The Fruglar's Guide to Pwning a Home

Any self-respecting cheapskate should cultivate a healthy hatred of mortgages. They aren't just debt, they are huge piles of life-altering, potentially soul-crushing financial obligations tied to tottering edifices of termite-eaten wood and slapped-on plaster.

The new lean, hungry breed of self-improvement people on Twitter are wise to this. This was Ryan Stephens on Twitter yesterday:

Home ownership is *NOT* usually a great investment.
• In the last 100 years, adjusted for inflation, real estate returns are close to zero.
• Houses take maintenance, they depreciate, they go out of style.
• Owning reduces labor mobility & economic flexibility. (1/2)

— Ryan Stephens (@ryanstephens) March 7, 2018

He goes on to link Paula Pant's excellent deep dive into the ancient rent vs. buy debate from 2015.

They both raise unassailable points that puncture the absurd rationalization bubbles that lead people to rack up insane levels of debt to make homeownership happen. In particular, they highlight the expenses and opportunity costs that the PITI calculators on Zillow and Redfin don't.

Listen attentively to these cautioning voices. Let their warnings saturate your soul and fill you with a paranoia of mortgage risks that borders on unhealthy. Then and only then, when you are gaunt and haggard from witnessing the catastrophes that ruined your life on the alternate timeline where you splurged on a house, are you ready to look to buy a house. Real estate is seen clearest from the distance of a good thousand-yard stare.

This is exactly how I came to homeownership: gravely suspicious and borderline hostile. When my cursor hovered over the fateful final PDFs, I half-felt like I was docu-signing my own death certificate (these metaphors are losing their dramatic weight in the digital age). Today, three years later, I'm putting the house back on the market with a conservative projection of $100k in increased value, plus approximately $33k in equity that would have otherwise gone to rent.*

Does the word mortgage fill you with fear and loathing? Do you want to ask that real estate agent to wipe that stupid grin off their face? When you behold your "forever home" for the first time, is your first reaction: am I really going to have to stay in this dump for the rest of my life? Then, good. You are ready for the Fruglar's Guide to Pwning a Home.

There are seven steps to doing it right. Let's enumerate:

1. Be Mobile

The worst mistake you can make when buying a home is chaining yourself to a market in an unaffordability bubble. Financing a home in the Bay Area or Los Angeles right now is the stuff of nightmares. Precious few jobs and no geography are worth mortgaging yourself up to the eyeballs for relatively crappy houses in massively overcrowded metros run by and for the elitest of elites.

Three years ago I escaped the LA metro by finding a new job in a smaller metro where the same quality of houses went for about half of what they were getting in LA. There were fewer restaurants and entertainment destination and no celebrities to bump into at the DMV, but such things should have no weight for the prospective homebuyer. If you're buying a home it should be because you want to fire your landlord and still put a roof over your family's heads, not get closer to hipster amenities.

2. Aim Low

The best psychological place to start your real estate is down in the dumps. The same goes literally. You've heard the mantra "Location! Location! Location!" and I'm not going to dispute that, just twist it. The best location to be at is at the bottom, not only because the barriers to entry are usually the lowest, but because a lot of time there's less downside.

This is not to say make a beeline for the worst ghetto you can find, but rather to seek out the lowest point in any area you have targeted. If you're looking in a decent hood, look for one of the houses that's struggling to sell. Likewise, if you're looking for a bargain in the ghetto, don't look for the best of the bunch, but instead the one that has already taken its licks from the market. This is a basic buy low, sell high principle, but few people embrace it during the home buying process.

3. Aspire to Landlordship

Whenever you buy a house, you are automatically stuck with a lot of the drawbacks of being a landlord: you have to make all your own repairs and pay all the utilities and taxes. If you've got kids, you can even experience what it would be like to have a tenant who draws on the walls, misses the toilet, eats your food and never pays rent.

If you're going to experience the drawbacks, you should absolutely hunt for the perks. At this stage of the process that means looking for a place with extra space. Multi-family properties include triplexes, duplexes and 2-on-a-lots are often in the same price range as bigger single-family residences and you get vastly more use out of the space. Would you rather have a game room that you'll feel obligated to fill with expensive time-sink toys or a studio apartment that you can rent out?

