7 ms·

My steps: 1. Buy a house in a place where it's normal for people for rent rooms or have roommates. 2. Rent out all of the rooms other than the one you live in

by tabeth 9y ago

My steps: 1. Buy a house in a place where it's normal for people for rent rooms or have roommates. 2. Rent out all of the rooms other than the one you live in. 3. Renovate the house, depreciating all expenses. 4. Make all necessary repairs, deducting all expenses. 5. Buy things like solar panels, which also can be depreciated (5 years) and improve the cost basis of your home. 6. When the house is paid off from rental income + what you had to pay in mortgage anyway (this will take between 5 to 10 years. This means if you're mortgage is $3000 and your rental income is $3500, don't pocket the cash. Put most of the rental income towards the principal and save some for repairs/improvements.) Buy another house and do a 1031 exchange. 7. Repeat step (1) with a nicer house, ideally with a duplex/triplex/four-plex. Stop repeating when you're seeing diminishing returns on the cash flow of your home (this will likely be at the multi-family level). Eventually all of your housing related expenses will be 0. Take the money you would've had to spend and put it into an index fund. Unlike most advice, the above steps are guaranteed to work as long as you buy a house you're capable and willing to pay the mortgage of without renting it out. Finally, because you're an owner occupant you have the ultimate leverage and it's effectively zero risk, since costs are spread across your tenants and benefits go to the property you own. What's the catch you're thinking? Why doesn't everyone do this if it's guaranteed? Turns out people don't like being a landlord or living with others. Swallow that pill and financial success is inevitable as long as you don't try to become an investor (that's an entirely different set of problems). You also have to be willing to do this even if you have a family -- however if you started this early enough (up to late 30s) you should be able to transition over to a multi-family in most markets and still have some privacy for you and your family. --- Unlike a lot of other advice, you don't even have to make a lot of money to do the above.

