House Hack – Bigger Pockets made this extremely popular and I think it is the EASIEST step into buying your first investment.
You will get favorable interest rates, be able to put less than 20% down and at least in Fort Collins, having an average of 5% appreciation every year, you could potentially remove your PMI, assuming a $350,000 purchase price and a 3.25% interest rate, as quick as:
EOY 1 Principal Balance: $332,700
EOY 1 Value of Property: $367,500
EOY 2 Principal Balance: $325,680
EOY 2 Value of Property: $385,875
EOY 3 Principal Balance: $318,428
EOY 3 Value of Property: $405,168
Boom! EOY 3, you can get your home reappraised and remove the PMI from your home. That’s probably around $150/Mo saved!
When you moved into your 4 Bedroom, 2 Bathroom 1,750 square foot bilevel home in 2020, rents were $1.15/Sq Ft in the area or roughly $500/Bedroom. These numbers would fetch you $2,000/Month in rent. Not bad. What does your monthly debt service look like.
Including your PMI, here would be your monthly payment including taxes, insurance, principal and interest (roughly):
Principal and Interest: $1,475
Taxes and Insurance: $350/Month
Right? If you believe you will never have any maintenance, marketing or turnover costs, sure.
Of course, I’m your first rental property, I believe you should manage it yourself, but for underwriting purposes, let’s include a 8% property management feet and be aggressive and put in there a 7% maintenance and marketing expense:
Property Management: $160/Month
Marketing and Maintenance: $140/Month
Total Monthly Expenses NOT including your debt service: $800/Month – this includes your PMI. Without PMI, the total operating expenses would be $650/Month.
Rent Year 1: $2,000
Op Ex Year 1: $650
Our income is going to increase at 4% annually and our expenses will increase at 3% annually.
Rent Year 2: $2,080
Op Ex Year 2: $670
Rent Year 3: $2,165
Op Ex Year 3: $690
At the start of year 4, you can expect your rent rate that you can charge to be $2,250 and your operating expenses to be $710/Month. We will get the home reappraised and DROP the PMI. So no, including your debt service of $1,475 and your operating expenses of $710/Month, your total expenses are $2,185/Month.
CASH FLOWWWW!!! This time, for real! Now, you have hopefully saved enough over the last 3 years to put down payment on your investment errr home, and keep rolling that strategy for the next 30 years and you’ll have 10 CASH FLOWING properties by the time your 55.
Of course, once a few years go buy and your cash flow starts to increase substantially from previous rentals, you’re savings will start to increase rapidly, allowing you to save more for your next down payment. Possibly in year 9/10, you’ve got 3 cash flowing properties and are ready to put 20% down on your next property in 2-3 years and expedite the turn to a rental. As Albert Einstein put it, the 8th wonder of the world is compound interest. Well in this case, it is not compound interest, but compounding income and ability to borrow that will allow you to become financially free through real estate.
This is NOT the sexy approach. This is 20-30 years of investing. Also, being willing to move every 2-3 years and not living in your dream home until you are 40-45 will take discipline and is not the norm. But do you want to be the norm? Working til your 60-70 years old and then hopping your retirement will last? 10-15 years of moving every 2-3 years and 40+ years of potential financial freedom. I choose financial freedom.