Real Estate - Buying
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This month we’re going to talk Real Estate. Not just primary residences, but also investment properties.
Besides our primary homes being one of our largest purchases and usually a significant part of our net worth, I meet tons of MBAs who own or have owned investment real estate, so we’re going to cover that too.
And I see tons of mistakes really educated people make along the way.
My hope is that by the end of the month you’re no longer making those same mistakes.
Except buying a home way out of your price range that you and your spouse just LOVE.
Let’s be honest, nothing I write here is going to stop that from happening.
Before we dive into this week’s topic, here are some things I read this week that I thought you’d like
NYT – 1,200 Acres of Powder for Around $100: Skiing a Vermont Gem
You don’t have to be the VP to ski in Vermont, and you don’t have to ski at a conglomerate-owned resort to have an amazing experience. A few days before reading this article, my wife and I bought our 2026 season passes for Bolton Valley (the mountain in the article). It’s an awesome mountain, the lines are short, and the trails are beautiful.
NYT – Financial Advice on Social Media Is Growing. And Risky
Say it ain’t so. You’re telling me the funny person on Instagram isn’t the best person to rely on for financial advice? But they’ve got 1mm followers!
Sitreps – Job Board
Your earnings power is one of your greatest assets, if not the greatest. Moving from a role earning $160k to one earning $300k can make a world of difference for your family’s future. Even better if the role aligns with your values and career goals.
Let’s dive in!
This month’s topic is REAL ESTATE. This is an asset class that is simultaneously over-hyped, poorly understood, under-appreciated, and approached with over-confidence. It can make and break fortunes. It’s an absolute juxtaposition and we’re going to cover a typical lifecycle of a property, from getting your keys to a tax-smart exit.
· Buying
· Investment properties
· 1031 exchanges
· Selling
More than Just a Mortgage.
Buying a home is usually one of the biggest financial decisions you’ll make, but most people focus only on the purchase price and monthly payment without considering the bigger picture.
Where do you want to live?
Should you rent or buy?
How much house should you buy?
Should you go use cash or a loan?
What kind of loan makes the most sense?
How do decisions like buying mortgage points or making a larger down payment impact long-term financial flexibility?
What happens when you want to sell?
Ways to buy a home.
My clients have bought homes outright with cash, used Federal Housing Administration (FHA) loans, VA loans, conventional loans, and jumbo loans. Some have bought at auction, some in bankruptcy court, some off market, and many via a real estate agent.
Each of these has different requirements, advantages, and drawbacks.
And any of these might be the best depending on your situation and your goals, and likewise someone else with your same finances but different values or priorities could make an equally good but different selection.
All Cash. You have no monthly payments, no interest owed, and come to the table with more negotiating power, but it also ties up a massive amount of capital that could be invested elsewhere. Most buyers can’t afford homes without a loan, and those who can often consider leverage so they can put their cash to use elsewhere.
VA Loan. No down payment, no private mortgage insurance (PMI), competitive rates, but it often requires a funding fee unless your disability rating exempts you, and there are some specific property requirements that might not fit your needs. Also, some realtors are lazy and discourage you from using your VA benefits because it creates more work and could make your offer less competitive. Realtors get a paycheck when the deal goes through so they’re incentivized to make a bigger deal happen sooner.
NOTE FOR DUAL MILITARY SPOUSES: Splitting your eligibility is usually a poor decision! You can both be on the loan even if only one of you uses your VA loan eligibility. This saves eligibility for another home down the road.
FHA Loan. Low down payment (3.5%), easy to qualify for, but comes with PMI that increases your payments. Can’t be used for your vacation house and is most commonly used for your starter house.
Conventional Loan. The standard mortgage your parents and most of your classmates got. Usually requires 20% down although this varies and has better terms for borrowers with strong credit scores.
Jumbo Loan. Your forever house might cost more than Fannie Mae and Freddie Mac will guarantee, so lenders impose additional requirements that make these loans more expensive. Sometimes making a slightly larger down payment can move you back into conventional loan territory with better loan terms.
Commercial Loan. You’re eligible for up to 10 conventional loans simultaneously so long as your finances support them, but for your 11th house you’ll be looking at a commercial loan that might have slightly less favorable conditions.
Seller Financed. These are way less common. Basically, the seller gets a downpayment and instead of making your payments to a bank, you make payments to the previous owner. These are more common when the seller can create a win-win by hanging onto a super low-rate mortgage and the buyer would otherwise have a hard time getting a conventional loan or doesn’t want to get a commercial loan. For these you can expect the sale price to be a bit higher unless you have a great relationship with the seller. These don’t count against your 10-loan limit for commercial loans.
