Friends Don’t Let Friends Rent: The New Home Buying Strategy
In this Mortgage Minute episode, host Art Alvarez (MortgageWorks) and co‑host Jeff For Local Marketing deliver a market update and then present a creative home‑ownership strategy aimed at younger buyers and renters. After reviewing recent bond‑market moves, war‑related volatility, and key economic data (ISM, ADP, employment reports), they explain how the FHA 5/1 ARM can be used as a qualifying and affordability tool, illustrating it with a $479,000 La Quinta listing, a $15,000 seller credit, and a permanent rate buydown to a 3.78% start rate. The core of the show is the “friends‑don’t‑let‑friends‑rent” concept: pooling down‑payment funds with trusted friends or family to purchase a starter home (or 2‑4‑unit property), split monthly costs, and build equity far faster than renting. They discuss practical considerations—co‑borrower calculations, partnership agreements, exit plans, risk of one party defaulting, and the suitability of multi‑unit homes. Additional ideas include parental equity extraction, the “kiddie‑condo” approach for college students, and the California Dream for All down‑payment assistance program. The episode ends with a call to action for pre‑qualification and voucher enrollment.
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Well, good afternoon, everyone. My name is Art Alvarez at MortgageWorks, where we have the answers and they're on the house, coming to you from Palm Springs. In the greater Coachella Valley area. Weather's a little, uh, back to normal, I would call it. Last week, past week or so, we got a little bit of a heat wave. In fact, last week we were getting up close to 100 degrees. Now we're back to our kind of seasonal, you know, uh, 80-ish, high 70 type weather, which is pretty comfortable. And of course, perfect timing for, uh, what, you know, I'd like to talk about sports here a little bit. Get the show going. And of course, we are now in the opening week of the BNP Paribas Tennis Tournament at Indian Wells. So of course, the Coachella Valley is bustling with lots of visitors. That is a tournament often, for those of you who are tennis fans, or maybe if you're not, it's often referred to as the fifth major. Not that it's an official, you know, part of the, you know, four majors in pro tennis, But there was— there's been talk that if there ever was going to be a 5th major added, that Indian Wells would be, would be the likely tournament. So it's, it's got that kind of prestige, and it's, it's very popular tournament, and they always sell out. And so I'm looking forward to that. Of course, I've got my, uh, got my money on Carlos Alcaraz. I was a Rafa fan, Rafa Nadal, so Carlos Alcaraz is sort of the Rafa Jr., so I'm, I'm in his court trying to root him along to, to win another, another tournament. Uh, we also got the World Baseball Classic started yesterday. The Team USA, uh, they play their first game tomorrow and they've got a pretty good team. We got some big names on that team, surprisingly, like Aaron Judge, for example. So I'm thinking they're going to do very well in that tournament. That runs from, I think, yesterday through the 17th. Of March. And then of course Major League Baseball starts right around 1st of April. And then of course, anyone out there who's a motor racing fan, we've got the Australian Grand Prix— that's Formula 1— coming up this weekend. So I'm looking forward to that. So with that, let's jump into what we start with always, is to let you know about what's going on with rates and the bond market. We're going to show you our rate grid. Lots of hand-wringing this week about that brief period last week when rates dropped, the media was back to saying that rates were under 6% again. And so, of course, lots of excitement when I was getting— we've been getting calls about refinancing and so forth. Well, unfortunately, that's already backed up a bit. And of course, mostly because of international events, you know, what's going on with the war in Iran, it's creating quite a bit of jitters in the financial markets. But if you look at our rate grid, The good news is, and this is recently updated, everything you see on there is current. I mean, we're still under 6 despite a little bit of run-up we've had this week because of, of the war in Iran. So all is not lost. We're still on the 5. So don't panic. And one of the things about this kind of environment is it's probably not going to be extended in terms of its effect on the markets. At least we'll see. But Jeff's going to go ahead and pull up now the 10-year bond chart. That's a 10-year bond yield. This is a 5-day chart going back from last Friday to now, and unfortunately it does show you the kind of trend we don't want to see. Rather than, you know, a nice gradual slide downward over the last 5 days, it's the opposite. You can see it dipped quite low on early Monday, but then since then it's has been gradually climbing. I think the good news, if you want to look at that glass is half full side of things, is that, you know, we're still under 4.15%. It wasn't long ago we were hitting 4.20% within the last, you know, few weeks. So all in all, I would say while the markets are jittery, particularly the stock market, the bond market I don't think really has reacted adversely as much as you might have thought. Typically when the bond stock market sells off, bond yields improve because of the flow of funds, money, you know, the flight to safety they call it, where money comes out of stock market, goes into bonds as a safe haven. But the countercurrent to that, which is why the bond yields elevate a little bit, is oil prices. Oil prices have exploded because of what's going on, and of course higher oil prices is a reason to be concerned about inflation because oil is a, you key ingredient in so many products and services that they can have an inflationary effect. So, that's part of what the bond market's reacting to. As to particular data that's been happening or that we're seeing in the market this week, another light week in terms of data overall. So, as I put there, light data calendar, but add to that wartime volatility.. And I think really the wartime volatility is really kind of overwhelming any of the other data points that might