Why and When Living in Rented Accommodation Can Make a Lot of Sense
Owning your house does give one a sense of achievement, it is true. There is also something to be said about the emotions of pride and joy of living in a home that one owns. However, when one thinks logically, this doesn’t have to be the only outcome of owning a home. In a lot of cases, it can actually make much more sense to live in rented accommodation while renting out one's own property to someone else. The correct choice ideally should depend upon where you live vis-à-vis where you own property.
When it makes sense to live in a rented home.
For people who live in San Francisco, Los Angeles, San Diego, New York and so on, where property prices are really high, renting can make a lot of sense. While property prices in these areas are very high, rents are low relative to these valuations. So it may not be affordable or even advisable to buy property here, but it could make a lot of sense to rent property in these areas.
You could say that rent of around $5000 a month is high, and you would be right. However, it is high only in absolute terms. That amount is actually really low when you factor in the fact that it’s what you're paying to live in a $2.7 million home! So if you're living in these areas with high property prices and low rents, it simply makes sense to live in rented accommodation.
You can still be a property owner.
In places like Atlanta you could still buy and live in your own home, but this could make a lot less financial sense in other places. It can make sense to own property in one place while living in rented accommodation in another place. You can still have the joy and the sense of achievement and ownership that comes from buying a house. You can own it, but not necessarily live in it.
There was a time when I was living abroad and the parents of my new wife came to visit us. We were living in a rented home – it was a beautiful home but it was rented. My mother-in-law’s first reaction was to say – oh if only you owned it! She knew that I owned dozens of homes in the US, but she still said this. It merely echoes the mindset that living in the property you own is somehow better than living in rental accommodation. If you can get past the mindset that wants you to live in the home that you own, you could find that you're actually making a wise financial decision. If you can overcome emotion and think logically, you would find that my point of view makes a lot of sense. Check out this video for more details.
I'm going to be speaking more about this in my nextquarterly event – about the possibility of living in a rented property while still being a property owner yourself. I will be touching on the best places to rent and the best places to buy property right now.
…And Where You Should Buy Instead
I live and work in the San Francisco Bay Area. So it follows that I would recommend investing in real estate in the area, right? Wrong! When people ask me about investing in real estate here, I advise them against it – for a couple of reasons. Would you believe, I lived in rental accommodation myself for 20 years precisely for those reasons? Read on to know more about my experiences with real estate in the SF bay area and why I advise clients the way I do.
Why San Francisco Bay Area is not the best bet for investors.
Here’s a fact that really amazes a lot of people: I lived in a rented property in Marin County for close to 20 years. So the guy who buys and sells all this property, who owns hundreds of homes and helps others buy thousands more, lives in rented accommodation? It does sound strange. But it was the logical, financially sensible choice to make. For one, the numbers didn’t make sense if I were to buy. Secondly, the laws are not really in favor of the investors.
Now I usually advise people to buy homes in large metropolitan areas where we have a lot of economic activity and job diversity, because this is where people are looking to rent homes. This is where they are willing to shell out top dollar to rent quality homes. I typically recommend buying in the Sunbelt states. While the San Francisco Bay Area ticks all of these boxes, the ratio between property prices and rents does not make sense. At one point I was living in a million-dollar home, but I was paying just about $3000 in rent. And now that same home would fetch maybe four million dollars but the rent in relation to that valuation is still peanuts!
Further, the laws governing rental accommodation tend to favor the tenant in California. So I would much rather be a tenant than a landlord here. This is the other reason why I would still advise investors not to invest in property in the San Francisco Bay Area.
Rent, don’t buy in the San Francisco Bay Area.
Back in the day, we were buying a lot of homes in Phoenix. This was a hot market for people looking to invest in real estate. At the time, we could buy good quality single-family homes for just about $150,000. This same home would then fetch rent in the area of $1100. This is the sort of rent that would help to generate positive cash flows for the investor. The ratio of value of the home to rent is favorable for the landlord. Now, even Phoenix is not a great idea, the reasons for which I’ve shared in previous videos and podcasts.
So to summarize, San Francisco Bay Area doesn’t make sense for investors because real estate is really expensive in the area. It is out of reach for a great many people looking to invest. Also important is the fact that homes there do not fetch rents that are commensurate with the value of the homes. If a four-million-dollar home only fetches about $7000 in rent, that is not great. While 7K is a lot in absolute terms, it is peanuts relative to the property value.
