With so much information out there, it can be very tough for first-time homebuyers to navigate between what works, what doesn’t, and what to avoid. Here to crush the confusion, David Sidoni is back for another Q&A. First-time homebuyers are feeling even more confused and abused in 2022, so desperation sets in, and many of them are saying, “Screw this! Just get me a deal so I can get a home!” David gets right to it and answers questions about foreclosures, insider deals, and using your purchase as an investment to build an empire. These things come up in ALL markets, so tune in to this podcast!
Foreclosures, Insider Deals, And Buying Your First Home As An Investment
Deals That First-Time Homebuyers Should Look For AND Avoid
I am going to answer some questions about foreclosures, insider deals, and investing for first-time home buyers. Are you ready to take a walk on the wild side and learn the tricks of the game? Let’s do this.
What’s up, everybody? What is happening to all my how-to-buy homies? I want to welcome you old-schoolers binging all those episodes or jumping up here to a current one so you can keep up with what is going on because things are so nuts in the 2022 market. If you are a new reader and you are here ready to consume this one show and that you are going to get all the tips, go out there, find a rockstar realtor, an awesome mortgage broker, and then go buy a house and make all kinds of money, I do still welcome. We are happy to have you.
I am extremely happy that you are reading after years of helping hundreds of first-time home buyers, myself. Now with the show thousands across the whole country, I highly recommend that you consume a little bit more of this content. You should not take a top ten list or a TikTok video to choose your realtor and your mortgage broker. How do I say this nicely? Any idiot can pass the real estate license exam, and they do, lots of them. Do not freak out. I am not a hater.
I am a purveyor of reality and a messenger of hope for you. If you want a quick fix, I recommend that you call your smack dealer because this show deals in facts. We are not about the quick high. The fact is this huge decision is gigantic. If you like this show, my advice is going to be able to help you out. You can scroll through all the topics and read 15, 20, 30, or 50 episodes to help you out.
The number one thing my first-time buyers tell me all the time. They are listening to me in their ear holes and they come back to me, and they say, “I should have started planning for this sooner.” Here is your chance. You got a chance to consume all this. Seriously, start thinking now about your plan. I had a reader hit me up on Instagram and he told me this, “I have not listened to my radio for three weeks. I have been bingeing your show.” My first thought was, “Radio? Seriously?” I am old and I do not even know how to use the radio in my car. I thought it was all playlists and podcasts. Anyway, thank you very much for the love.
In this episode, I am going to answer questions from the readers who have been here for a while, my how-to-buy homies. It is another edition of the reality check episode. I did one last time and it got some good feedback. In the last episode, I gave some reality checks. I thought that it would be good for you guys to hear this stuff too. There are no stupid questions. Crush the confusion. That is what I am trying to do here on the show. What is stupid is the lack of quality information out there for you, first-time home buyers, and how poorly the real estate industry treats you. We are going to cover these questions that you want to know.
Topic 1: Short Sales & Foreclosures
How do I take advantage of short sales or foreclosures? The other topic, how do I get an insider deal? We are going to talk about buying an investment home first because you want to build an empire. Topic number one, how do I take advantage of short sales and foreclosures? First of all, I love that you are thinking outside the box.
Red down arrow and houses. Falling real estate market. Low housing prices. Reduced mortgage rates. Crisis. Maintenance cost. recession. Housing bubbles burst. Bankrupt and foreclose. Affordable home[/caption]
First-Time Homebuyer Deals: Will you get another ten years of the market appreciating so you can cash in? Nope. Will there be another crash so you can get foreclosures for cheap? Nope. Foreclosures just don’t exist in today’s market.
Getting creative and not afraid of a little elbow grease and sweat equity on buying your first home, I am stoked about that. Now, let me completely burst your bubble. Speaking of bubbles, this is not a housing bubble. Do not be looking for a whole bunch of foreclosures. If you do not know what I am talking about, go back and read to the other episodes. They are the ones that say the word bubble in the title.
Number two, foreclosures do not exist in this market. That is your answer. That is the end of what I am trying to tell you. I wish I saw an easy way into this housing market for everybody in 2022, but I do not. How is that for captain positive? You, longtime readers, are like, “Where is my cheerleader?” I am not saying you still should not look for a way in.