otherwise have more of an effect. And again though, the data this week is relatively light. We had the ISM Manufacturing came, came out early this week. It was up for the second straight month to 52.4. Above 50 is considered expansionary, below 50 is contractionary. ISM Services expand at the fastest rate in 3.5 years at 56.1. Again, under 50 is declining. So that's So, that's both very good indicators that the economy, despite all the continued media stories about the economy's faltering, these two numbers don't suggest that. Things look to be pretty good. The Fed Beige Book also was released this week. Now, what the heck is that? Well, it's a book that's beige color. Well, a little more than that. 8 times a year, the Fed does their own study of the economy and then publish this book to kind of describe what's going on. And the latest book that came out this week described mild growth, a continued uncertainty in the economy, higher prices— of course, now particularly as it relates to the oil prices with the war impact. And of course, we've had some pretty severe winter weather. So all in all, it was a relatively, you know, moderate report in terms of, yeah, the economy is not, you know, set any records, but it's growing at a moderate or mild pace. And I think that's, that's still overall a good thing. Of course, you look at those two other data points, maybe it's just a question of once that trickles through, we might see some, you know, greater growth rates coming, going forward. The other data that came out this week, ADP employment. ADP, I don't like that index a whole lot. It can be way off sometimes, but ADP employment is new jobs added in the private sector only, no government jobs, only private sector. 48,000 was forecast, came in at 63,000. That would be another reason why that bond yields up a little bit because it's, you know, a much greater number of jobs added than forecast. And of course, if you get an overheated economy again, that can be inflationary. The big numbers this week are tomorrow. The U.S. employment rate I'm sorry, the US employment, that is total jobs added. By the way, that includes private and public jobs, public sector jobs. It was 130,000 previously, forecast to only be 50,000. And this is kind of weird. The US employment report is coming out of the federal government. Compare that 50,000 forecast, which includes government jobs, ADP already says, oh, we had 63,000 in February. So there's a little bit of a divergence there in these two numbers. So we'll be It'll be really interesting, interesting to see tomorrow when the federal government issues their employment report, how it matches up to the ADP report that we got yesterday. And then finally, the U.S. unemployment rate, that'll be out tomorrow. It's forecast to drop a tick to 4.3, previously was 4.4. So again, doesn't look like there's a whole lot going on in a negative fashion as to the labor market. Again, again, that could, you know, be causing a little bit of an uptick in the bond yield, but nothing crazy. I think it's relatively been mild in terms of the increase. So with that, we're going to go ahead and go to our next segment, and I'm going to talk a little bit about a product that I've talked about before, and that is the 5/1— I should say the FHA 5/1 ARM. And I'm going to pose the question again: is this the best ARM program available? And I'm going to say yes, and I'm going to show you some proof. So what I decided to do is I got on the MLS system here locally and looked at some listings in the high $400,000 range, and I found one, an active listing, a single-family home, a 3-bedroom, 2-bath in La Quinta, just down valley from here as we call it, and it's listed for $479,000. It's been on the market for better part of a month, no adjustment in the price so far. And so one thing I would point out, you know, here's an example of, at least in this market here in the Coachella Valley, there are single-family homes available, you know, at this level. So it's not like you have to think that for something at that price level it has to be a condo. No, there's some decent single-family homes available in this valley. And so this is a good example of one that's currently active, for sale. And so part of my message here would be for anyone who's maybe a first-time home buyer, or you're an agent working with a first-time home buyer, what I'm going to show you here is a good example of what's real, what's doable, what's possible today to provide you some very good, uh, terms in getting a property like this financed. So again, there's the active listing looking to $479,000. So let's assume you're going to make a run at this property. You think you can get a concession, but you end up talking to me. I talk you out of taking that concession off the price, and I suggest you offer $479,000 and you ask for a $15,000 seller credit. So again, as Jeff just pulled up, there you got— there you have it. Negotiate a $15,000 seller credit. Now, with an FHA loan, what's the down payment amount? It's 3.5% of the purchase price. $16,765. So again, what we have now so far is you're making an offer at $479,000, you're asking for a $15,000 seller credit, you successfully negotiate that, and your minimum down payment is only $16,765. Now, what would you do with that $15,000 seller credit? Well, I would recommend that you do a permanent rate buydown on that 5/1 ARM. Right now, the 5/1 ARM with no points is in the upper fours, like 4.75 or so, 4.75, 4.78. Well, with a $15,000 seller credit, you can then take that credit amount and apply it to the points that would be required to bring that rate down to 3.78. So those of you waiting for 2s and 3s, Here's an example. You can at least break through 4% and get to the high 3s with this strategy. And by the way, I say permanent rate buydown because with the FHA ARM, you cannot do a temporary 2:1 or 3:1. That's not, that's not allowed. So you would do that $15,000 credit would pay for the points to get the rate down to 3.78%. What does that do with your minimum down payment on that price as to the monthly payment. Well, get this, principal and interest, $2,212. I don't know about you, 3-bedroom, 2-bath home on a standard size lot, uh, I think the property, this property was around 1,600 square feet.
