Buying a Home to Invest or to Live In? The Answer to Whether You Buy above Your Budget or Not
Is it better to buy a home to live in or invest in? Buying a home to live in or invest in? There are many reasons why you might want to buy a home. And there are many different ways that you can use your property. This episode will help you figure out the best option for you and your needs!
Noah is a modern finance company helping homeowners tap into their home value to meet their financial goals without incurring new monthly payments or interest. Founded in 2016 and headquartered in San Francisco, Noah’s innovative equity sharing model is a debt-free alternative to traditional home equity loans and HELOCs.
For more information visit www.noah.co.
Buying A Home To Invest Or To Live In? The Answer To Whether You Buy Above Your Budget Or Not
We talked about enjoying the home you live in. How should one think about living below their means? This goes down to your personal philosophy around life, money, spending and wealth, but living below your means or stretching a little bit. It’s buying a home in a better location even if it's a bit of a stretch and banking on yourself that you'll be able to meet the debt obligations. What's your philosophy here? I've got a few thoughts but I'd love to hear yours first.
The way I think about it is, at the end of the day when someone is buying their primary residence, this is the home you want to live in, people should always buy a place with what they would enjoy. You should not buy a home that feels like a compromise at the time of purchase because then you'll never enjoy it. First and foremost, independent of budget, my personal philosophy is if you're ready to buy, buy something you love because you will be spending so much of your time at home, especially these days with COVID. Everyone is working from home.
Outside of that, you're buying a home and you're buying the neighborhood, so make a commitment to something that you will enjoy. If you do that, when it comes to maybe stressing yourself a little bit on the upside or the downside, you wouldn't mind making those smaller sacrifices because you've kept the bigger picture in mind here. If you don't love your home, then every small sacrifice will pinch you every single day, and that's not the right way to live.
You'll end up getting out of your home sooner. You'll pay big transaction costs to agents. You'll have penalties or whatever if you do things. A piece of advice that I have, and this is an advice that my financial advisor gave me was, “Decide if you want a home for investment or a home to live in. Don't try to compromise and do both.” This is a common mentality among people. It’s like, “I want to find a home I love but I also want to find a home that will be a good investment.” Eventually, you end up compromising, and it's so-so on both ends.
Either be focused on the investment opportunity, find a great location with appreciation, and say, “This is a way for me to improve my net worth and financially engineer things.” In some cases, buy a duplex or a fourplex if you want. In other cases, buy the home you love and don't focus too much on the after-investment value. As long as you can afford it, at least the lens you look at for property will be different.
To me, that has been a big learning lesson, and I eventually ended up going for a home that I felt would be a home I would love. Now that we work from home, it's a lot harder. No one initially thought they need that extra room to be converted into an office, or they don't have an office to work in, so they’re working from their living room or their kitchen or whatever it may be. That's the view in life. Choose something. Commit to it 100%. Don't waffle. Don't try to find a compromise because it's your personal wellness that is affected by the place that you live in.
The thing is when you try to do both things, which is, “I want a good financial return and I want a house that I love,” is like finding a unicorn. Yes, you may find the odd one but it's tough. If you find something, then everyone is after it. Markets are efficient. If you find something, I'm sure other people have seen it too, and then there's going to be a bidding war behind it anyways. The financial return component may not work out.
Choose a home to commit to a hundred percent. Don't try to find a compromise because it's yours. It's your wellness that is affected by the place where you live.
Call me spiritual or whatever, but I do believe as you start to upgrade your surroundings, your life follows through as well. You move into a beautiful neighborhood that you dream about. Suddenly, you're seeing aspirations and other people, and that motivates you to work harder. That's the psychology mindset of a homeowner where they bought a place in a nice neighborhood and now they're moving up. Also, if you like it, chances are other people will like it too.