It is still a mathematically better move for most people than fighting an ever-increasing rental market, so you have to pay more each year but there is some reality here. Are you going to see the huge 19% bump like we saw in 2021 from people who bought a home? No, blame the universe for not having you be mentally ready to read an episode in 2019 when I was just a sociopathic dude in my living room, scaring the crap out of my kids, screaming their microphone at 3:00 the morning in the middle of the night.
Another question about foreclosures that will help you answer. Will you get another ten years of the market appreciating so you can cash in? No. Blame your parents for not getting freaky ten years earlier. You came of age at this end of a decade of a long run-up in real estate. There is nothing you can do about that unless you know Doc Brown.
Will there be another huge crash so you can swoop in and get foreclosures for cheap? No. The numbers do not support the crash. Check the facts and figures in episodes 47
, and 74
. “There has to be one sad sack out there who is tragically going to lose their house and I can take advantage of them, so I do not have to pay over list price like everyone else.”
Truth bomb alert. Time for some harsh reality with the emphasis on harsh. Do not hate me. I am just a messenger. Do you think you are the only one out there who thought of this? Do you think that if a home is a foreclosure, the bank is going to do a secret off-market sale that only you and your realtor know about when every home out there is getting bid up? Do you not think they are going to put it out there and get all the desperate buyers in there to try to get the most money they can?
After all, they are a bank. When they do list a fixer-upper, they are trying to recoup their loss. Suddenly, that home appears on the market in 2022. If it is less than an HGTV beauty that is sold down the block, there were 50 people that did not get that house. How many of them are gladly going to fight for this house even if they do not do any fixing up to it and it looks like a fixer-upper?
That is the reality of what is going on. There is not anything out there. Let me back up my nuclear truth bomb with some facts and data, not ideas and philosophies I am going to spew on the internet. I mentioned this to you before and I will again now because I want the best for everyone out there. These are the Orange County numbers. I will give you the updated numbers. I live in Orange County, California, and right now, there are 1,358 homes for sale. The distressed homes, those are the ones that are foreclosures and short sales, made up only 0.2% of all the listings.
There are only two foreclosures and one short sale available to purchase in all of Orange County. Three distressed homes on the active market out of 1,358. That is 0.2%. In 2021, in the middle of the pandemic, when we thought this was going to happen, there were only six. If my county represents what is going on in the rest of the nation, what are the odds of the 0.2% homes in your market matching your wants and your needs? It is still going to have a bidding war like the beautiful turnkey flipper down the street.
The Covid Crash Of 2020?
Let me get into the details of why you wish your parents had gotten freaky and conceived you ten years earlier. 2011 was the best time to buy a home. Unfortunately, the crash of 2008 and 2011, when all those foreclosures hit, it is not happening again. I went back, and I researched a whole bunch of articles that I read and I saved on the potential foreclosure crisis and why it is not coming this time.
The first article I read was from March 19th, 2020. This is direct from the article, “With all the havoc being caused by COVID-19, many are concerned. We may see a new wave of foreclosures. Restaurants, airlines, hotels, and many other industries are furloughing workers or dramatically cutting their hours. Without a job, many homeowners are wondering if they are going to be able to afford their mortgage payments.”
“In spite of this, there are actually reasons we will not see a surge in the number of foreclosures like we did in the housing crash of years ago. Here are a few of those reasons.” This is back in 2020. These are the reasons they are giving you, March 19th, when the pandemic was starting to shut things down. The first thing is the government learned its lesson last time. The old crash happened, but during the previous housing crash, the government was slow to recognize the challenges of homeowners and they waited too long.
Now, actions are being taken care of swiftly. That was back in 2020. That week, they pumped out the mortgage forbearance. More about that a little bit. The other thing that was a big difference was homeowners learned their lessons from last time when the housing market was going strong in the early 2000s. Homeowners gained a tremendous amount of equity and they began to tap into that equity using their homes like ATMs. It was insane.
