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In another thread, I outlined the simple two-step process of economic advancement in this country, and while those two steps are absolutely true and fool-proof, there are lots of particulars that can be gone into….lots of expansion on those basic ideas.
If you didn’t see it in the aforementioned thread, the two-step process for economic advancement is:
1) Spend less than you earn,
And
2) Buy (invest in) something that will increase in value over time.
And that’s it. That’s the secret (big “secret,” huh?). Do that, and you absolutely WILL improve your economic status. No maybes, no doubt about it whatsoever. 100% of the time.
Along the way, pursuing the very strategy outlined above, I have discovered that some stuff works better than other stuff. Among the tips and tricks that I have discovered are these:
The “B” word – everybody groans when they hear the word “Budget,” but it is truly the cornerstone of economic advancement. Finding out exactly how much you got coming in, and where it goes each month, and it can be illuminating! I break my budget into four categories: Essentials, Extras, Debt Service, and Discretionary (savings), with notations about the % I am spending in each category. For illustrative purposes, my budget as it is currently laid out looks like this, percentage-wise:
Essentials (mortgage, lights, gas for the truck, insurance, phone, and ‘net access) = 47.1%
Extras (spending coin, movie rentals, a place to park my domain name collection, and misc) = 15.2%
Debt Service (I got my hands on some groovy low-interest credit cards, and transferred all my girlfriend’s debt to them to save her money….previous to that, I had paid all my debts, so this category, as a percent, was 0) = 16%
Discretionary (savings rate) = 21.7%
Right now, all the “discretionary” money each month is getting poured into paying the existing debts down, and they should be gone within a year’s time, at which the “Savings Rate” category will be back up to a healthy 37.7%
It is this last category that is the most important consideration in terms of improving your economic situation, because it is with this money (at whatever % savings rate you can personally manage) that will be used to actually go out and do step two of the abovementioned two-step (buying stuff that will increase in value over time).
For me, my interests run to real estate. I don’t know why, they just do. I like the thought of owning lossa houses. Maybe I played too much Monopoly as a kid or something, but that’s where my interest is, and that’s what I’m looking to acquire.
I started by buying a place for me. Nice place, too. One I knew I wouldn’t mind staying in for a good while.
Next step will be to buy some investment property for rentals.
Property: Single family houses LOOK attractive, but they can be tricky. For one thing, if you don’t keep it rented, you get to eat the mortgage. Not a very good way to invest. As long as the place stays rented of course, you’re fine. The property will tend to appreciate in value over time (historically, expect 1-3% appreciation per year), and assuming a sufficient down payment on your part, you will be making more money from rent each month than the mortgage payment + insurance. (this is key, do your homework in advance if you are an aspiring rental property owner, and find out what the market rate for home rentals is in the area you are considering buying into….armed with this information, you can set your monthly profits at whatever you wish, simply by increasing the size of your down payment—which equates to a smaller monthly mortgage payment, which = higher monthly gains for you.
Much better for the first time investor, however, is a multi-unit building (Duplex, Triplex, Quadraplex….on up to a small apartment building with 8-15 units in it). This is better for you than a single family dwelling because it spreads your risk out….it would be quite rare, statistically, for your 8-unit apartment building to be completely devoid of renters (unless the building itself is gone, which is why you carry insurance!), meaning that you’ll always have at least some money coming in from the property—lower “carrying costs” for you. That’s smart investing.
The above, however, must be balanced by turnover considerations. One unit apartments have notoriously high turnover rates, and each time you lose a renter, you must perform cosmetic (and sometimes, more than cosmetic) maintenance on the unit, thus, an 8-unit apartment building, consisting of 1-bedroom units would NOT be a favorable investment (in general), because although it succeeds in spreading your carrying costs, you will suffer from high turnover, so be picky.
Pricing: If you pay more than 7x-8x the annual rent (this varies from area to area….closer to 8 where I live), then you paid too much for the property. Don’t buy it at that price. Offer less, and if they won’t budge, don’t buy (that’s the beauty of investment property….you needn’t be in a big rush….just wait till a better offer comes along!). Alternatively, you can raise rents to bring things back into balance, but again, you are somewhat restrained by what the prevailing market will bear.
