Buying Your First Home - Does Dave Ramsey have it Right?

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Welcome, everybody, to another episode of the Main street business podcast. My name is Mark Kohler. I'm here with my amazing co host Matt Sorenson, who apparently got a haircut yesterday. So if you're watching on YouTube, you could be the judge of. Of the massacre.

I was just complaining about my hair. Okay, I just have a little moment. Don't worry. Don't worry. Okay. For all of you listening on the podcast and you can't see it, it looks great.

Yeah, you keep telling yourself that.

Hey, my hairstylist listens to the podcast, so.

Okay. Okay.

I want to give you some compliments and kudos, you know?

Oh, no, yeah. I don't want to blame her. I'm sure you were like, yeah, this is what I want to work with.

I mean, you know, she's doing her best.

It's an uphill battle. She's Bosley's daughter. Bosley. Or whatever. All right, well, welcome, everybody. We try to keep this light. If you're new to the show and you saw the topic, buying your first home, does Dave Ramsey have it right? Ooh, am I going to explain that?

Yeah, you got to explain that, because, you know, Mark likes to battle with Dave Ramsey, and we love Dave Ramsey.

Yes.

You don't know who he is, really. A good advocate for good financial management, getting out of debt. But sometimes he's a little. He goes a little too far, so. But otherwise, we love him. I just want to say that. So, Dave, if you're listening, it's okay. We can disagree on a few things.

Yeah, that's right. And we do. He has saved the lives of millions of people around the country. And for a lot of people, paying off your home, saving up for every little purchase you make, cutting up your credit cards, he's a lifesaver. However, our counter argument is if you're a business owner, you're going to need a credit score. Hey, credit card companies are evil. I'm with you, Dave. I'm with you. Should I be using a credit card to max it out and take a trip, you know, for spring break in Cabo? No, we absolutely want to have our emergency funds and be saving. But if you're going to build wealth, which is another class of people, a different type of person, that may not be Dave Ramsey's target market. You're going to need a credit score. You're going to go into debt. Good debt that creates income. Business debt isn't always bad. Buying a rental property that cash flows with a reasonable amount of debt, not going overboard. Very powerful. So. And buying your first home with some debt. I'm okay with that, too. Dave Ramsey may have a differing opinion. So that's all. So that's the end of that. We just want to let you know, if you're a Dave Ramsey fan, we're not here to beat him up. We're going to give you our perspective on buying your first home and some ideas. I've got a wonderful story that just took place in the last two weeks that I think will help bring this to light as well. So there we go. Is my disclaimer. My good.

Yeah. And I think there are situations where it doesn't make sense to buy a home, but we want this for the person that's never done this before. That's what today is really about. If you've never bought a home before, or maybe you've. You're getting back into the housing market you've rented in the past. It's a tough market right now to get into. We'll talk a little bit about that. But what should you be thinking about financially, tax wise, income wise?

I'm gonna cut you off. I want to say this. I think this podcast is also for some of you parents out there or awesome aunts and uncles that are mentoring a niece or nephew or a child. I've already. I bought my first home 30 years ago. I was grateful to do that, but guess who helped me do it? My dad. And it was a duplex, and I bought it when I was a freshman in college and I learned how to be a landlord. And, oh, boy, the stories. But I think many of you don't realize what programs are out there that can help your kids get into a home and help defer some of that freaking rent. You might be helping them. You know, I mean, there's, there's some good stuff here, so.

Yeah. Yeah. And I think, you know, one of the strategies I'm going to mention too, is turning that home into a rental. It's one of the things I've done with homes of mine. I don't, I don't like to sell them. Why sell them? Just. You already own it. You've got a mortgage on it. Just turn it into a rental. And that can be some great success there. Also selling your home, too. What are the considerations there on the back end?

Yep.

Okay. There's good tax perks.

Yep. Now, with every podcast, we like to do a little tax on legal tip that might help some of you in a unique way. We have a lot of listeners that just listen in at least for the tax legal tip. Now I've got a little legal tip. Matt, can I go first? Would you be okay with that? Okay. We used to have a little cool guitar riff legal tip. So I. But we don't anymore. So I just substitute.

That was.

That's as good as it gets.

Okay, I missed the old one. I don't know why.