cryoshon 9y ago
>1. Buy a house in a place where it's normal for people for rent rooms or have roommates sorry can you explain how you start with this step if your net worth is zero?
- tabeth 9y ago
  If you buy a multifamily you can do so with as little as 3% down. Rent out the rooms in your unit and you're generally good for most markets.
  - bequanna 9y ago
    The big caveat here is that you have to actually live in one of the units. This is commonly referred to as 'House Hacking' and you can buy up to a 4plex, I believe. Otherwise, barring some creative financing, you'll be putting down 20-25% of the purchase price.
    - tabeth 9y ago
      Absolutely right here. If you're not an owner occupant it doesn't make sense. One other reason you want to be an owner occupant, in addition to financing, is that you're closer to the action, meaning your property will be far less likely to be ruined as you respond to things way faster.
- lev99 9y ago
  Your net worth has to be more than 0, but you don't need a lot of money just decent credit.
- adventured 9y ago
  Have an income that can get you a mortgage for a starter property. The median existing US house is about $220k to $250k depending. Assume you shoot lower, $175k. Texas, and three dozen other states, are overflowing with houses in the $175k to $225k ballpark. Your primary challenge will be the downpayment. You'll either need to involve another investor, family/friends, do something risky on debt, or save for a number of years first.
notheguyouthink 9y ago
How viable is this if you're not a handyman? I've always thought something similar to what you're referring, but avoid it because I don't deal with anything construction related.
- jfaucett 9y ago
  Not at all. I've done this with my family, friends have done this, and it is definitely not for everyone - especially if you dont like doing all the repairs and renovations yourself all the time. I hated it, and sure after 10-20 years you are sure to succeed, and those who do this do well, but for me it is not worth it. I'd rather spend my free time doing just about anything except having to deal with all the headaches you have as a landlord and handyman.
- deleted 9y ago
  [deleted]
- tabeth 9y ago
  It's viable. Just make sure you get an inspection prior to buying the house (usually $1000 and under for this) to avoid getting a money-pit. Save a chunk, say 25%, of rental income and just hire people to resolve minor problems. Again, if you decide to do this get an inspection. You will be screwed if you buy something with structural, plumbing, electrical or foundation problems (which are technically structural, but I put in its own category since it's that bad). --- That being said, you're definitely going to want to learn how to do some basic stuff like drywall, change outlets, tighten pipes, etc.
- DamnYuppie 9y ago
  If the house is in reasonable shape when you buy it you don't have to be very handy at all. If you take preventative care, like checking the roof, cleaning out gutters, basic inspections monthly, you really shouldn't have any large expenses. Also there is a literal legion of professionals who can fix any issue you will encounter. The above advice doesn't apply if you are buying a distressed property that will require significant upgrades and repairs.
WhyNotHugo 9y ago
> 1. Buy a house in a place where it's normal for people for rent rooms or have roommates. Not sure where you live, but you already have to be a Millionaire in order to do this. Especially a house with multiple rooms that you can rent out.
- deadmetheny 9y ago
  This is only true in coastal bubble cities. It's perfectly viable in the 90% of the country that isn't those places. My setup is similar and I didn't start off rich at all.
- NickM 9y ago
  Not true. There are plenty of cities in the US where you can buy a very nice house with several bedrooms in the 150k-250k range. You can get by with even less if you're willing to start with a fixer-upper. Totally doable for non-millionaires, especially if you're starting off with a mortgage as the OP described. And plenty of people still seek roommates in these areas; lower housing costs also tend to correlate with lower wages and general cost of living, so it doesn't mean everyone is going to automatically live alone just because you're not in SF or NYC.
  - ryandrake 9y ago
    Ok so that means moving to a shakier employment environment (you are relying on employment while you bootstrap), so this becomes riskier than “guaranteed“.
- HeyLaughingBoy 9y ago
  Nope. I have a friend (Minneapolis, MN) who was doing exactly this, and she was far from rich. Last time I talked to her she owned a triplex and was renting out the upper two floors on a per-room basis, while she lived on the ground floor. OP is right though: most people don't want to be landlords. I was for a few years, then decided I didn't really want to be in that business. Pity too: my tenants were great and I was bringing in +$300/month over mortgage/insurance/etc. costs.
refurb 9y ago
The other catch is that housing doesn't always go up. It's awesome until you see a 30% drop in housing prices and your paying off a $300k mortgage on a house worth $200k.
- tabeth 9y ago
  This is irrelevant since you're an owner occupant. You're generally right, though. The goal with the strategy outlined is to hedge against that by living there yourself. That and tenants will protect you from appraisal gotchas.
  - zaphod4prez 9y ago
    Sorry, why does living there make it irrelevant? You still just "lost" 100k.
    - toomuchtodo 9y ago
      You still need to live somewhere and you don’t realize the loss unless you have to sell.
mythrwy 9y ago
Live in a house with a bunch of people I'm not married to for years and years? No thank you. I'll try the stock market instead.
- tabeth 9y ago
  This is true. One thing I want to add though, is that at least in your unit, standard housing laws do not apply -- meaning you can discriminate on any basis in regards to the people you allow to live with you.
switch007 9y ago
I'm starting with steps 1 and 2. I'm hoping to get a 3 bed mortgaged with repayments around $860, plus bills and taxes around $330. Rent out each spare room for around $555. As far as I know in the UK there are no income tax benefits unless you are a proper landlord letting out properties. It's not quite as lucrative as perhaps your suggestion, but if I take the profit from the lodgers and overpay the mortgage, it would be paid off in around 9 years (and I certainly won't be a millionaire at the end hah!) And it's quite theoretical, as I'm not going to live with 2 people for 9 years, but that's the math.
- tabeth 9y ago
  I'm not familiar with UK tax law, but you don't have to live with 2 people for 9 years. I'd do it until you have enough to put a down payment on a multi-family and transition to that. Then you don't have to live with the other people, but you still have the advantages.
subpixel 9y ago
"financial success is inevitable as long as you don't try to become an investor (that's an entirely different set of problems)" I'm curious to learn what new problems being an investor(read: owner not resident) introduces.
- tabeth 9y ago
  They're very numerous, including but not limited to: 1. A higher downpayment is required to purchase property. This means significant liquidity is taken from you immediately. 2. Investment property is often more distressed and/or requires more upkeep. Add the fact that you're not physically on the property and you'll see how you only will be reported for expensive issues and not preventative maintenance, which you can't really do as an investor (there are laws around just going in your property). 3. The biggest issue as buying as an investor is that you have to have a lot of money to cover vacancies. Under the plan outlined earlier vacancies don't matter since you'd only do it with a house you can afford with or within tenants.
turingcompeteme 9y ago
This advice can work out really well, or really poorly. I live in one of the largest cities in North America, and despite nearly three decades of house prices rising every year, a quarter of the houses in the city are still worth less than they were in 1989. What I pay in rent for my place would only cover about 60% of the mortgage. The only way for your plan to work out would be for housing prices to continue to skyrocket for many years. And they might. Instead, I took the downpayment for a house, plus the 40% I save every month from not having a mortgage and put it in index funds. Things will have to go really well in the housing market and really poorly in the equity and debt markets for me not to come out ahead.
eveningcoffee 9y ago
0. Do not have a family.
acconrad 9y ago
> When the house is paid off from rental income + what you had to pay in mortgage anyway (this will take between 5 to 10 years) buy another house and do a 1031 exchange. This means if you're mortgage is $3000 and your rental income is $3500, don't pocket the cash. Just to be clear, that is not what a 1031 exchange is. A 1031 exchange allows you to sell a property and buy another one, all while deferring the capital gains tax, so you have more principal to put into the down payment [1]. I think the more accurate advice here is when your property has appreciated enough from your renovations, repairs, and market appreciation, you can use that appreciation when selling + your principal (equity) to put a down payment on a bigger unit (such as a multiplex) and repeat the process. [1] https://apiexchange.com/what-is-a-1031-exchange/ https://apiexchange.com/what-is-a-1031-exchange/
- tabeth 9y ago
  This is correct. I think that sentence should be reordered, hah.
- manicdee 9y ago
  > When the house is paid off from rental income + what you had to pay in mortgage anyway (this means if you're mortgage is $3000 and your rental income is $3500, don't pocket the cash)
ryanianian 9y ago
Beware you may have a harder time getting a mortgage if you plan to use the home with tenants, even owner-occupied. When refinancing our place (which we don't rent out) there was a lot of back and forth over this subject when I merely asked if it was possible - the bank got spooked. (We have excellent credit and can easily pay 3-4x the monthly costs fwiw.) Eventually we convinced them we had no intention to proceed with renters (because we didn't it was just a question), but I imagine it would have changed the financials pretty drastically if we had actually intended on pursuing it. I don't know if a refinance versus original purchase made it different.
- mistermann 9y ago
  More accurate advice I would say is, just don't tell the bank whether you plan to have tenants. At least in Canada, the bank wants you to lie, closing the deal and banking the commission is all that matters. Risk is offloaded to the Canadian Mortgage and Housing Corporation, or if a bubble pops, directly to the Bank of Canada who will take any risky mortgages off bank balance sheets, as demonstrated in 2008.
  - ryanianian 9y ago
    I would re-phrase it as the classic lawyer advice - only talk when answering a question, and only answer exactly the question that was asked. For my case (parent post) this would have manifested as me just not asking about tenants, and if they brought it up as "are you planning to have tenants" I would say "No" (not "maybe" - no plan existed at that point!)

