So, you want to rent out the home you live in. Great! Welcome to the first step of being an investor! Today, I want to talk about cash flow. When I first talk to a potential client, one of the questions I ask is what they are expecting to get in rent. I usually get an answer in some way shape or form of “Well, my mortgage is this amount, so I need to get X amount so that I can have some cash flow.” Everyone wants cash flow, and that is totally understandable – who wouldn’t want to make some extra money each month!
Here’s the thing. Many times, unless you bought the property quite a while ago when the market value was a lot different, you may not have a ton of cash flow – if any at all. But, that’s definitely not a reason to not rent your house still! Before I tell you why, I first want to explain the two main types of rental property investments.
First, you have the cash flow rentals. The main reason for investing in cash flow properties is to provide funds to pay bills, live off of, etc. This may end up being $100 a month, $300, who knows. A lot of people who retire seek out cash flowing properties, because they want that extra passive income. Cash flowing properties are more difficult to find, and it usually takes a certain type of property. Fixer-uppers can end up making good cash flowing properties. That’s why investors like to buy properties that need work. They can purchase them at a lower price, fix them up, and have instant equity and cash flow. It’s difficult to find a property at market value that is going to provide instant cash flow.
The second main type of rental property is capital gains. People who invest in these types of properties are looking to gain value over time, and eventually sell for a major profit. They may also use the equity they gain to refinance and pull out equity to purchase more rental properties. It’s easier to find these types of properties in the traditional sales market. It’s important to make sure that these properties are in an area where values are expected to increase. You wouldn’t want to buy a “capital gains” investment property in an area that is going downhill and has decreasing property values.
So, which one is better? Both have pros and cons. Cash flow properties get you pretty quick cash, once they’re occupied. Another major benefit is you can still make money even if the market declines. If we hit a recession and prices go down, you’ll still be collecting rent and can wait it out until the market picks back up. The big disadvantage of cash flow properties is that they can be difficult to find, and once you find them they may need some work to get them rent-ready. They also aren’t “cash-flowing” unless you have a tenant paying rent, so vacancies and repairs are going to cut into the cash flow you are depending on.
Capital Gains properties also have pros and cons. Capital growth provides you leverage to keep building. Your property value should be increasing each year, thus building equity and allowing opportunity to pull out money and continue to build your rental portfolio. Capital gains properties are also easier to find, and with the right representation, you can still find a good deal on the traditional market. One big disadvantage of capital gains property is that when the value is going down, you don’t have as much equity to pull. It can also be difficult to predict growth – you may think it will be valued at $X amount in 5 years, and then the market takes a turn and it takes 8 years to hit that number. You just never know.
But, you, living in your home that you want to make a rental, you have a very unique opportunity. First off, you’ve been living in the property, so you know the condition. You know what works well, what needs to be fixed, and what needs monitored. More than likely, you’ve been taking very good care of your property, so maintenance costs are going to be lower than if you went out and bought a different investment property.
You also already have equity in the property. Say you’ve lived there for 5 years, and now you’re renting it out. You’ve got 5 years in equity already, and you’re going to be getting today’s rental rates! That’s amazing!
Sure, maybe you don’t have hundreds of dollars flowing in every month, but you’re continuing to build up that equity year after year. Even breaking even is a positive. If you went out and bought your house right now for the current value, you probably wouldn’t be breaking even each month.
So yes, don’t let the fact that you’re not cashflowing hundreds of dollars a month discourage you from renting out the home you live in. There are so many positives to doing this, and the payoff should be well worth it in the long run.
I hope this video helps you to understand the different types of investment properties, and why it’s so ideal to rent the home you’re living in, if you’re looking for a real estate investment opportunity. I’d love to talk more with you about this. Give me a call at 636-707-2000.