Get In The Game: Part 3

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This is Part III of this “Get in the Game Series.”  In this episode, I will discuss three separate real life stories, two which I went through, and one my daughter Haley went through.   The point I want to get across with each of these stories is there are many “outside the box” ways of buying real estate to “get in the game.”   The sacrifices you make will pay off over time and get you out of the cycle of being a renter to one of building equity (wealth from real estate ownership).

Story 1:   My first home purchase back in 1979.   Just out of college and was just starting my career as a real estate broker.   Was working on a 100% commission basis and had not closed a deal yet.   Found a house I could buy with a $10,000 down payment, assumed the existing loan (i.e., took it “subject to” based on the Wellencamp decision on the assumability of State Chartered Savings Bank loans), no qualifying.    Since I had no discernable income yet not enough savings for a down payment, I borrowed the money for the down payment from my Mom with the promise to pay her back when I sold the property (I ended up paying her back sooner than that though).   I stepped up and took a chance and bought the home.   I  had learned construction from my dad who was a building contractor, and I built a room in the two car garage to live in, and I rented the 3 bedrooms out.    That rental income covered my PITI payment until I started earning income, and when I did, I moved into the master suite, but still rented out the other two rooms to cover my payments.   Three years later I sold the home for a net profit of $35K, and added to my stake money for my next home.

Story #2:   My second home purchase was back in 1982.   For those of you who remember real estate and loans back then, mortgage rates rose to double digit levels as the Fed was trying to stamp out inflation as best they could.    I wanted to move up and found a nice house in Woodbridge I wanted to buy.  It was owned by a co-worker of mine and he was buying another house for his family, moving to Corona Del Mar.    He was thinking of keeping his Irvine house as a rental.   I talked him into me buying a third of his house, he keeps a third for himself as an investment, and I find a third partner to buy the other third.  I found another co-worker who was renting and talked him into buying the other third.    It was a four bedroom house and neither one of us were married at the time.    We figured out a fair market value rent for the home and agreed that the three of us would be equally responsible to pay the PITI + HOA payment on the home, but that the two of us moving into the home would be responsible for the fair market rent on the home each month, so the third owner (the one who owned the whole house before and now just a third and moved to CDM) only had to pay his third of any negative cash flow on the property.  We rented out the other two bedrooms to help us pay for our third of the expenses.   Over the next 2-3 years I slowly bought out my other two partners, got married and eventually owned 100% of the home myself.   That is where our two children were born.   18 years after buying a third of this home, we sold it and moved to the home we own now in San Juan Capistrano.   One last point, is we assumed the existing loans on the property that had double digit interest rates on them, and eventually refinanced those loans out as rates kept dropping for the next 15 years.

Story # 3:   This one is about my daughter Haley, who graduated from college about 7 years ago.   She took her first job out in Tennessee and her goal was always to make it back to the west coast, which she did 2 years after taking that job as a News Producer for a Channel 4 affiliate out there.   Because she was only going to be in Tennessee short term, we did not consider buying a place out there.  Looking back on it now though, we should have, and then turned it into a rental when she left as Tennessee is booming now.   Water under the bridge though.   I should have bought a lot of real estate along the way I didn’t.    That is another story in itself, the opportunities I have had.  Haley then got a transfer to the west coast up in Seattle.   Not knowing how she would like it up there, she rented the first year she was there.    Home pricing is similar there to Orange Counties due to the major industries that are headquartered there (i.e., Amazon, Starbucks, Microsoft, etc.).   Haley rented a studio apartment there her first year.  All in, it cost her about $1,800/mo.   The bottom end of the housing market at the time was in the high $600K to low $700K range, and she did not have the income to afford that, so she felt stuck in that “rent trap,” knowing her rent would be going up annually and at the end of the day, she would have nothing to show for it.  So we started talking about ways she could buy a home,  but that did not sound feasible initially, due to the high price of real estate.    We ran the math and was surprised at what we saw as possible.   At the same time a buddy of mine’s daughter was just hired by Amazon and he wanted to get his daughter “in the game” too.    We figured that if they pooled their income/debts, and bought a 3-4 bedroom place, their housing expense would actually go down if they rented out one or two of the other bedrooms in the home.   We agreed to lend them the down payment to buy the place (20-25%), with the understanding that when they sold the place someday that they would pay us back.   Here is what happened:

When we showed them that we could cut their housing expense in half, they got interested in looking into buying.  After a few months of looking at properties to buy they found a 3 bedroom townhouse style home in the city.   It was a much nicer living arrangement for them and much more square footage than they had in their respective studio apts.   They were the successful bidder for this property.   They qualified for the loan together and we gifted them the down payment on paper knowing they would pay us back some day, which they already have.   With the rent they received from the additional bedroom and the fact that they were only paying a third of the utility, cable, and internet expenses now because three people were sharing in those costs, we had cut their housing expense in half.     At about $900 a month in new housing expense for the two girls, that is not where the savings ends.  Note that of this $900, almost $200 was going towards principal reduction on their fixed rate mortgage, and they also now had tax deductible interest and property taxes they could write off against there income.   We also created a Tenants In Common Agreement between the two partners that covered all the different possibilities that could arise in their partnership, such as them getting married one day or wanting to own their own property 100% one day, etc.  In their case, Haley wanted to move in with her boyfriend, so she offered to sell her half of the property at fair market value to her partner or buy her partner out.  The partner chose to be bought out, so Haley’s boyfriend bought her out and Haley and her boyfriend then owned the property exclusively.  They eventually got married had a baby, moved back to Orange County, sold their Seattle property for over a $100K gain, and just bought a new home in Ladera Ranch. Homeowner’s for life!

If you missed Part 1 or part 2 of this series scroll down to see them.   One more part (4) will discuss other ways of Getting in The Game.  For now, hope this gets your wheels turning.

Ken Thayer                                                         Karen Gledich ext. 241                                   Crystal Lopez Hyman, ext. 306

949-489-9429, ex.t 209