So, where should you invest if the San Francisco Bay Area is not advisable? We are here to tell you precisely that. Check out myvideos or reach out to us and know more about our Remote Control Retirement Riches formula.
How Refinancing Your Current Home Gives You a Real Shot At Wealth Creation
Investors often ask me this – is it advisable to refinance my current homes and use that as down payment to buy more homes? The reason they ask is that‘refinancing’ is something of a bad word in some circles. For some, the very word smacks of risk and fiscal imprudence. For me, however, this has been a great option and one that I have used frequently. Let me explain how I made it work for me and how you can make it work for you:
Why refinancing is a good idea.
So you are still paying for your house – the one you live in or the one you have bought as an investment. Should you refinance this? A lot of people would caution you against this. And to be sure this option is not for everyone. If you are an aggressive investor and someone who is willing to step out of your financial comfort zone, this is a great option for you.
If you're someone who imagines wealth in your future and not a scenario where you're just getting by, this is for you.
So depending upon the interest rates at the time, you can take a call about refinancing your current assets. This generates a significant cash flow, and one that is tax free, by the way. This cash flow is then used for the purchase of a new home. You use it to make the down payment for this new home. This is something that I have done myself, because my aim was always to buy as many homes as possible. To my mind any asset you currently own represents the potential for creating more assets for you; more wealth for you in times to come. It would be a shame not to capitalize on that!
Don’t regret your decision later.
Now there are a great many of our investors who have been fiscally conservative, unwilling to take any chance that they saw as risky. However, over the years they would realize how it is possible to‘make money from money’. There would then be some amount of regret that they didn’t go ahead and buy more homes. I have often heard investors saying this:“I wish I had bought more homes.” They could have used the refinancing option to buy more homes but they did not. They could have been even wealthier in their retirement years than they ended up being.
Refinancing your current home may seem risky but it really is not – it is a well calculated risk at best and one that pays over the long term. When you refinance your home you generate cash flow to make the downpayment for a new home, which will soon start to generate a rental income. This will soon create a positive cash flow or help you break even at any rate. Find out more about this option in my latest video.
Why Your Cash Flow Will Increase Even When Cost of Living Rises
Our clients are familiar with our Remote Control Retirement Riches formula. This is among the best and more reliable ways to create wealth for yourself and your family, and to secure your financial future. Real estate is, in a sense, an investment that pays for itself. When you take out a loan and buy a house, you then rent it out. The rental income generated then helps you repay the mortgage. Over time it generates a profit. So what is the right way to use these cash inflows?
Two ways to use your cash inflows.
If your investment is not generating a profit for you right now, it will do so in the future. This is because as the cost of living goes up, rental incomes do the same. However, your mortgage payment amounts will remain the same over the years because you're going to have the benefit of the 30-year fixed-rate loan. So you will have surplus cash. What do I do with thiscash flow, my clients and people on social media sometimes ask me.
Well, one option is to create an emergency fund for expenses that may crop up for you as a landlord: maintenance, breakage, repairs, replacements etc. So you can put aside some money for this. On the other hand, you can accumulate your cash inflows and invest in more houses. You can buy more homes and further secure your financial future.
How I used my cash inflows.
There was a time when I was also putting money away for emergencies and contingencies. I would do this because I felt that as a landlord, I should have a way to defray expenses such as house maintenance, repairs and so on. I soon realized, however, that this was not helping me meet my goal – which was to buy as many homes as possible. I was not making the best use of my liquid assets by parking them in a contingency fund.
The better option was to use the money and accumulate my cash flows to buy more homes, and then generate higher incomes. And what about the times when those expenses cropped up? I found that it made sense to open up a line of credit with the bank – to be used as and when needed. This is also what I would advise investors to do with the cash flow that their investments generate.
It makes sense to create wealth, for a more secure, prosperous future. For this to happen, you cannot afford to let your cash flows stagnate. You have to put them to the best use possible. If you would like to know more about our investment strategies, visit us at icgre.com. To get more real estate investing tips, check out my podcasts and videos.