$2,212.
Now granted, that doesn't include your property taxes, doesn't include your homeowner's insurance, but still, $2,212, I would argue that's very competitive to what rents are. I mean, how many stories have you heard about somebody, you know, renting a, you know, modest 2-bedroom apartment, it's costing them $2,500 a month? Well, there you have it. Now, of course, yes, you add taxes and insurance, you're going to get up closer to $3,000. But again, you're buying nearly a half a million dollar home with a minimal $16,765 down payment, and you're getting 3.75%. Now, what does this ARM do? How is it structured? Well, you're going to have that initial rate and therefore the corresponding 2212 payment, that's fixed for 5 years. No changes. It's fixed for 5 years. Then what happens is the loan adjusts annually every 12 months after that. So then you say, okay, so what are the caps? Well, in the first adjustment in year 6, 1%. So if the— now I didn't mention ARM loans are going to have an index with a margin added to it. With the FHA loan, it's a, it's a 1-year CMT, Constant Maturity Treasury Index. Right now it's around 3.6, and then a margin that's added to that, uh, 2.25. So you add those together and voilà, you're talking about high fives. So let's assume after 5 years the loan's adjusting and the index plus margin calls for a 5.78 rate. Well, you have a 1% cap. So despite that index plus margin in year 6, you're going to only go up by 1% to 4.78%. You're not going to go to that 5.78% because you have the 1% cap. That cap stays in place annually every year for the remaining 25 years. So it's 1% at the first adjustment, 1% each subsequent adjustment over the life of the loan, 5% life cap. So on a 3.78% bought down rate when you got that seller credit, you're going to have a life cap of 8.78, single-digit life cap. That gives you lots of protection in a rising interest rate environment, which of course it would have to be a sustained rising interest rate environment to ever get to that life cap. But nonetheless, at least you are rest assured that you have a single-digit, pretty, you know, low-level life cap to guard you against the worst-case scenarios. And here's the kicker: the FHA ARM loan, unlike virtually any other adjustable rate mortgage product out there today, at least as it relates to a 5-year term, qualifies at the start rate. This can be very important if you're having trouble qualifying even at this price level based on debt ratio. This can help you qualify, give you more purchasing power. You know, the standard 30-year fixed FHA, as we showed on our rate grid, is right now it's back to about 5.38%. Getting to being able to qualify at 3.78% means your, your debt ratio is going to be calculated on a much lower monthly payment. That's going to help you reach that debt-to-income ratio limit that you have to meet. So this can be an extremely good qualifying tool for those of you who are a little bit stretched on meeting the debt ratio requirements. So again, as a first-time homebuyer, this is really good for you to know. If you're working with an, if you're an agent working with a first-time home buyer, you're running into some trouble in terms of getting pre-qualified because debt ratio is an issue, the 5/1 ARM can be a great alternative. Now you might say, oh wait, it's only fixed for 5 years, a lot of risk there, right? Yes and no. If you're able to pull this off and you start at 3.78% for 5 years, you know that worst case in year 6 is 4.78%, worst case in year 7 is 5.78%, you've got 7 years at that point where your rate's going to be between 3.75% and 7.75% and the current level of rates in general about 5.75%. That's an awfully long time to give you the opportunity to do what? Refinance into a 30-year fixed, a longer-term loan that's fixed for the entire term when the opportunity presents itself. Or alternatively, within that 5 to 7 year period, you might decide if it's a starter home, time to sell it cash in your proceeds and then look to move up to a higher home. So this is a great, great tool for those of you who are very interest rate sensitive and maybe a little bit tight on qualifying based on debt ratio. This is a great, great alternative that I want you to know about. And of course, it's available only for primary residence homes. It's not for second homes, it's not for rental property. And important to understand, you do not have to be a first-time homebuyer. A lot of folks think that FHA does not require you to be a first-time homebuyer. A lot of first-time homebuyers use the program because of the overall more lenient qualifying guidelines, the 3.5% down payment minimum. But despite all that, you can be a repeat buyer and use this program to buy a home. So again, if you're interested in this, be happy to give you some numbers. I can ask you a few questions, get an idea what your scenario is, and then I can put it together, a worksheet, and get that sent off to you so that we then we can talk about all the numbers in detail to make sure you're comfortable. My office line there is right there on the screen, so give me a call. Let's have a conversation. Let me show you some numbers and help you get into homeownership using what, again, I call the best adjustable rate mortgage program on the market today. That's the FHA 5/1 ARM. With that, we're going to go ahead and go into our next phase of our program. That's kind of a clever little slide there. A little play on a phrase that you've heard before. In this case, we're saying friends don't let friends rent. So I'm going to bring Jeff back on here so he and I can talk about that and explain to you what we mean by that little—
Art, I love your smile on this slide. Thanks for letting us put this together.
Yeah, I like the suit too.
