“Home is where the heart is,” but in this case, home is where the money is made. As I mentioned in a previous article, it is now more important than ever to diversify your sources of income. One commonly discussed method is investing in real estate. Using a home as an investment can be a reliable way to build wealth and generate a good return on investment (if the numbers are calculated correctly). But if you don’t have the 20-25% down payment then what can you do? Well this article will walk you through a simple yet powerful strategy.
Is A Primary Residence An Investment?
First let’s address something that continually gets talked about in real estate and that is whether or not a primary residence is an investment. The simple answer is no it is not. The reason people see a primary residence as an investment is because of the equity you can build along with gains you can see when you sell. This can easily be interpreted as an investment because of that however, a primary residence does not generate income. Up until the point of refinancing or selling, you only pay money out with no immediate return for that money. So now that we cleared this up let’s talk true investment properties and the strategy of sneaky rentals.
What Is A Sneaky Rental?
The “Sneaky Rental” strategy in real estate involves purchasing a home as a primary residence, living in it for a year, and then renting it out. This approach is often adopted due to circumstances like work relocation, where renting out the property becomes more financially viable than selling it at a potential loss in the market.
For individuals venturing into real estate investing, the “Sneaky Rental” strategy can be a smart choice. It allows for a lower initial investment compared to traditional rental property purchases. Typically, banks require a substantial 20-25% downpayment for rental property loans, which can be a financial hurdle for many. However, with the “Sneaky Rental” strategy, using options like FHA at 3.5% or conventional loans at 5%, the upfront capital needed can be significantly reduced. For instance, in a scenario where a $250,000 property would require $50,000 – $62,500 downpayment traditionally, the “Sneaky Rental” strategy could enable acquiring the same property for as little as $8,750 or $12,500, freeing up more capital for other investments or property improvements to drive appreciation.
By moving out after a year and converting the property into a rental, individuals can generate cash flow and repeat the cycle, leveraging the additional funds saved initially. This strategy not only provides a lower barrier to entry into real estate investment but also allows for diversification of investments and potential growth opportunities by utilizing the freed-up capital effectively.
Can I Retire Now?
The allure of real estate investing often paints a picture of quick wealth and early retirement. However, the reality is far more complex. Success in real estate hinges on a careful analysis and due diligence of the property and two key factors: time and scale.
Over time, rental rates tend to rise, gradually increasing the gap between rental income and mortgage payments. This leads to a boost in monthly cash flow. With multiple properties experiencing this trend, your cash flow can snowball, creating a substantial income stream.
Scale plays a pivotal role as well. For instance, in my market, properties typically adhere to the 1% rule (rent equals 1% of purchase price), generating $100-$200 of free cash flow monthly per property. While a single rental may yield $2,400 annually, the real transformation occurs with scale. Ten rentals can bring in $22,000 yearly, while fifty can reach $120,000, and one hundred can generate $240,000. Through scaling, seemingly modest monthly returns can evolve into a pathway to financial freedom.
Final Verdict
The sneaky rental strategy is a good way to get into real estate and get your feet wet without much risk. There of course are many other alternatives and depending on your circumstances, your market or your financial situation other strategies may be better. But I think this can get you in the door and allow you to begin your investing journey. As you grow and look to scale then this strategy will no longer be needed and you can utilize other strategies to grow more rapidly. I hope you found this useful.