This is not your typical real estate investing post. I’m 37 years old and have owned 4 (primary residence) homes over the last 12 years. One thing I can tell you from experience is that it’s not always the best strategy if you are trying to build wealth.
Let me explain…
The first was a townhome in what my wife and I thought was a nice area of town. Turns out it wasn’t so nice and we ended up selling it a year later for a loss. This doesn’t count the closing costs and down payment we were out when we first purchased the place. I’ll never forget the confused attorney’s face when we (the sellers) had to hand a check over at closing instead of the other way around. It was a sub-optimal experience for sure.
The second was a small single family ranch home that we built in a new neighborhood. We were actually the second home in the entire development. Turns out that many of the houses built after ours didn’t sell as quickly as developers had hoped (thanks recession), so they became rentals for government assistance programs. The neighbors that moved in failed to keep their properties up, prices fell further, and we decided we were ready to move to the other end of town. We couldn’t sell, so decided to keep the home as a rental. This brought in enough to make the payment each month, but not enough to cover any repairs or other issues that popped up.
Our 3rd home was nice, the neighbors were great, but it was never really the dream home. We bought it because we knew the builder and he was willing to work with us. We were in such a hurry to move from our previous neighborhood that we didn’t even check the school situation (another lesson learned…)
Thinking we finally learned our lesson we recently moved to a fourth home in a neighborhood that appeared to have everything we wanted (we had a list of things by now). Rather than buying immediately, we decided to rent first this time around. After a year of “trialing,” we decided to make the home ours and made an offer. The difference being that this time we decided to buy after getting to know the neighbors, market, schools, and ins and outs of the home.
I tell this story because over the last dozen or so years we have thrown away thousands (and thousands!) of dollars in closing costs, commissions, taxes, insurance, maintenance and more just because we’ve always been told that buying is better than renting. I now know that this isn’t necessarily the case, and have changed my thinking. Hopefully my new way of thinking can help you too.
Below is what I wished I’d known in my 20’s…
Don’t rush to buy a home
Renting for a couple of years is almost always more cost effective than buying a home, then selling it to upgrade shortly after. The exception being if you are buying a fixer upper and know you can add value, or you plan to rent it out and continue to build equity after buying a new place. Do not assume that the value will just go up if you buy. It doesn’t always work this way and even if it does it will not likely make up for your closing, maintenance, and other costs.
Multi-family properties are great starter homes
The term house hacking basically means renting out enough of your property so that you live for free. You can rent out rooms in single-family properties, but it comes at the expense of your privacy. A better plan is to buy something like a duplex and make sure you earn enough in rent from one side to cover the entire mortgage payment. This means you build equity while living for free. The downside is that you may have some additional maintenance to attend to, but that’s all part of home ownership so you might as well get used to it.
Upgrade and invest
This is the important part. When you’re young, your income will likely increase over time. Sometimes quickly. Most people use that income to buy more and better things. I want to encourage you to do the same, but buy more and better things that increase in value over time instead of decrease. A good example is upgrading to a nice single family home, but keep the duplex and rent out the other side. Now you’ll have a nice cash flow in addition to a new home. And after being in your single family home for a while, you may decide later to upgrade again.
While it took me a few properties to figure this out, we’re now in a nice home, in a nice neighborhood that we enjoy, and have 4 rental properties that we manage. The cash flow ends up being enough to cover our current mortgage, but we generally choose to continue saving it for any repairs needed or to buy another home. Ideally we’d like to add at least one new property each year.
The End Goal
I view the properties we manage as a wealth building tool for later on in life. Because we reinvest all of the cash flow I don’t see much out of it now (aside from the thrill of buying and fixing up a place and the occasional call from a tenant with a problem). My goal is to continue investing in a new property each year. I put each one on a 20-year note. This means in 20 years I will own properties that have increased in value, have little to no mortgage payment, and are still providing a cash flow that will increase based on inflation. This is all of course in addition to any “normal” retirement savings through IRAs or 401Ks. Ideally I’ll be able to accumulate enough properties so that the cash flow will equal or exceed my monthly income from my day job one day.
It’s still early though… I’ll need to accumulate many more properties before I’m there.
If I only started when I was in my 20’s…
Jess says
I like it, I’m 35 also and its nice to see an article with someone in the process of building wealth instead of, look at what I’ve done over the past 10 years and now I’m worth $5 million.
Thanks for sharing.