It looks good. You look sharp. You know, this is, this is a fun— and we talked a little bit off screen about this— is, is this is one of those moments, like, I know you love buy-downs, and because it, it does things that we don't normally think have been able to do. And this conversation you started, and we're going to have today, I think is one of those, those moments that really can change the way we in the future, starting today, buy homes?
Well, exactly right. I mean, you know, it's, it's, it's been the case that, you know, as people go into adulthood and, you know, they finish school and, you know, they're— maybe they've gone to college and they, they feel like, well, I'm, I, I'm not able to buy yet, that, you know, I don't have the, the wherewithal in terms of down payment money, or I'm feeling like I don't have high enough income, which oftentimes isn't really— that isn't always the full story. I see too many times it's, yeah, you have high enough income, but you have higher debt that's overwhelming that income, so it's becoming an obstacle. So what happens is younger folks, like, feel like they've got to wait this some magical period of time to sort out all these parameters. And what I think they're missing here is consider, you know, maybe a more creative way to not have to wait and get into ownership easier. And of course, by virtue of our slide here, that's where I would suggest to folks, you know, it's like— and I can remember from my own past experience, you know, way, way back before the, you know, I shouldn't say before the war because we got a war going on now, but yeah, yeah, when I got out of high school in, you know, mid-'70s, the first thing I did with two of my high school buddies is we immediately moved out of our homes. Now, we weren't forced to, we immediately moved out and we rented a home, and we had, you know, rented it from my girlfriend's father, but we immediately moved out when we were 18 and boom, we're living together, three of us, in a rental home. I think that's a scenario that maybe it still plays out a fair amount today, but if it does, too often it's more focused on renting something and folks aren't thinking about, well, wait a minute, if I think I've got a friend or two that I'm comfortable enough with, maybe I should consider doing something like that, but not just as a renter, maybe as a home buyer. And I think that's what we want to try to emphasize in our discussion today.
Well, you have a— you made a little video before we start, so I'll just, I'll just run that and then we can pick it up from there. Okay. So with this, it, you know, it makes me now kind of hit you right on that 5-1 arm. I'm like, okay, if two people did this, good friends, and they used a 5-1 arm to buy a home together, you said like $2,200 a month for this 3-bedroom, 1-bath or 3-bedroom, 1-bath or 2-bath home. Yeah. I mean, I'm like, okay, that's $1,100 or $1,200. Let's say $1,500 a month apiece. I'm not sure where you can live today for $1,500 apiece. And not only that, but you— but now the value of the asset you're living in continues to go up.
You're actually owning something. Well, exactly. And you're right. And those numbers, you know, you add in taxes and insurance, it's probably about $3,000 a month. Well, if you, if you found a trusted friend where you feel comfortable going into a transaction like that together and you split it down the middle, then yeah, $1,500 a month each. And you're not in a crummy 800-square-foot, 2-bedroom apartment that might be on the second floor of the building. You're on a standard size, 7,000-square-foot residential lot with a yard and, you know, lots of room and, you know, 3 beds, 2 baths. I mean, it's kind of a no-brainer. And the thing about it, I mean, I think the first key point is this is about— homeownership is about building wealth. And so that's what I think younger folks maybe don't realize is that you have that option if you're a little bit more creative about it. It's been, you know, we talked about on our show, was it last week or the week before? You know, the Fed studies this every 3 years and they've concluded again most recently in '22, we're going to hear the same numbers about '25 probably later this year. If you're a homeowner, you're going to build wealth at 40 times what you're going to build as a renter. So, okay, you might say, well, if I'm going to go in with someone you know, as a partner, then that diminishes that, that process. Well, yes and no, because, yeah, I mean, you're still— I guess you're building wealth that you have to split evenly 50/50. But when you consider it's 40 times what it'd be as a renter, you're still ahead of the game. And in terms of making your payments, you're no longer paying a rent payment that's just wasted money. Helping the landlord build wealth. Now you're making a payment that's comparable to rent, or if you're splitting it up the way we just described, better than what you would rent on your own. Then you're applying those dollars into a forced savings by paying down the balance to create even more equity that's going to occur even beyond the market appreciation of the home. So that's really one of the first points to understand about this. You're is the wealth creation opportunity that you can then start earlier rather than waiting later when you're trying to do it on your own.
Well, you know, talking about later, I think a couple shows back you were talking about the average age of a first-time home buyer is now 40 years old. Yep. And I think this is my understanding of the data is because it's that we're getting married later and we're having to save in our minds, we're having to save and prepare longer to buy our first home. So we kind of have that mindset, and tell me if I'm wrong, is we say, well, we don't buy a home, we rent until we're married or we're married with children, and now we have the need for more than a 2-bedroom apartment. And those are the kind of the triggering points to buying a home. But what I'm hearing you say is, and you've said the last couple weeks, is it's really a wealth generation procedure, like that whole compounding interest thing? The sooner you start, the more it adds up. Do we see that same thing happen with housing?
