. You have to understand the financial requirements. And then when it does come time to buy, there are things that you can do to put yourself in a position of power to make what you said is the biggest financial decision on your terms, not on someone else’s terms. Do you feel like oh, the reason why we’ve seen real estate issues in the past, and I’m thinking like namely 2007, 2008, 2009, Great Recession real estate was because people weren’t doing that? They kind of lost sight of being in control when it comes to making those kind of real estate decisions? I think that’s why a lot of people are locked into their housing right now. I think 2007-2008 was more of like, we all, real estate’s always going to go up, right? So, I run this real estate website, but I have a healthy fear of the real estate market that I think too many investors lack or don’t have. This is not a market that goes up all the time. This is not a market that is always a great investment. This is a place where you can lose your shirt, and it’s particularly painful for real estate investors, especially if your house is your only meaningful investment or the majority of your portfolio. So, I think that there wasn’t a healthy fear of this market in 2008, and I wonder if there isn’t a healthy fear in 2021 and early 2022.
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