All of these can be appropriate depending on your unique circumstance. And your circumstances change over time. One of my clients who owns over 100 properties started with a duplex about 10 years ago and has used every option on this list except the VA loan. Because remember, your circumstances change over time.
15-Year vs 30-Year?
Let’s put down the Dave Ramsey rules for now. His information templates really well for a significant percent of the American population and he’s done a great job helping thousands of people get out of debt.
But let’s be real, you’re probably not in that demographic anymore so stop blindly touting a 15-year loan.
While a 15-year mortgage helps you pay off a home faster, a 30-year mortgage offers more flexibility and better cash flow management.
I love flexibility when it comes to finances.
A 15-year mortgage means higher monthly payments, but you save on total interest paid. This can be great in theory because it forces you to live within a tighter budget and buy a less expensive home, but in reality, it can be restrictive.
A 30-year mortgage locks in a lower monthly payment, giving you more financial flexibility for investing, emergency savings, or other opportunities. Or you could always pay down your mortgage early, although this isn’t usually high on my to-do list.
Historically, buying a home with a 30-year mortgage and investing the difference in mortgage payments in something like the S&P 500 has produced a higher return than the interest payments you are avoiding with a 15-year mortgage.
But let’s take the math out of it for a minute. Assume that you break completely even between the two options here…
If one option gave you more flexibility, why wouldn’t you go with that option?
Even if the math were identical, the 30-year wins on flexibility alone. But since it often outperforms long-term, it’s an easy decision for most.
Points.
After locking in your mortgage rate, your lender will give you the option to lower your rate by buying it down with points.
I remember getting a call from my lender discussing points when buying my first home. I was driving between Yuma and Phoenix, Arizona after getting back from some training exercise and was exhausted when I got the call. Like any rational 2ndLt would do, I made a snap decision to buy down the mortgage by a few points to a more favorable rate since I was going to own the house for at least 15 years. Spoiler alert, we sold that house 3 years later when we left Yuma.
2ndLts know everything don’t they?
Buying down with points can save money, but only if you stay in the home long enough to break even. That’s usually around 5-7 years, which is longer than I’ve ever owned a home.
You might tell yourself it’s your forever home, or you’re going to rent it out when you move across the country, but how often do folks end up selling their homes after 4 years?
Way more than you think.
Especially young MBAs changing careers and moving for that next job.
In many cases, keeping the extra cash and investing it, or just building up your cash reserves, provides more flexibility than pre-paying interest, which is what you’re doing when you buy down your rate with points.
Your Down Payment.
Obviously, the size of your down payment affects your monthly costs, cash flow, and overall return on investment.
A higher down payment reduces your monthly mortgage payment, can avoid PMI, and reduces total interest paid. However it ties up capital in your home equity, something that sounds great until you realize you’re probably going to use that home equity to buy your next home, then your next one, then your next one. All the while the home equity earns no return but merely avoids interest payments.
A smaller down payment keeps more cash in your pocket for emergencies, investing, or other opportunities. You will pay more in interest because you’re borrowing more, but you’re hoping that you can put that cash to better use and clear that hurdle rate that is your interest rate.
This is a common scenario I model for clients when they’re approaching a home buying situation. A common misconception I come across is that a large downpayment will enable clients to live a better lifestyle because their monthly payments will be lower, and they’ll have more cash flow as a result.
Most of the time, the truth is they’re taking money from their left pocket where they could earn a rate of return and moving it to their right pocket where they can avoid paying interest.
Left to right. Right to left. It’s still your money.
Your finances don’t suddenly change just because you’ve moved capital around. This isn’t business accounting where we can just make the numbers look better by filling up the cookie jar or calling something a non-recurring adjustment.
There are situations when it makes sense to have a larger down payment and situations when it makes sense for buyers to have as little cash tied up in a property as possible.
Bringing it back.
Home buying can be an emotionally charged decision, but once you decide which house is going to be your home, the financing can be super rational.
So long as it takes a holistic view.
Don’t defer to what your real estate agent or lender suggests as the default. They do not understand your financial situation, nor do they have the breadth or depth of financial experience to advise you. That’s not their highest and best use.
I use a realtor to bring me viable investment properties. He screens a lot of BS out.
I use a lender to finance properties. They have rules and ratios that must be met.
I use an insurance agent to protect my property. They provide adequate coverage.
I don’t ask any of those people for advice on how to incorporate real estate decisions within my holistic financial plan. It’s not their area of expertise, and I wouldn’t trust that the information they provide is in my best interest rather than their own.
Buy smart, finance smart, and don’t let other people make those decisions for you.
Hope you have a great week.
-Henry