I wonder why. Okay, so here's my legal tip. And I've had two phone calls on this just in the last week. So I thought this might be a good legal tip. The two situations that have come to me from some clients are partnership agreements and a partner pursuing a project that the partnership is not thrilled about. For example, let's say Matt and I are going to partner up and open a restaurant. And in fact, what kind of restaurant would you open, Matt? If you were going to open a restaurant, what would it be?

Let's see. Tempanyaki.

Oh, that's right. Matt has a dream of running the Teppanyaki Grill. That's right.

He can make. He even do the volcano. I'll do the egg roll joke. Roll the egg.

Yeah, yeah. You've mastered the volcano. Didn't you figure out what camel I've made one on?

I've done it at home. A little bit on the little griddle. You know, it's pretty pathetic.

But you got the choo choo.

Yeah, I do the whole thing.

Okay. You're amazing. Your kids must love you.

My kids, they were not impressed. My kids were not impressed.

They're like, let's go to Benihana's. Dad, please put us out of our misery. Okay, so we, so Matt and I are going to open a restaurant and we're going to open a Tempanyaki grill. For those that have not been there. That's where you, you've seen it in the movies. You sit around a Grill, maybe 10 people, you and kind of a C shaped swear. C shape layout. And you watch this very talented person throw their knives around and spatula and cut stuff up. Throw things around. It's cool. Okay, so we're going to open a restaurant. Well, in most partnership agreements. Now this is why you open an llc. You do not do this on a napkin at Denny's the day before. You don't do this on a handshake. You don't do this with an email. That's when lawsuits start. So let's assume you have a good partnership agreement. A typical llc. We get both partners on a phone call with an attorney for $800 and a few filing fees. You got a legit LLC with an operating agreement done. Right. And if you need to talk for more than an hour, we bill some hourly time, but 90% of our clients are done with 800 bucks or so. Okay, so if you're going to form a partnership, people. That's my first point. And we've got prior podcasts on how to partner. Enough said. Well, in that partnership agreement, 99.9% of the time there's going to be a clause in there or several clauses that say something like this. Matt and I have a fiduciary duty. We have a responsibility to do what's best for the Tempanyaki Grill restaurant. We have a corporate opportunity doctrine that states if a opportunity for another grill across town comes up, we've got to bring it to the partnership. We have the partnership non compete terms that might say you can't go out and open up another grill mat down the street because you think you're a better grill master. You know, so there's going to be a variety. Any provisions come to mind to you, Matt, that might be in like the opportunity fiduciary duty competition?

Yeah, well, I think, I mean, just on that topic, are you talking about.

No, just say it on that topic. Like just, just on that topic because I had.

Oh yeah, yeah. You got to define like, are we locked down us. Because some people, let's say in the real estate context in particular, that get together, it's like, well, obviously I could buy my own real estate separate from this. We're not locking each other down to just do real estate deals together, are we or are we not? So you. That's got to be said.

Yep, that was one of the calls I had this week. So it was a real estate developing, a real estate developer with some partners. And one of the partners went out. Well, as a partnership, all development deals have to come before the partnership. Now they can buy their own little rental down the street, but development and see. But one of the partners went out and said, hey, I found this development deal. Do we want to do it? And all four partners said, nah, let's not do it. So this other partner said, well, I'm going to go do it anyway. Well, in some partnership agreements, if the partnership turns down the opportunity, the other partner can go do it. Others say, you can't do any developing unless it's with the group because we don't want to send the wrong message to the community or whoever we're branding. And are you playing off our partnership name and all these things. And if just on the restaurant thing, I may be able to go open a burger place, but I can't go open another Tempanyaki Grill. So I've had two calls this week, another business that was a service business and one of the partners had ran off and started competing. Another one was a real estate brokerage that was on Sunday. I've had three calls in just this week. Sometimes those things happen where it's meant to be for the podcast. So anyway, there was a Realtor that left a brokerage and said, I'm going to go open my own brokerage. And the brokers like, whoa, whoa, we got a non compete here. Whether he can enforce it or not is a whole other question. We'd have to check with Bobby Axelrod and whether Taylor could run off and do his own thing. But I'm just saying. So my legal tip is make sure all the partners, you and your partner, when you sign up for that Tempanyaki Grill restaurant, define what each partner has to do for each other to protect the investment, what they can and cannot do outside of the scope of the partnership. Make it clear, have that tough conversation up front because it prevents a lot of lawsuits later.

