Thursday, August 2, 2007

House Wisdom: Part Two

If I could tell you how to buy a second house with almost no money and minimal work, would you do it? Let's say you buy a house that appreciates $10,000 a year. In ten year's you could sell it and pocket $100,000 (before taxes)! There's several ways to do it, but here's a simple way that worked for us:

1. Buy your own house. If you haven't bought one yet, you'll have to get your first and then wait a couple of years. During this time, start looking at properties and getting an understanding of your local housing and rental markets.
2. After you've owned your house for a couple of years, get it appraised. So if you bought it for $200,000, let's say it's now worth $275,000. That means you have an extra $75,000 in equity (more if you've paid a lot of the home off). This equity can act as a kind of "psuedo-down payment" which you can use instead of cash as a downpayment to purchase another property. Banks generally require 25 or 35% downpayment which means you could potentially purchase a 2nd property for $300,000. Go in and talk to your bank (armed with your appraisal) and let them know you'd like to be pre-approved for a loan for up to $300,000 to buy a 2nd house.
3. Now at this point, the bank will want to know that you have the income to cover the monthly costs of your property. To get this money, you'll need to rent or lease out the property. The rent money needs to cover at least the following:
-monthly mortgage costs
-maintenance
-reserve
-utilities (if you are paying them)
-taxes
-management fees (if you get a company to manage your property)
If the bank thinks you can rent out a property for what you say you can and everything checks out, they will pre-approve you for the loan. Not all banks are as open to this kind of investing, so if your bank isn't, find another bank (or better yet a Credit Union - I highly recommend Crosstown Civic Credit Union here in Winnipeg - they are real estate investor friendly).
4. Go house shopping. I suggest finding a realtor who is themself a real estate investor - they will put good properties your way and find out potential rents for you. You must make sure you purchase a home that will at least cover (or better yet exceed) the monthly costs you anticipate from the home out of the rents. I have a simple spreadsheet which acts as my real estate calculator and I can size up a property and know if is viable in about 5 minutes. Contact me if you are interested in getting it.
5. Purchase the property. Make sure you factor in closing costs (sometimes 2-4% of the purchase price) and repair costs too. Then rent/lease it out the property or get a management company to do it for you.
6. Keep your renters/leasers happy and hold onto that property as long as you can!

This is a simplified explanation of the process. There is definitely work and risk involved and you need to buy wisely, but the key is that it doesn't take much money down. I think our investment property cost us about $2000 all together and that's cause we didn't put our closing costs into the mortgage. I hope this all makes sense, feel free to ask me questions. The cool thing about doing this is that you are using the equity in your house now to purchase another house which will also rise in value meaning in a couple of years you can do it all over again with a third house (using the increased equity in both of your other houses). Tomorrow, I will show the details on our own rental property so you can see how it works in reality.

3 comments:

Mark said...

I should also note that when you use your house as a "psuedo-downpayment" (or collateral) you still need to get a mortgage for 100% of the price of the house!

Warren said...

Hi Mark,
Any chance you can email me your handy dandy spreadsheet? Liane and I are looking at the possibility of buying a rental home which we would eventually move into if/when we out grow ours.

Mark said...

Done!