Mail Bag Joshua Kennon Pen
Kennon-Green & Co. Global Asset Management, Wealth Management, Investment Advisory, and Value Investing

Here is a great question about first home buying and what to expect …

Dear Joshua,

I’ve learned a lot over the years reading your content, and I value your in-depth research and nuts-and-bolts discussions on a lot of the subjects you talk about. With that, I have some questions about home ownership.

Mail Bag Joshua Kennon PenMy wife and I are in our mid 20’s, with two kids and we’re looking to buy our first house. I’ve seen some of your posts about your home, and would like to know what kind of research you did, or would recommend to us, before we take the plunge.

Were there any moments afterwards of “I wish I knew XYZ beforehand” that you could share? Hidden expenses, paperwork, missed savings opportunities, neighborhood/regional issues, other misc factors, etc?

To make matters a little more complicated for us, we’re looking to move across-state or possibly out-of-state, so ‘taking a drive through the neighborhood’ is out of the question until we’re very serious about a paticular house.

Thank you for your time!


Congratulations on working toward your first house!  

As you mentioned, I’m extensive in my research so I can’t say there were any major surprises from what I expected when I bought my first (and thus far, only) home.  Here are some thoughts I would have if I were explaining home ownership to someone for the first time and they didn’t know what to expect or how they should think about it.  I hope some of it is useful to you.

1. When Buying Your First House You Might Be Able to Get a Mortgage Credit Certificate That Will Save You Tens of Thousands of Dollars

If this is you first house, you need to do everything you can see if you qualify for what is known as an MCC, or Mortgage Credit Certificate.  It is only available from certain state and local governments, you must meet three conditions, and you can only use it with certain types of government loan programs, but if you qualify for one, the aggregate cash savings it puts in your pocket are enormous relative to your purchase price.

You can find some more information that is useful in IRS Publication 530 – Housing Guide for First Time Homebuyers.

2. Your House Payment Will Increase Every Year

If it’s your first house, you might think that your mortgage payment is set in stone.  Is your payment going to be $1,000 per month today?  Five years from now, it will probably be $1,250.  Property taxes and homeowner insurance rates very rarely decline.  Your mortgage itself may stay the same, but your mortgage payment to the bank is going to be higher year after year as the other costs get added to your escrow account.  We are at record low interest rates, so don’t count on any future refinancing to help ease your cash flow.  This is likely as good as it is going to ever get.

3. First Home or Not, Maintenance Is Much Cheaper Than Replacement

Setup a schedule for maintenance.  For example, this is the year I am having our decks restored, sealed, and stained.  Mother nature will wear things out from sun damage, water damage, whatever.  

[mainbodyad]Don’t wait until it needs to be done, have a checklist so that on certain days, four times a year, you oil the woodwork, lubricate the door hinges, clean out the light fixtures, clear out the gutters, or whatever is unique to your property.  Not only will it keep the place looking much better, and you happier, it will save you a large amount of money in the long-run.  It’s always cheaper to do a small amount of maintenance and keep something looking and working like new than it is to replace it entirely.

4. Put Firm Deadlines on Home Projects

It makes me sad that a lot of people will want to do something to their home, then put it off for years, only completing it when they are ready to sell.  This is your life.  You should get to enjoy it, not just the people who come after you and benefit from your work.  If you don’t like the flooring in a room, change it.  Don’t say, “someday”.  Schedule it.  You may have to put it off for three years if you are cash strapped, but put it on the calendar and make it a priority.  That old saying – goals without deadlines are just dreams – is true.  Schedule it.  Stick to it.  Make it happen.

5. Read Your Homeowner Insurance Policy Carefully

My homeowner insurance policy skyrocketed almost 50% over the past 18 months despite me not having a claim due to where I live in Missouri.  Even worse, some of it involved subtle coverage changes that amounted to a cut in benefits, and which were replaced by less useful payouts.  For example, damage from “vermin” in no longer covered, but the amount claimed for food that went bad during a power outage increased to $500.  If you don’t care about the risk of losing food in a power outage, cut that coverage and save a few bucks.  If it ever happens, pay for it out of pocket.  If it doesn’t, you’re richer than you would have been.

Don’t just throw the policy in a drawer when it arrives.  Read it every year.  You are buying a promise from a company.  You need to know what you are getting in exchange.

You might also consider flood insurance, which is not included in your homeowners policy.  If you don’t have it and your house floods, you could be thrown into bankruptcy court.  I live near Kansas City and I actually pay $12 a year for earthquake coverage, too, given that the New Madrid fault is overdue.  Don’t assume your policy covers everything; it doesn’t.

You can also add a $1,000,000 umbrella policy to your homeowner insurance for next to nothing – like $100 per year – that will kick in if your other insurance is exhausted.  If you select wisely, you can even get it to cover identify theft, libel, slander, and other non-home related items.  It’s at least worth researching.