They were buying luxury items and putting them in their house, like cars, jet-skis, and big vacations. When prices drip, many find themselves upside down. That is a negative equity situation where the mortgage is actually greater than the value of the home because they punched it all up by taking all the dollars out of the house and spending it on goofy stuff. What happened then? Some people walked away, leaving the banks with no other option, but to foreclose on the property. I have been screaming about this fact since 2011.
First-Time Homebuyer Deals: 2020 didn’t crash the market like 2011 because homeowners and the government learned their lesson. The government acted quicker, and homeowners are now tapping into their equity.
This is one of the biggest reasons for the crash that happened back in 2008, and it is not happening now. From 2005 to 2007, homeowners cashed out $824 billion worth from home equity refinancing. From 2017 to 2020, they cashed out only $232 billion. It is less than 1/3 of what we saw before the last crash. At the time of the article that was written here in 2020, 37% of homes in America had no mortgage at all. 16% had 50% over equity. Again, most experts are not predicting that they will. Most homeowners will still have vast amounts of value in their homes and will not walk away from that money. That is what they wrote back in March 2020.
Prices dipped a little bit in the early pandemic but it lasted only eight weeks. During 2020 we saw bidding wars happen. They happen with people wearing gloves, masks, and hazmat suits. Every single open house that I went into, there were Clorox white boxes that people bought in bulk at Costco. People still fought through that and they started buying. In 2021, prices jumped 19%. All those people were afraid of losing their homes. Even if they lost their job, their home still went up 20% since 2020, and they were sitting on a ton of equity. Equity cures everything, which is the reason why you are not going to be able to find as many foreclosures.
Forbearance & The Lack Of Foreclosures
I kept reading through everything, being the real estate nerd that I am. I have got my laptop filled with all kinds of detailed real estate articles. In the middle of 2020, I started to see more articles coming out and then more as foreclosures and the government giving forbearance. I have been watching this the whole time. I have seriously seen anywhere from 50 to 100 different articles on this stuff. They are all saying the same thing about forbearance. If you do know what forbearance is, forbearance is the government telling people, “Do not worry about it. You do not have to pay your payment.”
Now that we have gone through all that, the forbearances closing is not going to happen. The first reason why we are not going to see the crash as we did on the last bubble is because there are fewer homeowners in trouble this time, like a lot fewer. After the last housing crash, over nine million households lost their homes to foreclosures. Nine million people lost to foreclosures or short sales or if they gave it back to the bank, which still counts as a distressed property. Many people believed that millions of homeowners after COVID were going to face the same fate. However, I have something interesting to help you understand that is not true. It is called data facts.
There are many homeowners who are fully caught up on their payments or with a plan from their bank. They have actually reconstructed their loan in a way so that they can continue to start making the payments. The latest data from the Mortgage Bankers Association is how people exited the forbearance program starting all the way back in June 2020. People were already getting out of the program. Here are the findings. Number one, although a lot of people projected that 30% of all mortgage holders were going to enter the forbearance program, in reality, only 8.5% of the entire nation entered into this forbearance program where they put a pause on their payments.
Coming to the end of 2021 and into 2022, there is still only 2.2% left. It was only 8.5% of the country, but what happened to the people that came in and are no longer in the program because we are all the way down to 2.2%? Here is the math, 36% left the program and paid in full, with 6.9% of those people actually paying off their loan in full. 38.6% of the people are back in and paid off and 44% negotiated work-out repayment plans. That means a bunch of them received loan deferments, a loan modification, or getting an entire prepayment plan. 16.8% of the people left the program still in trouble without loss mitigation in place, but most of them have the equity on their home, so they can sell that and cover the debt.
I do not know what is going on with these people. These people are stubborn or they are hiding under the covers. Have you ever had those days where you do not want to deal with anything? That is what they are doing, but they have got the equity. Sooner or later, when their backs are against the wall, they could sell the house. The second piece of data they were giving us was the number of homes in forbearance. It is extremely low compared to the crash times.
Back then, we told you that 9.3 million people lost their homes to foreclosures. As of January, the total number of mortgages still in forbearance is only 890,000. In 2022, 890,000 people who remain in forbearance still have the chance to work out a suitable plan with their banks. The deal is that once you get a loan, it goes to a servicing company from the banks. The servicing companies for the mortgages are under incredible pressure by both the Federal and state agencies.
