I never could have imagined, when I put my 5% down on my loan for my first real estate deal (my first home), that it would change the course of my life in so many prosperous ways.
Hi, I’m Joe DiSanto. I spent my career in Los Angeles, starting and owning entertainment businesses. I’ve also invested millions in real estate, transacting on 16 properties over the last 16 years. This is the story of my first investment.
It was April of 2004 when I bought my first house. I was 28 years old. I was living in Los Angeles where, even at that time, real estate prices were SKY HIGH. I’d been eagerly hunting for something I could afford, and trying to amass that 3.5% down for an FHA loan! I was just convinced that owning a house was going to be a good investment.
Although at the time I didn’t completely understand why.
I lived in Venice, a laid-back beachside surf and skate mecca, where I would have liked to remain. Unfortunately, I couldn’t afford to buy in Venice (at least not a single-family home, which is what I preferred).
So, I started to venture east, away from the beach, looking for a property I could afford. I hoped to discover something in a neighborhood that would have the potential for gentrification.
At that point, while I wasn’t out of credit card or student loan debt by any stretch, I had set aside enough money for a down payment. I had also been pre-qualified for around 450K, with as little as 3.5% down. (Now, I’ll admit, the lending standards of 2004 were, shall we say, pretty “loose”…but I wasn’t complaining!)
I looked for about 6 months and made multiple offers on properties, only to beat out each time. Finally, though, all the stars aligned and there was a possible home for me!
I decided that instead of an FHA (Federal Housing Administration) loan, where I would have to pay mortgage insurance, to go with an 80% first mortgage and 15% HELOC, and managed to put 5% down (this route avoided PMI in those days). It was a very tight lending situation but we closed it! So for 457K, I was the proud owner of this amazing house….
This 1720sf, 1922 craftsman was located in the neighborhood of West Adams, and although this area has taken off now, at the time it was rather “up and coming.” My girlfriend (now my wife) was not as thrilled about the location as I was. It’s not like bullets were whizzing by, but let’s just say that we didn’t go for long romantic moonlit walks every night. But our immediate neighbors were all pretty cool!
Over the next three years, my house increased in “paper value” by over 45%…or to around 675K. I quickly learned that my increase in “paper value” was convertible to “cash value”, via a cash-out refi! I took out about 130K over two refi’s and converted an adjustable-rate HELOC to a 30yr fixed 2nd (which ironically hurt me as rates went lower, but I slept much better at night)
So, my initial investment of 35K gave me back 130K from cash out Refis. And that money was all tax-free because it was a loan. Now, I had to pay it back of course, but I would have never been able to access such low cost, tax-saving money.
I should take a moment to say that I’m a very financially prudent person, and did the math on the increase in monthly carrying costs when taking this cash out. But I was going to use much of it to pay off other debit…and would end up saving money overall every month, even with using some of the money for renovations!
What was to come in the next decade was a hell of a roller coaster ride for real estate. The bubble burst in 2008, and we were underwater on our home, like many other people during this time. But it did not affect us at all (thx 30 yr fixed loan).
We enjoyed living in the house the whole time. And luckily, I caught those three years of the upswing before the BIG DROP!
All that said, the lesson of this story is NOT about how much money we made when we finally sold the house 10 years after the purchase. It is about how it changed my life, and possibly the trajectory of my career! SO MUCH was made possible and so many doors were opened by this “Giving Tree” of a house.
How My First House, at the age of 28, Completely Improved My Financial Situation and Changed My Life
1. I was able to refi cash to pay off all of my credit card debt
Not only was the interest WAY LESS, but the interest now became tax-deductible, saving me even more money. And in addition to that, being collateralized Real Estate loans have a far less damaging effect on your credit score than unsecured credit cards do, my credit score went up (even though technically I had more debt)!
2. I was able to pay off all of my 30K in student loan debt
I had not made a dent on it up until that point. I had been deferring repayment so I could focus on reducing my credit card debt first. And again, the interest became tax-deductible, which by that time I had surpassed the income limits to deduct my student loan interest. The interest rate was also lower than my student loan rate.
3. I was able to use money from the refi to make many improvements to the house, which increased its value!
I made about 55K in total improvement over the 10.5 years I owned the house. (The exterior paint palette was my favorite addition.) Many of the improvements were for our enjoyment, like landscaping the backyard, but they also increased the value of the home. The majority were updating the major systems of the house like the roof, plumbing, and mechanicals. We also updated the small second ½ bath and made it a ¾.
Now when I do improvements I look at them like I’m doing a flip. I call it the “Live-and-Flip” which I recently learned is an actual “thing” some people call the “Live-IN-Flip.” Potatoes, potatoes. Anyway, let’s take a look at that nice paint job…
4. I utilized the refi cash to start a business
About two years after I bought the house, I was devising a plan to start a post-production company with three good friends and co-workers. I was able to use this money to help fund our start-up. We all put in some cash, but I had more money available and was able to contribute even more, which made all the difference for our business to get off the ground.
5. When our business began to grow, we knew to buy instead of rent
Two more years after we started our business, we needed a larger space. We were looking at raw commercial spaces, and all of them required us to pony up the cash to do our renovations. I thought to myself, “Why would we renovate someone else’s building? Let’s try to buy one!” (Turned out you can get in as low as 10% down for “owner-occupants” via another government program from the Small Business Administration. It’s called an SBA 504 Loan).
