Live in your Investment – How to Eliminate Life’s Biggest Expense

Investment Properties

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In my line of work I often see a lot of people headed for financial disaster and part of my responsibility is to help find ways to fix their situation so they have a better chance of achieving their retirement and other goals.  This usually starts with a review of their budget which means cutting the cable bill, skipping Starbucks, and generally adjusting goals and priorities.  But these are all small things. While it is smart to cut the frivolities that amount to useless spending and makes us no happier in the long run, to be the most effective in saving for your retirement or bettering your lifestyle is to cut the largest expense you will ever have in your life…your mortgage!

Obviously, the title of this article tells you this isn’t an article on refinancing.  The easiest way to remove your life’s number one expense and lifestyle killer is to buy a multi-family property (duplex, triplex, Quadraplex) and live in one of the units.  I have done this for the last two years and it has allowed me to do many things that I would not have been able to with the burden of a $1,200 monthly mortgage payment, such as realize my dream of working for myself and helping other people with their finances.  Imagine your life without a mortgage payment, and what this would allow you to do!

I cannot believe that more people don’t do this.  But as Fearless Men we pride ourselves on doing what other people do not. Below is the outline of how to do this yourself.

How to buy the Property

Area – Find an area that you want to live in.  Most of the time if you want to live in the area then other nice people like you will as well.

Mortgage – You can use FHA which still only requires 3.5% down, I personally used an FHA 203k loan, which allows you to include some of the initial repairs in the loan. Although I have heard these loan have become more expensive and stricter rules.  Some retail banks are offering loans with as little as 5% down payments again.  Keep in mind with a lower down payment you may be subject to mortgage insurance.

Realtor – Find a good Realtor, preferably one that has experience with rental property.  If you are in the Minnesota area, I know a good one.

Analyze – Make sure the numbers make sense.  Deferred maintenance can really hurt your plan. Make sure all of the large systems (roof, furnace, siding) are all in good shape and if not plan for their replacement.  Also, if you plan on holding your property as an investment when you move out make sure the numbers still make sense without you there.  The cost of a property manager can be expensive, usually charging 10% of the gross rents and 1-month’s rent to place a tenant.

Type of Property – I would recommend starting with a 2-4 unit property since you can get the most rent and therefore tend to cash flow better than a single family home. But if managing a multi-family property is too daunting or if you already own a Single Family Home you can still do this you just have to get creative.  Rent out a basement or even a bedroom.  Look at your layout and see if you can build a separate entrance and make it into a multi-unit property.  You can always take the space back over as your family grows of you need more room.  Make sure to check the zoning laws in your area before making large changes.

How to Landlord

Landlording can be scary but it is not that hard.  The top three tips I can give you are:

1. Screen the Prospective Tenant

2. Run a full background check on the Prospective Tenant

3. Check Previous Rental History, Verify Income, and Run a Criminal Background check on all prospective tenants.

Yes, I know these are all the same – that is the point. All of your problems will come from putting a bad tenant in your property.  I use a service for this which costs $50 per adult.  This should be paid by the prospective tenant.

My worst tenant had over $1 million per year in income (she was a member of a Native American tribe that owned a very successful casino).  She showed me her pay stubs and I was sold.  I did not run a background check and I regret it. I had to kick her out early after she caused considerable damage to the unit.  But, this is a story for another day. The bottom line is run a background check.

From personal experience landlording is easier when you live in the unit. The tenants behave better when they know the landlord is on premise.  Also, being an on-site owner means you don’t have to drive to the property to make repairs.

Run your property like a business, use a proper lease, keep a separate checking account, and track your expenses.  Consider purchasing a $1MM umbrella policy to protect from liability – this is surprisingly affordable.

The best resource I can give you on all things real estate is the online forum Biggerpockets.com.  It is an active community of Real Estate investors sharing knowledge and answering questions from other investors and wannabes.  You would do well to spend a few days reading through the message board on landlording.

The numbers on my Property

This wouldn’t be much of a blog post if I just told you I was doing this without sharing some of the details.  Here are the numbers on my investment.

Purchase Price – Around $135,000 w/ 203k rehab adding $17,000 for a total purchase cost of $152,000

Rent Roll (There are four 2 bed 1 bath units)

Unit 1: $799

Unit 2: $799

Unit 3: $700 – Rented to a family member so they receive a discount. This unit could rent for about $900 because it has additional square footage in a finished attic space.

Unit 4: $0 – This is my unit.  I fixed this one up a little nicer to accommodate the discerning tastes of my lovely wife so I think I could rent this out for $900-$950 once we are gone.

Total Rent = $2,298, once I leave I should be able to get over $3,000/month.

Monthly Mortgage – Interest, Principal, Insurance, PMI (remember I used a FHA loan) – Just over $1,200/month

Please keep in mind when doing your own calculations that cash flow is NOT equal Rent minus your Mortgage payment.  Over time about 50% of your rent will go to expenses like repairs, replacements, utilities, vacancy, etc.  You need to make sure you save for these expenses.

It’s Good to Have Land


Now, sit back and sip your sweet tea because, “It’s Good to Have Land.”

While Stewie is right, owning a rental property requires work.  But come on, you knew that already.  There is no such thing as a free lunch. While there are repairs and maintenance with any house having more units means more maintenance.  Four units means 4 refrigerators, 4 Furnaces, etc.  It would be wise to learn some general home maintenance skills as hiring out repairs can be costly.

Over time, you may get used to not having a large chunk of money going out the door every month, but what do you do with all that extra cash.  Well, now what kind of financial planner would I be if I didn’t tell you to save it, invest it or use it to pay down debt.  Whatever you do have a plan.  A plan for surprise expenses, a plan for your extra cash flow, a plan for after you move out.

“Landlords grow rich in their sleep without working, risking or economising.”

-John Stuart Mill, English philosopher and economist 

BIO: Phillip Christenson is a Chartered Financial Analyst (CFA) and owner of an Independent Fee-Only Financial Planning Company in Minnesota, Phillip James Financial. He also authors a blog on his website devoted to personal finance and investments. He can be reached at phil@phillipjamesfinancial.com or by calling 763-639-2175.

Comments

  1. I currently rent out my townhouse and live in my wife’s house. I always wanted to get into rental real estate and if I had to do it all over again, I would have bought a duplex and rented out the other side. My Dad tried to convince me to do this, but I was stubborn and knew better ha!

    • It’s never too late to get started. You already have experience as a landlord so you are are much better off then most. Since the market has turned around a bit you might be able to sell the townhouse and buy more units, a duplex or triplex. I never liked Townhome/Condo associations – you can’t control what they do.

      Any chance you can convince your wife to move to a multifamily property? It’s a tough sell so you have to make her see the long-term benefits – more spendable income, secure retirement.

  2. Thanks for this post! I have been the renter many times. One of my financial goals for the future is to become a landlord and have rental properties.

  3. I have never thought about living in a multi family home but it makes absolute perfect sense. Thanks for bringing it to my attention. Although in my area multi family units are hard to come by.

    • In Minnesota, the (affordable) multifamily properties are in the cities (Saint Paul and Minneapolis). You can find them in the suburbs every now and then but they are so expensive that they do not make good investments once you are not living there. For our next move my wife wants a newer single family home so in order to keep the rents coming I have thought about building a new multifamily. I think I can convince her.

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