Rick Sharga, who is the Executive Vice President at RealtyTrac
tweeted this, “The Consumer Financial Protection Bureau and the State Attorneys General looked like they are adopting a zero-tolerance approach to mortgage servicing enforcement. Likely that this will limit foreclosure activity for a good part of 2022, while service explorers explore all possible loss mitigation options.” That means getting a deferment or getting a deal with a person instead of foreclosing on them.
One of the other things that they talked about in this article is that there are 16.8% still left in the program. Many of them have enough equity to sell their house. Of the 1.22 million homeowners currently in forbearance, 93% have 10% equity in their homes. That is plenty of money to sell your house and get out of there scot-free without having to go into bankruptcy or foreclosure. That is an important number that 93% have 10% equity. If you take 6% or 7% to sell your home, they have got plenty of room to do it.
The other thing that we have been noticing is there are a lot less foreclosures happening right now. The fourth thing they talked about in this article is that over the past couple of years, we are seeing the banks are working with people. Even in the midst of a pandemic, there have been far less foreclosures than there were even in 2017, 2018, or 2019. We are talking 400,000 foreclosures that normally would have happened did not happen. The biggest piece is number five, this market can absolutely absorb. Do you want to be a negative Nellie? I do not care. Do you want to be a hater? Rock on. I am telling you this right now. If a million new listings hit the market, we would be fine.
You heard my numbers. We are not even talking close to that many people that might get dumped out of the forbearance program. Back in 2008, the oversupply of homes that were already happening was added to that with the foreclosures. When all the foreclosures hit in 2008, our number now is lower by 600%.
I know some of you were pulling out your calculators right now to figure out how you even calculate that. It is exactly the opposite now of how it was last time. The total housing inventory at the end of November amounted to 1.1 million units. That is the end of November 2021. They have got this weird stat in real estate where it is called a month’s supply. 1.1 million units based on the demand everyone trying to buy the house is 2.1 months of demand. It is also called an Absorption Rate.
It means that if no more homes came in the market now, if everything froze, how long would it take for all the active buyers out there to buy up the 1.1 million homes. It says it would take 2.1 months. That number is way too high. I think it would take 2.1 weeks. A balanced market means that we have approximately six months of supply of inventory. At 2.1 months, the market is severely understocked. That means we can take a million homes and drop them on the market even if a million people went into foreclosure. There still would not be enough inventories to meet the current demand. It would barely slow it down.
First-Time Homebuyer Deals: The CFPB and the state attorney generals are likely adopting a zero-tolerance approach to mortgage servicing enforcement. This will limit foreclosure activity for a good part of 2022.
I do not even think prices would drop if a million new homes came out. It would satisfy the people who are out there and we might flatten at worse. Ivy Zelman is the Founder of the major housing market analytical firm, Zelman & Associates
. She was on point when she said, “The likelihood of us having a foreclosure crisis again is about 0%.”
Topic 2: Insider Deals
That is your foreclosure topic. Topic number two for this episode, how do I get an insider deal? If you are new to the home buying game and you are super bummed out because of the first topic, you thought you were going to be able to get a deal and sneak in and grab a foreclosure, and you found out that is not going to be happening in the current market. I am going to burst your bubble again.
I am going to read you a listener email I got a long time ago. If you love the drama, I am going to rip this to shreds. Before I do, I want to make sure that I preface by saying that I do not blame this guy. I love any young entrepreneurial person out there trying to take on the world, especially an exciting new home buyer. I know there is not enough information out there for you. I want to change that. I admire this spirit. Go for it.
If you think I am not out there cheering on people that have ideas that they do not know if they are going to work, nobody in real estate thinks what I am doing is a good idea. I am a few years into this craziness. I want to help delineate fact from fiction. I know it all sounds easy because you read a couple of books, you listen to a couple of podcasts, and you think you can get rich quickly in real estate.
