You may think Im an elitist if you read my article Cut FHA PMI- Housing Market going in wrong direction. You’re half right.
The fact is that you’re able to purchase a house with little money down is not a problem, its leveraging debt to income and the Lending environments rule. Leverage is a wonderful thing as long as there is a plan in the background! I would recommend that the person comfortable leveraging the numbers would have a successful financing planner working for their money that is not tied up on the house purchase. Also, I would recommend that the person’s accountant would help advise someone with a low down payment in vetting the plan of execution so that your aware of your path towards financial success.
My issue with clients with 3.5% down on a house is that when you sell a house, you pay 6% or higher. The broken piece is that your transaction costs and your equity in the property could be imbalanced. In this scenario, when you Sell a house you are gambling on the market appreciation or are you only going to take a clients built equity to pay your agent for that professional service? That doesn’t sound like good business!
If you have read my story titled “Is the American Dream, just a dream?” you will have more understanding of the ‘equitable position’ of owning Real Estate. I just had a client in the booming market of Madeira, a suburb of Cincinnati- loose money on a house that they bought in 2010; arguably pre-recovery. On a phone call with the client 2 days before Closing, he said “You know a house is more of an asset if you only do the maintenance, it can be an investment but you need to constantly work to improve it!” That was the best explanation that I have heard to date and I needed to write that down!
In summary, I would recommend that if someone is only putting down a minimal amount of down payment, that they have liquidity elsewhere in their life so that the “big gamble” isn’t on the house. Also, this concept of reinvesting constantly makes you wonder if your debt service to income ratio is low enough that you have monthly cash flow for those stabilization projects. As a rule of thumb, you are supposed to have 6 months of ‘Living’ within an investment vehicle that can be liquidated without major penalty in less than 3 days.
If you read this and want more information or coaching on the correct next steps for you, I would love to have that conversation and refer you to a professional financial planner so that you can make educated buying and selling decisions. No reason not to Win!
