Why you Should Purchase at Least One Real Estate Investment Property While you are Still Working your 9-to-5
Admittedly, we do not have a real estate investment property. We prioritized our time with our kids being toddlers to start traveling ahead of purchasing real estate. We intend to return to it once our kids are a little more manageable. If we had known about all these tips we are sharing with you sooner, we definitely would have secured an investment property before we left our 9-to-5s. Ah, hindsight is 20/20.
If you can get yourself even just one property to rent out long, mid or short term, there are great tax advantages especially if your individual brokerage investments are in a high income strategy. We still toy around with getting a DSCR (debt-service coverage ratio) loan for an investment property (borrow based on the rental income of the property) or another non-traditional loan to secure a 2nd property, but so far we haven’t personally pulled the trigger - so we are definitely no experts here.
However, we have met some really brilliant mortgage brokers over our journey of buying and selling our primary homes. AND through our financial education courses, when needed, we’ve been able to question traditional lenders and search for other options. Along the way, we’ve met some brilliant folks with great DSCR options as well as those who can provide non-traditional loans based on your dividend income (even if you don’t show more than 2 years of consistent dividend income on your tax returns!), so please let us know if you need any recommendations!
An important analysis we’d like to share through our research on this topic is a simple rate of return calculation on a property. So, even if you find a property that shows negative (i.e. the mortgage is more expensive than the rent you could receive), you may still find it’s a good overall return. Only if it is an investment property, you can just consider the money you are personally putting into the home (above the renters payment) as a means to diversifying your portfolio; just moving it from one investment pot to another with a different return and liquidity.
As an example - say you want to purchase an investment property for $250,000. The standard down payment for an investment property is 20-25% so you’ll need to put $50,000 in as down payment (be sure you use margin for this!). Also, assume taxes are $2,500 annually, your interest rate is 6%, home insurance is $900 annually and therefore your mortgage is $1,482. In this area, based on the size of the home, you can only expect to collect $1,200/month in rent. That means you are putting $282 into the property monthly. But here is the return analysis:
First, total your Gross Earnings = Appreciation + Rent + Principle = $27,659
Yearly appreciation is $10,000 (4% is the average real estate market return)
The principle paid on your mortgage (using year 2) is $3,259
Yearly rent collected is $14,400
Then, total your Expenses = $1,482 (mortgage) x 12 = $17,784
For simplicity, we are just assuming your total expenses is your mortgage payment only but it is important to consider other expenses that you’d incur based on the property.
So, your Net Earnings = Gross Earnings - Expenses = $9,875
Expected Return = Net Earnings / Money into Property = $9,875/$50,000 = 19.75%
Again, for simplicity, we aren’t including closing costs, furniture expenses, etc. which is important to consider for the amount of money you put into the property.
With all that, 19.75% might be pretty good return worth considering, depending on your overall portfolio...
For more, see our 10 practical tips to implement while working your 9-to-5 to realize the dream of early retirement.
Do you have at least one investment property?!
FINANCIAL DISCLAIMER
Do your own research! We are not providing nor are we intending to provide any sort of financial, tax or legal advice. This article simply includes practical tips that we’ve compiled based on our independent analysis, implementation, and realization of the results - which changed our lives. Everything is of course, subject to market fluctuation. Please always be informed and consult your professionals prior to making changes.
