Buying a home has long been considered a good investment. But do you have to live in the home? Owning a home and renting it out may be the better choice.
You finally saved up an emergency fund and paid off your high interest credit cards. You need a place to live and you are tired of “throwing your money away” each month to your landlord. Your home purchase will make a great investment, right?
Do you want a home or do you want an investment? Do you seek security or freedom?
A Good Investment
A good investment is something that will pay you more than you paid for it. An asset is anything that puts money into your pocket. Does your personal residence put money into your pocket or take money out of your pocket? Rich Dad, Poor Dad examines why people consider owning a house as an asset, but by Kiyosaki’s definition, it is a liability.
Every month you have to pay the mortgage, insurance, property taxes. Even if the house is paid off you are still spending money maintaining the house and paying your taxes and insurance. The house is still taking money out of your pocket.
Your paid-off house might make your net worth look good but the equity is locked up in the home. It can if the purchase is timed just right, but most times it is not.
Imagine you financed your $100,000 home 30 years ago at a low 5% interest rate and today your home got appraised at $300,000! Wow, you got a total return of 200%! What a great investment, right? What about ongoing maintenance and repairs? That brings the grand total investment to $282,422.95. An Investment Property
So how is purchasing an investment property different? Your tenant makes those payments.
On our $100,000 home example, you put down $20,000, and then for the next 30 years the tenant’s rent check covered the mortgage, taxes, insurance, repairs, and upgrades. You increased your rent to stay ahead of inflation and property tax increases each year.
Your $300,000 home is now a 1,400% return or 9.4% annual return based on the $20,000 you paid towards the house. Assuming you invested in a good cash flowing home, your tenant gives you more each month than what it takes to own the home. You are leveraging someone else’s time and money and now that same home is an asset.
But…Where Will I Live?
But you still need to live somewhere! Sometimes it just makes sense to live in a rental. In that case you can still live in your perfect home, just as a renter. It might sound like I am against home ownership; I am not. Homes provide lots of intangible benefits. The pride of home ownership is a real thing. Dr. Donald Haurin, economics professor at Ohio State University, published a research study showing that “for children living in owned homes rather than rental units, math achievement scores are up to 9 percent higher, reading achievement is up to 7 percent higher and behavioral problems are 1 to 3 percent lower. Homes can be a great purchase; just don’t tell yourself that your home is an investment. Math, specifically the opportunity cost of your down payment, says to invest in a rental property and not your personal residence every time.
Some personal finance gurus like Dave Ramsey advise you to buy your personal residence and pay it off as fast as you can. Paying down your mortgage might preserve wealth but it will not create wealth. People say home ownership is an excellent path to build wealth. I would change that to say rental property ownership is an excellent path to build wealth.
Ramsey has valid points though. If you have extra money each month and are trying to decide between paying off your mortgage and buying a new expensive car, please pay your mortgage. But if the decision is between paying off your mortgage and investing your money in the stock market or in a new investment property, I would disagree with Ramsey and tell you to invest first.
Retirement Income
No one can retire on paying off a mortgage alone — you need to create monthly retirement income to replace your current job income. Try not paying your property taxes and see who really owns your paid off house.
Retirement income might come from traditional places like social security, annuities or pensions. Or retirement income might come from investments like dividends, IRA withdrawals or rental properties.
Since all three options involve initially living in the home, the interest rate on the mortgage will be lower than the interest rate you would get on an investment property.
Option One – Buy your home, live in it for a few years and then when you move out, you rent it and buy your next home.
Option Two – Buy your home and rent out the extra rooms to your friends so that they cover all your monthly expenses.
Option Three – Buy a small multi-family property (Duplex or Triplex), live in one unit while renting out the other units. If you want to read more about purchasing a multi-family property I recommend reading “Real Estate in your Twenties”
You need to look at your reasons for buying or renting a home against your short and long term financial goals.
Perhaps, yes, if its your choice.
Homes can be turned into rental properties. With necessary adjustments and with proper leasing or rental documents, you can turn your house into an additional income stream. What's even good is rental fees tend to increase on regular intervals. Depending on a home's location, it can also be a perfect vacation house. Typically, families, especially those with children, and those which embrace the concept of extended families - do love to have vacation houses. During specific periods of the year, the house can serve as a reunion spot for relatives to gather. So, thinking of having a vacation house? Home values typically increase. So you better ask your local real estate agent which areas have markets in which home prices experience surges. Buying a house is also seen by financial houses as a better investment than credit cards. This is one reason why there are many lenders that charge low-interest rates on home mortgages.
Are these reasons still not enough to convince you how good of an investment is owning a house? Another bonus benefit of owning a house is the local community attachment you're going to build.
