The first time that I saw my new home in person, I had owned it for over two months already.

It was the summer of 2006 and my wife and I were moving across the country to the Northwest in the midst of a very hot market. We were outbid on a property in the neighborhood we liked when, a week later, the house directly across the street popped up on Craigslist (pre-Zillow days). It had been recently renovated and we knew that we’d have to act fast or it would be gone, too. I offered full-price directly to the seller, did some light haggling over the inspection report, and closed on my birthday.

I still own that house today. It became our first rental property in 2010, and I’ve refinanced it twice, once pulling out equity to purchase another investment home and a second time to lower the rate. It’s a modest home in a nice but unassuming neighborhood, but it launched my trajectory as a real estate investor.

I wasn’t planning to be an investor when we bought it, but we made several of the right moves by accident that have allowed that modest home to build wealth far beyond its four walls. The goal of this new series is to help you, wise reader with impeccable taste, make the right moves on purpose!

How to Think Like an Investor - Even if You’re Buying Your First Home

If you own a home, you are a real estate investor. If you aspire to own a home, you will become an investor, so it will be helpful to start thinking like one. Real Estate is the most accessible path to financial freedom available to most Americans. The ability to build and access wealth over time through a home (or portfolio) is unmatched by any other asset class. This is due to three main factors:

The ability to use leverage to purchase real estate
The ability add value to your home by yourself
The favorable tax status for real estate with the government

There are ways to structure your purchase, financing, and ownership of a home or portfolio to best utilize these advantages. I’ll walk through these in turn, but the most important element to consider when building wealth through real estate is time.

Play the long game

Real estate is a get-rich-slow scheme. True wealth is built over years and decades, taking advantage of the Eighth Wonder of the World: compound interest. When you own real estate (whether primary or investment), this magic works in two ways simultaneously:

Your home appreciates over time
The principal on your mortgage is paid down in accelerating fashion

The chart below visualizes these twin effects. Assuming a home value of $100k, purchased with a loan of $80k at 6% interest, that appreciates at a rate of 4% annually (a little below the 60-year avg). You can see how the gap widens between the value and the debt on the property. The difference is the equity, and it accelerates over the years.

While the amortization of any fixed loan (blue line) is written in stone tablets from the moment of closing, the appreciation curve (red line) only looks consistent over a long time horizon. If only it worked that smoothly in real life! In reality, home price appreciation (not absolute value) fluctuates from year to year.

But, it is important to note that across the broad US housing market,there HAS NEVER BEEN a 10-year period in the market failed to appreciate since WWII. In other words, if you bought a property at any point since the 1940’s and held it for 10 years, you will never have lost home value, even through the Great Financial Crisis of 2007-2011.

This chart is a great example of the best pithy advice I can give: Don’t wait to buy real estate, buy real estate and wait.

Trying to time the market perfectly with the interplay between housing prices and mortgage rates is a fool’s errand. Time in the market beats timing the market. If you do have a long-term mindset to purchasing a home, the best advice is to start somewhere!

(There are plenty of Purveyors of Doom on the internet who are predicting a 2008-style housing price crash any time now…)

If you need a sane voice in this debate, follow Logan Mohtashami for data-driven analysis and great hair.

It is important to also consider the flipside of this long-game maxim: if you are not planning to keep a home for more than three years (and do no major value-add improvements), it is best not to see a home purchase as an investment. In that short of a timeframe, your principal is more at risk to the normal fluctuations of the market, and you may not have enough appreciation to recoup the combination of 1.5-2% in closing costs from the purchase and 4-6% in selling costs on the back end. There are many other reasons to buy a house with a shorter timeframe (lack of quality rental housing, value-add opportunity, control over the home, etc…), but it is risky from a purely financial lens.

There are those who wouldn’t consider your principal residence as an investment, and not entirely without merit. But there are a number of strategies that can supercharge the financial returns of your home. I’ll dive deeper into these in the next installment: Cash is King (aka Liquid Swords)