How Does Inflation Impact Real Estate Investments? It's Not What You Expect
What amount of cash flow can you expect from a $200,000 home when you put 20% down payment? This is a question that I was asked just recently by someone looking to invest in real estate. I would have answered this question differently, and with a different set of numbers just six months ago. Now, however, the prospect has changed significantly. Read on to know why, or watch this short video.
Recent changes in the economy and their impact.
The economy has seen some significant changes in recent times. I've said for a while that inflation is coming, and that turned out to be true! So this question about cash flow that an investor can expect from a $200,000 home and a 20% downpayment – it had a different answer just six months ago. At the time, you could get a nice new single-family home for $200,000, whereas now you would probably have to pay in the region of $260,000 for something comparable. Of course the numbers differ from market to market, state to state, but I'm giving you some ballpark figures here.
So six months ago, after you had made your mortgage and other payments, you would still be able to net a few hundred dollars from your rental income for a $260,000 home. Now however, interest rates have gone up too. So your 30-year fixed-rate loan is that much costlier. Now you can expect to just break even or make a small profit.
Why real estate investors need not worry.
However, it isn't all bad news. In fact, if you have been a smart real estate investor and bought single family, brand new homes, you are probably in the best position. Right now, people looking to rent, prefer single family homes over anything else. The home with a yard, extra space for a home office perhaps – that is the sort of thing people want. And since the demand is high, rental incomes are also on the rise. So right now, there is a shortage in the property market: more people looking to rent than there are houses available for rent.
And in the coming days, as rent incomes continue to go up, your outflow or your mortgage payments are going to remain the same. With the gift that is the 30-year fixed-rate loan, you're going to find it easier to repay your loan as time goes by, while your rental income will continue to rise. In my book, that is a great deal!
If you have a question about real estate investments, feel free to ask me about it. You can reach us at our Toll Free number(800) 324-3983 or at(415) 927-7504, or you can email us at email@example.com. Who knows, the next time you watch my real estate videos, I may well be answering the question you asked!
Should You As A Landlord Worry About Meeting Unforeseen Expenses?
How much emergency cash should I have for each rental property for unforeseen maintenance and repair expenses? Is there a percentage? These are some of the questions that our current investors or would-be investors ask me at times. After all, as a landlord one has to be prepared for things to break, need replacement or regular maintenance, right? However, I have some tips for people who don’t want to park thousands of dollars of their hard-earned money in some emergency/ reserve fund.
Who needs an emergency fund?
If you follow what we call the“Remote Control Retirement Riches” formula that we have perfected over the years, you don’t need to worry about all of this. The first thing to do is to remember – only brand new homes! I will always advise my investors to invest in brand new, single-family homes. Single-family homes fetch the best rent, and buying brand new has several other benefits. For one, you are far less likely to have breakdowns or breakages in a brand new home. A brand new roof is less likely to spring a leak and a brand new air conditioning system is far less likely to malfunction, for instance.
Plus, there is the builder's warranty that protects you in the unlikely event of such expenses as well. So if you decide to opt for a brand new home – wisely – then you are much less likely to need a reserve or emergency fund for your rental home. By the time a few years go by, your cash flows start to improve – while your mortgage payments remain the same, your rental income increases. So you are able to maintain better liquidity.
Why a bank credit line makes more sense.
Back in the day, I would park thousands of dollars in an emergency or a repair fund, meant to be used when a rental property of mine needed repairs or maintenance and so on. Soon I realized the futility of jamming my hard-earned money for so long. My aim was to invest in as many houses as possible and having to maintain some emergency fund or account spoiled my chances of doing this. So I decided to take another route.
Instead of keeping money aside in some emergency fund, what I did was start a line of credit with my bank. I didn’t even need to use it, but it was there in the event I needed it. If there were repairs to be made or things to be replaced, that line of credit would take care of the expenses. I find that this makes more sense than maintaining an emergency fund. Watch this video for details.
It is all a part of the Remote Control Retirement Riches formula that we at icgre.com have developed and refined over the years. You too can benefit from it at no added cost to you.
Inflation Means Higher Interest Rates – But This Need Not Impact Your Investment
“Now that interest rates have gone up by 3% relatively quickly, home prices are up significantly from a couple of years ago. So, is buying single family rental homes still worth it?” This is a top-of-the-mind question for a lot of investors right now. This is something that I get asked on social media, by people reaching out to us aticgre.com or people who attend our quarterlyonline expo events. And to these people I have one simple, straight answer – Yes! It is worth it. Investing in real estate using the formula we have perfected at ICG Real Estate is always worth it. I have also explained this at some length inthis article.
