Burton: Start investing in real estate by using your primary residence
Special to the Daily
Investing in real estate and buying a primary residence are two very different ways to own real estate. However, if done properly, your primary residence can kickstart a real estate investment portfolio in the best possible way.
I’m often approached by people who want to invest in real estate. They want to know how I built my real estate portfolio. I get excited because I want to share how I did it. Real estate is a great use of capital for long-term wealth building and I’m a firm believer in it. We live in an area where long-term rentals are in high demand where this strategy can be applied.
Turn your home into a rental
A great way to start investing in real estate is to buy your primary residence with the expectation that you’ll rent it out one day. That doesn’t mean that you should buy the most expensive home you can qualify for. People do this, and it’s fine when your goal is to live in your dream home. There’s nothing wrong with buying your dream home, but when you want to have a portfolio of properties, that will likely get in the way.
Instead, you want to look for a home that will be a good rental property that you will live in for some time. This is your “stepping stone” home. It means making a sacrifice on space, lot size and finishes. This will be a rental at some point and the numbers have to make sense. You’ll know this by comparing your total monthly housing costs to the potential rental income and if rent is greater than expenses than it could be a good rental.
The primary residence is important because you can get the best possible loan terms from your lender. A primary residence loan will have a lower interest rate, higher loan to value, lower closing costs and a fixed rate for the life of the loan. And after you move out of the property, the loan terms stay the same for the life of the loan.
Moving on up
When you’re ready for the next one, find another house that is better in some way than the previous one. Determine whether this property will also be a good rental down the road.
Is the location desirable? Are the expenses lower than the potential rental income? Is there value add opportunity? The value add isn’t entirely necessary but it’s a great way to increase the appreciation and equity in the home.
If your analysis shows that this will be a good rental, then this property will be purchased as a primary residence and your first home will become a rental. The rent must offset your expenses allowing you to qualify for the next loan (check with your lender to verify the requirements).
This is known as a primary residence upgrade and the process can be repeated several times. Again, the loan terms will have a lower interest rate, lower required down payment, lower closing costs and fixed rate for the primary residence.
A long, slow process
Continue this process every few years and slowly start building your real estate portfolio. Remember that real estate is a long slow process of wealth building and it is not a get-rich-quick scheme. However, as years pass, the benefits of owning income-producing properties will snowball.
The loan principal is paid down, the cash flow accumulates and in 30 years or less you’ll have a paid-off home with monthly cashflow for a well-executed retirement plan. Be aggressively patient. Care for the property, your tenants and your business to succeed. A paid-off rental property will make a drastic difference in your retirement plan.
Bret A. Burton is a broker associate with LIV Sotheby’s International Realty. He owns and manages a portfolio of nine properties from Avon to Vail and exclusively rents his properties long term. He has acquired his portfolio using creative financing, partnerships and the strategy discussed above. Connect with Bret on Instagram and Facebook @skitownrealtor, e-mail firstname.lastname@example.org or at 970-688-1819.