You finally saved up an emergency fund and paid off your high interest credit cards. You need a place to live and you are tired of “throwing your money away” each month to your landlord. Your home purchase will make a great investment, right?
Do you want a home or do you want an investment? Do you seek security or freedom?
A Good Investment
A good investment is something that will pay you more than you paid for it. An asset is anything that puts money into your pocket. Does your personal residence put money into your pocket or take money out of your pocket? Rich Dad, Poor Dad examines why people consider owning a house as an asset, but by Kiyosaki’s definition, it is a liability.
Every month you have to pay the mortgage, insurance, property taxes. Even if the house is paid off you are still spending money maintaining the house and paying your taxes and insurance. The house is still taking money out of your pocket.
Your paid-off house might make your net worth look good but the equity is locked up in the home. It can if the purchase is timed just right, but most times it is not.
Imagine you financed your $100,000 home 30 years ago at a low 5% interest rate and today your home got appraised at $300,000! Wow, you got a total return of 200%! What a great investment, right? What about ongoing maintenance and repairs? That brings the grand total investment to $282,422.95. An Investment Property
So how is purchasing an investment property different? Your tenant makes those payments.
On our $100,000 home example, you put down $20,000, and then for the next 30 years the tenant’s rent check covered the mortgage, taxes, insurance, repairs, and upgrades. You increased your rent to stay ahead of inflation and property tax increases each year.
Your $300,000 home is now a 1,400% return or 9.4% annual return based on the $20,000 you paid towards the house. Assuming you invested in a good cash flowing home, your tenant gives you more each month than what it takes to own the home. You are leveraging someone else’s time and money and now that same home is an asset.
But…Where Will I Live?
But you still need to live somewhere! Sometimes it just makes sense to live in a rental. In that case you can still live in your perfect home, just as a renter. It might sound like I am against home ownership; I am not. Homes provide lots of intangible benefits. The pride of home ownership is a real thing. Dr. Donald Haurin, economics professor at Ohio State University, published a research study showing that “for children living in owned homes rather than rental units, math achievement scores are up to 9 percent higher, reading achievement is up to 7 percent higher and behavioral problems are 1 to 3 percent lower. Homes can be a great purchase; just don’t tell yourself that your home is an investment. Math, specifically the opportunity cost of your down payment, says to invest in a rental property and not your personal residence every time.
Some personal finance gurus like Dave Ramsey advise you to buy your personal residence and pay it off as fast as you can. Paying down your mortgage might preserve wealth but it will not create wealth. People say home ownership is an excellent path to build wealth. I would change that to say rental property ownership is an excellent path to build wealth.
Ramsey has valid points though. If you have extra money each month and are trying to decide between paying off your mortgage and buying a new expensive car, please pay your mortgage. But if the decision is between paying off your mortgage and investing your money in the stock market or in a new investment property, I would disagree with Ramsey and tell you to invest first.
Retirement Income
No one can retire on paying off a mortgage alone — you need to create monthly retirement income to replace your current job income. Try not paying your property taxes and see who really owns your paid off house.
Retirement income might come from traditional places like social security, annuities or pensions. Or retirement income might come from investments like dividends, IRA withdrawals or rental properties.
Since all three options involve initially living in the home, the interest rate on the mortgage will be lower than the interest rate you would get on an investment property.
Option One – Buy your home, live in it for a few years and then when you move out, you rent it and buy your next home.
Option Two – Buy your home and rent out the extra rooms to your friends so that they cover all your monthly expenses.
Option Three – Buy a small multi-family property (Duplex or Triplex), live in one unit while renting out the other units. If you want to read more about purchasing a multi-family property I recommend reading “Real Estate in your Twenties”
You need to look at your reasons for buying or renting a home against your short and long term financial goals.
Perhaps, yes, if its your choice.
Homes can be turned into rental properties. With necessary adjustments and with proper leasing or rental documents, you can turn your house into an additional income stream. What's even good is rental fees tend to increase on regular intervals. Depending on a home's location, it can also be a perfect vacation house. Typically, families, especially those with children, and those which embrace the concept of extended families - do love to have vacation houses. During specific periods of the year, the house can serve as a reunion spot for relatives to gather. So, thinking of having a vacation house? Home values typically increase. So you better ask your local real estate agent which areas have markets in which home prices experience surges. Buying a house is also seen by financial houses as a better investment than credit cards. This is one reason why there are many lenders that charge low-interest rates on home mortgages.
Are these reasons still not enough to convince you how good of an investment is owning a house? Another bonus benefit of owning a house is the local community attachment you're going to build.
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Minggu, 23 April 2017
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