If investing in a duplex or bigger, and you’re not planning to live in one of the units, expect to pony up 25% down. This brings to light one advantage of the single family home, because even if you don’t plan to live there, you can get into a single family investment home for 10% down all day long, with few problems (faster….riskier in terms of carrying costs, but cheaper to buy into).
Closing costs: Expect to pay ~3% of the total purchase price of the property in closing costs (so, for a 65k single family home, expect about 2k in closing costs, with a 6500 (10%) down payment).
Holding: Given that the property appreciates in value, you can either buy to keep, or buy to resell down the line, and if you do the latter, plan to hold it for at least five years….the longer the better, but unless you get an inside scoop on the new highway being built right thru where your property runs, five years is about the minimum amount of time needed for the $ appreciation to surpass the various fees associated with buying and selling.
Financing: Given the low interest rates being offered right now on mortgages, buying NOW is better than waiting, but banks like to make sure you’ve got the money in the bank (and are not borrowing the money for the down payment) – here’s a useful tidbit in that regard….banks check your records back three months. I found myself slightly short with regards to being able to pay all the closing costs on my house, so I wrote a check from one of my credit cards and just quietly dropped the needed funds in the bank account four months before contacting the bank. They looked at three months of bank statement data and gave me the nod. Problem solved.
If you have no debts to speak of, you can do the same thing, financing the entire down payment with your various credit sources to get in NOW, and make paying them off a priority (works best if you have some juicy low-interest rate credit sources already lined up, and that was, in fact, my first priority).
Also, don’t bother with keeping a ready cash reserve to handle big expenses for your rental properties…ties up money better used in other places. Just keep one of your credit sources untapped and at the ready, so if you have to replace a roof or an AC, or some other big thing, you can do it in an instant, without having to scramble for the money. Odds are extremely in your favor that if you have multiple properties, the AC won’t go out everywhere at once, so you need not have to have a huge line of credit standing ready (I use a 10k credit line for that purpose).
Lots of others, but that’s enough for starters….it’ll be interesting to see what else crops up here in terms of ideas (and no doubt, the communists will descend on the place in droves, telling us how evil we are, but….whatchagonnado?
)
-=Vel=-
If you didn’t see it in the aforementioned thread, the two-step process for economic advancement is:
1) Spend less than you earn,
And
2) Buy (invest in) something that will increase in value over time.
And that’s it. That’s the secret (big “secret,” huh?). Do that, and you absolutely WILL improve your economic status. No maybes, no doubt about it whatsoever. 100% of the time.
Along the way, pursuing the very strategy outlined above, I have discovered that some stuff works better than other stuff. Among the tips and tricks that I have discovered are these:
The “B” word – everybody groans when they hear the word “Budget,” but it is truly the cornerstone of economic advancement. Finding out exactly how much you got coming in, and where it goes each month, and it can be illuminating! I break my budget into four categories: Essentials, Extras, Debt Service, and Discretionary (savings), with notations about the % I am spending in each category. For illustrative purposes, my budget as it is currently laid out looks like this, percentage-wise:
Essentials (mortgage, lights, gas for the truck, insurance, phone, and ‘net access) = 47.1%
Extras (spending coin, movie rentals, a place to park my domain name collection, and misc) = 15.2%
Debt Service (I got my hands on some groovy low-interest credit cards, and transferred all my girlfriend’s debt to them to save her money….previous to that, I had paid all my debts, so this category, as a percent, was 0) = 16%
Discretionary (savings rate) = 21.7%
Right now, all the “discretionary” money each month is getting poured into paying the existing debts down, and they should be gone within a year’s time, at which the “Savings Rate” category will be back up to a healthy 37.7%
It is this last category that is the most important consideration in terms of improving your economic situation, because it is with this money (at whatever % savings rate you can personally manage) that will be used to actually go out and do step two of the abovementioned two-step (buying stuff that will increase in value over time).
For me, my interests run to real estate. I don’t know why, they just do. I like the thought of owning lossa houses. Maybe I played too much Monopoly as a kid or something, but that’s where my interest is, and that’s what I’m looking to acquire.
I started by buying a place for me. Nice place, too. One I knew I wouldn’t mind staying in for a good while.
