My first home became my first rental property in 2011 when I relocated with my wife about 4 hours south of where I was living. Like many, I did not intend to keep the house, but the housing market was at its worst in 2011 in my area and I was not willing to take such a loss. The good news is that my finances were enough in order that I didn’t need the money from selling the house to pay for the move.
The house is on my mind because the appraisal is scheduled today for refinancing the property. I waited this long to refinance because there was a chance we would move too far away for me to manage it. Now that we at least know we will end up somewhere within a day trip of it, I am ready to refinance and keep it for the long-term.
This house caused, and continues causing, both great anxiety and great lessons for my financial wherewithal and goals. Unexpectedly, it has also shaped some of my more recent views of the government and its interaction (some might call interference) in my financial world.
Search for a Home
I bought my home in July 2008. That’s right, just at the beginning of the recession. At the time, even family members and other trusted friends I asked seemed to think this was a great time to buy and that the market could not possibly go any lower. I was 25 then and didn’t know much about what caused and would continue to cause the real estate downfall. Plus, the government offered a $7500 interest-free loan for the purchase of a house. What a great deal! I prepared for a cross-country move that included a visit to house hunt, a visit to close, and then a final move. One bullet dodged is I knew I wanted a single family home and that meant I would have to get a fixer upper to afford one. I found the house, but during my first visit, my company’s stock plunged and all travel froze. How was I going to get back for closing?
Financing the Home
My credit has always been solid, so getting the loan was no issue. Unfortunately, I didn’t have a lot of liquid cash because I was maxing out my 401k and paying cash for my MBA program. I contend that these are the right things to do (avoiding debt and saving for the future), but I ended up trying to do one more right thing that would cost me later. I qualified for a FHA loan, but could eek out enough for 5% down, which could get me a conventional loan with a better rate. I qualified and was all set up. This meant, however, that I was stuck with PMI.
Closing the Home
Since I couldn’t get back due to travel restrictions, I got a power of attorney for my parents to sign for me. Before I even arrived, they had all the old carpet ripped up and the hardwood underneath sanded, stained, and coated with polyurethane. I was sitting pretty with a great buy and some easy renovations to watch the equity build up.
Renovating the Home
Who knew renovations could be so expensive? With the liquid assets I had left, I gutted the bathroom, removing the old 1950’s tile and adding ceramic tile floors. Next, I waited for my $7500 interest-free government loan to finance the kitchen renovation and bathroom addition. I saved a bunch of money doing most of the work myself and learned a lot about DIY projects, however, the total cost was still expensive.
Time to Move
I met my wife and realized I would move in 2011. My house was on the market for 3 months, lowering the price 3 different times and had a grand total of 5 showings in that time. I hit my limit and opted to rent it out with the intention of waiting for the housing market to rebound so I could at least break even as compared to what I put into renovations. The good news is the renovations I completed allowed me to charge rent that is $200 more than the mortgage payments. My renters are responsible, pay on time, and have no intentions of moving.
The Government Kicks to the Pants
Through this process, every move I made that I thought was financially responsible ended up being a missed opportunity with government programs.
- The $7500 interest-free government loan – this program got upgraded the very next year to an $8000 gift. I kept hoping my obligation to repay my loan would be forgiven. No such luck and when it no longer became my primary residence I was required to pay the whole thing back.
- The conventional loan with PMI – the HARP program allows people in various scenarios to refinance regardless of amount owed and other factors. A conventional loan with PMI converted to a rental loan is not one of those scenarios.
In both cases, I thought I was doing the responsible thing, but the continuous meddling by the government makes me hit my head against a wall as it seems to favor those who were less responsible with their loans in the first place and I got caught somewhere in the middle. Admittedly, however, if I would have waited to buy until I had 20% down, it would have been sometime after 2008 and I would have gotten a great deal.
My refinance is based on a specific assumption of what the appraisal will be. It is a conservative estimate, so I am pretty confident, but nothing is ever certain with this house. The refinance will be a nice savings and make the house an excellent asset going forward.
I learned many lessons with this house and feel I have matured along with it. It is my first house, so it will always hold a special place in my heart (definitely a love/hate relationship). So today, I hope that the house gives one back in the form of a nice appraisal and we can ride off into the financial sunset, collecting rental checks as a result of blood, sweat, tears, and education in real estate.
Have you taken any hard knocks in real estate? What do you have to do to stay on the positive side of things?