Author: John W. Schaub
My Rating: 3/5
Summary: Practical advise for building wealth by investing in single family homes.
My Takeaways
Buying houses let’s you diversify your investment across price ranges, locations
Commercial building’s value is tied to the cash flow it generates, a well located house will appreciate at a greater rate.
When investing in commercial buildings, you are negotiating with other sophisticated investors as opposed to homeowners.
Starter houses rent well and rent fast. During hard economic times, tenants often downsize to these houses to save money.
Larger houses will produce larger capital gains, but can reduce taxable income.
If income is important, start with lower priced houses in a good neighborhood.
Buy in the best neighborhood you can afford.
Majority of renters prefer 3 bedroom two bath house. Demand is higher than 2 bedroom house.
Find a house with a garage or basement. Tenants need storage.
Yards are a big selling point. Look for an average sized yard
An investment house should be big enough to attract a normal-sized family with their belongings, but not much bigger.
Buy a house that is functional and well located, then keep in good operating condition. Don’t buy houses with fancy items like trim and elaborate landscaping
Don’t get houses with pools or hot tubs.
Avoid lots on busy streets or odd shapes
Avoid corner lots
Before you buy a house, research propert taxes to see if they will change when you buy the house.
Tenants can be too rich or too poor.
There are six reasons why single-family houses make better investments than any other asset class:
- Houses can make more money with less work.
- Houses provide cash flow, but their value doesn’t depend on the income generated.
- Homeowners sell because they have to and aren’t experienced investors like those found with commercial real estate.
- Lenders prefer to make loans on single-family houses because they’re lower risk and easier to manage.
- Diversifying is simplified with individual houses, leading to increased investment safety and higher profits.
- Easier to identify trending factors that make a market good to invest in: population growth, demographics, local government regulations and zoning laws, and inflation.
The first step is to set a goal for the number of free and clear houses that you want to own. Work backwards into this goal by first setting an income goal and then asking how many free and clear houses you will need to produce that target income.”
- Set a goal by deciding how much monthly net cash flow you want and determining how many houses you need to get there.
- Buy one good house at a time, at the right price and terms, and hold while it appreciates in price and cash flows.
- Own your houses free and clear by using the cash flow to pay off debt quicker, strategically sell some houses to pay down the debt on others, or refinance some houses to pay off other.
If you have two houses, it’s better to have a debt of 80% on one and 0% on the other, rather than a 40% LTV on both.
That’s because as a real estate investor, you have more negotiating power with the lender with a conservative 80% loan-to-value. Conversely, the more equity you have the less likely the bank is willing to work with you, because they know you’re highly unlikely to walk away from the property.