Inflation is rising, but this is not necessarily a bad thing.
I have been shouting from the rooftops about the inflation that is going to come, and come it has! Everything is more expensive right now and your hard earned dollar is simply not going as far as it used to. Rising inflation inevitably means that interest rates are going to go up, and that is what we have seen as well. Where, until recently loans were available at the lowest ever interest rates – as low as 2% in cases – all that has changed. Rates were between 2% and 4% and now that figure has climbed to about 7%. This has alarmed a lot of people and made them wonder whether or not to invest in real estate.
So here’s the thing: if interest rates are at 7%, they are still lower than the inflation rate, which is hovering in the region of 8.5%. And when I look back at my long investing career, that 7% is still an astoundingly low rate. Investors – and myself, I must add – have grown very wealthy with the help of investments made in times when those rates were a lot higher. In fact, when I first started to buy property back in the 1980s, interest rates were as high as 14%. And I still was able to create positive cash flows and keep buying more and more houses.
Why you don’t have to worry about 7% interest.
I get calls and emails from investors who are happily wealthy, having invested maybe fifteen years ago when interest rates were 7% or 8%. These investors went on to buy multiple homes. They did this by first generating a positive cash flow from rental income and then buying more homes. And then some years down the line, when there were still some years left on the loans, they sold off a couple of the homes. They then paid capital gains and repaid the remaining loans, and now enjoy their investments, free and clear!
So, don’t worry about the 7% interest rate. Your real trump card is the 30-year fixed-rate loan – which Warren Buffet also recommends. With this loan, inflation is your best friend! With inflation, cost of living will rise, and hence your rental income will increase as well. However, with the 30-year loan, your mortgage repayment is never going to change. And that amount is going to look smaller and smaller as the years go by while your rental income will continue to rise.
I have a lot of stories about successful investors who were buying real estate when interest rates were much higher than they are right now. I will be sharing some of these stories in the upcoming expo and will also go into the details of rising interest rates. To know more, you can check outthis article or watch this video.
Investing In Rental Homes? What Matters and What Does Not
As a real estate investment guide, I get a lot of questions about the dos and don'ts of investing. People ask me questions on our quarterly expos as well as on social media – and you can subscribe to myYouTube channel and follow me onInstagram, by the way. One of the questions I get asked is, whether investors should buy subsequent homes in the same location as their first property purchase. Should they buy their second and third homes and so on in the same area? And my answer to them is, it doesn’t matter!
Why it doesn’t matter.
Now if you buy one home and then you buy another in the same location – the same city, say, it can be convenient. You already are in touch with the brokers, you already work with the property management people, and you're already familiar with the mortgage company that did your paperwork. So you know the ropes and you're familiar with the people. Getting a second and third loan may well be easier when the lender has already advanced one loan. This is convenient and the familiarity is comforting for you as an investor.
So, I'm not saying there are no advantages at all. There are advantages but they are not significant in terms of any financial advantage they will bring you. Where you buy your second, third and fourth homes – this is not going to make much of a difference to your retirement riches in the end. There are other far more significant factors that will make much more of a difference to your financial outcomes in the longer term.
What really matters.
Number one is the 30-year fixed-rate loan. Yes I know I've said it before, but I’ll say it again – it is a gift and one that you cannot afford not to take. This is the loan that you pay off over 30 years at a fixed rate of interest. So if you're repaying X amount today, you're still only paying that X amount ten, twenty years later. By then, inflation is going to make that amount seem puny in comparison to what it seems today. Meanwhile, the rental income will help pay off the loan.
Number two is the sort of investment you make. Quality single family homes in good areas have the best chance of getting top dollar rent. So that is what you're going to want to look at when you invest in real estate. If more than one of your investments is in the same geographical area, well and good. If not, that is no problem either! So long as you have the important aspects sorted, this doesn’t really matter.
To know more, watch this video or listen to this podcast.
