Real Estate Investing – Liability to Asset
Various Investment Information
Here is my strategy for moving into August:
- Reduce mortgage payment through one of two methods: 1) sell home 2) rent out rooms 3) rent whole property 4) lease option
- Invest Day trading money into diversified high yielding dividend stocks
As far as the mortgage goes I cannot refinance thanks to the housing market plummeting and wiping out all the equity I purchased when I bought the place. (~5k equity on a zero down purchase is now non existant). Selling the home is unrealistic as the market is still dropping. This leaves me the one option of renting out the house either in total or on a room by room basis.
Considering that 1200 of my payment is interest, I can use that as a deductible on my taxes. Meaning, I will get 400 back for every month I make payments. So my real liability is 1200 per month NOT 1600. 200 of the payment goes to principle so I get that money back when the place is sold. So my real liability is for 1000. Living in my home I would have to rent each of the remaining bedrooms for 500 a piece to break even.
The other rental option is to rent out the entire home. However, the going rate for a 3/2 in my area is about 1100 per month. Not living there means I would shift my tax benefit to depreciation instead of write off. Depreciation equals roughly 1% of the home’s value every year. In my case that would be 1900/12, or 158 per month. So renting out the place would cover 1260 out of the 1600. Clearly breaking even is far more desirable than having a 340 negative cash flow.
The third option is to buy a second multifamily property AND rent out my current home. If I purchase a quadraplex for 300000 with ~15% down, then my payments would be around 1700 (similar to my current home). Assuming I rent out three units and live in the fourth as my new primary residence, I will gain 500 per unit and be able to claim write off for the interest. Let’s use the lowball estimate from my current home. That means I will have a difference of 1700-1500-400 = 200 positive cash flow at the end of year (not to mention principal being paid down). This leaves me with an overall 200-340 = -140/month negative cash flow.
Negative cash flow has a pretty negative connotation, but look at it like this: if I were to rent an apartment I would be paying close to 500/month in pure negative cash flow. The net result of this -140 cash flow equates to my cost to live in a unit inside my quad. 140$ in rent is a pretty good price if you ask me.
Looks like I have my goal for turning around my house being a liability! Time to find me a quad ASAP!
Well not so fast. I do not really want to landlord these places unless I have to, so lets look at management fees. The average in my area is a 10% off the top fee. So we take the 1100 + 1500 = 2600 and add 10% of that to my negative cash flow for a grand total of -400$ liquid cash each month. Thats still 100 cheaper than renting and 400 cheaper than just flat paying for my current place.
Yeah, time to start looking more seriously.
But what about a lease option? Admittedly this is one I know the least about. If memory serves correctly, a lease option behaves like this: buyer moves in under contract to lease the property for a defined amount of time, once that time expires they have the option to buy for the signed price minus payments made during lease.
Considering the market, this sounds like a helluva option. I could lease out my property for the TOTAL payment amount (including HOA) and have one of two outcomes: the leaser purchases the property for what they sign (no less than what I paid), or they let the lease expire (they made full payments for me in the mean time). This sounds VERY appealing.
Now for the investing. Until I can find a good quad to purchase, I need to find a high yield location for my cash. My target would be a 10% yield stock with no change to positive average quarterly gains. Considering the economy, this may be too risky as it would take my entire investment amount to pay for the down on a new property. Guess I better make some calls before I look at throwing money on the market.
Tags: beginner investing, Beginner Stock Market Investing, Passive Income, real estate investing