Next step will be to buy some investment property for rentals.
Property: Single family houses LOOK attractive, but they can be tricky. For one thing, if you don’t keep it rented, you get to eat the mortgage. Not a very good way to invest. As long as the place stays rented of course, you’re fine. The property will tend to appreciate in value over time (historically, expect 1-3% appreciation per year), and assuming a sufficient down payment on your part, you will be making more money from rent each month than the mortgage payment + insurance. (this is key, do your homework in advance if you are an aspiring rental property owner, and find out what the market rate for home rentals is in the area you are considering buying into….armed with this information, you can set your monthly profits at whatever you wish, simply by increasing the size of your down payment—which equates to a smaller monthly mortgage payment, which = higher monthly gains for you.
Much better for the first time investor, however, is a multi-unit building (Duplex, Triplex, Quadraplex….on up to a small apartment building with 8-15 units in it). This is better for you than a single family dwelling because it spreads your risk out….it would be quite rare, statistically, for your 8-unit apartment building to be completely devoid of renters (unless the building itself is gone, which is why you carry insurance!), meaning that you’ll always have at least some money coming in from the property—lower “carrying costs” for you. That’s smart investing.
The above, however, must be balanced by turnover considerations. One unit apartments have notoriously high turnover rates, and each time you lose a renter, you must perform cosmetic (and sometimes, more than cosmetic) maintenance on the unit, thus, an 8-unit apartment building, consisting of 1-bedroom units would NOT be a favorable investment (in general), because although it succeeds in spreading your carrying costs, you will suffer from high turnover, so be picky.
Pricing: If you pay more than 7x-8x the annual rent (this varies from area to area….closer to 8 where I live), then you paid too much for the property. Don’t buy it at that price. Offer less, and if they won’t budge, don’t buy (that’s the beauty of investment property….you needn’t be in a big rush….just wait till a better offer comes along!). Alternatively, you can raise rents to bring things back into balance, but again, you are somewhat restrained by what the prevailing market will bear.
If investing in a duplex or bigger, and you’re not planning to live in one of the units, expect to pony up 25% down. This brings to light one advantage of the single family home, because even if you don’t plan to live there, you can get into a single family investment home for 10% down all day long, with few problems (faster….riskier in terms of carrying costs, but cheaper to buy into).
Closing costs: Expect to pay ~3% of the total purchase price of the property in closing costs (so, for a 65k single family home, expect about 2k in closing costs, with a 6500 (10%) down payment).
Holding: Given that the property appreciates in value, you can either buy to keep, or buy to resell down the line, and if you do the latter, plan to hold it for at least five years….the longer the better, but unless you get an inside scoop on the new highway being built right thru where your property runs, five years is about the minimum amount of time needed for the $ appreciation to surpass the various fees associated with buying and selling.
Financing: Given the low interest rates being offered right now on mortgages, buying NOW is better than waiting, but banks like to make sure you’ve got the money in the bank (and are not borrowing the money for the down payment) – here’s a useful tidbit in that regard….banks check your records back three months. I found myself slightly short with regards to being able to pay all the closing costs on my house, so I wrote a check from one of my credit cards and just quietly dropped the needed funds in the bank account four months before contacting the bank. They looked at three months of bank statement data and gave me the nod. Problem solved.
If you have no debts to speak of, you can do the same thing, financing the entire down payment with your various credit sources to get in NOW, and make paying them off a priority (works best if you have some juicy low-interest rate credit sources already lined up, and that was, in fact, my first priority).
Also, don’t bother with keeping a ready cash reserve to handle big expenses for your rental properties…ties up money better used in other places. Just keep one of your credit sources untapped and at the ready, so if you have to replace a roof or an AC, or some other big thing, you can do it in an instant, without having to scramble for the money. Odds are extremely in your favor that if you have multiple properties, the AC won’t go out everywhere at once, so you need not have to have a huge line of credit standing ready (I use a 10k credit line for that purpose).
Lots of others, but that’s enough for starters….it’ll be interesting to see what else crops up here in terms of ideas (and no doubt, the communists will descend on the place in droves, telling us how evil we are, but….whatchagonnado?
)-=Vel=-
As to those questions!
)
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