Off-Market Homes & Liquidating Stocks
Now you are pumped until you call me with your six months of knowledge and you are ready to buy a home for super cheap and then flip it and make a ton of money. I wish it was that easy. Do not call me a hater for dropping some reality on you. I am doing this out of love. This is a question that came within an email and it was entitled, “Our current flexible mindset.” “I would prefer not to liquidate all my brokerage stocks unless we can find a single-family home or a condo at 15% to 20% under market value.”
As I understand, this means finding off-market deals using either realtor connections or DealMachine
. I get so bombed when I understand that first-time buyers go out to find information on buying their first home. The only things they find are these podcasts and other resources out there that are strictly made for people who are looking to invest. They listened to BiggerPockets
, DealMachine, or other real estate podcasts or books.
They are all about growing your wealth through the real estate, so a lot of people think, “I am going to get a jumpstart on this. I am going to do this at the beginning. I am going to do this with my very first home. It is cool because I am going to use the leverage of the bank. I am going to start with a low-down payment. It is an easy way to start building wealth through buying my first piece of property.” This is far more complex than it seems, and to do this, you have to have an investor mindset. That mindset is predicated on, “Not all deals work out for investors.”
In this case, your first deal, which you have to be able to walk away from or, even worse, have to get into in them and have it to go sour, is going to suck if that is the place where you live. The minute you tie your personal home into that equation, you stop being an investor because now you are personally involved in it, and that changes everything. Let’s get to some of the factual reasons that this plan is flawed.
Even if you do not give a hoot about where you live and you are like, “I do not care. I will take any deal.” Time for truth bombs to shed some light on this. That person out there who thinks they know what they are doing. You have logged all the 50 hours of reading about real estate. Do you think anyone can use a realtor connection and get an off-market home for 15% to 20% off-market value?
Can I please have some of that crack that you are smoking? In a slow market, the average home sells at about 95% to 97% of the list price. In average, a slow market is called the list price to sales price ratio. If you do not know what that is, stop asking me to buy a home for 15% to 20% off-market value. If a home is 3% to 5% off-market value in a slow market and not even close to your 15% or 20% that you are looking for, since 2020, most homes have been selling above their list price.
That is 101, 102, sometimes 110 sales price to list price ratio. God bless you for digging deep and doing your research. I do not know who is telling you that, but they are so far off of what you can buy a home based on where it is for the market value. It is straight-up BS. Here is how it works. Any home that far off the market has big problems and you are not going to be able to get a loan to purchase it because banks do not lend on big problem homes.
The reality is the home is going to be purchased cash by a cash investor who understands the game. They are going to be happy to sell you that home for 5% above market value after they rehab it with a team that they have on retainer to do the cheap for them since they work on volume with multiple different properties. That is the game they are playing. It is not whatever you heard from people trying to sell you a seminar on their podcast.
It is not whatever you heard from people trying to you to do their webinar. The cash game is deep pockets. It is experience and understanding of how things work. It is buying multiple different homes and not all of them have to work. It is not just one purchase, which is what happens when you are buying your primary residence. I ask you, are you ready for that, homie? Those cash peeps can afford to lose money on one home because that is not the only deal this month. They have got at least 8, 10, or 12 deals that are going to be in the black so they can eat a few.
What if that home is your home because you are doing one for one? What are the odds that do in one for one? You are going to end up being better than them. If you do not want to liquidate your stocks to start and be a cash buyer, then you have to get a loan to buy homes with the rest of us, lowly buyers. They all play by a different set of rules. Continuing in the email, he says to me, “We do not want to string an agent with a tough search like this. I understand sometimes it can take months. No property nor the first deal is ever perfect, and you can’t wait forever. At this point right now, we are not going to invest to own any property without making sure that improves our financial situation.”
First-Time Homebuyer Deals: If you want your first home to be the foundation of your financial empire, you missed the basic principle of investing. With Homes today, you have to understand where their pricing is.
Let me ask you a question. Which way has the market been going and how about interest rates? Can you show me the spreadsheet that shows that waiting even just four months for a home to try to find one that is even 5% of the market value is cheaper than buying a home at market value four months ago when the rates were lower by half a point and the prices were lower by 5%? Did you understand that? No.
