Got another excellent idea for all house hunters / owners out there!!
This one comes from Jessi upon hearing news that we’re considering owning again, and I’ll admit it’s actually helped calm my nerves a bit just reading and seeing how you can *systematize* things and better separate out your emotions from the equation. Something I’m notorious for, especially when big decisions are on the line ;)
Check it out and see if it’s something that might be able to help you too! Whether you’re on the hunt or even already a home owner… The second half of the email could be a good option for anyone.
And speaking of hunts, we just wrapped up our first one over the weekend and I actually didn’t hate it too much! In fact, there was a small part of me that even found it – dare I say – FUN! Haha… Kinda like having your very own HGTV show, only in real life :)
We ended up nixing about 6 of the 7 homes we saw, but the one that stood out was enough to give me some good hope and continue the process without kicking and screaming too much…
So we’re getting there! And already better than we were 10+ years ago when we bought the first thing we saw on the spot, haha…
But enough about me – here’s Jessi’s tips on how she manages her home and the finances that come along with it… Really interesting idea!
Hi J –
I’ve been reading for a long time, and want to say thank you for all of the great tips and humor you bring to my inbox! =) We just hit $250,000 net worth this month (!!!) and a major part of that is because we bought our first house three years ago, and it turned out to be a fantastic investment.
So since I know you’re stressing about giving up the rent life, I thought I would share a tactic that has helped me feel more comfortable as a homeowner.
Buy your home like a landlord, live like a renter. Do the math on what a “fair market rate” is that you can afford for a three-bedroom house (and all your other “must haves”). I’m not familiar with rents in your area, but I live in $$$ California so I’ll use those numbers.
Let’s say rent averages $2,750 between the ‘burbs and closer to the city. Then ignore all of those investor rules like the 1% rule or the 50% rule. The cost of lumber, plumbing, paint, and appliances has nothing to do with rent or sale prices in an area. With Amazon and so many online retailers these days, flooring costs what flooring costs whether you’re in CA or the cheapest neighborhood in the midwest.
So decide how much you think you would need to stash away each year for home maintenance. I set aside at least $10,000 per year. Let’s round up and make it $12,000 for easy math. That’s $1,000 per month to set aside for home maintenance.
Now, take that $2,750 fair rent, subtract $1,000 per month for repairs/maintenance, and $1,750 is what you’re aiming for for your monthly PITI (mortgage principal, interest, taxes, and insurance). Buy a house in that price range (this is KEY, don’t overpay just because “it’s so cute!”), and set up a bank account just for the house.
Every month, pay that bank account your $2,750 “rent”. Set up an automatic mortgage payment from that account. Every time you do a repair or maintenance that normally would be covered by a landlord, reimburse yourself from that bank account. If you buy furniture or cleaning supplies or other “renter” items, you pay for it out of your general living expenses.
It starts turning into a game, seeing what the “landlord” will and won’t cover, and how much the account can grow from your investment in your “renters”. At least for those of us that think budgeting is a fun game. =D
If you buy right, the account will grow, and when it gets nice and full you can splurge on a new roof, or a kitchen remodel, or pay down the mortgage. If the home value goes up, tap into that equity by opening a HELOC. (But only use it as a house emergency fund. I treat mine like a super-low-interest credit card and try to pay it off immediately.)
Best part is, you’ll never be stuck with awful tenants. ;) After all, if your landlord invested correctly your rent should cover the mortgage, repairs, maintenance, and outsourcing those tasks as necessary so buying the home yourself shouldn’t be any different.
Don’t budge on that price, and don’t forget that the mortgage is NOT the same as the rent. We hunted for nearly a year before we found the perfect house in our price range. And it wasn’t even on the market! When the next-door renters moved out, I called up their landlord and asked if he’d be willing to sell for $X. He did! We got an insanely good deal for the neighborhood and had $100,000 in equity within a year of purchase. Now a lot of that is luck, but also because I refused to settle and overpay.
And hey, think of all the shenanigans you can get away with then you’re the landlord too:
- Cookie cutter house? No problem! You’re the landlord! Add whatever character you want. Don’t underestimate the power of fancy hinges and interesting window casings.
- Boys get a little wild and put a hole in a wall? No problem! You’re the landlord! Call up a Task Rabbit and have it patched in a jiffy. Use the house account.
- Get a dog one day that digs up the bushes? No problem! You’re the landlord! Zero-scaping is better for the environment anyway.
- Wife wants to paint a mural on the kid’s bedroom wall? Luckily the landlord is super lenient, and will let your family really put their own mark on the place. (Literally!)
The benefits go on and on. Best of luck in your home search! I don’t think you or your family will regret it.
PS: I was firmly in “camp renter” until my brother bought a house and I realized I did not know enough about the process. I started researching and became obsessed with real estate investing, and we have an addition planned that’ll let us “house hack” (another interesting concept you might want to check out, but definitely tougher to do with kids).
Awesome, right?? Treating your property like a rental, only you’re the ones who are actually renting it? From yourself??? :)
And again, even if you already own your home it doesn’t mean you can’t still try out the *separating* of accounts and finances like that… I don’t know why it is, but I swear it’s much easier to spend money that’s earmarked for something than when it’s just lumped together in a large savings account…
It’s as if your brain has already told you it’s “gone” so spend away!! Which I suppose could backfire if you’re trying to buy something ridiculous, but in terms of home ownership here I think it’s a worthy trick ;)
Lemme know what you think! And especially if you’ve got your own house-hacking tips as sometimes the smallest things can make the biggest differences in our lives/finances… Big thanks to Jessi and everyone else who’s been sending these over lately. 👍👍
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!