I’ve mentioned before that I’ve always wanted to become financially independent (FI). I may not have known the term “FI,” but it’s always been my goal. With that in mind, I was focused on making effective financial decisions. At the top of my list: becoming a homeowner. I heard that renting meant “throwing money away” (in reality this is not always true) and I never wanted to do that. Here’s the story tallying up my wins and losses from buying a condo at 24.
The Set Up
Let’s step back a bit. I was 22 years old and a recent college graduate. I was about to start my first “real job” at a large and reputable company located in New York City. The first obvious step would be to find myself a nice pad in the city, right? Doesn’t every cool young professional need to live in Manhattan? Rent for a small one bedroom was $3K a month. To afford it, I’d need to split a tiny apartment with a roommate or two or maybe three.
This plan sounded meh, to me. I had a little different idea.
Live Rent Free – [Big Win]
I decided to live rent free. My parents were generous enough to let me move back in after college. They lived a “commutable” distance from my future office.
I paid them a small amount to cover the extra house costs of me living there. No rent. No utilities. No cable. You get the point. Life was inexpensive. To be clear, I’m very thankful for the support they provided. Not everybody has this option.
How I Saved for a Down Payment – [Win]
Free rent allowed me to save like crazy. And it worked! I contributed enough to my 401(k) to earn a company match. I maxed out my Roth IRA also.
I chose Roth IRA over a deductible option because I had the expectation that I was going to be rich one day. When I was 22, I figured I’d be in a higher tax bracket in retirement than I was in at the time so I went the Roth route. The verdict is still out on if I was right.
I put the rest of my savings in equity mutual funds to grow in a taxable brokerage account. There were no tax benefits to this account but I’d have access to my money for a down payment. Reflecting back, having my savings in equities may have been a little too risky. I was planning to use the money for a down payment before long after all.
Year 1 – [Big Win]
Living with my parents was pretty good the first year. My job ended up requiring significant travel, so for half of my time midweek I was on the road. My girlfriend was still in school, so I spent many weekends road tripping to visit her. It would have been terrible to pay big money for rent to sleep in the city for only 10-15 nights each month.
I used my 90-minute commute to read whatever I could get my hands on. That reading including many personal finance publications, which shaped my life. I may not be writing this blog without them. But I still hated the commute back then. Today, it’s much more pleasant to have unlimited content – and no big books to carry – at our fingertips while commuting.
Year 2 – [Smaller Win]
Back to the story: year one I banked big money. Year two my girlfriend graduated from college and she, too, found a prestigious job in the city. So we started looking for our new studio in the city, right? Wrong!
We both stayed home with our respective parents for another year. Our parents lived close to each other so it was easy for us to hang out. Going out in the city with friends was a bit of a pain but we made it work.
The living arrangements became more of a burden the second year. When I had to commute, it was a grind spending three hours a day on the bus. I was no longer traveling back to college, so our social life centered around Manhattan.
Not only were we commuting during the week, but also doing the same on weekends. It was worth it at the time for the cost savings, but eventually, I wanted something more.
The Condo Purchase – [Win]
After two years home, I was ready to move out. I’d saved up more than enough for a 10% down payment. At this point, I’d read “The Automatic Millionaire.” I knew David Bach’s theory about how homeowners have a distinct advantage to wealth.
I decided on an urban area just outside of NYC and started shopping for a home.
Finding a home we liked in an expensive area and small budget was not easy. The condo I found was being sold by the owner with no realtors involved. I made an offer. It got rejected. I came up by $15k and the second offer was accepted!
Reviewing the Paperwork – [Win]
The seller turned over the legal documents for the condo. I read each carefully and I noticed that the square footage was overstated in the listing. For real estate that is expensive on a per square foot basis. These measurements matter!
Since the place was smaller than the listing, I canceled the sales contract. I then negotiated with the seller for price $10k lower. The closing went smoothly and I became a homeowner soon after my 24th birthday.
Timing – [Loss]
I bought the condo in the summer of 2007. I may have been ready to buy, but the market didn’t exactly cooperate with me. About a year after my purchase, the housing bubble burst! There is a saying that you can’t time the market. Well, I certainly did not time it well.
Lesson: Don’t buy at the top of a bubble.
Picking a Two Bedroom – [Win]
My goal was to buy a small two bedroom condo to stay in budget. Why a two bedroom? House hacking! House hacking is when you rent out a part of your house to somebody else. It helps cover your mortgage and keeps your expenses lower.
Even the least expensive place in town was stretching my budget. If I could share the housing costs, it would give me a better opportunity to save for other goals.
My House Hack – [Ultimate Win]
I invited my girlfriend along when shopping for the condo. She was planning to spend another year living with her parents. Still, we wanted to make sure she liked the place I bought. Our plan was for her to move in the following year. After weeks of searching, we found a place and had our offer accepted.
