Why Your First Property Needs To Be A Rental Property To Keep Your Financial Future Alive.
So, you’ve just got married and your spouse brings up the idea of getting out of your 1 bedroom rental apartment, and purchasing a single family home. A nice big yard, privacy, space, and ability to make your own decisions without checking in with the landlord. Sounds nice, right? Well, not really! What we are going to discuss in the article is how poor of a decision it is to invest in a single family home if you have nothing more than a full time job. What you’ve been told and taught all your life is mostly wrong and out of touch. Let’s discuss why.
Single Family Homes Are Liabilities.
As you go through your childhood, teen years, and young adult life you like know and visit many people that have comfy and cozy single-family settings. They have very few worries, and typically spend the weekends in the yard + grilling. It just seems so much better than cramming into a tenant apartment on the bad side of town. The truth is a single family has many benefits, but the worst thing about it is something that can potentially get you stuck in the mud for your entire life! That thing is the liability mark it creates on your credit report!
Most folks spend between $200,000 and $300,000 for their home. That generally averages out to a mortgage of $2,500 a month. You and your spouse both work full time and bring home $1,000 a week each (gross) respectively. That equates to about $5,500 a month after taxes and contributions are taken out. $2,500 goes towards your mortgage, and then another $600 goes towards your water, sewer, electric, heating, internet, and TV. You are now down to $2,400 for the rest of the month! You go grocery shopping once a week for $200, and now your total is down to $1,600. Then, you have some car problems and that costs you another $500. At $1,100 now your spouses birthday comes around and you treat them to a nice night on the town and a special gift. You’re at $800 before the car payment of $400 is due. Without continuing you are starting to get the picture, I hope?
Buy Assets To Eventually Pay For Your Single Family Liability.
When you put yourself in this hole from the beginning without any auxiliary income other than your job you become a serious liability to the next company/bank you try to ask for a loan/line of credit from. Whether it’s a car, furniture, or even a home equity line of credit, you will likely get poor terms on your debt if you get approved at all! If your plan is to invest in more properties in the future, you have fallen so far behind the 8 ball by purchasing a LIABILITY instead of an ASSET. A rental property is an asset even though it has a mortgage. You get to count that income on your tax return in addition to receiving many favorable tax deductions that rental property owners do. Once you obtain a few of these rental properties you almost are living for free (assuming you purchased them right). Now, when you go to the bank to ask for that car loan you probably will get a much lower interest rate and better repayment terms. The reason is that the bank sees you have your shit together and can afford it! Also, consider that each child you have potentially adds to this hole you are digging. You started with the single family, and then you popped out two kiddos. These dependents will go on your loan applications too! They consider that!
What most people don’t tell you growing up is the struggles they face from day to day. They hide these struggles and pretend that their life is a fairy tale, but the truth is they have a stack of unpaid bills in the kitchen drawer that they have no idea about how they are going to pay them. That is a result of poor decision making and putting emotion before intelligence. Whether you want to be lazy in your single family, or show it off to your friends, the net result is still usually the same.
When my wife and I started our lives together we lived in a trash neighborhood for 2 years until we were able to afford our first property. From there we were able to scale and grow efficiently. If we just jumped into a single family from the start, I would be living paycheck to paycheck. YES, owning rental property is a full-time job, but it comes with great reward and upward mobility. There is no better investment on earth than in real estate. Whether it’s 2 units or 200 units you are setting yourself up from success and financial freedom. Imagine, being able to walk into your job and tell the boss PEACE OUT! It seems unattainable, but it is 100% possible here in the United States. Take advantage of our history and capitalist roots to secure your dreams!
We would love to hear your feedback on this topic! Post a comment below so we can start a discussion!
Gregory Rice is the Vice President of franchise sales for Nexus Property Management®.
Nexus Property Management® is a National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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