Saturday, June 13, 2009

My biggest and best money-earning tip

A lot of frugal blogs, including this one, focus on all of the small ways to earn and save money. Most of the time, that's our best way to do it and for a lot of people it's the only way

But my biggest money-earning tip is this one: invest in real estate. Beg, borrow, steal - just get yourself in real estate. Think this is a bad time? It's not. There is no bad time, even when prices are sky-high. But right now when interest rates are low and housing prices are down is the best time in 10 years.

The easiest first step is to buy your own home. When you're buying a personal residence, you qualify for lower interest rates and down payments, and often there are subsidies for first-time buyers. Interest rates are going up right now but they're still very low, historically, and there many people can still qualify for mortgages. Fair mortgages that they can afford.

We have been very lucky in this area, and we've also worked hard. Stewart bought the home we live in before we started dating and I moved in here in 2003. He had the foresight to anticipate what this neighborhood was capable of and the house now has plenty of equity in it.

In 2003 we tapped that equity with an equity line and used it as the down payment to buy a house right across the street - we refinished it and now rent it to a great group of "kids" (they're in their 20's but seem like kids to me!) In 2003 they were still giving out equity lines on investment properties, so we got one and used that as the down payment on another investment property a mile away. We happily rent it to another great set of "kids."

My rule of thumb, based on the reading and research I've done on real-estate investing, is that I need to be able to charge in rent my total expenses plus 25%: so if my total expenses are $2,000, I need to be able to charge around $2,400 in rents. We do this and more on the two properties that we already own.

Each month I am able to pay the mortgages plus an extra 10% to help pay the mortgage off sooner. I'm also able to send about $1,000 to the equity lines to help bring those balances down. The balances are coming down slowly, but they're coming down. If there is a repair needed I break even that month, but I never go into the red. In about 13 years the equity lines will be paid off and in about 20 the mortgages will be paid. We will own those two homes free-and-clear and someone else will have paid every cent of it.

We intended to buy another but prices went up past the point I was comfortable with. There was no way to even pay expenses, let alone allow for any overage to protect us when the house needs repairs. So we waited, and waited, and waited.

About 8 months ago I decided to test the waters and started looking at properties online. It looked promising, so we found a new agent and I started looking. A month ago I did a blitz-weekend of property hunting and found 8 that looked like they might work. I ran the numbers, analyzed everything, and Stewart and I picked the two most promising out of the bunch. Went back for one more look and put an offer in that very day; we found out the next day that we got the house we bid on. We're currently under contract and on July 17th, it will be ours.

It's the crown jewel of our "portfolio." Two units - a four bedroom upstairs and a separately-metered two-bedroom downstairs. New kitchens, new bathrooms, new carpets, refinished hardwood floors. Central air, front porch, back deck, four parking spaces in the back. Plus it's one block from the Metro, four from Safeway, and about 8 from the new development in Columbia Heights. It's a gem.

Original woodwork:

Master suite:

Main unit kitchen:

Front porch:

Main floor:

We were able to use the balances on the two equity lines to put down the down payment. We did have to increase the equity line on our primary residence to do it, but we made it by a hair.

The market will fluctuate, housing prices will fluctuate - just buy a good house with good features in a good location and a good price. If you know that, no matter what, you can pay the mortgage with the rent you take in then it's worth doing. In 30 years the house will be paid off on someone else's dime. If the house is worth more, that's icing on the cake. If it's worth less, drat. Doesn't matter - you didn't buy it. It's a free house, and that's worth a whole heck of a lot.

For reading, I really recommend anything by Robert Shemin. His focus is on making money by being a good guy - a good landlord, an honest person who treats tenants well. I've implemented many of his techniques and have had a wonderful 6 years as a landlord.

I'm happy to answer any questions you have about this kind of investing. It's worth it, I promise!

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