Turning your home into an investment is a great way to jumpstart the wealth-building process. This technique is especially useful for people just beginning their financial journey or those who have fallen behind in their retirement planning. A home becomes an investment when other people rent a portion, or all of it, from you and the income you receive from that rental covers your ongoing direct costs of ownership.
Your goal is to buy and move into your own multi-unit rental property to help you minimize your living expenses by sharing the property's costs of ownership (loan payments, repairs, taxes, insurance, etc.) with your tenants. You will then pay off the loan used to buy the property as fast as possible. Once you own your rental property free-and-clear, you will have an asset that will pay you a significant monthly income for as long as you own it.
In the United States, apartment properties with four units or fewer make the best candidates for this technique because they are easy to finance. The entire process is very similar to buying a single-family home and is fairly straightforward. Whatever type of property you buy, make sure you can continue to comfortably afford making the loan payments if most of your tenants move out for some period of time and you talk to a professional accountant and attorney before you try this technique.
Example: You want to buy a four-plex. You have a small down payment and your take-home pay is $45,000 per year. You make the choice not to spend more than 30% of your income on housing, so you are limited to a maximum monthly loan payment of $1,150 ($45,000 multiplied by 30% = $13,500; $13,500 divided by 12 months = $1,150 per month). The rents from your soon-to-be-acquired four-plex, however, can also count toward your income, allowing you to get more property for your money.
In this example, the payments will be a little higher on the four-plex, because the taxes and insurance cost more. The house, however, doesn't get the financial benefit of collecting rents, which makes a significant difference in how much of your own money you must use to pay back the loan on the property. In other words, if you owned the four-plex, you would use your tenants' rent money to help repay your property loan.
If you owned the four-plex, continued to make the entire monthly loan payment from your personal income, and used an extra money the property generated, after expenses, as an additional monthly payment to your lender, it would dramatically reduce the amount of time it takes to repay the loan. Remember, it would still take 30 years to pay off the house. Once the property is paid off, your home has turned into an investment that pays you a monthly income and allows you to live for free. How different would your financial life be if you didn't have to pay rent or make a house payment? How different would your financial life be if you used this technique multiple times, moving from four-plex to four-plex while using the income from each paid property to pay off the loan on your most recent purchase?
Living in your own rental property isn't for everybody. You will have to put up with your tenants' idiosyncrasies, sacrifice some privacy, and deal with their problems and complaints. You might have to take a property management class or two. You may even have to plunge a few toilets and do many of the repairs yourself to get the numbers to work for you. Is this really so bad? How long would it take you to save the equivalent value of your rental property by simply saving a portion of your income? Giving up a traditional home and living in your own rental property with tenants could yield significant long-term financial benefits. Consider this option carefully before you rule it out for the pretty little house with the white picket fence.
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