I wrote my first blog post ever on how most homes are not an investment. I argued that they are, in fact, a liability because of the negative cash flow. (YOU PAY CASH TO STAY IN THE HOME, THE HOME DOESN’T PAY YOU!).
I got A LOT of feedback on that article so I thought I would revisit the topic of investment real estate and why your personal residence is really not an investment at all.
An investment pays you dividends, when was the last time your bank transferred money INTO your checking account because you had a mortgage? Literally never.
If there was a tenant living in the basement and you we're receiving rent checks on the first of every month, that is a whole different story. Your asset (real estate) would be producing cash (dividends). If you own something that doesn't produce cash, I don't call it an investment.
It may well be a good deal, like buying a home at a low price, but it is still an expense when it comes down to it. You have to shell out the money every month for the mortgage, taxes, insurance, utilities, maintenance, etc, etc..
By the end of your time in the home, when you're ready to sell, the cost of staying there will eat away at your profits. You will NEVER see that bank interest or insurance payment again, the money is gone forever. Not to mention the burden of inflation eating away at your investment every year.
One way that you can mitigate these losses, and even turn them into an investment, is by using a tactic called “House Hacking”.
It sounds sketchy, but all house hacking does is turn your liability of a home into an asset!
One simple example of the house hack is by purchasing a duplex or other multi family property where you can live in one unit and rent the others. The cash flow (rent) will offset or completely cover the mortgage and expenses from the whole property. Other people will be paying for the mortgage interest, insurance, taxes, and all of the associated costs of real estate ownership.
The best part is, if you ever decide to move out and buy your own liability, (read: a single family home) the property will now have one more rent paying tenant. This increased cash coming in every month will not only pay for the cost of owning the property, but it may even cover the cost of your personal residence!
If you're really interested in this concept, I recommend checking out a government backed mortgage loan called the FHA loan. It is for first time home buyers and is applicable for properties under 4 units. The specific requirements and details are different for each city so just google something along the lines of FHA MIAMI or talk to a licensed real estate agent. Broadly, if you have a solid income source and it is your first time buying a property you can purchase for about 3.5% down!*
House hacking is really cool and it gets especially juicy when you calculate the Return on Investment numbers. If you're interested in learning more about investment real estate I highly recommend checking out the Bigger Pockets YouTube channel, they have some great content. If you get stuck, just remember:
If it doesn't produce CASH every month, quarter, year, etc you have a liability not an asset!
If you thought this was helpful, terrible, or somewhere in the middle, please leave me feedback in the form of a Direct Message on instagram @MakeDollarsAndSense, or feel free to send me an e-mail/text to the information on my Home Page. I truly appreciate constructive criticism and opposing views, so bring em on!
*I am in no way recommending that you purchase a single family home that does not produce income with that much leverage/debt. I am saying that you CAN get your feet wet in INVESTMENT real estate for a surprisingly small amount of money if you use this FHA loan correctly. And it can bring in some crazy ROI numbers. DO NOT USE BORROWED MONEY TO BUY THINGS THAT YOU CAN'T AFFORD, AND ALWAYS PAY OFF ANY DEBTS AS FAST AS POSSIBLE TO MINIMIZE INTEREST.
P.S. New blog posts coming your way every Monday!
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