6. The third lien on my house saved our real estate deal
Here’s a funny (not funny at all actually) story. As fate would have it, we entered the financial crisis toward the end of our escrow on our building purchase. Our financing was affected and it was looking like the deal was going to die after 6 months of development work and 150k invested.
BUT, in a last-ditch effort, I was able to convince the seller to loan me 125K at closing, so we could get SOME of our renovations done, and close the deal. While admittedly it wasn’t the greatest security for them, I got them to agree by putting a third lien position on my house and one other partner’s house. It saved the deal!
7. The deal is saved, made me and my partners over a million dollars, half of which we reinvested in another property
Cut to 8 years later, we sold that building we bought and tripled our cash investment (pre-tax). We each kept half our winnings and reinvested the other half into another even better building for business. With the development of that building, we have generated another roughly 1.5 million value, in 3 years (on paper that is).
8. We made a net profit of roughly 92K, and sales proceeds of 131K, which we invested in our next house…in our ideal location!
10 years after purchase, and post-crisis, we sold it for 163K more than we bought it for. Ironically it was less than the 2007 max value! Still, with that appreciation, the principal paydown growth we had amassed, and all the tax savings we enjoyed due to the interest rate deduction, my wife and I took the proceeds and put them into our next house…ALL TAX-FREE!
9. We profited over 250K on our new home in less than 3 years
This house was back on the west side where we wanted to live (finally)! We would never have gotten into it without our first house. Oh, and we sold it 3 years later and profited over 250K (another “live-and-flip”)…TAX-FREE AGAIN!
Here’s a tip. If you live in your house for 2 of the preceding 5 years, you can take up to 250K profit for a single person, and 500K for a married couple, and PAY NO TAX!!!! It’s an insanely great deal.
10. My wife and I quit our high-stress jobs and moved to Florida
All of the above made it possible for us to earn, save and invest quite a bit of money. After almost 20 (me) and 16 (my wife) years in LA, we cashed out and moved with our young son to a small gulf-side town in Florida.
It was the craziest thing we’ve ever done, but it’s changed our lives for the better. My wife can stay at home with our son, and I work way less. I do bookkeeping, give small business, real estate & financial advice, and run my finance blog playlouder.com
So am I a Real Estate Genius?
Did I Predict All this Would Happen?
No, sadly I’m not a genius. All this happened because I simply took the money I would have had to pay in rent anyway, and turned it into an investment. Very simple concept.
Did I know that all this was going to happen? Not entirely…but I certainly believed I would come out on top, to some degree, with owning my house. I did know that if I wasn’t in the game, I had no chance of winning the game!
I also believed that if I had continued renting, and put all of my remaining money in the stock market, it would not have had the same chance to grow as much (thanks leverage!). Especially considering a good chunk of my available money would have been going to rent anyway.
Now, you might be saying to yourself, “Well it all worked out for you because you lived in Los Angeles, where real estate eventually ALWAYS goes up in value!” To that, I would mostly agree, but also say that many smaller city markets have significant growth capacity as well.
It’s true that the market where you buy your home, and the price of that home, will certainly affect how much upside you have. Still, I vehemently believe in the power of real estate, in most markets, to improve your life.
Some Final Thoughts
It’s been quite a ride since 2004, and I’m very thankful to my little 1922 craftsman, for making much of it possible. When I hear so much talk lately about how “it’s better to rent than own,” I worry for the people who are listening, and how it may negatively affect their lives and future success.
I realize that homeownership is not the perfect fit for all people and all situations, but it should always be seriously considered. If you want to read more about why I think you should own vs rent, you can check out an article I wrote on the topic:
Renting vs Owning: Why You Need to Own the Real Estate You Live In (of Which You Will Be the World’s Best Renter!)
In closing, if you still aren’t convinced by my story that real estate is a magical and wonderful life-changing asset, then here are a few other opinions from leaders in the field on the value of owning real estate….
“Real estate is a bankable asset, so you can always leverage it. It also doesn’t tie up a lot of cash. You can put down as little as 10% and use banks’ money to grow your investment. With such low-interest rates, that’s like free money.
“Buying real estate has made me rich — mostly through necessity, not by design. I bought my first itty-bitty studio after scraping together a few bucks because I needed to live somewhere anyway. A few years later, the studio doubled in value, giving me enough cash to plunk down 50% on a one-bedroom apartment. That soon rolled into a two-bedroom, then a three-bedroom, and finally landed me in my 10-room penthouse on Fifth Avenue in New York City. Buying that tiny studio was the most important decision I made because it got me in the game.”
“Most millionaires I know made more money from owning real estate than any other investment. Real estate consistently increases in value over time and outperforms other investments. Plus, it isn’t as vulnerable to short-term fluctuations as the stock market. You get a tangible, usable asset, whether you’re renting out an apartment or commercial building for income or buying a home. And there can also be tax benefits for investment properties.”
—Peter Hernandez, president of the Western Region at Douglas Elliman, founder, and president of Teles Properties
About the author: Joe DiSanto is the founder of Play Louder, a finance, business and real estate blog that helps readers learn how to better manage their personal and business finances. He successfully climbed out of 70k in debt, started an Emmy winning entertainment company which billed mid-seven-figures in revenue annually, and has invested millions in real estate. Joe semi-retired with his wife and son at age 43, and now advises small businesses and individuals on how to best maximize their financial potential.