Somewhere in the process, I got awfully lucky! My girlfriend fell in love with the place and decided to move in right away! (No my exclamation points are not sarcastic!) Move over random people on Craigslist! I pulled off the best house hack ever! And best yet, this girlfriend finally married me a few years later!
Buying Before Knowing Needs – [Loss]
One thing I’d like to point out is that in hindsight, buying this condo did not work out perfectly. In fact, I listed it as one of my regrettable decisions.
I was very focused on the financial aspect of this decision but there is more to life than money. The mistake I made was that this was a home not a business transaction. I wish I focused more on how I wanted to live in the long term.
If I had, I would have realized that renting for a year or two was not going to destroy my chances of achieving FI. Doing so would have allowed us to better understand our desires for a home.
The condo I bought was – dare I say – tiny. Yes it had two bedrooms but it was under 550 square feet with no storage outside of the unit. We were able to make it work but after three years of “living tiny,” both of us wanted more space. Unfortunately, due to the drop in the market, we were not ready to sell and stuck it out.
Lesson: If you are going to buy a home make sure you would be comfortable staying there for the long haul. The benefits of buying could be offset by transaction costs if you sell shortly after you buy.
Avoiding PMI – [Win]
To buy the condo, I made a 10% down payment. Lucky enough, I was able to find a first-time home owner program through a bank. The program allowed me to avoid paying private mortgage insurance (PMI). They also gave me a competitive interest rate. Avoiding this insurance “tax” was key for me, since paying it has no benefit for the home owner.
The Joy’s of Homeownership – [Loss]
One night out, I received a phone call from the fire department. There was an “alarm” going off in my home. They were standing at the door about to break it down and said they’d give me five minutes to get back.
The apartment was flooded! My water heater “exploded.” The alarm was a water alarm that would alert us if it ever leaked. Unfortunately, we were not home when it went off and it did not leak, it gushed.
I dried off the floor and it looked like there was no lasting damage to my unit. Unfortunately, I soon met an angry neighbor who lived below me. All the water damage ended up being in her apartment. Gravity flows down after all.
I spent hours on the phone with my homeowner’s insurance company. I learned that the damage to her apartment was not my responsibility. I felt terrible and considered paying her deductible for her.
Then I realized something. Every unit in my building had been renovated at the same time. They all had the same water heater. If I was not liable and paid for her damages, would somebody pay for mine if I had the same problem in the future? It was a tough call, but I pointed her to her insurance company and did not pay anything out of pocket.
It gets better. My worst fear came true a few months later. The apartment above me had a leak of its own. This time, I bore the brunt of the damage. We lost just about everything in our second bedroom. A computer and desk were the bigger items. We also needed to rebuild the sheet rock and paint. With a freshly painted room and less stuff we decided it was finally time to move.
1) Talk to your insurance company before ever paying someone out of pocket.
2) If you think there may be a problem with your neighbors’ homes, tell them about it!
3) Replace water heaters when they reach the end of their useful life. Don’t wait until they cause damage!
Being a Landlord – [Loss]
After five years, we had enough of “tiny living” and moved into a one bedroom luxury apartment. It was 50% larger than our current two bedroom.
We spoke to a few realtors to get sales and rental estimates to figure out what to do with the condo. We concluded that renting out our “investment property” was the way to go. It would, in theory maximize our return on capital.
We did so for two years with two different tenants. Neither lasted more than a year in our tiny house. I’m not exactly a handy person so when things broke, it was a huge pain. Especially while working a full-time job.
If I was making a large profit while renting out the unit, I may have a different perspective. As it was, I was just covering my mortgage with rent. It wasn’t worth it.
The Sale – [Tie]
To reduce stress and pad our down payment fund for a future home, we decided it was time to sell in 2014.
Based on the Average Sales Price chart above, I should have taken a loss. The average real estate sales in my county decreased between the year I purchased and the year I sold.
My sales price ended up being the same amount I paid for the unit. Had I waited one more year, I may have been able to actually eak out a little profit. My timing seems to always be terrible but at least I got rid of the headache without a loss and moved on.
The Outcome – [Win]
We lived in this condo for five years. It was tiny and far from ideal but we made it work and look back on our time there fondly.
From a financial perspective, this condo was a stretch to afford by myself on my 24-year-old salary. Sharing the costs with my wife meant it was no longer a stretch and put both of us in a good financial place.
Our careers (and incomes) progressed nicely after moving in. Our housing costs actually went down after refinancing. Looking at it this way, the condo was the fuel to fire our future financial goals. We were able to live well AND save for the future.
Did you buy a home at a young age? How did you pull it off? When you look back, do you think it was the right call?