Right. And, and see, that's the thing, is that the way— yeah, I mean, it's pretty shocking when you hear about that. You know, the average first-time homebuyer is now 40, so they're, they're taking this extended period of time to prepare themselves to own a home. I think it has to be flipped. In other words, you know, that 40-year-old who is the first-time homebuyer probably spent years and years and years renting, right? And maybe they rented early on when they first got out of school and they're young with a roommate or two, and then eventually they got their own apartment, but they're still waiting and waiting and trying to save money and all this. I would say flip that, flip that whole process on its, you know, upside down And again, when you first start looking at having housing of your own, don't dismiss buying. Yeah, you may not be in a position to do it by yourself, but, you know, again, if you have a trusted friend or friends, talk to them and have some discussion about, you know, is there some mutual objectives that this kind of strategy would would work for all of them and then set their mind into doing it. Because the thing about being a renter, and we've talked about this before, it's uncertain because in most cases, most renters will tell you they're dealing with a rent increase, if not every year, every couple years. So you don't know what your housing expense is going to be in the future. And when you're making— again, I already said it— when you're making that payment, you're doing nothing to build wealth because it's It's just money going to the landlord and helping him build wealth or her. So as a consequence, you know, those first few years where you're— you haven't bought a home yet, get that out of your head, get a friend or two, look to buy. And then maybe by the time you're 40, maybe at that point you're going to then have moved up to where you own the home on your own and the friends are gone. You've already sold that early property and you all split up the proceeds and went your merry way.. But in the meantime, you built some wealth that you could use to apply to the next transaction.
Yeah, I agree. You know, one of the things you talk about is, is when you do this, you lock in your housing costs.
Talk about that a little bit. Yeah, I mean, see, that's the thing compared to rent, which can go up often, if not every year, often when you get a mortgage and in most cases, again, the core product is a 30-year fixed rate. Remember what we've told our viewers before. Warren Buffett says the 30-year loan is the greatest loan there ever was. It's a one-sided bet. It locks in your worst case. When you get that loan, whether it's 3.78% for 5 years or you get a standard FHA loan, 30-year fix at 5.38%, you have certainty. You know what your payment is, you know what your rate is. It's not going to change. That's incredibly important because it locks in your housing expense, your shelter expense, and then the added benefit of that monthly payment fixed. You're not going to see it go up if it's a 30-year fix. Then the other benefit is it's paying down your balance, creating that additional equity, you know, beyond that that's going to occur just from the home appreciating in the market.
You know, another thing that I notice is, As you said, it's turning your housing payment into ownership. And I don't know about you, but I always think of like a homeownership, whether it's your car or your home, or it's just a personal piece of property, we tend to take care of it differently. And I'm not saying renters don't respect their properties. I'm just saying that we say, hey, let's, let's add a bush, let's repaint the house, let's upgrade the kitchen, let's do this, and it just keeps forcing the equity. Is that, is that fair to say?
I think it is fair to say. I mean, yeah, you don't want to like put all the renters in a bucket saying they're all, you know, lousy at, you know, maintaining the home they're renting. But the reality is, you know, part of the reason interest rates for loans on rental property are higher is because an investment property loan is considered more risky to the lender Part of the reason for that is the collateral, the home on average is not going to be taken care of quite as well as when it's owned by the occupant. And so, you know, lenders have to take that into account because, you know, unfortunately, default rates on investment property loans are higher than primary residence loans. And too often when the lender gets that property back, it's in not very good condition. So that becomes an issue. And so that's another reason why if you shift from thinking of yourself as a renter and getting into homeownership, again with a friend as we're saying, you're, you're positioning yourself to obtain that asset and you're more likely to take good care of that asset. And that's something that's unique to owning the home versus renting. Yeah, most people are conscientious, but are you going to take that extra step to really take care of the home? Maybe not. You're paying rent to a landlord who presumably is going to help maintain the property. But that can be a challenge. And you know how many calls you have to make to get this or that fixed. And sometimes the landlord's slow and so forth. You can buy— you can avoid all that if you get into this strategy, buy the home with a friend or two. You're still making a comparable payment, but you're building wealth. And over time, you're going to be much better off. All right.
I want to ask a question. You know, when you talk about with a friend or two, is it— is there— is there this, this line in the sand that says, wait a second, we have 3 people on that, on this mortgage? Is that a better or worse position for you as a lender? And do you look at it differently? Or do you say, you know what, we have 3 people that are qualified that can buy this property together and we're moving forward because of that? Or is there a bigger risk for the lender?
No, there's not. I mean, there's more work involved, you know, especially if we got, say, 3 borrowers that are all, you know, single, then, you know, we've got 3 applications, we've got to pull 3 credit reports. And so there's a little bit more processing work involved, but otherwise, With most programs, the qualifying for the monthly payment, which is basically a process of verifying your, your stable recurring monthly qualifying income based on your jobs or other sources of income, determining what your monthly liabilities are, and then calculating a debt ratio which takes into account the principal and interest, taxes, insurance, and HOA dues if applicable on the home you want to buy for the loan amount you want. And you add to that your other consumer debt and divide it into your, you know, gross monthly income. Um, when you have multiple borrowers, that process is the same, and we just basically put everything together. We got 3 borrowers, we did document and determine what their monthly income is for each of them, add it all together. We pull their credit reports, find out their monthly debts for each of them—car loans, credit cards—add it all together. And then divide it, you know, the housing expense that they applied for, put all that, divide it into their combined incomes to get a consolidated debt ratio for all 3 of them. So, you know, it's a straightforward calculation and it's the same whether it's 1 borrower or even 4, for example. So yeah, from that perspective, it's not really much difference.