by tabeth 9y ago

cryoshon 9y ago

>1. Buy a house in a place where it's normal for people for rent rooms or have roommates sorry can you explain how you start with this step if your net worth is zero?

tabeth 9y ago
If you buy a multifamily you can do so with as little as 3% down. Rent out the rooms in your unit and you're generally good for most markets.
- bequanna 9y ago
  The big caveat here is that you have to actually live in one of the units. This is commonly referred to as 'House Hacking' and you can buy up to a 4plex, I believe. Otherwise, barring some creative financing, you'll be putting down 20-25% of the purchase price.
  - tabeth 9y ago
    Absolutely right here. If you're not an owner occupant it doesn't make sense. One other reason you want to be an owner occupant, in addition to financing, is that you're closer to the action, meaning your property will be far less likely to be ruined as you respond to things way faster.
lev99 9y ago
Your net worth has to be more than 0, but you don't need a lot of money just decent credit.
adventured 9y ago
Have an income that can get you a mortgage for a starter property. The median existing US house is about $220k to $250k depending. Assume you shoot lower, $175k. Texas, and three dozen other states, are overflowing with houses in the $175k to $225k ballpark. Your primary challenge will be the downpayment. You'll either need to involve another investor, family/friends, do something risky on debt, or save for a number of years first.

