When it comes to residential property here is a bottom line rule of thumb: A home is a money pit that will cost you money in the way of the mortgage principal, interest, taxes and insurance. Add to this regular maintenance and repairs and after everything is said and done, the only investment value a home really offers is appreciation and that is speculative depending on where you live. Not all markets have rising values all the time and property values can be effected by plant closings, layoffs, etc. For all practical purposes, a residential property, a “home” does not fall in line with the true spirit of real estate investment, which is property the will cause income-producing “positive” cash flow. Indeed, single family residential property used as a residence has the reverse effect and causes outgoing cash flow…thus, the “money pit”.
The smartest way to invest in residential property and still generate some form of “positive cash flow” is to purchase a duplex, live in one side and rent the other. Many times the rent income coming in from the other side can nearly cover the mortgage payment of the entire property providing nearly free housing to the owner. The renters on the other side are not only paying your mortgage, they are helping you build equity in your property. This equity will also grow over time with appreciation, providing two sources of wealth building: one from cash flow pay-down of the mortgage and the other, property value increase through natural appreciation.
The money you would normally spend on a single family residential mortgage payment (PITI) can be saved, in whole or in part, as a down payment for the next duplex during the time you live in the property.
The name of the game is to buy a duplex, live in half, rent the other half out and save for the next duplex. When you have enough money, move out of the duplex, rent the unit and move into the next duplex and repeat the process by renting the other half out. In this way you would have 3 sources of income working for you: income from unit A and B in the first duplex and income from unit B in the second. Now you have real estate working for you and you are on your way to serious income producing cash flow.
The only downside to the project is you will have to live next to your tenant for a period of time. The upstroke is it gives you a taste of property management without biting off more than you can reasonably chew. Indeed, this very concept is how many real estate millionaires are birthed.
Not many people think about this angle when they are looking for a home and it is worth careful thought and serious consideration. You have two options: The money pit or income producing property. It’s a choice you will have to make.
To your success!
Copyright © 2006 James W. Hart, IV All Rights Reserved