I Invested in a Home I Didn’t Own; Here’s Why
Early in 2020, I was finally ready to purchase my first home and I enthusiastically initiated the process.
Ever COVID.
The uncertainty of the pandemic scared many homeowners and the market seemed to briefly freeze. That is, until the mortgage interest rates continued to plummet, inversely driving the demand upward.
Homes were flying off the market, cash offers started dominating the offer pools, and investors were scooping up as many properties as they could get their hands on.
Here I was about to put a significant portion of my savings into a modest investment but amidst the frenzy, I’d need to see a house within hours of it being listed, make an offer the same day, and be prepared to give things up in negotiation if I wanted to win.
Ooof! The anxiety!
I hung in there though and made multiple offers but my price point was shared by countless others and it was difficult to compete.
Eventually, the market prices had risen to a place where I found myself priced out.
Months after I started my search, I took my foot off the gas pedal to allow the craze to cool off.
Moving in with my significant other
While I waited, I decided to move into the house that my boyfriend owned.
Now I know what you’re thinking, why didn’t I do that before?
Well, I was determined to be a homeowner. I‘d been striving to own my own property, live there for one year and then turn it into a rental property. And then we planned to move in together.
When I put this goal on hold, it made sense for us to decrease our monthly expenses by living together. We took action and quickly began discussing alternative routes for my investment plans.
Reviewing traditional options
Initially, I intended to find a place and put down the minimum viable amount of the purchase price to secure a reasonable monthly payment. This exact amount would be based the interest rate, purchase price, and estimated monthly payment.
I’d planned to harness an FHA loan, in which you have the option to put down as little as 3.5% on your primary residence.
In doing so, I was aware that with any down payment of less than 20% of the purchase price, PMI (private mortgage insurance) would be required and it would add an additional cost on top of the mortgage.
This would be feasible with a roommate sharing the cost of the increased payment.
Because I was no longer able to proceed, I considered purchasing a property exclusively for rental purposes.
It’s important to note that for any rental property, you forfeit the opportunity to utilize an FHA loan. This meant I’d now be required to put at least 20% down (maybe even as much as 25%).
It would drive up my cost to enter the market and I’d need to evaluate if I could cover my living costs as well as a rental property in the event that it was vacant.
After running the numbers, it was too large of an upfront cost again because of the increased purchase prices. So I went back to the drawing board.
Investing into my partners home
In my boyfriend’s home, we had all of the space we needed and more. Personal offices, storage, living areas, and much of it unoccupied.
It occurred to us that we could finish out the basement, move a renter in to assist with paying the mortgage, and only have to share a few of the common spaces.
With an upfront investment, we could decrease our monthly costs even further and simultaneously increase the value of the house with additional finished square footage.
We need to consider the total cost of the basement remodel and calculate the potential earnings with a tenant to make sure we’d see a return.
Weighing the risk and reward
This all sounds nice but what I’m sure you’re thinking what our family was thinking; what if we break up?
Well, the decision was very personal. Our relationship is and was extremely secure and we were beginning to envision how we wanted the rest of our lives to be.
For couples who are not married where one partner owns a property, it might be dangerous for the other partner to invest into the home in the event that they ever split. It’s not as though the risk didn’t exist for us but it was a risk we were willing to take.
To factor this into our decision, we created an agreement that would result in mutually advantageous outcomes, regardless if we stayed together or split.
Crafting our arrangement
After considering the long term return for the investor (me) and the owner (boyfriend), we determined that this was an exciting opportunity for us both to invest and maximize the potential of this single property.
We entered into a contract together that outlined the percentage of ownership we would each hold in the home after the project was complete, the potential appreciation that we would each claim if we split, the original value of the property and each of our rights in the agreement.
To some, this might be a scary situation but for us, it worked.
As part of our plan, we refinanced my boyfriend’s home prior to the start of construction. It decreased the mortgage payments by nearly four hundred dollars which reduced our monthly expenses and allowed us to have more cash on hand.
From there we researched contractors, obtained quotes, created a blueprint for our desired layout and broke ground on the unfinished basement.
As expected with any construction project, there were many delays, frustrations, additional costs, and a larger bill than the initial estimate. We had prepared and were ready for the possibility of these outcomes so we took it in stride.
Days after construction ended, we located a renter, secured an application, a background check and a lease to move her in as soon as possible.
Reflecting on our decision
Obviously, this project was costly. Between the remodel and the refinance, both of our savings took a hit. Even still, we had planned accordingly and were able to finance it completely in cash.
As a result, we now consistently receive rent from the completed unit. For reference, it pays half of our mortgage. My boyfriend and I split the other half of the payment and are spending less in monthly expenses than ever before.
In three months, our basement unit has paid back 9% of our construction costs. We have not yet reassessed the value of the house with the additional bedroom and bathroom but it will undoubtedly increase the value of the house when we choose to sell it.
While our basement remodel extended the amount of time I will need to save to enter the market, it was a great way to put my cash savings to work in the interim and gather experience with managing a rental unit. In the background, I’ve continued to save for the down payment and still have plans to invest in a rental property when the timing is right.
In the end, this strategy might not be right for every couple, but it’s just one way to move toward investment goals when your initial plans don’t work out. In the current market, it’s important to be creative and find a model that fits your needs and provides a return.
