Chapter Two – Laying the Groundwork
Your first goal – buy your own home as soon as you can. You can start making money right away just by owning your own home.
Story: My husband and I were just 26 and 25 years old. I was in graduate school (so I was a net loss for income) – my husband was fresh out of college and his salary was small. We had one baby born that year and we bought a small 1000 SF older home (2 BR 1 BA) in North Carolina for $48,000. I love being able to say that my first home cost only $48,000! We moved in, we liked doing home improvement projects and over the next 2 years we fixed up the place and made it better than it was. It was simple things like painting the dark cabinets white to brighten the kitchen and opening a pass through between the kitchen and living room to open up the house. Before we sold it, we put in new carpet also. We lived there for 2 years and then needed a bigger house – so we moved to a 1400 SF home in Apex. We decided to rent out our first home for a couple years. It was quite a distance from our new home. Since it was an older home, we had many calls from the tenants and it became a pain to go out there to fix things all the time, especially since we now had 2 young children (1 who was very ill). So, we sold the home after owning it about 4 years. Before we sold it, we did the most important thing (something that seems obvious but most sellers do not do) – we made it look incredible. We put in new carpet and repainted all the walls. The place looked great. We sold it for sale by owner and it sold within 2 weeks for $80,000! During the time we owned it, we had to replace the water heater, heat pump, wood rot on two floors, and the sill. That cost us about $10,000 – yet, even so our profit was $22,000!!!! We were floored. Wow, that was the easiest way in the world to make money.
Our second home in Apex was new construction. They were selling these homes pretty inexpensive for 1995 – we paid about $78 per square foot or $109,000 for a 1400 SF new home. We lived there for 3 years and sold the place to move into another bigger home. We were able to sell it for $122,000 and again we net $13,000 in just 3 years and we didn’t have to do anything on this place for improvements! Plus the $22,000 and the $13,000 were all tax-free since we lived in the home for at least 2 consecutive years of the last 5 years we owned it. We knew we were on to something!
Our third home was a little different – we got it for a good price, $92 per square foot but the market hit $100 per square foot and then it remained steady for about 4 years. It was frustrating – but that can happen and you need to be prepared for it. After the 4 years prices starting going up again and now are going up at a remarkable pace and have hit around $122 per square foot with people now asking between $135-$150 per square foot in some neighborhoods. If they start selling for those prices, I expect to see the prices here follow. Even at the $122 per SF, we are looking at over $60,000 gain right now – but, we finished our third floor and are adding a sunroom so we are adding another 500 SF to our home – which will bring in an even bigger return. We now have 4 children who have friends and schools they attend, so house hopping is no longer an option for us – I wish it was because house hopping is a great way to make free money! More on that later.
The point of this story is to show you how much we gained from doing nothing but living in our home. Appreciation is a great thing. When you rent, you are paying down someone else's mortgage and giving away your appreciation and tax advantages. Remember, you can write off all the interest and more from owning your own home! So, as soon as you can, buy a home. Even if you are only going to live there for 2 years and then want to move on – the gain is worth it. There are lots of great financial loan programs for first time home buyers too – so do some research, look into it, spending time doing that will pay you back! Find a good home – even if it is small and buy a home as soon as you can.
The second best thing you can do during this preparation stage of your life is to establish excellent credit. I cannot stress how important this will be to your success. It might take 2 or 4 years before you can start really investing but buying that first home and letting it appreciate while you work on establishing excellent credit is the start you need.
Here are some things that you should know about credit – it is not just about paying all your bills on time. It is about how much debt you have, how close to the limit of your credit cards your balance is, and how many times your credit has been checked. I have never paid a bill late in my life. I have always had excellent credit – but my score dropped when I did some heavy investing. I had to use creative financing to get started – more about that later – I had many credit inquiries because of all the loans I needed to apply for, and my debt ratio is high – all of these things decreased my score even though I have never paid a bill late. Still, starting with the excellent credit rating had allowed me to get heavily invested when it was my time to start investing. Now, I will need to take 1-2 years to pay down some of debt and not have my credit checked and I expect to be back to that excellent credit rating – then I can move forward again. Sometimes it can take time to do this, you won’t have instant riches – but you will be on your way to a good financial future if you have patience.
One more thing about credit, having a home to pay on will be a great start to your excellent credit rating – but you will need to have some credit cards that you charge on and then pay off without letting your balance get close to your credit limit. All these things will help improve your credit – you have to use credit to get “credit” for it!
To summarize, assuming you are ready to get started – maybe fresh out of college – or even if you just have a decent job and a high school diploma – your first goals should be:
1) Research First Time Homebuyer programs – many will allow you to put 0-3% down.
2) Buy your first Home
3) Spend 2-3 years getting an excellent credit rating.