Your Home May be the Perfect Rental – Timing is Everything.
by Evan Vanderwey on 28/07/10 at 6:48 pm
I’ve talked with a number of my clients about the following four realities. Many have taken action based on these.
Real Estate is on sale like never before.
You know this already. Most people won’t take advantage of these prices because they can’t see what’s happening around them through the haze of the negative news media and the scare of some impending global gloom and doom. Be that as it may, the fact remains that you could buy your next home, a move up in your own market, for a more favorable price than at any other time in the last 10 to 15 years in most of the country.
Rates are very favorable.
Rates today are very low, at an average of around 4.25% (15 year) or 4.75% (30 year) as of this writing. Even if rates hits 7% in the next 24 months, that is still historically very low. The biggest determinant of making money in real estate is NOT the interest rate you get on the mortgage, but it never hurts if you get a low one. The government has made it artificially beneficial for home buyers to make a killing in this market. Artificial, that is, unless you actually lock in one of these low rates for yourself! If you do that, then the benefit becomes very real for you. In the face of potentially rising future rates and home prices, you can set your fixed-loan terms today and hold onto them long into the future.
Renters are plentiful.
I’ve asked more than a dozen clients to take what I call the “Craig’s List Challenge.” Take a picture of your own home and put in on Craig’s List “For Rent.” Choose a payment that is a little more than your mortgage payment(s) and list only your email address as a way of taking requests. Do this only if you are actually considering renting out your home. I bet you have no less than five requests inside of a few days.
The point of this exercise is to show you that you have options other than selling your home. Because of the tightening lending standards today, many good people are just a year or two from getting qualified to buy their own home. They can rent from you while they work on their finances. They might even buy your home from you in the end saving you even more money.
But I’m not the Landlord type.
Now may be just the time to join the growing crowd of landlords who are not the landlord type. I’ve never heard one rental-home owner say, “I always wanted to be a landlord when I grew up.” They generally have other motives.
Let me runs some motivational numbers for you. Let’s say you purchase a nice home for $100,000 at a deep discount from a bank or on a short sale. You finance it using a 15-year fixed-rate mortgage at better than 5%, and with taxes and insurance your payment is just over $1000 per month. Then you rent it to a family with kids who will take very good care of it for $1100 per month. You have to spend $2000 per year for maintenance and miscellaneous expenses, but for the most part this is running at a break-even for you.
15 years from now your rental is paid for and generating $1500 per month in rent (assuming normal inflation). After taxes, insurance and maintenance, you are netting $12,000 per year.
Using very little of your own money, and taking advantage of ideal market conditions, you’ve created a long-term passive income stream for you and your family.
Now, lets add up all four of the above realities.
An even easier way to buy a rental home is to turn your home into a rental and purchase another home for yourself. This kills two birds with one stone. You were planning on “moving up” by now anyway, and you get to make/keep a great investment (your home) in the mean time.
What are you waiting for? The timing may be perfect.
