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So youhave the older generation who bought homes in their 20’s andput down some serious roots. Did your parents or grandparents lived in the same place for decades? Mine too!
Then you have the new generation who can’t stay in one place long enough to buy a home. Renting an apartment means freedom! You can move every couple years (months if you’re really a free spirit!), and you don’t have to be tied to an address. There are just so many places to see and experience, why commit to just one?!
I have the solution to this old-gen/new-gen argument thatwill give you the best of both worlds! And I know this solutionworks because I’ve done it. Twice.
The solution? Buy rental properties.
Wait, don’t leave; hear me out!You might be like the majority of the girls in their 20’s and 30’s that I talk to. Theythinkbuying real estate is reserved for someone else (ahem, rich old white guys), so they don’t even consider this very doable path to serious wealth.This is a huge mistake! Keep an open mind, and please read on for my Three Reasons You Should Buy Real Estate (even if you don’t want to own your own home). 🙂
Reason #1: You have a place to retire (or a place to sell so you can buy a place to retire!)
Do you really want to be paying rent forever? Can you even afford to?
Try to image life after retirement. I know it’s forever away, but try. Once you retire, you’re on a fixed-income, living off your retirement savings and, fingers-crossed, a little social security money. As you know, rent tends to go up year-after-year. Your income after retirement doesn’t. How much would it suck to have to move to a crappier place when you’re 80 because you can’t afford the latest rent increase?!
That’s why you want to own a place when you retire. Preferably a place that’s totally paid off so you’re not even making a mortgage payment.
What if you want to retire abroad? Cool! Sell your place so you can pay cash for your new place abroad and still live rent-free and debt-free!
Want to spend your retirement living in an RV and seeing the world? You got it! Sell your place to buy your RV and buy gas for years of adventure!
Your retirement may be decades away, and live for today, or whatever, but failing to own real estate at retirement will be a giant regret for our generation.
Reason #2: You can growyour net worth faster and higher
You know how you can drink threeglasses of wine and be fine, but one shot of …well, anything… reallystarts the party? Real estate is that shot that takes your net worthto the next level.
What is net worth? It’s basically everything you own minus all your debt. Like if you suddenly had to cash out all your bank accounts, sell all your possessions, and pay all your debts, how much money would you have left?
If you’re fresh out of school, you probably have a negative net worth. Your $2,000 in savings plusyour $1,500 worth of IKEA furniture do not cover your $70,000 student loans. That’s ok; we all start there-ish. I started at -$47,587 in 2007. Totally normal!
Let me explainhow real estate grows your net worth faster than other investments. Unlike most investments, with real estate you don’t have to pay for the whole thing upfront. You get to invest just a small percentage of the total cost of the house and use “good debt” to cover the rest. Good debt just means that you’re using the debt to buy an asset, not a liability. We’ve got a couple posts for more info on using good debt. Check outThe Rich Get Richer: How to be One of Them and 4 Ways to Use Smart Debt to Improve Your Life.
Example: You put down $20,000 to buy a $200,000 house (btw, there are ways to put down even less than 10%. Please leave a comment if you want to learn more about that!). Congrats, you now have an asset worth $200,000! Of course you also have debt of $180,000.
But here’s the cool thing: real estate values typically trend up, increasing in all but the worst of years. And at the same time, you’re paying the loan down. So before you know it, you’re asset might be worth $230,000 because of market increases, and your debt is down to $140,000 because you’ve been making your mortgage payments! Boom, you’ve just added $90,000 to your net worth! Sure beats paying rent!
Reason #3: You’re making money in fourdifferent ways on rental properties!
Sound too good to be true? I thought so. Until I read Gary Keller’s Millionaire Real Estate Investor. He showed me the four different ways to make money on each property.Let’s list ’em:
#1: Appreciation
This is the fancy way of saying that the value of your real estate typically increases year-over-year. You hear stories of people who bought a house in LA in the 1970’s for $40,000, and it’s now worth $1,500,000. That’s appreciation in action.
But what about the real estate crash of 2008? Can that happen again? Well, technically, yeah. Never say never, right?But we all learned a valuable lesson from that experience, and mortgage lenders have made serious policy changes to avoid another crash.
But it’s an understandable concern. And you should know, going in, thatreal estate is cyclical; it goes up and then down, and then up again, and then down again. But on the whole, the up years are far more common than the down years, and the overall ups are higher than the downs are low. So when you wait out the down markets (ie, don’t panic and sell when the market drops), you’ll come out ahead.
#2: Renters are paying down your debt
If there’s anything better than paying off debt, it’s having someone else do it for you! Under the right conditions (which are the only conditions under which you should invest in a rental property!), your tenants are paying rent that completely covers your mortgage payment. They are paying off your debt for you!
#3: Renters are also putting money in your pocket
Don’t just settle for having your tenant’s rent payment cover your mortgage. It should also cover your property insurance, and your property taxes, and then some, so you get to actually pocket money every month! Of course by “pocket”, I mean save and invest 😉
Real-life example: J and I have a house in LA. Our monthly mortgage payment is $1,716.37, and our monthly tax and insurance payment is $564.34, so we pay a total of $2,280.71/month.We charge $3,100/month in rent (which is actually a little low for the area, but we have really goodrenters we want to keep, so we haven’t increased their rent as much as the market is increasing). Ta-da! $819.29 of passive income in our pocket every month!
#4: Tax breaks
The US government decided a long time ago that home-ownership was a good thing for the economy. So they wrote tax breaks for homeowners into the tax code. Your rental-property related expenses likeinterest, taxes, insurance (btw, those three items are included in your total mortgage and escrow payment, so they aren’t coming out of your pocket, they’re coming out of your renter’s pocket), repairs, maintenance, and real estate agent fees are tax-deductible.
Let’s say you spent $10,000 on expenses this year (very possible, because again, some of these expenses are built into the mortgage and escrow payment covered by the rent). If you’re in the 25% tax bracket, you just saved $2,500 in taxes this year! Think of all the great things you could do with an extra $2,500/year!
Recap
This generation is different from the last one. We are more interested in mobility than in establishing roots. We’re seeking more adventure and less comfort. We’re looking for more flexibility and less routine. I have had 14different addresses inthe last 15 years, and I love it! But all this fluidity has led to a generation of renters, not buyers.
The previous generation was smart to invest in real estate, and we’d be smart to follow their example. Even if we don’t plan to stayin that real estate.
There’s no denying the benefits of owning property, especially rental property. Yourtenants pay off your debt and put money in your pocket. Plus the value of your real estate appreciates. PLUS you get tax breaks. PLUS you’ll have a rent-free, debt-free place for your retirement!
Don’t be full of regret at retirement! Start investing in real estate even if you don’t want to own your home.
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