Everyone knows that you can build wealth by investing in real estate. However, most everyone thinks that there is no opportunity for them to get on this train. Its’s easy to see that it works wonderfully well for some; all you need to do is listen to billionaires speak, or read your history book about how most fortunes were made by early Americans. I would like to offer you some insights I have learned over the past 63 years since I bought my first investment property, that make acquiring real estate investments workable and profitable for one with an ordinary income level, and those who weren’t born with a silver spoon in their mouth.
Most first time investors with limited assets and an income that would preclude saving at least 5% above all expenses should consider buying a single family residence or a duplex. Duplexes are best fitted for a buyer who can occupy one of the units while renting the other to pay all or most of the bills. You can utilize lower cost owner occupied financing, you get all the tax benefits on the rental side of the property, and it’s a pretty cool way to save money for your next acquisition by having someone else pay your current mortgage payment.
Some considerations apply to any purchase: You must have good credit. If it isn’t good, you must get it fixed. Any good loan officer can help with that. You must have sufficient funds, after the down payment and closing costs, to cover getting the property leased, and receiving no rent until there is a tenant. Fortunately, our rental market is very tight now, favoring the landlord in both the ease of finding a tenant and in getting a good lease rate.
I’ll use the example of a daughter of a friend that I encouraged to buy a home in South Austin instead of continuing to pay rent. Nine years ago she purchased a home for $152,000, using an FHA owner occupied loan at 5.65% for $3000 down, with seller paying closing costs. She moved in, rented two rooms to former classmates at $700 each, which paid most of the $1450 monthly payment. Three years ago, she refinanced the loan at 4.5% with a new payment of $1200. Last year she found the love of her life, moved out and rented the home for $1750. This story points out the not so well known plusses of investment real estate.
Except for the principal reduction, she writes off all loan expenses; interest, taxes and insurance. She writes off the management fee, repairs, maintenance, and even trips to inspect the property should she move out of town. She can also claim depreciation for the wear on this property, which takes 29.5 years per IRS. Even so, the property has appreciated, not depreciated. and is now valued at $265,000 — $113,000 appreciation in 9 years, or an average annual of $12,500 or 8.3%. The loan balance is now $135,000 giving her an equity of $130,000 and a nice monthly cash flow from the rent. All the tax benefits, or tax write-offs, are a direct reduction of earned or investment income. The payoff here is in green dollars that would otherwise go to IRS. Another notable benefit should interest rates go to 10% in the next 5 years, her rate of principle and interest remains at 4.5%.
Ready? The first step in getting on this train is thinking that it’s possible for you; next is finding a good Realtor and loan officer, preferably in that order, to help you work your way into the beginning of an exciting experience and profitable future.