Monday, October 21, 2019 / by Jessica Nager
Real Estate Investing For Beginners: Make Your Home Your First Investment
First and foremost, the purchase of your first home should be treated as an investment. Making memories and growing a family are all great perks of home ownership, but If you don’t view your house as a financial investment, then you’re not ready to buy. There’s no other way you should be looking at it if you want to make a good financial decision.
Now that we have our groundwork established, let’s get to our 3 reasons why Gary and Grant got it wrong.
Reason #1: Buying A Home Doesn’t Necessarily Require A Large Capital Payment
Our gurus don’t believe in tying up capital in a large down payment, which is understandable. The facts are, though, that the days of having to put down 10-20% are long gone! Buyers in 2019 have more options today than they’ve ever had before.
There are a variety of ways you can minimize or eliminate tying up huge amounts of your cash, such as down payment assistance from the government via qualifying grants. FHA loans are another affordable option, only requiring 3.5% down and a minimum credit score of 620. If you’ve built up stellar credit, you can get a conventional loan that requires as little as 3% down.
In most cases, you can buy a house for 3-5% down (and in some cases, no money down), which isn’t an unreasonable amount of your capital to invest. 3% of a traditional house value is only about $7,000—a small price to pay when it comes to staking out a piece of home ownership. It’s pretty clear that Gary and Grant’s advice here doesn’t stand up to the facts.
Reason #2: Owning A Property Has Huge Tax Benefits Over Renting
When you write a rent check to your landlord every month, you usually hand it over and forget about it: your landlord, however, does not. To him, that check represents cash, and that cash does two things.
First, he’ll give the check to his mortgage company, and they’re going to apply some of that money towards his principal balance. This means that your money is slowly paying down his balance, allowing him to build up his equity.
Second, he’ll be able to write off all interest paid on the mortgage, as it’s 100% tax-deductible. For example: let’s say his income is $40,000 per year and he’s paid $6,000 in interest during the same time period. That means his taxable income will be dropped to $34,000 instead of $40,000, saving him some major cash in taxes.
Wouldn’t you rather reap the benefits of being the homeowner rather than just the renter?
Reason #3: You Can Leverage Your Primary Resident To Become One Of Your Most Valuable Assets
As we’ve covered, you should never buy your first property without viewing it as an investment—which means you need a few exit strategies. We call this “house hacking.” When people ask for my advice on how to get into real estate investment, my first question is always, do you own a primary residence? If not, there are a few strategies that can be employed.
1) Buy a property, fix it up, live in it for 2 years, and then sell it. If you live in a property for at least 2 years and then sell, the profits from the transaction will be 100% tax-free.
2) Buy a home, fix it up, then turn it into a long-term rental property. Make sure to buy in the right areas; you might need to sacrifice in location to take advantage of a long-term investment.
3) Buy a multi-unit property as your primary residence, living in one unit and renting out the others. While this is a big investment and not for the faint of heart, your tenants will cover your mortgage—and then some. This is how you build equity by leveraging other people’s money.
It’s easy to take what big businessmen and investors say as facts, especially when they’re plastered all over the internet, social media and the news. The next time you hear a controversial or shocking statement, be sure to take the time to investigate and search out the right advice so you can make an informed decision. While many of these larger-than-life personalities are well intentioned with the information they dispense, their advice can easily be taken out of context.
Do you have questions, or want to know what it takes to become a primary residence investor? Are you in need of a strategy to turn a home you already own into an investment property? Contact me today and let my team and I go to work for you!