Whilst you might not be able to make much rent from it, if you've ever rented it one day, if it's a place you love, hopefully that's a place other people will love. There's a big caveat here. I'm someone that likes the contemporary postmodern type of environment, which seems to be in vogue, but if you're into Renaissance extreme decorations and personality, that is the worst thing you can do.
The home that I bought was staged badly initially and they fired the agent. The agent simply remodeled it and went quickly. I bought it because I loved the interior upgrades. One piece of advice for someone who wants to at least sell the house one day, you might love it, but you want to make sure it fits what the market wants as well. Some markets like contemporary. Some markets like traditional. Some markets like one floor because it’s more of an elderly population. Anything to share on that?
It reminds me, in the Bay Area, if you drive on the 280 Freeway, there is the Flintstones home in Hillsborough. It always reminds me of that. I'm sure that the person who built it was a big fan, but I often wonder what the resale value is.
That home took forever to sell. It’s famous. For anyone reading this, you've got to see it. Type in Flintstone Home California. They ended up putting it on Airbnb, but it was a home that was on the market forever. The eventual list sale price was only $2 million to $3 million. I say only because, in that neighborhood, that home could have gone for way more, but they made it so unique that it's impossible to find a buyer. Either the home is unique and quirky that you'll find that one person who loves it will pay whatever they want. The fact is, people aren't going to overpay.
In some ways, I believe that the market will set the price. If there's only one bidder, there's no competition. It’s the same if you're selling your company, your home, your luxury car, or whatever it is. It may be modified and custom so that someone else like you might love it, but if it's too quirky and there's only one other person interested, there's no competition. There's no incentive for someone to pay more.
The thing that we do at Noah is that if you think about home prices and what moves there, the individual characteristics of a given property matter less over time. What most people don't control, first and foremost, is your neighborhood. The block or the neighborhood in which you stay dictates a big part of the appreciation and the pricing of the home. Beyond that neighborhood, if you go one step further, it's the city or the metro market in which you live.
For example, if you live in the San Francisco Bay Area, compared to Sacramento, all things being equal, the Bay Area homes tend to be more expensive and sell for higher appreciation compared to Sacramento in certain cases. Finally, there is the angle of the macroeconomic situation. If you're selling your home in 2009 or 2010, in a financial crisis, it may be the best time in the neighborhood but it’s not going to see a lot of appreciation as compared to selling your home now, which is a seller's market because of the imbalance in supply and demand.
That is something that a lot of individual owners, buyers, and even sellers forget. There are macro conditions, there is the city, there's the neighborhood impact, and then there is the impact of the individual home, whether it's a 4-bedroom or 3-bedroom. You have to take a holistic view when you're thinking about buying or selling a house, and not just that particular asset.
To that point, taking a holistic view, and this is a painful lesson for me being an Indian, I grew up in a poor neighborhood. My parents weren't wealthy and I'm used to finding a bargain. I'm used to being cheap. It was a painful lesson for me to unlearn in real estate because I would look at the asset itself and I'd want to maximize my cash-on-cash return. I'd want to maximize the cashflows. When I get the best value price per square foot, I want to get a bargain, and I did that.
I bought a couple of properties like that and then I bought a few properties that my agent pushed me to buy. These were single-family rentals, some in the Bay Area. Some of these were beautiful properties that were expensive. I wasn't making as much rental yield on it, but they were in good neighborhoods.
Now, I'm thinking of selling these. I've had offers and there's very little to almost no appreciation on the ones that were for cashflow, but the ones that were in a better neighborhood with better fundamentals, the appreciation is real. That game is powerful when you look at things like mortgages because if you're building principal and you're putting some money down, there's that leverage. A $50,000 down payment and a $200,000 increase in home value is a high return.
That's a 5x cash-on-cash return for you. The reality is that your rental yields will never get your 5x cash-on-cash return. That makes another case. Even if you put 3% or 5% down, but getting started on that journey creates this compounding effect because your mortgage is amortized, so that's cleaning equity from downside protection. Home is appreciating if it's in a good neighborhood that's creating upside leverage, so you are winning from that perspective, as a homeowner as compared to a renter today.