When, you know, this kind of makes me think about, again, I'm going to refer to my next door neighbor who their daughter's just moved back home after being gone for like 6 years with college and way working is now she's moved back home. And I'm just now saying, if they had equity in their home, is this one of those opportunities where they could actually say, you know what, she has another friend or two friends who could do this strategy. And but maybe she doesn't have the money to go down, but she has a good bit, a good job. Is that an opportunity where the parents could actually pull some of that equity out of their home and then gift it to that child to help them with their, their portion of that down payment to get this done and really kind of get them started in their life.
Absolutely correct. I mean, and we've talked before, I mean, I've encountered a fair amount of younger borrowers who, despite all the media stories to the, to the contrary, they— some of them have pretty good incomes. But yeah, they may be lacking the down payment portion. So for a parent, especially if you've got that now adult child who wants to come back, and, you know, even despite the fact they may have a very good job getting paid very well, but they haven't been able to save any money, That's a great way to kind of pursue this strategy is get mom and dad involved. Maybe they can pull some equity out of their, their home either through a HELOC or a fixed-rate second and so forth, provide that as gift for down payment for their child. In doing so, encourage their child to see if there's another friend or two that can go in with them on that, uh, so that, that way they're able to buy a decent-sized home, one that's probably going to appreciate well, in good condition, and if it's a big enough home that can, you know, how is both the child and their friend or friends. Yeah, that's an absolutely great strategy. In fact, I would argue another wrinkle to that, and we've mentioned this not recently but in the, on the show in the past, is the, the kid, what I call the kiddie condo approach, where, you know, parents, if they've got a child going to school, you know, going away to college, Don't ever forget about the option of, yeah, look at on-campus housing, which of course isn't free. It can be pretty expensive actually. And compare that to the other alternative: find a property nearby the college or university the child's going to go to. You know, it's a condo perhaps, or maybe even a single-family home. And look into, rather than paying all that money for on campus housing, find a property near the campus, purchase it. Parents are co-borrowing with their child who's going to attend that college or university. They occupy it, the parents do not. That can be a springboard to get into, um, homeownership. And again, it could be just for their child alone, or maybe their child has a friend who's going to the same school, and maybe talk to that friend And then maybe the parents of both students can then get together and come up with a strategy like this so that they can get into homeownership while they're literally attending college like I did, uh, simply because of my friend's parents who said, hey, we want to get this house for our son who's going to this college. You're going to college down the freeway. Any interest in buying a home with us so that you and our kid can live in it together and then rent out the other two? I mean, it was a great strategy. Folks need to think about that today as a way to basically get into this homeownership that we're talking about.
It sounds like the whole process you're talking about, and let's face it, we all get stuck in it. We think linearly, like these things have to happen in this order. Like, okay, you got to get married, you got to have kids, then you buy your house. And yet there are so many other options. I mean, this next bullet point, homeowners build wealth faster. And you're talking about starting building wealth now in their early 20s instead of waiting till they're 40. It seems to me— well, I'll give you a perfect example. My wife and her best friend, they, they knew each other since they were 10 years old. They did this exact strategy before I knew them, and they built a house together. And then it would— their agreement was, hey, whoever gets married first has to move out. Well, my, my wife and I got married before she did, but there was already then equity built up and there was some wealth there that allowed us to say, okay, let's go buy a home of our own that wouldn't have been there had she been a renter.
Right. That's a, that's a perfect example of what we're talking about. Absolutely perfect. And for some reason, it's just gotten out of people's minds now. I'm a little surprised, and I don't know if it's a generational thing. Like I said, back when I was, you know, 50 years ago getting out of high school, we just, we just automatically assumed, oh, when you're out of high school, it's time to move. I think a lot of families, that, that's not an automatic thought. It's like, I think maybe more often it's like, I'm going to hang around home as long as I can. And I think, you know, that's all fine and good. I don't mean to criticize that, but at the same time, You know, years later, you don't want to be nearing 40 years old and complaining about, oh, I couldn't get a home because, you know, it's too hard. There are ways to get around that much earlier if you're motivated to do it. And again, those bullet points you just put up there, we keep harping on it, but it's such compelling data. You know, the 40 times thing. I mean, 40 times higher wealth building from owning than renting. That alone should just be a kick in the butt to anybody who's been wallowing around renting and say to themselves, I need to get out of this trap because it really is kind of a trap.
