Let’s face it, there are dozens of ways that men and women can begin to invest in residential real estate – fix and flips, wholesaling, and, of course, rental properties.
Nearly all of the methods that are traditionally employed have the requirement of “time” in them. Time to find the properties, time spent finding buyers, time (and money!) spent repairing depressed homes that were poorly maintained by their former owners.
For investors who have the financial means, there is a smarter system, especially if that same investor is currently living in an apartment or other rental property.
Buy a house!
As simple as it sounds, it’s true.
Now, I don’t know every – or really, any – details of your finances, but if we can make some assumptions and you can see yourself in these assumptions, then this one strategy may very well open doors to financial freedom you never thought possible.
Let’s start with the assumptions:
One, that you have some income left each month to invest, or, some income you are currently investing in a 401(k) or IRA.
Two, the property you will invest in is a single-family home with a traditional 30 year fixed mortgage with roughly a 4.5% interest rate.
Lastly, that this home will ultimately be converted to a rental property within several years.
Now, there are obvious short-term benefits to home ownership, which have been exhaustively covered over the years. Suffice to say that if your rent is currently $1,000 and your mortgage is $1,250, the financial benefits of home ownership far outweigh those of renting, especially when you look at inflation and its effect on rental values towards the end of the loan life.
In other words, rents in that area will be far higher, while the costs of the mortgage will have stayed the same – $1,250 – in this example.
Now, for those readers who are single – there is the added benefit of roommates in the short term. This could easily cut the out-of-pocket expenses by a half or even 2/3, yet the owner still has the benefit of an investment as well as a place to live. In other words, “home” is both a debit and a credit.
The scenarios change considerably if and when our homeowner makes the decision to convert the first property into a rental home and buy a second home as their primary residence.
When you own two homes and are collecting rents on one of them, you’ll effectively have positive cash flow on the rental property through using intelligent planning to orchestrate the rents and still have the tax benefits of home ownership in your residence. Additionally, since the first mortgage is predicated on the costs of the home several years before, it is quite likely that rental costs in the area will have risen, so cashflows from that property will likely cover all the expenses of ownership and still afford some overage each month.
Remember, you will be responsible for maintenance and, at some point, will have to replace the roof, the furnace, the water heater, and such, so it is simply smart planning to direct some of these cashflows into a maintenance account.
Now, it’s important to remember in this very general scenario that we have made a number of assumptions and I have specifically NOT included too many numbers in it to show you the “why” of value being built into your real estate investments.
On the other hand, I’ve run any number of scenarios through some specialized software and within several years, the cashflow generated begins to push past similar values and investments dropped directly into stock and mutual fund investments. The important thing to remember, though, is that our investor is building equity in two properties.
In short, as each month’s payment is made on the homes, the amount of ownership is going up while the amount debt is going down. In the meantime, the overall property values are going to trend up as well.
It’s critical to not make the mistake that so many investors made prior to the crash in 2007-2008.
Home values traditionally have grown several percentage points each year for decades. The double-digit growth in the first decade of this century was an outlier that caught many off-guard.
On the other hand, that same growth has been exhibited in the stock market in recent years and now we are seeing some of the very same types of setbacks occurring with stocks.
Get it? Now home values are “corrected” and are trending as they traditionally do in most markets, with little chance for them to sag.
The last key, using the assumptions we’ve built into our discussion here, is the primary difference in the savings between the stock market and real estate investment. We’ve already addressed the fundamental challenges of stock market investments – the fact the markets can go up or down, seemingly on a whim. Reviewing the ideas of real estate investment, the fact is, on a thirty year loan, the mortgages are paid off at month 360. Thus, the monthly investment (or credit) of the house payments have simply gone away.
Thus, the investor in the scenario now owns two properties free and clear, with distinct, marketable values plus has the “extra” money that had previously been used to pay the debt service on these homes to continue to invest. As pointed out earlier, the rent costs in the areas have by now far exceeded the principal payments on the mortgages due to inflation, yet the investor’s out of pocket expenses on that debt service have largely been fixed since day one.
The end result is this – there are any number of ways to save money and make it work for you over the course of your working life. Some investors believe the stock market is the only way to save, while others feel that real property offers far better returns on their investment.
Which one if correct for you? It all depends on your beliefs, but real estate investment does deserve a closer look, especially using some of the powerful tools we now have access to. If you’d like to learn how you can incorporate strategies like this into your current investment and savings strategy, I’d love to sit down and share some of the many scenarios that we have available to us today.