And a lot of times there's an expectation that you guys have. But does the document reflect that? You know, because later when that there's pressure on it and there's someone making money possibly that the other one's not, then there's going to be a rub. It's just going to happen. Does this mean I get the tax tip?

Yeah. And I want to say one last thing on the legal tip. Yes. Before we go to tax tip, I've got a college student or two that followed by podcasts that said something this week and I want to break it, put it in a basic standpoint. Let's say you're going to just do some screen printing in your dorm room and you're going to make some T shirts. Or let's say you've got an idea for a social network and you're just a student at Harvard thinking, hey, let's have people hook up and date. And a couple guys from the crewing team had this idea as well and everybody's got ideas floating around. Could be a recipe for a movie called the Social Network. But the point is, even in college when you're just doing little projects, you got to have this open conversation before you shake hands because you don't want your buddy down the hall making shirts in his dorm room too, competing with you. So, okay, tax Tip. What do you got?

All right, tax. If I had a client asked this morning about taking early distributions from a Roth ira. So, Roth ira, you know, you put the money in, you don't get a tax deduction, but it grows and comes out tax free at retirement. When you're 59 and a half, it's like the only thing you can use to make money tax free, not pay the IRS anything, and stay out of jail. It's pretty cool. So, well, what if I want to get the money out early before I'm 59 and a half? This client wanted to take out earnings. They want to take out what they'd put in their contributions, which can do 6,000 a year, plus the gains that he had made.

Oh, my word. What's this guy? Cowboy. Yeah.

Now, here's the rule on that. If you want to take out the gains, the earnings you've made, you pay tax on the gains at ordinary income rates. So let's say you put in $20,000 over the years, and now that account's worth 50. So you have 30,000 of gains there. That 30,000 is going to be taxable to you as ordinary income, plus you're going to have a 10% early withdrawal penalty on it. 3,000 bucks in this instance. Now, the other 20,000 that he put in as contributions, that's going to come back to him. No early distribution, penalty of 10% and no tax. So, remember, it's really easy to get out the contributions you put in. It's not painful. There's no tax, there's no penalty on it. You can always grab it out. That's one cool thing about the Roth ira. But if you want to pull out the gains before you're 59 and a half, it's going to hurt. 10% penalty, plus you got to pay tax on it.

I taxed it. Do you know what? Your tax tip is going to play into our topic today a little later. I'm gonna just. Okay, so the suspense is building, everyone. Yeah, you do. You do. Okay.

All right.

I'll tell a little story about a yesterday meeting in my neighborhood on that very topic.

Oh, okay.

That plays to our topic at hand.

I don't know where you're going, then.

Okay. All right. No, you don't.

Yeah.

No, you don't. What was it? Wasn't that Tommy boy? He goes. Yeah, you. You were this. No, you weren't. No, I wasn't. He's getting on the bus. Or was that. That was Billy Madison, I think, when he was getting on the bus.

Oh, yes.

Wasn't that.

Yeah. That Veronica Vaughn. You know, he's like. Yeah, we used to date. No, you didn't. A friend of mine and her. David. No, they didn't.

That was a closet. Oh, okay. All right. Excuse me, everyone. Okay, so here is the topic of the day. I think I can say definitively that for. And I'm anxious to see if Matt agrees that the first big investment all of us will generally make in our lives is buying our first home. Now, meanwhile.

Okay.

You okay with that? Okay.

Can I note something on that?

Yeah, go ahead.

You want to keep going?

Well, I was just gonna say. I was just gonna say this. Meanwhile, you might. It may not be your first investment. I want people to start building a Roth IRA even in their teenage years and saving for college or little things like that. But this is the first big investment. That's right. Yeah.

Yeah. And I think, you know, being an attorney and doing estate planning back in the day, it was really interesting to see people, you know, the typical millionaire next door type person, okay, that they bought a home, they lived in it for a long time, they paid it down, they put away money in a retirement account, they maxed it out over 20, 30 years. And it's like. And they didn't have a huge income. Okay, they were not huge income earners, but it's like, oh, I have a million dollar net worth. I have something to work with here that I could retire on. And so. And the nice thing about a home is it's. You know, Mark talks a lot about like kind of these savings app and getting in a habit of saving. A home is something where it's a habit of saving too, because you're paying down the mortgage. I mean, you get appreciation over time too. But it's something that's a, that's a habit that forces you really to save and have something of value build up over time.