If you would like me to address a particular issue in one of my videos or podcasts, be sure to let me know. Just drop us a line at firstname.lastname@example.org
Why Depreciation On Real Estate Is A Gift You Cannot Afford Not To Use
I always say that the United States of America has on offer some of the best gifts for investors, which people in other nations cannot even believe! For instance, there is the 30-year fixed-rate loan that is an unbelievable gift, and then there is depreciation which is another incredible gift for investors. In my recent podcast I speak about how depreciation helps investors make the best of their property investments, about depreciation recapture, step up basis, and more.
How depreciation helps.
Now I don’t know where else this is true, but in the USA it is – that you get depreciation on your real estate investment. Typically depreciation is available on cars or machinery or gadgets and so on – things that will lose value over time as they are used. Real estate is different in that it is not going to wear out or stop working at some point like a car or piece of machinery. And yet, our great country gives you depreciation on your property – this even as your property may actually be going up in value.
Depreciation is flexible in the way that you can use it. It is a tax deductible expense and as such it will be very useful for lowering the amount of tax you pay in a given year. Also, you can choose to use your depreciation in the current year or later depending upon your income in a given year. Of course there is a threshold beyond which this cannot be used and currently that limit is $150,000/-(this of course is subject to change) adjusted gross. The ability to carry forward net operating losses is quite unique in my view.
Other concepts to understand.
Now I have to clarify that I am not a trained accountant and you must cross check all of what I say with your CPA. However, my many years as an investor and investment guide have given me some practical insight that I'm sharing here with you. So, depreciation comes in handy in yet another way. There is something called depreciation recapture, which can help you take advantage of inflation. It is very useful when selling a property – whether you do it soon after buying or many years later. You can‘recapture’ depreciation in the future – when your dollar is literally worth less.
And then there is the concept of step up basis: I like to explain this as, stepping up on a stair and on the day of your death. Not to be morbid, but this is going to help your heirs save on taxes after your demise, as I explain in my podcast. This is a pretty vast subject and quite complex. So I urge you to clarify all these concepts with a CPA. You may also want to attend ourquarterly events where we invite CPAs to explain matters such as these as well.
What To Do When Tenants Cause Damage – We Have You Covered
What happens when it turns out that your tenant is not the best sort of tenant? What if they cause damage to your property? What if they break rules and contravene the terms of the lease agreement? A lot of real estate investors worry about bad tenants. It is not unreasonable to do this. However, you can rest assured that things will get looked after when you’ve opted for the Remote Control Retirement Riches formula that so many other investors have used.
A bad tenant is not your headache.
So you have a tenant who breaks things or makes alterations they aren't supposed to or causes some other type of damage. What do you, as a landlord do? Well, you do nothing. This is because you’ve done the smart thing by engaging a property management agency to look after the property, deal with the tenant, documentation etc. It is the job of the property management firm to take care of the wayward tenant. The property manager will deal with the tenant and ensure that your loss is made good.
The options available to a tenant would depend upon the state laws within whose jurisdiction the property is. Most states have very fair and balanced laws that equally favor the landlord and the tenant. I'm not talking about New York and California, but then we don’t advise you to invest in these states anyway.
So there are laws in place to protect the rights and interests of property owners. The owner is entitled to make good any loss or damage using the amount of security deposit paid by the tenant. If this is insufficient and the damage is more extensive, there is the option to approach the small claims court for compensation. Garnishing of wages may be another possibility.
The Remote Control Retirement Riches formula.
All this sounds like a lot of work, a headache really! But here’s the best part, this is not your headache as a landlord. It is the job of the property manager to deal with the tenant, to recover the damages, to deal with the attorney and the court and so on. Property management firms typically have attorneys who deal with this sort of thing, so that it isn't your headache.
And that is why we call it the Remote Control Retirement Riches formula. You as an investor could be in any part of the country – even the world, and your real estate investment is looked after for you. You don’t have to deal with the issues that typically crop up between a landlord and a tenant because you have competent people to do this for you. At ICG Real Estate we have devised a formula that requires you, as an investor, to do nothing!
If you would like to know more about securing your future and the future of your family, reach out to us at icgre.com. We have helped thousands of investors create not just financial security but wealth for themselves with the help of real estate investments. Sign up for our updates or attend one of ourOnline Expo events. You have nothing to lose and a lot to gain!
ICG uses single-family home investments, bought in advantageous locations and the best U.S. markets. We enable you to enjoy the clout that comes from purchasing a multitude of houses, even if you only buy one.
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