notheguyouthink 9y ago

How viable is this if you're not a handyman? I've always thought something similar to what you're referring, but avoid it because I don't deal with anything construction related.

jfaucett 9y ago
Not at all. I've done this with my family, friends have done this, and it is definitely not for everyone - especially if you dont like doing all the repairs and renovations yourself all the time. I hated it, and sure after 10-20 years you are sure to succeed, and those who do this do well, but for me it is not worth it. I'd rather spend my free time doing just about anything except having to deal with all the headaches you have as a landlord and handyman.
deleted 9y ago
[deleted]
tabeth 9y ago
It's viable. Just make sure you get an inspection prior to buying the house (usually $1000 and under for this) to avoid getting a money-pit. Save a chunk, say 25%, of rental income and just hire people to resolve minor problems. Again, if you decide to do this get an inspection. You will be screwed if you buy something with structural, plumbing, electrical or foundation problems (which are technically structural, but I put in its own category since it's that bad). --- That being said, you're definitely going to want to learn how to do some basic stuff like drywall, change outlets, tighten pipes, etc.
DamnYuppie 9y ago
If the house is in reasonable shape when you buy it you don't have to be very handy at all. If you take preventative care, like checking the roof, cleaning out gutters, basic inspections monthly, you really shouldn't have any large expenses. Also there is a literal legion of professionals who can fix any issue you will encounter. The above advice doesn't apply if you are buying a distressed property that will require significant upgrades and repairs.

WhyNotHugo 9y ago

> 1. Buy a house in a place where it's normal for people for rent rooms or have roommates. Not sure where you live, but you already have to be a Millionaire in order to do this. Especially a house with multiple rooms that you can rent out.

deadmetheny 9y ago
This is only true in coastal bubble cities. It's perfectly viable in the 90% of the country that isn't those places. My setup is similar and I didn't start off rich at all.
NickM 9y ago
Not true. There are plenty of cities in the US where you can buy a very nice house with several bedrooms in the 150k-250k range. You can get by with even less if you're willing to start with a fixer-upper. Totally doable for non-millionaires, especially if you're starting off with a mortgage as the OP described. And plenty of people still seek roommates in these areas; lower housing costs also tend to correlate with lower wages and general cost of living, so it doesn't mean everyone is going to automatically live alone just because you're not in SF or NYC.
- ryandrake 9y ago
  Ok so that means moving to a shakier employment environment (you are relying on employment while you bootstrap), so this becomes riskier than “guaranteed“.
HeyLaughingBoy 9y ago
Nope. I have a friend (Minneapolis, MN) who was doing exactly this, and she was far from rich. Last time I talked to her she owned a triplex and was renting out the upper two floors on a per-room basis, while she lived on the ground floor. OP is right though: most people don't want to be landlords. I was for a few years, then decided I didn't really want to be in that business. Pity too: my tenants were great and I was bringing in +$300/month over mortgage/insurance/etc. costs.

refurb 9y ago

The other catch is that housing doesn't always go up. It's awesome until you see a 30% drop in housing prices and your paying off a $300k mortgage on a house worth $200k.

tabeth 9y ago
This is irrelevant since you're an owner occupant. You're generally right, though. The goal with the strategy outlined is to hedge against that by living there yourself. That and tenants will protect you from appraisal gotchas.
- zaphod4prez 9y ago
  Sorry, why does living there make it irrelevant? You still just "lost" 100k.
  - toomuchtodo 9y ago
    You still need to live somewhere and you don’t realize the loss unless you have to sell.

mythrwy 9y ago

Live in a house with a bunch of people I'm not married to for years and years? No thank you. I'll try the stock market instead.

tabeth 9y ago
This is true. One thing I want to add though, is that at least in your unit, standard housing laws do not apply -- meaning you can discriminate on any basis in regards to the people you allow to live with you.