Maybe at this point, you got to trust me a little bit. You would not be stringing good agents along because if you brought this formula and this idea to not buy any old home, any good realtor would show you these simple facts. They would hope that your mind is open and if it was not, then you are probably going to move along to the next one and wait for someone to tell you what you want to hear.
This crap is dangerous. It is as dangerous as Dave Ramsey telling people to sit out the 2010s and stay renting when they could have bought the home. The math would have earned them tons of money without any risk of them going into bankruptcy, which is the big thing they are trying to do is keep you is out of debt. The reality check is if you want your first home to be the foundation of your financial empire, you missed the basic principle in all investing. Homes now, you have to understand where their pricing is. You missed it. 15 to 20% off buying never happens. It sure as hell does not happen in this bidding war market.
You have to work the math. You have to see how to make the math work for you because no one is selling you that Google Stock at $2,700 a pop. No one is going to go, “I got to get rid of this one. Let’s get rid of it for $2,200.” No matter how many podcasts tell you, “This is the best way to make money and build an empire.” Do you mean the best way for me to make money is to buy $2,700 stock for $2,200? I would never have thought of that. What commodity sells itself at 15% to 20% off-market value in a market that is appreciating?
He wraps it up by saying, “Your show alone has been a good inspiration, regardless if you can recommend a real estate agent that we can end up working with.” That is very nice and I appreciate that. Needless to say, I do not think that my unicorns ever told him the story that he wanted to hear. Remember, everybody out there looking to buy a home and looking to get a deal, this is the time in history that you got this idea. That is the ultimate factor. If you do not study the past market to understand the present market, you are never going to be able to take advantage of the present so you can thrive in the future.
If you are determined to get what you heard was possible once on a podcast somewhere, without researching the market history, to see if that is possible in the present market. Instead of actually accepting reality and realizing, “Here I am in today-land.” Most likely, if you keep doing that, the future is going to pass you by. Google is not $100 a share. You may have to find a new way to build your fortune, but in the meantime, the whole thing that I am trying to help you guys understand is you still need shelter. Let’s see if you can make that work for you. The payment you are already paying, even a little bit.
I have no idea what happened to the guy. If he is still reading, give me an update. I would love to hear about it. I do hope it worked out for him. It is probably the harshest I have ever been on the show because I am here to support you guys. I hope you understand what I am trying to do is if it is like with my buyers. My buyers will tell me all the time, “Right now, homes sell in a couple of days.” People will come to me and be like, “This home looks awesome. It is $50,000 less than all these other $700,000 homes. It has been on the market for 94 days.” I go, “Say that back to me.” “It is $50,000, less than all the other homes we have been seeing.”
“How many homes have we tried to put offers on?” “Nine.” “How much have we been going over the market price?” “$50,000, sometimes $100,000.” “How long has this home been on the market?” “Ninety-four days.” “How long does it take for all those other homes to sell?” “Two days.” You come in with these great questions and great ideas, but once you get into what is actually going on, you are going to be able to see red flags from a mile away.
Topic 3: Investing Before Buying
Topic number three, investing first, then buying your own home. That is on the same topic here, but this is a little different because people are coming in and they are trying to ask a safe way for them to start to build their wealth. They want to start it with their own home first. Here is the reader’s email, “Thank you. I am new to this and have only read to a handful of your episodes. I am sure that some of the questions I have for you are probably going to be answered if I took a little more time reading, but I figured you are so forward about telling people to reach out to you. I figured I would email you my situation and see if you could guide me some.”
I am totally down with that. This is great. I got to answer him. Hopefully, other people reading and thinking about using their first home as an investment, you can use this information. We get to the heart of the matter. He says, “Where I live is expensive and I do not foresee myself being able to buy here anytime soon.”
“While I would very much like to buy a home someday, for the current situation, the smartest move for me financially would be buy a home somewhere else out-of-state where I can buy with my current income. I am most interested in buying an investment property. I have some questions about that option. Before I go further with any questions, I also want to bring up that I am open to the idea of relocating in order to get whatever advantage as I can as far as down payments and loans.”
