Make money on a new home?

[Lisa R.]

Hi. After reading all the books, I have decided to purchase a new home-but with the intention of renting out two rooms, and still make a profit every month that I can save to reinvest later. I don't ever hear much about this, so I am assuming it may not be the way to go. I didn't go with an older fixer-upper because I do not have the funds to fix up a house. My question: my plan is to still slowly fix up my new house with better upgrades. Do you think in five or six years I will be able to sell the house for more than I paid because of the upgrades, and make a profit? If not, how long do you think it might take for the property value to go up if it is going to? Thank you, Lisa Southeastern Wa

[Tyler Wehrung]

Lisa,

First off congrats on purchasing a home! What you are doing is often referred to as "House Hacking" and is a popular strategy for those just getting into the the game. If you are making money above your mortgage payment that you will be setting aside to invest, then that would be your cash flow. You should keep some of that money in a reserve account for maintenance, vacancies, etc. Since it is a new house, the maintenance category will likely be lower than normal. I wouldn't focus a lot on upgrades because most renters aren't overly concerned with them. There also isn't a great rental ROI for upgrades meaning renters generally wont pay you enough extra a month to make it worth your time. However, if you are considering selling in a few years then focus your upgrades on the kitchen and bathroom and still I wouldn't go crazy with them.

A conservative average appreciate rate is 4% per year and I don't know what you paid for the house, but should go up in the neighborhood of 20-25% over the next 5-6 years.  Also without knowing the numbers, I would guess that you will pay your mortgage down between 15-20k during this time.  Assuming there isn't a downturn in the market, these factors alone should put you in a good position to sell for a profit, leverage your equity, or use a 231 exchange to trade up to a larger property - All could be great options!

Good luck with what ever you decide!