Always be compounding. This is the advice I give to a lot of people that reach out looking for advice. It seems to be the same thing that I say especially if you're early on in your career or you've just graduated. Get a job. Diligently put a percentage of the income that you have into savings. Have a rainy-day fund. Then start to save up for that home and make that down payment and own that home.
Home can be a source of wealth.
Over time, as you pay down your mortgage and your income increases, and your mortgage balance and principal balance decreases, go buy another home. Go invest in stocks and keep compounding. That's where the magic happens in life if you compound over 5, 10 or 20 years. You said it at the beginning in a previous segment. What are the stats again? You said it was $55,000 average net worth of a homeowner versus $15,000 of a renter. Is that right?
It was $1,500.
$1,500 for a renter. That's the net worth. That's a crazy difference. I know that I've heard this stuff before but I still thought $15,000. $15,000 versus $255,000 tells the story completely. For $1,500, if you're talking about America, you're one accident away from having nothing because healthcare isn’t free.
There was an article a couple of years ago where a lot of Americans couldn’t afford emergency expenses because of that. That creates a challenge on the part of homeownership. The other way to think about it is a home is a source of wealth, that's great, but then how do you manage that wealth? How do you compound the wealth that you have? A philosophy we have at Noah is to think about, if you had $255,000 of cash, you will most likely have a financial advisor. You will have somebody who looks out for that money or professionally is investing that money.
Given that, Americans now are sitting on $8 trillion of home equity wealth, which is more than the stock market. Residential wealth exceeds in market cap in the stock market now. Most residents or homeowners don't have a home advisor. If you think about it from that perspective, we think that in the future, you need somebody. It could be a piece of software, technology or a human person to become an unbiased adviser for you and your home to say, “It's now time to refinance to save on your mortgage rates.” “It's time to do some home improvements because the home can benefit from that. It's time to maybe upgrade your homeowner's insurance policy because you're not fully insured.”
There are 4 or 5 things that matter, and there is a tremendous opportunity here to create a platform also for home wealth management, which can help people make the type of decisions, which often come with experience. You have a lot of that, but the average person does not, so you can use technology to do those things for yourself as well.
In a different episode, we had someone come on and talk about buying fractional shares in different real estate in different markets, which previously was never available. You would have to club together with some friends, and that's complicated to do. Somehow, you'd have to qualify for debt financing for the mortgage, and then you'd buy a project overall. It's great to see new forms of access now where you can buy fractional ownership and a real estate investment or even an index of real estate, which basically means multiple properties in Texas or Chicago. Many crowdfunding platforms are going in this direction too.
We normally work with institutional investors on that side of the platform. We have the consumer platform where we have home equity access for existing homeowners. We have down payment assistance for buyers, but all of that capital for the Noah platform comes from institutions. We end up working with pensions, with family offices. We work with private equity funds.
The reason they come to us is what you mentioned. They want to access high-quality single-family homes in good neighborhoods because they are able to provide that capital on return on their investment while also helping consumers when it comes to their financial needs and cashflow. It creates this unique alignment of interests, as I call it, with the consumer. The investor wins by sharing the appreciation.
On that note, how can our audience reach you? Are you looking for anything from any of our readers? What's the best way for them to get in contact with you?
The best way is my email address which is pretty simple. It has my first name, Sahil@Noah.co. They can email me directly. I’m more than happy to chat with anybody either on the consumer side of the business or the investment side of the business. We also have a website, Noah.co. If they're looking for financing, go there. We have an amazing team that is pretty experienced across mortgages and home equity. We'll be more than happy to assist them with whatever they need.
Sahil, thank you so much for coming to the show.
Zain, thank you so much for having me. It's been a pleasure.
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About Zain Jaffer:
Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.
His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as "Forbes 30 Under 30", "Inc. Magazine's 35 Under 35," and the "SF Business Times Tech & Innovation Award." He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.