Well, to me, it's like using your example you gave earlier, you said the down payment was about, let's call it under $20,000. So if I were one of two people and we each put $10,000 in as our down payment, and then we made our payments, this 40x, if I'm not mistaken, your data said the average homeowner, the value that they had, the $96,000 versus $10,000. So even at the end of that, let's say a period of time, we say, hey, 10 years from now we decide to, to sell. I'm going to— I'm probably going to definitely get back my 10 grand and you're going to get back your 10 grand. And really compound that to the point where now I have a really nice nest egg that I can probably— I mean, a lot of things can happen, but the chances of it, based on some historical data of when properties go up and down, it's usually up, that we're going to, we're going to turn out pretty well.
Yeah. I mean, the odds are in your favor. Not guaranteed, right? I mean, things happen. Timing is everything. We have talked about over the, you know, over the decades and evaluating home prices in the US. There's been a few dips, but overall it's been a pretty nice trend line, you know, higher 4% annual appreciation rate is typically used in any kind of disclosures as to appreciation in homes in general. And yeah, we were talking about that, that principal and interest payment on our 5/1 ARM example. Yeah, $2,212. Split that— well, and then we said add tax and insurance, split it in two, it's $1,500 each. Same goes with the down payment part. Yeah, $16,000, $17,000 is what we said was a down payment, 3.5%. Well, gee whiz, if it's you and a friend, now we're talking. You only each have to come up with $8,000, actually a little more because of closing costs. But still, let's say you need to each come up with $10,000. You may have some of that already because you were trying to save. But at the same time, if it's you and your friend, presumably you both have parents. Your parents may be motivated to see you out on your own. Owning a home and off the sofa. So heck yeah, do we— if we were asked, you know, by our child, you know, can I have $10,000 as a gift to buy a, you know, a home with my buddy? Sure. But, you know, let me write you a check right now. I mean, that's what happens when you start thinking like this is all the numbers get to be a lot more achievable. Oh, I don't have to come up with $20,000. I just need to come up with $10,000. Oh, I don't need to pay $3,000 a month. I only need to pay $1,500. Now you got to like the person you're going to do this with. You got to trust them. So you got to do some work there. But assuming you cover all those bases, why would you not do that versus just going out on your own and renting an apartment for the next 20 years until you're that 40-year-old first-time homebuyer?
Well, you know, that brings up this next point. I want you to walk us through this. Is there— there is this different mentality of like, if I'm going to rent with somebody, I have to have a different— I have a different feeling than if I'm saying I'm going to buy with someone and, you know, we're— I don't— you know, we don't— we're co-renting or we're co-owning. And I guess, again, you're not an attorney and I don't want to throw you under the bus here, but are there some things that we want to take a look at to make sure that when we enter into this that we are kind of, kind of seeing it with both eyes wide open?
Yeah, I think it's important to cover that, um, because it's not just about, you know, kind of informally, yeah, I'm going to have a roommate. And a lot of times when you have a roommate, it's a case where, you know, maybe you sign a rental agreement, then you've got a— you've added a roommate to the, to the apartment, but you haven't added them to the rental agreement. That kind of goes different ways, but, um, but, you know, it's important to structure it for what it is. It's a little more formal than just having a roommate. It's essentially a partnership. It's essentially like a business partnership. And so you've got to be able to talk through it with the friend or friends that you want to do this with and make sure that you have an understanding. So you're going to treat it like a partnership, not as roommates. You should, you know, have an agreement that you all talk out. Put it in writing. That never hurts. It would be always a good idea for you and the person or persons that you're going to do this with to make sure you have an understanding among all that you all are in agreement with what you're going to do and you put it in writing. That just goes without saying, but it's really important to do that. The other thing is, um, have an exit plan. You know, if you're going to go into buying a home with another friend or friends you should talk about the future. And like you said, in your own personal experience with your wife and her co-owner, they bought a home together and they agreed, they had an exit plan already in their minds. Yeah, whoever, whichever one of us gets married first has to move. Well, that's an exit plan. So, you know, maybe in this case, the exit plan won't be that, but you want to have some idea, some agreement among the parties. How you're going to exit from this relationship because eventually that's going to happen and you want to make sure it can be done in a clean, tidy, and efficient way and it's not going to create problems later. So, and by the way, I mean, part of the reason why you want to do all that is because, you know, you're going to be not just owning the home together, you're going to be obligated on a mortgage together most likely. You're both going to be borrowers. One of the things you have to be cognizant of is it's kind of like when you have a co-borrower on your car loan. You're both borrowers, and if one of you runs into financial difficulty, you can't make the payments, that doesn't relieve the other party, the other borrower, from having to make the payments. Oh, because my, my co-borrower has got problems and can't pay their half, so I'm not going to pay my half. No, it doesn't work that way. That payment's got to be made every month. By one of you, you know. So just because one is having a problem doesn't mean that the other one is off the hook and that neither one of you have to pay. So that's a really important thing to understand, um, because that could be an issue. And yeah, many first-time homebuyers are already doing this, um, you know. In a lot of cases, first-time homebuyers these days will use their parents as a co-signer, co-borrower, uh, but you know, the co— the parents are aware that they're taking a little bit of risk. Now