6. Know Your Personality and Pick a Neighborhood That Matches It

In my case, my neighborhood charges me a couple thousand dollars a year for lawn service, automatic sprinkles, snow removal, and trash removal.  If it snows, at 4 a.m. I hear a team of workers outside clearing off my driveway and sidewalks. I see people walking around the property adjusting the sprinkles to make sure they don’t hit any of the landscaping plants.  My neighbors are mostly calm, quiet executives, professors, and professionals.  The school districts are great.  

The extra money it takes to live here in terms of annual dues is not wasted.  If I weren’t spending it, I would have to pay for a lawn mower, weed eater, gasoline, spend time out of my day mowing my yard, sprinklers, etc.  All of those hidden expenses would have been as big as the cost of doing it myself, especially when the value of my time is added into the equation, so I am much happier outsourcing it all.  

7. Search the State Sex Offender Registry Based On a Potential New Address If You Have Kids or Your Wife Comes Home Earlier By Herself Each Day

If you are looking in a less expensive neighborhood where there isn’t considerable distance between the property or gates, especially since you have children, I would run a search through the national sex offender database and make sure there were no convicts living nearby.  The Justice Department has a website that can link you to each state’s database to run a map search based on your address.  The Missouri site, where I live, lets you run searches based on location, brings up images of the person, the details of their crime, and more.  That way, you can know what they look like, whom they profile, and be aware if they are in the area.

8. Buy Less Square Footage and Focus on Quality

Buy less space, make it higher quality, and not only will you have a nicer home, you will save a lot of cash on a lower mortgage, heating, cooling, insurance, maintenance, as well as time on cleaning.  When I bought my first house, it was nice, but I live way below my means and think it is a good policy to live by because you are never stressed out about anything, even if the stock market is collapsing, real estate is falling, and the government spending is out of control.

[mainbodyad]Think about the mathematics.  If you could spend $100,000 less on a mortgage by getting a smaller house in a nicer neighborhood, not only will you save $100,000 in principal repayments, but you’ll also save nearly $67,000 in pre-tax interest costs over 30 years at today’s lower interest rates (in a normal interest rate environment the savings are even larger), and cut your heating, cooling, maintenance, property tax, and insurance bills by tens of thousands of dollars.  All in all, over the life of a 30 year mortgage, that frees up $200,000+ in cash to invest in the interiors while you are in the same financial boat you otherwise would have been!

I’ll show you actual pictures of what I mean by going through the MLS listings for the United States.  This bedroom comes from a large 5,000+ square foot house that is currently on the market, sitting on a decent piece of land:

Example of Terrible Bedroom

This bedroom comes from a 2,700 square foot house – almost half the size of the previous home – that is currently on the market:

Example of High Quality Bedroom In Smaller House

I see people do it all the time.  They will go for as much house as they can, and then be broke for ten years trying to catch up to it, while their interiors look horrible and they drain their bank account.  Live better.  Be better.  Buy a nice home and then use what you save every month to invest in the space.  You don’t have to over-improve the property – high quality furniture and objects can be taken with you when you sell.  

To give you a real world example of what I mean, I did an MLS search for a 50+ mile radius around downtown Kansas City and came up with this 6 bedroom, 4 bath house, 4,000 square feet on 1.6 acres.  Look at the interiors.  I will never understand how people allow themselves to live this way.  All of their money was spent on the exterior – impressing other people, rather than the interior – what they get to enjoy for their own life.  It’s madness.  Stop worrying about what everyone else thinks because the odds are good they aren’t giving you much thought in the first place.

You don’t have to go crazy.  I posted a few pictures of a couple rooms in my house mid-renovation, and it’s nothing too over the top, but it definitely all works together and is cohesive, with things getting switched out by seasons so there are distinct “feels” to the house depending on whether it is Spring, Summer, Thanksgiving, Christmas, or Winter.  You will never find a wire frame bed thrown in the middle of a room with nothing around it.  It’s so soulless I don’t know how you could ever want to be there, let alone live there.  Make your home reflect your personality.

9. It’s Almost Always a Bad Idea to Get Anything Other Than a Fixed-Rate Mortgage

Variable rate mortgages outsource all of the risk of the credit markets to you.  Given that we are at historically row interest rates, I think they are ticking time bombs.  They are only appropriate in a very limited number of circumstances, and almost always in cases where the person is simply using a short-term bridge loan or something that doesn’t represent a large part of their net worth. 

10. Don’t Buy In a Neighborhood Where the Average Home Price Relative to Median Household Income Is Far Above Historical Standards

This would be a big red flag to me that home values are detached from reality.

What Do You Wish You Had Known Before You Bought Your First Home?

Do any of you reading this have any advice or thoughts?  What do you wish you had known before you bought a house for the first time?