Totally concur. The counselor concurs. Now I will add this. Okay, everybody, this is concept stuff first. Then we're going to get into some how to. But for some, some people go, well, why? Why would I buy a home? Now, it is true for some of you that may be in an urban location, renting is cheaper than buying. You know, when I was living in Southern California, the amount of down payment I needed to buy a place was off the chart. And that could be in the Chicago suburbs, any of the top 10 cities, New York, obviously. Sometimes buying a home is something that happens in your 30s or 40s. You know, it's way down the road. But I would say for the majority of people, especially out in rural areas or small town America, Main Street America, which is a huge follower, maybe we should name our podcast Main Street Business. For all of you out there on Main Street America, buying that home has a couple major benefits. One, you quit paying rent to someone else. Most oftentimes, if you do it right, your house payment should be equivalent to or less than your rental payment would have been. Now if you're buying a nicer home, you're, you know, that's, you don't want to over buy a home. That's Dave Ramsey's point to let's not overbuy and paying down the mortgage. That's another topic. But for all of you that are just getting started, why would you do this is so you quit paying rent. You do get a deduction for the interest you pay. If you're itemizing your tax return and you get to write off property taxes, but you're building equity, that property is going to go up in value over time. Historically, real estate has averaged 5 to 6% per year. You're not going to sell it in a year or two or three. We hope you keep it five or seven. And as Matt said, he's turned some of his homes into rental properties after he moved out. So this home could stay with you the rest of your life. It builds equity and you quit paying rent. Any other good reason? I mean, just.

Yeah, I mean, I think you have, when you look at a home and even with housing prices being really high right now, I think that's a big thumb that scared a lot of people as well. Housing so high right now. Well, when it's your home, you have a certain cost built in cost of living. Like you have to allocate a certain amount of money anyways to living somewhere, whether it's paying a mortgage or paying rent. Now I guess you could live with family or you know, bum on your friend's couch or whatever it is, but I mean, you know, as a responsible adult, you want to be independent. You're going to have a built in cost of living. Now look at your area. If that's 1500amonth, let's say it's 1500 to 2000amonth. That means you could be that same payment could be a $400,000 home.

I love it. Okay, now let me give an example. Okay, time for an example, if I may. Yeah. And I asked Jack and Allison, my amazing daughter Alison, twin daughter to Sydney, who's been on the show before as well She's a realtor of mine down in Southern California. But Alison's still going to college with her husb.

Jack, she's also your daughter. She's a, she's a realtor of mine. She's your.

Oh, well, I said twin sister to Sydney. When I said Allison twin sister to Sydney, I thought it was implied she was also a daughter.

Yeah, that's true. Follow the logic.

We don't want to get into the birds and the bees today with you, Matt. But twin daughters of mine, both. Yeah, one daughter. Anyway. Okay, so here's the deal. So Allison's still going to college. She's in a rural area and they're a brand new married couple, no kids. And early on, because they live with me as a parent, you know, from over the years, they've had to hear me over and over again. And after she got married, it didn't take me long to brainwash my son in law, Jack, who's a stud. But I said, you need to buy a house. And they're like, okay. Now Dylan, my oldest son, we've talked about Dylan's home that he bought previously on the show. But, but Jack and Ali are. This was new to them. So over the last six months I've been drilling them, get a house, get a house. Because rent for a married couple in this rural area is around 800 bucks. So as Matt said, they're looking out there going, well, we're going to have to be out 800 bucks anyway, so what can we do? So in a lot of rural areas around the country, there's what's called a RDL loan, typically through the state that'll say if it's in a kind of a development zone or can be a term that's thrown out as well where the state wants to see home building take place, they'll do a no money down grant. A lot of times what they'll do is they'll go to Fannie Mae and Freddie Mac and the bank and the state will say, we'll take care of the down payment or we'll guarantee the loan. And so you can. So that's option one. I was like, look in these areas we drew out on map. And if you find a home in these areas based on student income, you could still buy $100,000 house in a rural area. And we're like, well, we don't want to drive 20 minutes away or 30 minutes away. I'm like, okay, cool. Keep looking in town. Knock yourself out. So they find a place in town and it Was actually pretty funny, Matt. They called me up and they're like, yeah, got one. It's a $300,000 house in town. I'm like, you ain't qualifying for that. What are you crazy? Gosh. And I, they go, well, it's a three plex kinda. The basement's unfinished and we think we could. And it's already renting. I'm like, well, okay, go talk to the banker here. And they had a realtor that I hooked him up with. So I'm getting to a point here. This is important, Matt.

