Most people want to know the right way to buy a home. But, have you ever stopped to think about how NOT to buy a house?
This blog shows buyers the wrong way to purchase a home. If you have some tips in this area you want me to share to other Rocking Real Estate blog readers, contact me and I’ll see about adding them to this article.
1. Buy a house with someone you’re not married to
Being a CPA, I understand the many pitfalls of partnerships, and that’s exactly what you’re doing when you own real estate with someone who you aren’t married to.
You become partners.
Now, for some, this sounds like a pretty sophisticated way to invest. Let me remind those people that more partnerships fail than succeed, especially over long periods of time. So, it’s actually more likely than not that your venture will go south than succeed, and when it does, it can get very ugly.
Just imagine giving a friend of yours $1,000 to invest. You give it to them on Monday and by Friday it’s worth only $500.
Now imagine instead that you gave your friend $100,000 or $200,000 to invest and the same thing happened. How would that make you feel? How would it affect your friendship?
Scary, isn’t it?
2. Co-Sign on a loan
The reason the bank wants a co-signer in the first place is because they have done the analysis and determined that the person needing the loan has a high probability of default.
Translation: they NEED a co-signer because they KNOW the borrower is GOING TO DEFAULT!
So, even if it’s for your brother, your mother, your sister, your son, your daughter, or significant other (someone you’re not married to)…
CO-SIGNING ON A HOME LOAN IS A BAD IDEA! (Was that clear?)
So, if you can’t afford to purchase the item yourself and give it to the person as a gift, you shouldn’t co-sign for it, because that’s essentially what will be happening anyway. They’ll default, ruin your credit, the bank will sue YOU, and your relationship with the borrower is damaged, sometimes irreparably.
This is ironic because the whole reason you become a co-signer in the first place is because you value your relationship with the borrower so much. You think you’re investing in their future, but you’re really straining your relationship.
Proverbs 22:7 says, “The rich rule over the poor, and the borrower is slave to the lender.” So, even if the borrower is able to make their payments, you’ve effectively gone from a mother/daughter relationship to a lender/slave relationship.
As Dave Ramsey says, “Thanksgiving dinner tastes different when you’re eating it with your master.”
Bottom line: if you really want to help, consider giving money instead. This way, you can help with the down payment without mudding the financial waters. For those independently wealthy individuals, you might even consider buying the home yourself and let your sons and daughters rent it from you at reduced rates. Just be sure you have a contract with them before they move in.
Which brings me to my next point.
3. Rent out a home without a contract
You wouldn’t let a stranger rent from you without getting an iron-clad contract in place, why would you let your relative or significant other?
I think the issue here is that most people think that contracts are a bad thing, reserved only for those people who you don’t trust. However, quite the contrary, contracts clarify expectations and outline entry and exit strategies for all parties involved. In this way, everyone knows what is expected of them before the deal is made.
Contracts are also a firm document that you can refer to when someone’s memory gets “fuzzy”. Instead of having to constantly renegotiate verbal deals, written contracts provide a refreshing unambiguous, unbiased look into the deal, so that all parties feel like they’re given a fair shake.
4. Get a 30-year mortgage
While this may be normal, being normal is being broke all your life. I want to be StRaNgE!
Here are the facts. Did you know that one hundred percent of all foreclosures happen on homes with a mortgage?
So why drag out the payments until you are 65? Do you like giving the bank all your money?
Instead, you should have a sizable downpayment, preferably 20%, to avoid mortgage insurance, and no more than a 15 year loan. Then, any extra cash over and above your retirement and children’s ESA’s or 529 plans should be paid towards the principle. Most people that do this pay their home off around 6 years earlier!
For you math geeks out there, here’s some numbers. Right now 30 year mortgages are at about 4.25%, and 15 year loans are at around 3.375%. If you were to purchase a $200k home for 30 years, had a 20% downpayment (borrowed $160k), and ignored taxes and insurance, you’d pay a total of $283,357.38 over the life of the loan. Your payment would be $787.10/mo.
Conversely, if you got that same loan, but at the 15 year length and rate, you’d pay only $$204,122.84. That’s a savings of $79,234.54, half of what you originally borrowed! $1,134.02 payment/mo.
If you went CRAZY and paid your loan off in nine year’s time, you would have a savings of $97,605.90 over the 30 year loan! That works out to be a savings of $387.33/mo over the 21 years that you didn’t have to pay a mortgage!
Now here’s where things get really jiggy.
If you turned around and invested that $387.33 per month savings in a mutual fund with a 10% Compound Annual Growth Rate over those 21 years, it would equal $329,790.44!!!
That means you can choose to be normal, and have a paid for house in 30 years. Or, you can be a FINANCIAL ROCKSTAR and have a paid for home AND $330k in investments by spending the SAME MONEY!!!
5. Invest in Real Estate by Borrowing the Money
Bottom line: you shouldn’t invest with money you don’t have. Sounds simple, right?
However, for some reason, this wisdom goes out the window when people talk about purchasing real estate for investing. They see everyone else doing it and think it’s the easy way to make money. But think of it this way. If you had a paid for house worth $250k, would you go get a loan on your home to invest in the stock market?
So, why would you do the same thing with a rental property? You’re effectively borrowing money to invest with, and you’ll end up sending all the profit to the bank, and you’ll have bought yourself a J-O-B (property manager).
Instead, what you should do is save up and pay cash for any investment properties. This also prevents you from paying too much because your budget is limited by how much cash you have on hand, not how much the bank says you can pay them. Then, when the time is right, you’ll swoop in, get a great deal, and have that great passive income you always wanted!
If you follow these simple guidelines of how not to buy a house, you too can avoid a lot of headache and pave your way to financial wellness!
image courtesy of phasinphoto / freedigtialphotos.net