Inspired by “Rich Dad Poor Dad,” I recognized the immense potential of asset ownership, particularly through real estate. Though I cherish my day job, I’ve seen the importance of multiple tax-efficient income streams. Solely relying on a singular income isn’t sustainable for the future I envision for my family. While salary increments are welcome and career progression is vital, diversifying income avenues is essential.
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Step One: Read books on Real Estate Investing:
Anytime I embark on a new venture, my go-to is reading. For me, books serve as mentors. This time, “Rental Property Investing” by Brandon Turner was my guide. It taught me about property analysis, management, tenant relations, tax benefits, and more. I’m even on my third read. I also learned that Rental Property Investing is what I want to do within Real Estate Investing.
Step Two: Assess our present situation for the initial Real Estate Investing Strategy:
My wife, Eunji, and I are scouting new locations in anticipation of our baby, Ahrin. When we first settled into our home in 209, we were fresh into our marriage, navigating our late twenties, and hunting for affordable housing. Though we adore our residence, its proximity to low-ranked schools (GreatSchools ratings of 2-3) is concerning.
Fortunately, we refinanced our mortgage timely, securing a favorable 2.25% rate for 30 years. We could only lock in such a rate again soon if we chance upon a property with assumable loans. Getting such a low rate would be hard. Given the current real estate inflation, likely influenced by the low rates and the home-buying surge during the pandemic, I’m anticipating a market downtrend. But then again, only time will tell if I’m on the mark.
Step Three: Planning and Analysis:
Eunji and I have been deliberating our next steps. Our idea is to lease our current residence while finding a rental in a district with better school ratings above 7. Our very first home will become our first real estate property.
Here’s the calculation methodology we employed to validate this plan:
- Property Appreciation: Our property’s value has increased since our initial purchase by 26%. Our annualized return on the equity to initial cash invested is around 68% and 43% if we include all the mortgage payments we made.
- Potential Rental Income:
- Estimates from platforms like Zillow and Redfin offered a rent range. Adopting a conservative approach, I estimated our rental income as 0.5% of our initial purchase price.
- Expenses:
- Property Tax, Mortgage, HOA fees: These are consistent costs we accounted for.
- Vacancy Rate: Local metrics hinted at a 2.8% vacancy rate.
- Management, Repairs, Capex: Allocated 9%, 7%, and 5%, respectively, of our estimated rental income.
- Insurance: Considering landlord insurance often surpasses regular home insurance, I adjusted our current premium by an upward 25%.
Our calculations suggest that our monthly cash flow should hover around the break-even point. Yet, our projected returns look promising when factoring in a conservative 3% annual property appreciation and the increase in our equity. The annual rate of return to our initial cash investment would be around 31% of our initial cash expense, which includes the closing cost and refinance fee. This rate of return is expected to grow over time.
The Caveat:
Every plan has its potential drawbacks. For us, it’s the capital gains tax. Selling our home now would yield a profit after accounting for the initial costs and selling expenses. But transitioning it into a rental and selling later would involve a 15% tax on the appreciated value. However, we’re optimistic that the long-term benefits outweigh the initial tax implications.
We also know that operating rental properties takes time and energy, such as finding good tenants and maintaining the property well. The good thing is that Eunji and I are not believers in getting rich quickly or expecting passive income with minimum effort.
In Conclusion:
The world of real estate is as vast as it is intricate. As Eunji and I stand on the precipice of this venture, we are filled with both anticipation and determination. With thorough research and careful planning, the journey ahead will be both rewarding and enlightening. And we’re excited to share our experiences with all of you.