So, okay.

They go, okay, I know Matt's. I can see him rolling his eyes. If you're on YouTube. He's like, what the hell, Finish the story.

Rolling my eyes.

Okay, you're good. Okay, okay. So they get to the bank and the banker's like, well, the only way you're going to qualify if it's an FHA loan. And he goes, we can might be able to get you into a 3.5% down program. So you do the math. 3.5% on 15 on 300,000. We're looking at about a $15,000 down payment. Pretty good. So they're like, we've been saving our money, hence we're going to come back to Matt's ROTH tip. So they've been saving their money. And I said, I think you guys could scrape together 15,000. I might help you out with three or 4,000 to get you over the hump. But three and a half percent down, $300,000 property, it was already cash flowing, $1,800. The upstairs and a little cottage and back was bringing in $1,800 for a total of 1800. The tentative mortgage payment in their initial meeting was 1600 bucks. So they not even finishing the basement. The rent was going to cover their mortgage payment and they were going to have to take the time to finish the basement so they could move in there and live rent free. And this place is going to be worth 350 to 4. That was trashed. It was like, I swear there was a Trans Am up on blocks in the back. I mean this was like the hood. But they. I'm like, they did six loads to the dump the first two weekends just cleaning crap out. And I think they already have $25,000 of equity. I couldn't believe the seller didn't take the time to do that. But the point is, me as a parent, I got my kids into a house into story for rent free with a place that was a duplex or Threeplex. They qualified for the loan on their own. I did not have to co sign at all. They had enough savings to pretty much cover the down payment. And I'm just proud as can be that, yeah, it's their first house. I'm so stoked.

Yeah. Yeah. I mean, so that, you know, they took it to the next level. Of course. And not only you have to do that. Okay. Don't think, you know, you might have a spouse or other person in your life. That's like, there's no way in hell I'm going to live in a place with tenants.

Okay.

You're not going to sell me on that. Now, credit to Jack and Allison for doing that, because this is the perfect property that turns into a rental when they want to buy the next home. They're going to keep this. Right. And this is going to turn into the rental. So. Okay. But I think for the, you know, let's say you don't have any other rental things in there. It's just single family home or a condo, townhouse, whatever it may be. Okay. And this is suburbia. Okay. You're not getting the free rdl, you know, or something like that. Okay. Let's just keep it pretty straightforward. Three and a half percent down is what you said. Fha. Now, you might hear a lot of people talk about, oh, you want to get 20% down. Why would you want to get 20% down? Now, if you were buying a $300,000 home, that's 60 grand you're going to have to come up with. Yeah, why do you want to have 20% down? You want to avoid mortgage insurance. Okay. This is one of the biggest wasteful things you're gonna have in a mortgage payment.

Yeah.

It is a total.

Dave Ramsey hates it.

Yeah. And for a good reason. You are going to pay the bank, basically. You're gonna basically buy an insurance policy and pay for it every month. It's gonna be hundreds of dollars, by the way, just for the right to own this property. And that mortgage insurance, usually it's going to take seven years for it to go away, you know, on your amortization schedule. And so on a $300,000 house, you might be paying a couple hundred bucks every month out of your payment just for mortgage insurance.

Now, on that note, this is why, taking Dave Ramsey's route, he would say, if you want to buy a home, save your money, avoid mortgage insurance. Buy within your means. And those are all great points. I totally agree. But if you're able to say, hey, 3.5% down. Even with mortgage insurance, I'm going to be close to what I'd pay in rent people. You're building equity, that rent. A good chunk of that rent payment is paying down your mortgage. See what's happening? Your property is going up in value slowly but surely. And the mortgage is going down slowly but surely even with no major appreciation or even a pay down strategy, which Dave Ramsey and I, we love that. Right? Let's get this thing on a 15 year note. Let's do double payments once a year. Let's really ramp down that mortgage. Oh, I'd love that. But even with just a moderate paydown, you're going to be building equity every year, even with mortgage insurance and still saving money. But I like that Matt brings us up so that you go in with your eyes wide open. Now what's cool about a fixer upper is a couple years from now they're going to have 60 grand of equity in it and they can rebuy.

