Wow, it’s been a month since I wrote #7 – Stock Participation Plan. December was a busy month for the blog as there were so many topics to cover.
On to #8 – Real Estate. I am talking about about buying a home to live in and also keep personal finance in the equation. Of course, the best way to do this is to purchase a fixer upper, put some sweat equity into it, and then resell the place after a few years. This is a great way to generate equity and you don’t even have to pay any tax on the gain as long as you live there for at least two years. However, that’s a hard sell to many people, me and the Mrs. included. Instead, we went the easier route and purchased a home we liked about 5 years after I started working. This was our first home and it was a modest home in a newer up and coming neighborhood in the suburb.
In 2000, the local housing market was doing pretty good, not too hot and not too cold. It was a great time to buy because the real estate bubble hadn’t quite begun to inflate yet. The one thing we did correctly was to get a 15 year fixed rate mortgage instead of the usual 30 year. The payment was pretty high, but we were able to afford it with 2 salaries. Eventually, we refinanced to get a lower rate and the mortgage payment went down significantly. We were able to grow our income and inflation also helped ease the pain of the mortgage payment after a few years. This is probably the only time I will ever say that I like inflation.
We downsized to a smaller condo in 2007, but kept the house as a rental. We missed the boat during the real estate bubble and could have cashed out for a great profit. In hindsight, this didn’t hurt us too badly because about 75% of the rental income goes straight to our net worth today. If we sold the house in 2007, I would have put the profit in the stock market and lost a large % anyway. I am not good at keeping cash around because I’d rather invest.
Here are my real estate investing strategies for regular people, the non-handyman types like us.
- Buy only as much home as you need, don’t take into account future expansion. If you are a couple with no kids, then buy a one or two bedroom condo. Once you out grow it, move and rent out the old place.
- If the bank will lend you $$$, buy a duplex instead of a stand-alone house. You can rent out one unit and live in the other. In 5 to 10 years, you can move and rent out both units.
- If you can get a 15 year loan, do it so you will get to positive cash flow sooner. After 10 years, 75% of the mortgage payment goes to the principle. If we had taken out a 30 year loan, only 35% of the mortgage payment would go to the principle after 10 years. Try it in a mortgage calculator.
- Get a property management company if you don’t want to deal with the renters or with fixing things.
Right now we have a rental home and a 50% interest in a rental condo and I am looking to acquire another investment property in 2011. I found out that it’s more costly to buy an 4-plex investment property than a home to live in. The finance guy at the bank told me it’ll cost an extra point if it’s a 4-plex and another .75 point if the owner does not live there. I am going to fill out the prequal application soon so I can find out how much the bank is willing to lend us.
What do you think about this post? Good solid strategies or another crazy idea at Retire By 40?