switch007 9y ago

I'm starting with steps 1 and 2. I'm hoping to get a 3 bed mortgaged with repayments around $860, plus bills and taxes around $330. Rent out each spare room for around $555. As far as I know in the UK there are no income tax benefits unless you are a proper landlord letting out properties. It's not quite as lucrative as perhaps your suggestion, but if I take the profit from the lodgers and overpay the mortgage, it would be paid off in around 9 years (and I certainly won't be a millionaire at the end hah!) And it's quite theoretical, as I'm not going to live with 2 people for 9 years, but that's the math.

tabeth 9y ago
I'm not familiar with UK tax law, but you don't have to live with 2 people for 9 years. I'd do it until you have enough to put a down payment on a multi-family and transition to that. Then you don't have to live with the other people, but you still have the advantages.

subpixel 9y ago

"financial success is inevitable as long as you don't try to become an investor (that's an entirely different set of problems)" I'm curious to learn what new problems being an investor(read: owner not resident) introduces.

tabeth 9y ago
They're very numerous, including but not limited to: 1. A higher downpayment is required to purchase property. This means significant liquidity is taken from you immediately. 2. Investment property is often more distressed and/or requires more upkeep. Add the fact that you're not physically on the property and you'll see how you only will be reported for expensive issues and not preventative maintenance, which you can't really do as an investor (there are laws around just going in your property). 3. The biggest issue as buying as an investor is that you have to have a lot of money to cover vacancies. Under the plan outlined earlier vacancies don't matter since you'd only do it with a house you can afford with or within tenants.

turingcompeteme 9y ago

This advice can work out really well, or really poorly. I live in one of the largest cities in North America, and despite nearly three decades of house prices rising every year, a quarter of the houses in the city are still worth less than they were in 1989. What I pay in rent for my place would only cover about 60% of the mortgage. The only way for your plan to work out would be for housing prices to continue to skyrocket for many years. And they might. Instead, I took the downpayment for a house, plus the 40% I save every month from not having a mortgage and put it in index funds. Things will have to go really well in the housing market and really poorly in the equity and debt markets for me not to come out ahead.

eveningcoffee 9y ago

0. Do not have a family.

acconrad 9y ago

> When the house is paid off from rental income + what you had to pay in mortgage anyway (this will take between 5 to 10 years) buy another house and do a 1031 exchange. This means if you're mortgage is $3000 and your rental income is $3500, don't pocket the cash. Just to be clear, that is not what a 1031 exchange is. A 1031 exchange allows you to sell a property and buy another one, all while deferring the capital gains tax, so you have more principal to put into the down payment [1]. I think the more accurate advice here is when your property has appreciated enough from your renovations, repairs, and market appreciation, you can use that appreciation when selling + your principal (equity) to put a down payment on a bigger unit (such as a multiplex) and repeat the process. [1] https://apiexchange.com/what-is-a-1031-exchange/ https://apiexchange.com/what-is-a-1031-exchange/

tabeth 9y ago
This is correct. I think that sentence should be reordered, hah.
manicdee 9y ago
> When the house is paid off from rental income + what you had to pay in mortgage anyway (this means if you're mortgage is $3000 and your rental income is $3500, don't pocket the cash)

ryanianian 9y ago

Beware you may have a harder time getting a mortgage if you plan to use the home with tenants, even owner-occupied. When refinancing our place (which we don't rent out) there was a lot of back and forth over this subject when I merely asked if it was possible - the bank got spooked. (We have excellent credit and can easily pay 3-4x the monthly costs fwiw.) Eventually we convinced them we had no intention to proceed with renters (because we didn't it was just a question), but I imagine it would have changed the financials pretty drastically if we had actually intended on pursuing it. I don't know if a refinance versus original purchase made it different.

mistermann 9y ago
More accurate advice I would say is, just don't tell the bank whether you plan to have tenants. At least in Canada, the bank wants you to lie, closing the deal and banking the commission is all that matters. Risk is offloaded to the Canadian Mortgage and Housing Corporation, or if a bubble pops, directly to the Bank of Canada who will take any risky mortgages off bank balance sheets, as demonstrated in 2008.
- ryanianian 9y ago
  I would re-phrase it as the classic lawyer advice - only talk when answering a question, and only answer exactly the question that was asked. For my case (parent post) this would have manifested as me just not asking about tenants, and if they brought it up as "are you planning to have tenants" I would say "No" (not "maybe" - no plan existed at that point!)