One of my brothers, Chris, is in town for a visit and we were talking about housing during dinner. He is saving up some cash because he is planning to buy a house in a year or two. He said a house is a good investment, but it’s just too expensive in the Bay Area. Currently he is renting a room in a friend’s home and he is thinking about moving to a more affordable location like Austin, TX.
Personally, I don’t think a primary residence is really a good investment. If you’re single, it’s probably better to rent and put your extra money into the stock market. When you have a house, your monthly expense can increase quite a bit. A bigger home will mean higher utility costs. You’ll have a property tax bill, homeowner’s insurance, yard work, repairs and maintenance expenses. It can also be quite expensive to furnish a house, too.
In my opinion, a primary residence should be a place to live and if you get lucky with the market appreciation, then that’s just gravy. There are many ways for regular people to invest in real estate, so let’s share them with Chris today.
Buy a fixer upper
One way to make money with your primary residence is to buy a fixer upper. You need to search in a good location for a house that needs work. Then put in a lot of sweat equity to bring it up to the neighborhood standard. After a year or two of working on the home every weekend, then the place would be ready to sell for a tidy tax-free profit*.
*note* You can profit up to $250,000 and don’t have to pay any capital gain tax if you’re single, $500,000 if you’re married. You also need to live there for at least 2 years to qualify for the tax exemption.
This works best if you’re single. I know this wouldn’t work for us because Mrs. RB40 doesn’t want to live in a rehab house for long. Once we fixed it up, then she’d refuse to move.
Rent out some space
Renting out a spare room is a great way to generate a little extra income. In expensive areas like Northern California, there are always people looking for a more affordable option. If Chris buys a 3 bedroom house and rents out 2 rooms, then he’d have a lot of help paying the monthly housing expense.
When we lived in our old house, we occasionally rented out a room to engineers and it worked out quite well. Just pick a workaholic tenant and you will rarely see him/her at home. Buying a multiplex and living in one unit sounds like a good plan, too. You get some tax benefits from occupying the property, but it can be hard to live with other families.
Rent out your old home
Another way to start making rental income is to rent out your old home when you move. This is a good option if you can afford the down payment for the next home without having to sell your previous one. This is what we did when we moved to our current condo. We refinanced the old house to a lower payment and were able to generate a little cash flow. Now that the market has recovered, I’m going to put it up for sale and take some profit. I need a long break from being a landlord.
Real Estate Investment Trust
REIT is a company that owns and operates income producing real estate. You can buy and sell shares of REIT through a brokerage, like stocks. REITs allow regular people to invest in commercial real estate without having to deal with the day to day operation of running the place.
We have some Vanguard Real Estate ETF and that’s a good way to get started in REIT. It’s a good diversification from stock and bonds. Generally, you want a little slice of Real Estate, Gold, Energy, and commodities to help balance out your portfolio. Here is our current asset allocation.
You can check your current asset allocation easily with Personal Capital. They also have tools to help you figure out your target asset allocation and cash flow. Check them out if you haven’t yet.
Crowdfunding real estate is the hot new way to invest in real estate. You can pool your money with like minded investors and invest in various projects like a B&B rehab, a mobile park, and a strip mall. Realty Mogul (realtymogul.com) started about a year ago and members already invested $14.6 million.
This is quite an interesting concept, but I don’t know if I’m ready to jump in. You have to do your own homework and it seems like there can be a lot of risk with these projects. The total return of 12-18% sounds really tempting, though. This projection includes appreciation. The cash on cash return seems to be in the 6-10% range.
Currently, only accredited investors can invest with Realty Mogul, but they hope to eventually bring it regular investors too. If your net worth is over $1 million or your income is over $200,000 for the last two years, then you are an accredited investor. The minimum investment is $5,000 per project.
Real Estate Investing
Investing in real estate has never been easier and buying a primary home is probably the least profitable way to invest in real estate. I think we’ll stick with REITs for now and keep an eye on crowdfunding. Once that opens up to regular investors, I’m sure there will be a lot more money flowing in.
Do you have any investment in real estate? The real estate market is hot again and everyone is jumping on the band wagon. What’s your play?