And then that's the great strategy because I'm just ran the numbers here on a $300,000 mortgage. Okay. Your mortgage insurance monthly payment is going to be about 300 bucks. Oh, that is painful. That is a lot of money on. I mean your mortgage payment alone is just the principal and interest is maybe only going to be 1300. So you're going to add on and that includes your property taxes by the way. And, and or no, that does not include property tax. Sorry, you're just your principal and interest on a $300,000 loan. Basically three and a half percent interest rate net right. Now, assuming you put 3.5% down 1300 bucks, you're gonna throw 300 bucks out the window. Also on mortgage insurance, okay. It's not paying down your loan or anything. It's just going out the door now like Mark said, you can refi later. So once you get enough equity to where you have 20% equity, you can refi out, get rid of that loan, remove the mortgage insurance. If you've heard the radio ads or seen the ads on the Internet or social media, you'll see that all the time. Banks are saying, refinance your loan with us. Get rid of your mortgage insurance. Refinance your loan with us. This is what they're getting at.

Yeah, and Matt said it quickly, but I want to break down what he just said there. Remember actually go back in time when I said Jack and Ali's house payment is going to be $1600 but their rent coming in on the two other units is, is 1,800. Now they've got to build out the basement, but that's going to build huge equity in this place because the appraiser did not value it as a three unit, only as a two unit. That's why I think this is going to be just a gold mine a year or two from now, and they'll have 100 grand of equity in this. But the point is, I said it was 1600. What did Matt say the mortgage payment was? 1300. The mortgage insurance was 300. So that 1600 was already in that number. And some of you said, boy, that sounds like a high mortgage payment. It's because Matt just broke it down. That's that mortgage insurance. So think of they finish the basement, they go refi. They might get rid of that mortgage insurance within a year's time. And. And now they've added $300 of cash flow in their back pocket.

Yeah. Let's break it down even another step. Okay, so we have that 1300 mortgage payment before, and that's just the principal and interest.

Okay.

Now if you look at this, on the 3.5% rate, put in 3.5, three and a half percent down. Also, that payment comprises of 850 bucks of interest, 450 bucks of pay down of principal. So every time you're paying that mortgage payment, you're paying down the loan balance. 450 bucks. That's like throwing 450 bucks in a savings account.

Yep.

That is equity. You are growing value. That is, that's increasing the value of your property because it's decreasing the actual loan amount. So when they were saying it's 800 bucks a month to rent anywhere, even if you take out the rental income, if you look at it, they're basically throwing away 850 bucks a month in the mortgage interest. But they're that 450 on top of it, that's actually paying down.

It's.

It's going back in their pocket. Just for the long term, though, I

like what Matt just said. I'm going to say it a different way. I didn't even expect you to go down this path. Is it. Remember their rent in the area was 800amonth. Comparatively, if they just went and rented somewhere and someone may say, well, why are you going to pay a mortgage payment of $1,300 when you could rent somewhere for 800? Because they say, well, guess what? 450 of that $1300 going right towards the equity of the property. I'll get that back. So it's kind of forcing you to save and in a very, very good way. I love that. Great point. Well, let's think. There's lots of ways to get find a home to buy. You can even a lot of times people will say don't even go through the realtor market, go through MLS because everything's been picked over by the real estate investor community by then. And that's true. And I love realtors. I'm a huge fan of realtors and brokerages and some people it's the best thing you can do to get the help of a realtor. Jack and Allie went through realtor. My daughter's a realtor at Sydney. But some of you, if you have the skill set can literally start going out and looking at foreclosed properties. Properties that from an estate sale someone died and the how home hasn't gone on market yet. You might be able to find some property tax defaults. And there's lots of strategies out there that you can learn in a real estate investment community like Renatus. Matt. I both speak for Renatus. And so you could even find equity in a property. Matt Sorenson has said you don't make many when you sell property. What is it, Matt?

