Do you rent? Or do you own your home?

There are pros and cons to each scenario. Let’s call it a “framework” to help you decide which is better for you… renting or buying.

I go over this framework in detail in the following short video. Give it your attention:

Let’s look at the numbers…

If you’re renting a place and the rent costs you $2,000 a month, you are paying $24,000 annually to live in a property that isn’t yours (X12 = $24,000).

The upside is that if anything happens to the property, your landlord gets to deal with it. If a toilet breaks, he repairs or replaces it. If a storm blows the roof off your place, the landlord handles it.

The downside is that you will never own the property and if you make any improvements to the property, you are doing so to benefit a property that doesn’t belong to you.  – Tweet   Your landlord may thank you though! (Now he can charge more rent to the next tenants.)

Now let’s look at what happens when you buy a property

For the property, which let’s say is valued at $600,000. The down payment would be $120,000. You’re going to be taking out a loan of $480,000. For easy math, let’s say that the interest rate is 5% and it’s an interest only loan, which means you will pay $24,000 annually in interest payments.

If this were a fully amortized loan, in the beginning of the loan, you pay far more each month toward the interest. Over the term of the loan, you’ll pay less and less in interest payments, but it takes years to get to the point where you are paying more toward the principle than interest.

If you take out an interest-only loan, you are only paying the interest and will do so until that part of the debt service (mortgage payment) is paid off. Then you move to paying the principle. Of course, you are responsible for paying taxes that can be escrowed (included) into the monthly mortgage payment.

As a homeowner, you will also be responsible for paying for any repairs. However, you will be paying homeowner’s insurance, so you will be responsible for paying the deductible on any big repairs. You still get to pay for smaller things that you wouldn’t ever make a claim on, because they wouldn’t make sense. The deductible would be more than the repair cost!

All of that said,  it may cost you about the same annually to own the property in which you will live as it would to rent someone else’s property that you will never own  – Tweet  . You won’t be building any equity in the property in a rental situation either. That’s something you really need to think about.

When you are buying a property, you don’t have to answer to a landlord. You’re the decision-maker! Buying a home in which to live provides more stability typically. And no one will raise your mortgage… unless you’re in an ARM (adjustable rate mortgage). That’s a whole different topic.

What if you buy properties to rent them out instead?

Hey, there’s a great idea!

Now that you know what goes into buying a property, you might want to apply the knowledge to buying rental properties. You can take out a loan to buy a second or even third property. Beyond that, you’re going to need a private lender or equity partner. That’s a different discussion and I’ve covered raising private capital before. (It is how I do some of my bigger deals.)

If you are the landlord you get to charge rent.

Yes, you are responsible for the big things that may go wrong in the property, like toilets and termites, as you may have heard some gurus say. BUT… you have insurance for that and you should be putting money into reserves to cover big surprises.  Reserves is just a fancy way of saying a savings account that is not to be touched unless something big happens.  – Tweet   If nothing ever does, all the better. You are putting money away for your next property.

As a landlord, you can add amenities to a property and then up the rents. The more doors you own, the more income you earn every month. If you have one single-family house, that’s going to cashflow a few hundred dollars above and beyond the expenses (mortgage, taxes, insurance, etc.) every month. But owning one rental property isn’t going to get you anywhere very fast.

If you have a duplex, you get to multiply the cashflow by two. If you have a four-plex you get to multiply the cashflow by four. If you have a small apartment building, well, you get the picture. The more units of property you own the better.

Or you can rent a unit, never buy a property, never participate in real estate investing and call it a day. For me, I’m heading into bigger and bigger deals in the multifamily investing space. You might think that I live a house that I own, because that’s what investors do, right?

Wrong.

Full disclosure, I live in a home that was inherited by my wife where I live happily live with our kids.  We are very fortunate for our situation therefore I continue to invest in cash flowing real estate investing. I wouldn’t buy a property right now as my primary residence. For me it doesn’t make sense yet. Maybe it will one day, but currently I am focused on putting that money to work for me in other ways… more productive ways in real estate investing!

What about you?

Based on what you just read in this article and after watching the video… then doing the math along with me… here’s my question for you this week…

itisbetterwords

I truly want your answer and explanation. So please get back to me. Contact me now. Here’s that link:

http://keeponcashflow.com/contact-us/