granted, they're going to trust their own child, but unfortunately I've seen circumstances where in hindsight they shouldn't have trusted their son or daughter, and they start grousing about the fact they still have to make the payment when the son or daughter ends up running into problems with making, you know, their half, if you will, if not the whole thing. So that's really something that already kind of happens, but you really, really have to dial in on this with who your partners are going to be to make sure you all understand. And so that's why I think that, as the last bullet point says, I think this is a concept that's worthy of pursuing when you're young. Don't wait to be that 40-year-old first-time homebuyer. Yeah, there's some things to worry about, some of these issues that you want to make sure you talk through. You do have to have a certain level of trust with the person or persons. And by the way, when I say person or persons, One of the property types that I think this is really well suited for are 2 to 4 unit properties. You know, it's one thing to buy a single family home, maybe with 1 or 2 friends. So there's 2 or 3 of you and yeah, maybe you find a 3-bedroom home. It's a single family home, but, you know, you can get into issues like, all right, who gets the primary bedroom? Who gets the secondary bedrooms? You know, and so you can get into that kind of stuff. Or, you know, who's going to make sure the fridge is cleaned up every so often? You know, of course, that's stuff you deal with when you're renting, right? If you have roommates. So you have those same issues when you're owning. And certainly with a single-family home, we're all inside the same home with multiple bedrooms. 2 to 4 unit properties, I think, are really a good option in this kind of scenario because that way you can each live in one unit, right? If there are two of you. Buy a duplex. You each live in one unit, so you have more privacy, but you still own an asset jointly together. If there's 3 of you, buy a triplex. If there's 4 of you, maybe buy a fourplex. And those are great properties to get ownership of. And then later on, when you've already established that exit plan and you're going to end up mutually deciding to sell the property, or, well, actually, you could either mutually decide to sell it or you can mutually decide to keep it even though you're all going to move out into your other primary home, and then you, you are basically business partners starting your real estate investment portfolio. Here you are owning a 2 to 4 unit rental property, and that can be a great, you know, platform to expand that portfolio over time. So that's why I think the 2 to 4 unit properties in particular are a good property type to consider this this scenario. And in fact, I think I told you, Jeff, not long ago, I read an article about, along those lines, about a young married couple with a, with a small child who decided to get divorced. Apparently it was relatively amicable. What did they decide to do? Because they were faced with co-parenting and they wanted to kind of stay close to each other, which is very common with folks who get divorced and have small kids. They try to stay kind of close to each other for the co-parenting part of the process. They bought a duplex together. You know, each of the divorced spouses live in one unit, but they've got their child, and that way they can do the co-parenting much easier. It's a lot more efficient, close by. You know, the child gets the opportunity to spend time with both parents if, again, if it's amicable. I thought that was a great idea, very unique, very creative, and I think that's something that younger divorced folks with small kids So, if divorce is going to happen, wow, this is a great strategy to use, again, particularly for a 2 to 4 unit property.
I love it. Well, this is a, for many, is a new concept and something they hadn't thought of. It's kind of outside the box, but I mean, you've been doing this for, you know, 4 and a half decades and I'm sure you've seen it way more than once and it work out. And I think we're in that timeframe where we have a lot of kids, and I'm going to say kids under 30, that have come back home. And, you know, no offense, I know parents, they love their kids, but it's also that time where it's like it's time to leave the nest. And this is a great way to help them do that and establish that whole wealth-building process and ownership and responsibility so that when they do get married, or if they get married, whatever the situation is, they're on a lot better financial footing than they— than had they just been staying in their room that they've had since they were 4 years old and, you know, not, not taking that responsibility because they're, they're really not even a renter at that point.
They're not, they're not developing any equity. Correct.
Yeah, exactly right. All right, well, I think that's a great topic. I'm— I really appreciate you talking about this. I'd love to come back and talk about this again. I'm sure you have examples examples that you can share, uh, yeah, as I say, over 4.5 decades that you can share, that very— is very positive. Um, so with that, I'm going to turn it back over to you, Art.
Okay, sounds good. Thanks, Jeff. Well, thanks everyone for watching and listening to this week's Mortgage Minute. Uh, my name is Art Alvarez with MortgageWorks, where we have the answers and they're on the house. I want to remind you, California Dream for All program, the open period for getting pre-qualified and getting a voucher to be eligible for the program Again, this is the one that provides you up to $150,000 of down payment assistance provided by the California Housing Finance Agency. The open period is right now. It started February 24th, goes through mid-March. I encourage you to call me. Let's get you pre-qualified and get you a voucher so that you'll be eligible for the funds. Again, it's a randomized drawing. You're not assured the funds when you get your voucher., but you need to get that voucher to have a chance for it at all. So call me and I can get you set up with that. If you're a first-time home buyer, please do so. Or if you're an agent working for a first-time home buyer and a down payment assistance of 20% of the purchase price up to $150,000 sounds interesting, call me and I'll get you going and ready to go to hopefully get that, that voucher to cash in your, your funds. So with that, Enjoy the weekend. Enjoy the tennis tournament here in the Valley if you're locally here in town, and looking forward to seeing you all next week on the next edition of the Mortgage Minute. So long, take care.