My property has a little detached "casita" in the backyard. I've rented it out to my parents at a discount rate for the better part of the last three years. Closer family ties, free date night daycare and extra cash to pay down the mortgage - can't beat that. Prior to that, I was a boon to another microlandlord, renting out her converted garage apartment for several years. My rent paid ~2/3s of her monthly mortgage payment.

4. Pick a Price Point and Stay There

There is a price point above which you cannot and should not go. Arriving that price point is just a process of arithmetic informed by your downpayment savings, your income, your financial stress thresholds and the external factors that determine the ITI in the PITI. Old reliable financial guru Dave Ramsey, who generally gives great, albeit monotonous advice, suggests that your price point should fall in line with a 15 year mortgage with a total PITI payment of no more than 25% of your monthly takehome pay.

Knowing this price point gives you powerful bargaining power. With no asking prices in my price range, I had to low-ball on my offers. Having a point at which I could not cross allowed me to sit on my final offer with complete resolve. I could not and would not go any higher. As a result I got the house for ~$20k under asking.

5. Crush the Downpayment

The desirability of a house should be inversely proportionate to the amount of debt you have to take out to get it and how long it will take to pay it off. Market mobility, aiming low and landlordship are all great ways to pre-emptively reduce the debt burden, but ultimately you're going to have to put cash on the table, and the more the better.

This is where the opportunity costs of homeownership start to bite, especially for confident investors who expect lofty returns on their capital investment. A lot of very rich people have financed real estate with stingy downpayments, hoarding cash to get into more and more deals. A lot of those people have gone bankrupt too.

For a level-headed homesteader who doesn't want to play at real estate kingpin, the best course then is throwing the entire cashwad (minus a modest savings cushion) at the house. This is the course I took three years ago, taking the lion's share of my savings to put just over 30% down on the house. By limiting the total amount of my debt in this way, my PITI payments were high on P from the get-go, vastly improving my personal buy vs. rent advantage.

6. Attack the Principal
Following the same line of reasoning from the 5th step, the goal should be to get out of debt as fast as possible. Yes there are potential opportunity costs to consider when choosing to pay additional principal vs. investing in something else, but do not underestimate the significance of the psychological opportunity cost of staying in debt. You aren't a homeowner in a real sense of the word until you actually own the home, free and clear. Until then the bank owns a substantial part of you.

In my own case, I set about the most aggressive debt-reduction plan possible the moment I closed on the house. Every spare dime went at the principal, except for a modest retirement plan contribution. Sticking to this plan with religious fervor for the first 2 years took an extra $60k off the principal. I was on pace to pay the house off in a little over 4 years until I decided to sell and rerouted the principal payments into home improvements and moving expenses.

7. Stay at Least 2 Years
The ballyhooed homeowners tax breaks are the itemized breaks for mortgage interest and property tax, but these are overrated. Those breaks only soften the consequences for taking out too much debt to buy too much house. The real prize is the capital gains exclusion on the sale of your primary residence. For couples that exclusion extends to an insane $500,000, more than enough to cover the $100k leap my home made over the last 3 years. The catch is that the home has to have been your primary residence for at least 2 years.

Obviously, a gains exclusion isn't going to mean much if you don't have gains, and it's a cruel joke if your property drops in value, but if you started with steps 1 and 2, there's a pretty good chance that you'll be in the black. The joys of tax free gains will be mitigated by the commissions, fees and transfer taxes they hit you with on the way out, but the exclusion is still too good not to wait two years for.

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Once you hit 7 you are home free. Sell early if you want to cash in on a real estate bubble and then circle back to 1 to find a new market to plow some of that equity into. Or stay plugging away at 6 until you've got a paid-for house under you. Either way, if you follow the 7 Steps, you too can enjoy the sweet, sweet satisfaction of outright pwning the homeownership process.

*I will revisit this post with some crow-eating soul searching if this victory lap turns out to be premature.