You say you make money when you buy, you realize the money when you sell it, but you make money when you buy, not when you sell. And I've stole that that someone else came up with that.

But I thought you said it.

I mean I said it but not through. Let me throw out another thing to consider too. We talked about appreciation of value. There's a few other things to think about. One is we obviously know the property is going to go up over time. Right? Real estate goes up over time. The app just let's take the median price of a home in the U.S. okay, in the year 2000.

Can we, can we really use 2000 as any sort of metric?

But well, I mean it was, you know, we never. Real estate crashes but 2000. Okay, okay. I'm just saying, let's say you're think I'm just thinking about this in 10 year chunks. Okay, let's do it in 10 year chunks. Let's do 2001. Then I'll just do okay, the average home price, 140 grand. Okay, let's say you held that you bought the average home in the US in 2001. Let's say you held it till 2011. Now we did have a real estate crisis and crash here in the middle. But even despite that in 2011 that would be 172,000. Okay, 172, you would have made money. Right. You obviously held it, you had the benefit of living in it. You would have had to pay rent somewhere. You'd pay down the mortgage. Let's say that was in that example, you know, 450 bucks a month. And by the way, the longer you hold the loan, the more of your money that you pay goes down to principal than it does interest.

Yeah.

So it becomes more and more valuable along with you hold it because you're paying down the loan more.

Yeah. Let me add to that too. He bought it for 140, it was worth 175. Ten years later, that's 35,000 of appreciation. But you probably would have had 35,000 of mortgage reduction. So now you've got equity of 70 to 80,000 sitting in that house.

Yeah.

Let alone if you have found something you can improve, that's just a home with no improvements. Yeah, that's just me.

At the value from 2011 till now, average home price 175. Remember in 2011 till 2020, end of 2020, last data, you're about 310,000.

What?

Double?

Yeah.

Yes. Average medium home price. So now, so we know there's appreciation in the property. And so in a 10 year period like that, that's almost doubling the value of the real estate in that last 10 year window there. But here's one other thing I want to think you to think about too, as you're buying home. I think you want to be there for more than five years.

Great.

Maybe three. Now you might have the strategy of, well, I'm going to hold it and turn it into a rental. So in that case, don't stress. But if you're like, well, I want to sell it to get the next house, there's a certain amount of costs built into that. Right. You're going to have realtor costs of, let's say it's 5% right now. So on that $300,000 home, you know you're going to have 5% cost. You're going to have, what is that, 15 grand just in cost to sell it for commissions. Then you have maybe another 5,000 other closing costs. You're gonna have about 20 grand. So, but by the time you get mortgage pay down and appreciation over a few years, you may only break even. So there's just certain costs in selling. So I wouldn't be buying unless you're really in for, I would say as a rule of thumb, five years, possibly three, you know, but, but that's another consideration to think about. Is there is a cost in turning over real property and I get your money back up.

Okay. And I want to add one last. This is my story from yesterday that brings Matt's tax tip full circle and probably the last point I have to make. So I was dropping off an estate plan for a good friend. He and his wife, they'd had some health struggles in the family and they're good friends and family. So I drafted an estate plan for them and I had it in a folder and I was just on my way to the office in a big hurry and I stopped by and at the house they had their college age daughter who had just gotten married about a year ago. They were visiting and I opened the door and handed off the estate planner. They're like, wait, wait, wait, we got some questions for you. I'm like, okay. So I was grateful they followed the podcast some and, and I was honored. And they said, hey, can you ask us? We're opening up a Roth ira. Where should we do it? I'm like, okay, this is not a two second answer. Let's talk. What are you guys doing? And da, da, da, da, da. And they were going to leave for the summer and do what a lot of college students do. They teach English in a foreign country or do summer sales for pest control or alarms. And that's what their plan was. They're going to be gone the next four to five months, earning big money, knocking doors. And I said, and they go, but we've already saved up about $12,000. But we haven't put it in a Roth. What do we do? And I say, okay, step one, I want you to be buying a house. And I literally gave him this speech that we've just been talking about a little shorter, but gave him this talk that we've been covering in this podcast. And they kind of blew them away. They're like, hold up, hold it. We were going to talk about a Roth, but now you're telling us buy a house. And I said, now let's bring it both together. I want you to go put that 12 grand in the Roth right now before May 17th. That's six grand for each of you. For last year. You go, do your summer sales, make 50 grand and put your six grand each for this year in there. Now you're going to have 24 grand sitting in a Roth. And they said, but you just told us to buy a house. And I go, yeah, but when you go to look for houses this coming fall, and I'm going to come to part two, of this. When you start to look for houses, you can pull out the 24 grand if you need it. And they're like, you can? Yes. You can't pull up the earnings, but you can pull out the deposits.

