Keeping up with the Jones’s requires not just more income, but growing your wealth. One of the best ways to grow wealth is by buying more homes as you progress through your career because home value generally trend with inflation and, when rented out, can at least breakeven or be another source of income for you.
But with such rewards comes risks. So lets cover some of the best ways to grow your home portfolio and your wealth with it.
How to add investment homes to your portfolio by leveraging your primary home’s equity.
As a baseline we are going to assume:
1. You Own a Home
2. It is Your Primary Home
3. You can afford it
4. You are getting 2 or more homes over time.
5. You are renting out the additional Homes
Here we emphasize using your primary home as a way to buy another home. 1. Buy the Home with a 20% down payment -Can reduce interest rate -Eliminates costly PMI Payments -You will likely need a debt to income ratio of sub 43%) 2. How to get the Down Payment -Pull it out of the first home via equity payments -Appraising your first home that’s value has increased. 3. What type of Loans work for this? –Conventional Loans –Jumbo Loans –Cross Collateral Loans (may be the most useful for this) -I would avoid HELOC or hard money loans.4. *The links I provide throughout this blog are epically useful by the way.
First thing’s First! What your second investment home should be is dependent on what financing you can get, the property’s likely capitalization rate, and how YOU actually want to live. I mention this because you could always move to your second home and make your primary home into a rental.
Here are your Basic Buying Options and things to note relative to how you’re living now.
Buy an investment home that’s similar to yours:
-Might as well stay where you live, no moving costs
-You will likely understand the tenant base better
-The repairs, loan type, etc. will also be more familiar
Buy a cheaper Home (below median income)
– Cheaper, meaning you could buy more of them
-More properties, theoretically, reduces portfolio risk.
-Lower mortgage balance, reducing your debt exposure
-Possibly won’t fully understand tenant base.
Buy an Expensive Home (above median income)
-Less homes to buy, allowing you to focus on less places.
-More expensive homes tend to have lower cap rates.
-Jumbo loans are more likely, which have higher rates.
-May not understand tenant base.
Here’s what you need to consider and my suggestions for handling each one.
From contracts, compliance, workorders, rental taxes, Fair housing regulations, and beyond tenants can become a lot to handle.
-Get a property management company…like us!
Down Markets can be rough if you’re not ready
Lets say you have 4 rental homes after years of work. But then the market drops and your vacancy shoots up along with rents going down. Your properties are now losing money every month…and ohh yea you financed your homes on adjustable rates and now the Fed is upping interest rates to ‘save’ the economy. Well now you’re losing a lot of money a month. Way more than your salary can handle.
-Do anything possible to keep the tenants within reason so long as the property at least breaks even.
– Get fixed rate financing.
– Sell Your worst performing home/s first.
– Have a higher minimum cap rate you will buy at