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August 6, 2010 / Abigail Adams

Consider making your first home a rental, a duplex

Whenever I talk to anyone thinking about buying a home, I give them two pieces of advice.  1. Consider purchasing a duplex at least as your first home.  The rent from one unit of the duplex will cover about half of your mortgage.  2. And no matter what type of property you purchase, have at least 10k in savings for your house (this doesn’t include closing costs and realtor fees). The first year in my home, I spent about 7-10k getting things fixed that had been neglected (trees trimmed, pipes fixed, furnace replaced, etc). 
 
The biggest thing I learned about being able to get out of the “rat race” is use other people’s money (OPM) to do so.  You leverage OPM in order to put yourself in a better spot sooner, so you have the freedom to do what you want with your time, rather than being a slave to “the man,” which I don’t think most people want to do. 
 
I’ll just give you a little bit of background about my property and what it is allowing me to do.  I am going to be very open about my experience, because I can’t stand when someone says to try something out, yet they don’t give you any concrete information.
 
Currently I live in a 3 unit property, and rent 2 of my units out. My mortgage is about $1000 a month, and my rentals cover about $800 of that (once I refinance my house, I will actually be making a profit over my mortgage payment, yay!).  So someone else is essentially paying my mortgage for me.  I still have to do repairs and improvements (ones I would have to do regardless if I were in a rental or not), but I am not paying $1000 out of my pocket, plus repairs by myself.  Let’s say a furnace needs to be replaced (about $1500) and I have no one helping pay my mortgage, I have to still cover my mortgage and the furnace, so that is $2500, as opposed to $1700 out of my pocket since I have the rentals.  This year I will gross a little under $12k from rental income (after all the repairs and improvements, I will have probably made about $7k – but I didn’t put this in my pocket as cash for me to spend, it paid for my mortgage, so it went in my pocket in the form of equity).  (*Note: This year I made a bit more in rental income because I had someone renting a room in my house that counted toward the overal income of the property, I usually make about $10k)
 
Another great thing about having a rental, is the tax savings.  When you own your own home, you are very limited as to what you can write off in your taxes.  If you own a rental, there are a plethora of things you can write off (ie the furnace, landscaping, utilities you pay for the rental, etc).  Last year I had over $12k in write offs solely based on my rental.  That reduces my taxes significantly, and all those write offs were money I was going to spend anyway, rental or not.
 
With all of this, there are a few things that are happening at the same time.  Someone else is building my equity for me because they are paying my mortgage, repairs and improvements I do increase the equity in my home, and I can write most of it off, which reduces my taxable income as well.  I pay less taxes and don’t pay a full mortgage, yet I reap the benefits of building equity in my name, which will allow me to use my money that I would otherwise be spending on a mortgage, on something else like building my nest egg, putting towards a vacation fund or purchasing another property. 
 
The average person lives in a house (that they have mortgages on) for 5-7 years, and never winds up owning any of the ones they live in.  The first house you buy will probably not be one you live in, in a few years.  So knowing that, may make it a bit easier to consider doing a rental to be able to build equity and save enough, so when you move in your next house, maybe it can be a lot better, rather than just a little better.  And by no means am I saying that you can’t get an awesome house as your first.  I did, and I love my house.   
 
Even if you decide you don’t want to consider this that is fine, I just wanted to put it out there so you had some idea of what it could mean to you if you were to consider the idea.  And who knows, maybe you will do something like this later in life.
 
There is one other thing I want you to know however, no matter what you do purchase.  If you get a 30 year mortgage, and stay in the house for the entire 30 years and pay everything off on schedule, you will have most likely paid double what the  mortgage was originally taken out for in regards to the selling price  (say the purchase price was $100k, thirty years later the house is worth $300k, when you go to sell it, you really only make a net profit of $100k, because you paid $200k to own it, and you probably don’t make a true net profit of $100, because over the years you probably put lots of money into the house, plus paid all the taxes on it, so maybe you only break even). 
 
One way to help yourself build equity faster and pay less in interest (the interest in a mortgage is front loaded, and the first 7 years you are mainly paying interest, and only a small portion of principal), is to make one extra payment a year, either by taking your payment and dividing it by 12 and paying that much more to principal each month, or picking a month each year to make an extra payment.  If you do this each year, you reduce the time it takes to pay off a 30 year mortgage by 7 years, you save a ton on interest and build equity faster.  But make sure your extra payments are going to principal only.
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