This is a personal finance blog, intended to document my own personal journey on the path to financial freedom, analyze current theory, and develop new theories. It is not intended to act as personal advice to individual parties. Individuals should consult a certified financial planner, or other financial expert in order to tailor a financial plan to their own life situation. Although this blog also contains affiliate advertisements and links, all opinions are my own. See disclosure page.
Tuesday, October 4, 2016
Real Estate is a personal passion of mine. I currently rent a one-bedroom apartment in
Inwood, a neighborhood in northern Manhattan.
I am also a landlord. I own a
rental property in Portland, OR.
When I bought my house in Oregon, it was with the intention
that I would live there, and I did for a few years. It was also a move that I made not only to
build equity, but also to lower my cost of living. “But Lacy,” you might ask “How does buying a
house decrease your cost of living?”
It’s simple. Buy your
freedom house. Your freedom house and
your dream house are NOT the same
thing. Your dream house is the one that
has the perfect number of bedrooms, and the perfect number of bathrooms so that
your twice per year guests won’t ever have to use the same toilet that you
do. All joking aside, your dream house
is the one that you aspire toward, and has all of the amenities that you want.
Your freedom house has all of the amenities that you need.
For instance, I had been renting a 2 bedroom, 1 bath house
in a trendy, walkable neighborhood, near buses, for nearly $1300 per
month. I asked myself “Can I get what I
need for less than what I am paying now?”
Not as a rental, unless I moved to a different neighborhood, which I was
willing to do, but I don’t drive, and need to be on a busline. So, I started researching houses for
sale. I was making $25,000 per year, and
because of that, I could only get approved for $120,000 of a mortgage
loan. In Portland, Oregon, housing
prices are typically double that (or more) unless you strike a killer deal, but
that didn’t stop me.
A few months later, I bought a Fannie Mae foreclosure for
$102,500, and put about $5000 down. The
transaction was really pretty smooth, although foreclosures can be difficult
for people, as can short sales. The one
thing to remember, if the bank owns the property, they really don’t plan to do
any repairs. They also don’t want to be
a landlord. Their only mission is to get
the house off their books. That means
they need to sell it so that it doesn’t show as a loss that they are taking, or
at the very least, they need to minimize the losses that they will end up
taking. Where a human being that owns
the house may be moved by you writing them a letter about how you want your
children to grown up climbing the beautiful oak tree that is in the back yard,
the bank isn’t interested in this plea (to view Fannie Mae foreclosure listings
in your area go to www.homepath.com).
The Fannie Mae house was my freedom home, not my dream
home. It had horrible wood paneling in
the living room and faux tiles in the bedroom that matched the ones in the
kitchen. It was a real eye sore, but, it
was structurally sound, and had great bones.
It had 2 legal bedrooms, 2 bathrooms, and unfinished basement with 2
bonus rooms, hard wood floors, a garage (also in rough shape) and a decent
sized back yard. It was also in an up
and coming, walkable neighborhood, and near several bus lines. This could more than meet my needs. It also saved me $500 per month in housing
costs. Yes, I had to make the down
payment and move, but that was fine since I wasn’t going to try to sell it. (If
you plan to sell within a few years, you may not recover the costs associated
with the down payment and moving. So,
crunch your numbers carefully.)
Now that I am living in New York, I want to buy a property
to live in here. How do I replicate the
things I did right the first time, now that my circumstances have changed?
Avoid the 2 income trap.
Buy only what I need.
Consider the “what ifs”.
Avoiding the 2 income
Budgeting your life to two incomes will keep you from
getting ahead. It offers very little
flexibility, and is likely to keep you in a situation where you will always
NEED two incomes. This is not
ideal. When I bought my freedom house,
my income was the only one being considered.
My significant other had stopped working in order to go back to
school. So, at the time, I was the only
one with a steady income. I had avoided
the two income trap based on shear circumstance, rather than intention. In order to replicate this strategy in the
future, I will need to buy only as much house as can be sustained on one
Two incomes are the norm nowadays, right? Not if you are single. Fully using two incomes can also prevent one
or both people in a partnership from being able to take an opportunity. For example, we came to New York because I
had received an opportunity to get a Master’s Degree that would be funded by an
organization. The organization would
also help me to find a job that would more than double my salary once I was
finished. I took it. My partner and I lived one year apart (the
length of time it took us each to get our degrees). When I had secured a position and apartment,
we moved our household across the country.
I would have had to decline the offer had we made different choices
regarding our housing purchase. If we
had both been working, and qualified for closer to $240,000 of a mortgage, the
payments would have required that we both continue to work in order to keep the
house. Since we had only used one income
to buy the house, the payment was low enough not to be a burden. I was able to take the offer in New York. While my partner was still on the west coast,
I rented a room from a friend in New York.
The rent plus my mortgage in Oregon still cost us less than the mortgage
would have cost us had we used two incomes for the original purchase. That year was certainly difficult
financially, but we were able to make it work.
Once we moved, we turned it over to a management company, and have a
lovely family living there. Our monthly
net profit is close to $500 per month.
This is another thing that wouldn’t have been possible if we had
purchased with two incomes in mind. If
we had purchased with two incomes in mind, we would likely operate at a loss if
we rented it out. In the future, there
are things that I would like to accomplish which would require me to either
quit working, or scale back immensely. I
know that in order to keep those goals attainable, I must avoid the two income
Buying only what I
I made two lists. One
list was my bare essentials, my needs.
The other list was my wants.
Considering my current circumstance, my needs include two bedrooms,
close to public transit, elevator (or ability for wheelchair access). My wants include two bathrooms, extra
storage, laundry in the building, outdoor space, and a dishwasher. Getting everything from the want list is not
likely, but creating it is good. If a
few items from the want list appear in a property I see, that is
wonderful! It could put the place in the
Considering “what ifs”
I’d like to review an item on my list. I said that I need two bedrooms. That seems unnecessary for a couple with no
children. I have a sibling with a severe
disability that lives with my mother. If
anything unfortunate should come of my mother, I will immediately become my
sister’s guardian. This may or may not
happen, but I cannot afford to be ill prepared.
I need a second bedroom, and the ability to get a wheelchair into my
home. Another “what if” to consider is employment? What if both of us become unemployed or
underemployed at the same time? A second
bedroom could be rented out to help minimize costs. It is important to consider “what ifs” that
are plausible, but don’t go overboard. Consider
a few “worst case scenarios” that seem entirely possible, such as job loss or
illness perhaps. Then see how these
scenarios impact your housing and budgetary concerns, and factor them into your
Many people that purchased
houses in the early 2000’s found themselves buying their dream home, and
quickly found the house becoming a nightmare.
Your house should offer you the security of knowing that you will
eventually pay it off and not owe anyone.
It should allow you the freedom to pursue your dreams within it. If you focus on what you need and avoid the
two income trap, you can buy your freedom house.