“I am under the impression that if I live in a place I am buying, I can get a lower down payment and maybe better loans, but I am not sure if that applies to multi-units. I would like to buy a multi-unit or a duplex, a couple of questions right off the bat. Number one, do you need 20% down for an investment property? Number two, do you lose any advantages you might have as a first-time home buyer if you are buying an investment property? Number three, is buying a multi-unit considered an investment property, even if you live in warrantless units?”
What I told him was as far as buying an investment property that you live in, I love that idea because that is great, because you can buy them without having to put the full 20% down. If you are buying a duplex, triplex, or fourplex, you can get into one of those and you can still take advantage of the low down payment options that are open to first-time home buyers. It is not going to affect how you are going in. There will be a little bit of stuff that is going to happen with the approval based on the rental and the rental history. In general, you can still get in for a lower down payment, as long as if you are approved to buy something in that price range.
It is a hybrid. It is considered an investment property, but if you are buying it yourself, you will still be able to take advantage of the lower first-time buyer or general lower down payment programs. That was my answer to that guy, but some people say, “I want to buy my own investment property first before I buy my own property.”
First-Time Homebuyer Deals: When you secure your own property, you want to eliminate your largest monthly expense of renting. Then convert that into a mortgage, which makes a good return on your investment.
That is where I get into a little different area. I get that question often from first-time buyers because they hear about real estate investing and they think it is too expensive where they are. They got FOMO, so they want to go out and buy a home someplace else and rent it out. A lot of times, in my humble opinion, your best bet is to keep saving and secure for your own home purchase as the foundation of your real estate investing. It is the advice that I give everybody.
I have learned that investing can sound like a simple way to build your wealth. People out there, especially people trying to sell you something, are going to tell you that it is easy. Remember, there is one key formula that most people do not talk to you about in the equation of buying investment properties. If you buy an investment property and you do not own property yourself, you might make some money every month, but what about the rent that you are still throwing away? There are tons of math to consider if you want to buy an investment property first before you buy your property.
I am only going to skim the basics because there is so much more to it. My show does not talk about buying investment homes instead of owning them because it is very complex and it is totally different for each person. My goal is to help people take advantage of the thing that they are already going to buy. That does not mean that I can’t explain it.
I know from experience that the majority of first-time home buyers, the complex math usually works in your favor when you secure your own property first and eliminate your largest monthly expense of renting. You convert that into a mortgage, which by the way, is the safest, orderly, proven long-term high well notes. It is more of an average return on your investment, low to average, 3% to 4%.
If that does make sense to you and you do not want to trust me on this one, you think your numbers are better investing as opposed to getting in your own house, here is some basic math for you. These are things that my friends, a lot of people I work with at Disneyland, who are young first-time homebuyers, especially the tech dudes who have nothing to do but sit around in between shows and research crap. They come to me with this and they tell me, “I heard about this guy and he is buying property in this place for this. This is his numbers.”
Let’s say that they want to live in a $500,000 condo. It is going to cost them $25,000 all-in. That is 3.5% down payment and 1.5% closing costs. They want to buy that house. They do not have $25,000 and they do not want to spend about $2,800 a month it would cost, PITI. What they have got is $15,000 and they think the $2,800 a month is too steep for them.
They researched and they come back to me, and they say, “Here what I am going to do, Dave. I got my idea. I am going to go buy this $250,000 house. I am only going to put $12,500 down. That is going to be my down payment and closing costs. The payment is only going to be $1,400, but I can rent it for $1,800. It is $400 a month, $4,800 a year. Sounds great, right?”
It does sound great and so does a house made of lollipops and gingerbread. It is not real. The 3.5% down payment for your primary residence that you are talking about going out and buying an investment property, technically, you are not allowed to use a low down payment if you do not live in the house and it is not considered your primary property. There are people who find ways around it, but technically, you are not allowed to do it. That is the big one I want you all to know.
If you could finagle a way around a low down payment for a cheap investment property someplace else, let’s think about the math that you talked about. You put $12,500 down. You are making $400 a month. That would be an annual return of $4,000. On a $1,250 investment, $4,800 a month is 38.4%. If this was easily doable, people with $100,000 cash that they want to invest, and trust me, there are plenty of those people out there, they would be doing this eight times over and then they would figure out a way to save $100,000 and they would be doing it again next year. Everyone with any money would go after a 38.4% return on their investment.
