Recently I was researching the best investment strategies to plan for our retirement and the kids' futures. I came across an article titled "Your Landlord Might Be a Baby. " It was a catchy title but lacked helpful info regarding financial benefits. After a little more research, I came up with my own list. So here is some valuable information that might be worth considering whether you are planning for yourself, your children, or your grandchildren.
Considering that homes have gained significantly in value over the years, I often think of what our kids will be able to afford when it's time for them to buy a home.
In the 1970's, in San Antonio, the average home price was in the 40's. Today, the average home price in SA is in the $300s, which covers a broad spectrum of price ranges averaged together. I don't have a crystal ball, but if I do some quick math, I can assume that prices will be pretty high in 15-20 years between regular value increases and inflation. OUCH. (Legal disclaimer- they could go down, they could.) With that being said, the long-term trajectory has only gone up.
How and why to buy an investment property:
Someone else is paying the mortgage/taxes and ins. In 15-30 years, the gain is all yours.
Take out equity when/if needed- this could be for college tuition, weddings, down payments for other homes, investing in the stock market…you name it.
They can be great tax write-offs.
Grow generational wealth
You are providing a home to someone who, for whatever reason, is not ready, can't, or doesn't want to buy their own.
So how do you buy a property that you intend to use as a rental? It is pretty simple, and there are certainly more than a few ways. Keep reading, and I will briefly describe the two most common ways.
Option 1: Buy a home intending to live in for just a bit and then rent it out. It's best to go with a conventional loan with as little as 5% down. You will likely need to stay in the home for 12 months…some loans differ, and sometimes it's shorter or longer. You will want to start saving for your next down payment to do it all over again!
You can use an FHA loan, but keep in mind that you can only have one FHA loan (in most cases) at a time. The benefits to this are you have a minimal down payment, typically 3.5%, and the barrier to entry is lessened. If/when rates go down, you can refi to a conventional loan, stay in the house a bit longer to save for the next house, and so on.
Option 2: You are either wealthy or have saved a nice chunk of money to bypass all of the above. Yay for you!
It's a pretty simple setup- a 20% down payment will open the door to an investment property with the intent to rent it out immediately.
*Both options above will require you to pay closing costs- typically 2-3% of the purchase price, but in today's market, in most cases, sellers are happily (maybe not happily) paying buyers closing costs.