Yeah. No tax or penalty.

No tax or penalty. And so I said, now you're getting the best of both worlds. And they. Their brains were like. And they're like, oh, my gosh, the Roth buy a home. And I said, now, part two. We are sitting on the biggest pile of deferred mortgages and foreclosures ever right now in this country. I was at a title company yesterday, Matt, in the state of Idaho, and I said, how many foreclosures is the county ran this last 12 months? Zero. I said, where are they all at? On a desk or in a huge filing cabinet, A room at the county recorder waiting to foreclose. We've had 12 months of just regular foreclosures just pile up, let alone the COVID foreclosures that people don't ever pay. And I go, how many mortgages are in deferment? He goes, over 30% of mortgages in this country are in deferment. Yeah, that's what he said. Now, this is just a title company. This is.

But I think. But it is. It is higher. That is. That is true. And I know that the consumer.

How.

It's the Federal Consumer Financial Protection. I can't remember what it's called, but they basically went to mortgage lenders and said, hey, by the way, this moratorium's ending, but you've got to get your procedures ramped up for working with these lenders. And we don't want them to be. To do any predatory stuff. You've got to work with them, try to make plans, help them get through it. Because on the other end, they do have equity. A lot of people do have equity because values have gone up, but there's going to be a lot of people who have no ability to pay anymore for whatever reason. Yeah. And so there's definitely going to be some chaos once this moratorium expires.

And let me say, a deferment means you're not going into foreclosure when the moratorium is over. It just means you kick the can to the end of the mortgage. You're going to have to make those payments. Deferment's okay, but the indication is that's the point. There's some people that are going to go, I've been deferring and I still can't make my payments. And the banks have opened the door to foreclosure again. So the I point to this couple was go do your summer sales this fall. Might be a buyer's market. So right now may not be the perfect time to buy a new home anyway. And they're like, oh.

So I said, yeah, and it may not be a buyer's market this fall, but it may not be the best sellers market in the last 30 years, which we're facing right now. Yeah, sellers basically, you know, they put, they list it and they got 100 people at the door at least here in Arizona. Yeah. Tomorrow, over overpriced, you know, everybody's offering, you know, anyway, so. Okay, well, I was just gonna make one last point.

Okay.

And then I'm done.

I'm done. I'm already done.

That was your last one.

That was my last point.

I was just confirming because you didn't say that. And I'm not gonna hold you to it. Okay. I get the last word.

Yes, sir. Okay, well, maybe. Depends on what you say.

I know you too well. I know you too well.

I won't do my best.

Now here's the cool thing. When you make money, when you sell your house later, there's a great thing called the sell of home exemption where the gain you make on your house is excluded. It is not taxable. So if that house that you bought in 2011 for 175 that you sell in 2021 now for 310, you have 100, what is that $135,000 gain there? And you might have some realtor costs and you know, eat into that, but you got $100,000 plus gain. Do you pay tax on that?

Nope.

Okay. For single people, you get to exclude up to 250,000 of the gain on the sale of your home. And for married people, up to 500,000. Now you've got to own it and live in it for two years. Okay? So you've got to own it and live in it for at least two years to claim that exemption. But that's a little tax perk in there. Get you some tax free income when you sell it and make a gain on your house later on. Love it.

I'm done.

Okay.

I don't need to say anything. That was so. Amen. Just say amen. So thanks, everybody. We wish you the best. Don't give up. Keep investing. Keep a stiff upper lip. It's tough. We'll be here every week trying to give you little tips and guidance and support. We'll have another topic next week. And then I think our open forum will be two weeks from today. So submit your questions@mainstreetbusinesspodcast.com and just keep living the dream.

Don't give up. Yeah, see you then. Thanks, everyone.