If the cashflow was only $100 instead of $400 a month, that is still an 8% return on investment. That is still considered good if you are dealing with stocks. If you are reading this and still think it is better for you to do this, do not even come at me with, “David, you are not counting the equity that goes in the house.” Yes, you are right. The home is going to make some equity, but remember, number one, any gain in equity on an investment property that you do not sell is just on paper. Do you know how much it is going to cost you to sell the house? Instantly, you have to take 7.5% off of your equity profits. In the nowadays’ market, it is going to take you about 2 to 2.5 years to gain 7.5%.
You are not even making any money on the equity for a couple of years. That is the basic math. I am not even taking into account any of the things that come along with being a landlord. We are talking about understanding the process of buying a home out-of-state, the property management fees, the vacancy rates, the tenant issues, the leaky toilets, the property upkeep, and the list goes on and on. In general, the numbers that you hear about investing in your first home are too good to be true. You know me. I am all about truth bombs, especially if you do not have the capital to back things up if anything goes wrong.
Learning The Game
If you have a handle on the entire real estate investing game and you want to make it happen, then you know what I am going to advise that you should do. If you know what you are talking about, then you probably know what I am going to say you should do. It is that duplex, triplex, or fourplex. I have actually heard them called a quadplex. If you got questions about that, hit me up. I actually heard that in March 2022, some lenders are now starting to land on the property as opposed to on the borrower. Does that make any sense to you?
Let me explain to you in layman’s terms. If you are trying to buy a duplex or a fourplex, they are actually going to take into account what the rent is to decide how big a loan they are going to give you. Usually, a loan is based on your income and your debt, but instead of using that, they are talking about upping your ceiling for your max approval, which I’m seriously into.
We are going to take a little while and make sure that works out, but if you have got questions about that, hit me up with it. I am all for people making the right moves to set themselves up for the long game. In my opinion, as stated by many different episodes that I had done in the past, the numbers that were thrown away in your rank usually outweigh the profits that you can make playing any investor’s game. You are playing with a regular person’s capital.
That is coming from me, the guy who railed on Dave Ramsey for being too safe. There are people out there who are saying that I am being too aggressive. Dave Ramsey is the safest. I am giving you a safer or even just safe option. I am going to fight the power and disagree with people that are too conservative in their home purchase philosophies. Yet I have been at this for a long time, and I still tell people that the math is probably in favor of you getting your own property first before you go out and try to buy an investment property. If you have your heart set on that, I always recommend that people get into a duplex or a multi-unit.
Do that first before you start building your empire. I am down with the empire. If you have questions about options to use and each buyer situation is totally different, go to HowToBuyAHome.com
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reviews are always the bomb. They help me out. I am here to help you out and answer your questions. I am trying to get this so big that we can start a revolution and change the way the real estate industry treats you, first-time home buyers. You need to understand all this and make sure that you are protected, so you do not get screwed.
Do not be bummed out if I trashed some of your ideas. That is fine. The name of the game isn’t figuring out how to do something so totally crazy that no one is ever done before. The name of the game is to come to someone that has done it and go, “Here is the cheap shortcut and the easiest way to do it. That is the best you can do.” If you could even close to that, you scored in this market. Believe in the math, believe in the process, and you will be able to find a way to dump your rent, whether you take an aggressive plan or conservative plan once you fully understand the rules of the game. That is the way this works. Learn the game, and you can do this.
This podcast was started for YOU, to demystify things for first time home buyers, and help crush the confusion. After helping first timers for over 13 years, I knew there wasn’t t a lot of clear, tangible, useable information out there on the internet, so I started this podcast. Help me spread the word to other people just like you, dying for answers. Tell your friends, family, and perhaps that random neighbor you REALLY want to move out about How to Buy a Home! A really easy way is to hit the share button and text it to your friends. Go for it, help someone out. And if you’re not already a regular listener, subscribe and get constant updates on the market. If you are a regular and learned something, help me help others – give the show a quick review in Apple Podcasts or wherever you get your podcasts
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