by Patrick St.Cin
Property investments potentially have excellent returns and can diversify your portfolio to insulate you from recessions and other adverse economic conditions. There’s no single right answer on the best way to invest in real estate. Are you getting started in Real Estate Investing and wonder how to live in your investment property?
Tip 1: House Hacking
This can mean a few different things. House hacking is essentially a hybrid of buying a home to use as a primary residence and buying a rental property. In general, the term refers to buying a residential property with two to four units or with a Granny Flat/Additional Dwelling Unit in the backyard and living in one of the units while renting the others out. In theory, if you have the money you could purchase an entire duplex or four-plex and rent out any apartment to tenants. Keep your expenses low so you can keep rent affordable to entice prospective tenants. You also could purchase property that you live in while renting out other rooms in the property.
Either way, you’re the landlord. Be a good one, and you’ll be in a much better position to succeed in this investment. Keep the property in great condition, be readily available to your tenants when needed, and if necessary hire someone who can help with repairs.
Let’s say you find a quadruplex (four units) for $200,000. Including taxes and insurance, we’ll say your mortgage payment is $1,500 per month. After you buy the property, you rent out three of the units for $600 each and live in the fourth. Not only do you live for free (the rent covers your entire mortgage payment), but you’re generating a positive cash flow of $300 per month and are building equity in a more valuable property than if you had bought one unit to live in.
House hacking can be an excellent low-cost way to start building a portfolio of rental properties. Because you live in the property, even a multi-unit residential property can qualify for primary residence financing, which comes with lower interest rates and lower down payment requirements than investment property loans. You’re typically required to live in the property for a certain amount of time after you buy it, but once that period expires (usually a year or two), you’re free to repeat the process with another multi-unit property.
The obvious downside is privacy. There’s value in having your own yard, and it can create some awkward situations when you live in the same building as your tenants. Even so, if you’re a new real estate investor and don’t really need your own house, you may want to consider house hacking. This isn’t as much of an investment strategy as it is a side hustle, but it’s still worth mentioning here. With the emergence of platforms like Airbnb, it’s easier than ever to rent out your home when you aren’t around or to rent out a spare room in your home for a few days here and there.
Tip 2: Tax-Free 2 Weeks Income
One interesting aspect of this strategy is that if you rent out your home for fewer than 14 days in a year, you don’t pay tax on the money you collect. If you go out of town for the holidays or take a summer vacation, using your home as an occasional short-term rental can offset your travel expenses with tax-free income.
Landlord Tax benefits:
- The mortgage interest deduction for the mortgage interest you pay to buy and/or fix up your properties.
- Deductions: insurance premiums, repairs, utilities (that are not paid for by the tenants)
- Depreciation: You are allowed an annual deduction for the wear and tear your property experiences over time, spread out over 27.5 years for residential properties. Land cannot be depreciated.
Living with Tenants is Too Much – What is a Traditional Landlord?
Owning rental properties is an excellent way to invest in real estate while building wealth and generating income. The return potential is strong thanks to a combination of income, equity appreciation, and the easy use of leverage when buying real estate.
However, owning rental properties isn’t right for everyone, so consider these drawbacks before you start looking:
- Cost barriers: It can be very expensive to buy your first rental property. Most lenders want at least 25% down for an investment property loan and it’s smart to keep several months’ worth of expenses in reserves.
- Uncertainty: When it comes to rental properties, vacancies happen and things break. While the overall return potential can be great, rental properties have considerable short-term risk.
- Time commitment: Even if you hire a property management company, owning a rental can be a time-consuming form of real estate investing.
Tip 3: Vacation or Short-Term Rentals
A vacation rental tends to bring in more income per rented day than a comparable long-term rental property. However, there are some potential drawbacks to owning a vacation rental. Marketing and managing a vacation rental is more involved than a long-term rental. As such, property management is far more expensive — expect to pay a property manager about 25% of the rent on a vacation rental. That’s more than double the 10% industry standard for properties with long-term tenants. Furthermore, you may need a special license in your preferred locations, which can be very expensive.
On the positive side, you may be able to use the home when it isn’t occupied. It can also be significantly easier to finance a vacation rental, especially if it meets your lender’s definition of a second home and you don’t use the rental income to qualify. There are loans options available for short-term rental funding.
Always buy property for the best possible price. You want to buy those properties that offer specific challenges that match your personal talents so you can use your skills to upgrade and enhance the value of the property and increase the Net Operating Income over time. Obviously, the higher the rents and the lower your total monthly expenses, the greater your net income from the property will be. Costs that affect cash flow include principal & interest payments; property taxes; insurance; maintenance/repair costs.
Although we’re always quick to advise against borrowing too much and overleveraging your real estate investments, you also don’t want to be too conservative and underestimate your cash needs. The cost of refinancing is such that you may be able to refinance the property no more than once every several years, and if you suddenly need cash to overcome some unanticipated problems, the costs of short-term funds can be high. Borrow extra money or have an untapped line of credit available (which some lenders offer at no carrying cost to their best customers) to allow for reserves.
Joint ventures, wholesaling, fix-and-flip, and property management are just a few of the other ways investors can profit from real estate.
If you need funding, apply now. I am working online with the rest of you.
Patrick St. Cin
W – 512-213-2271