The two step guide to creating real estate wealth

[Dan D.]

I've read a lot and listen to almost all of the podcasts.  I've analyzed numbers, and to me it comes down a simple two step program for success.  Any more that this, and you're getting into the weeds.

Step #1:  Buy a nice house.

Step #2:  Rent the house.

That's it.

In more detail, buy a decent house if you can.  One that doesn't need a lot of repairs if you can help it.  Buy it at market value if you want.  Offer a little less, but buy something. Something affordable is good.  Something that can rent to a family with an okay income that could rent for a decent price, but go ahead and buy a house for $150,000 with 20% down and rent it.

Step two, rent it.  A nice house in a good community that you would pay at retail prices should get your rent around $1,100.  Sure, it's not the 2% rule, (or the 1% rule for that matter) but you want a nice house that "might" appreciate in time. 

If you do these two things, and even if you don't do it well, if you have a job, or a little bit to get you through hard times, chances are you'll do fine.

Results of doing so:

The numbers:

$150,000 house.  20% down,  ($30,000).

Rent $1,100 a month.  Mortgage at 4.5% = $608.02.

Gross rents minus mortgage at the end of year one will be $5,900 to pay taxes, insurance, expenses.  

Equity gained from mortgage paydown will be: $1935

Property appreciation at 1.5% (a safe bet if you straight line it over 30 years) will be: $2,250

Depreciation deduction (25% tax bracket income): $1,363.

Total end of year one: $11,448.

Worst case, you have some higher than usual expenses year one and a bit more vacancy landing that first tenant, but for the $11,448, you can fix a fair number of things year one and still pay insurance and taxes.

At a 50% rule for expenses on gross rents, and including a 10% vacancy rate, you still clear $3,500 year one.

The best news is, after year one 90% of the work is done the money gets better each year after as more debt is paid down, rents increase, appreciation wealth increases, and you've locked in your biggest cost for 30 years by securing that 30 year mortgage.

That $600 payment in 20-30 years will seem like $300.

I think if you go much beyond this, you are starting to over-analyze.  Yes, there might be better deals out there, but for $30k, I'd suggest this is a better way to go than buying a car or perhaps paying for a college education.