Have you been thinking of up-sizing, or upgrading or downsizing? Maybe wanting a community with more amenities? Maybe a lagoon view? Also consider relocating to another home that would be ideal to convert to a rental unit in the future.
If you establish a process, after several buy-convert to rental-buy cycles, you will have increased your net worth substantially and your cash flow goes up significantly. Treat it like a business; you are in the business of increasing cash flow and net worth.
The down payment is “in the bank”. The property will appreciate, and the levered gain will be a great benefit. In the case of a $200,000 property appreciating 3% – it goes up $6,000. The down payment was 20% ($40,000). The property appreciation is a 15% increase on the down payment. If there was $300 per month cash flow, you can then calculate a 24% return on the down payment. That is a good return.
Then there will be tax deductions. The big ones are:
- Mortgage Interest
- Depreciation
- Property Taxes
As an example, let us say there were $18,000 in deductions and you are in the 22% tax bracket; you would not pay $3,960 in taxes. If the cash flow is $300 per month, you are up $7,560 for the year. And the property is appreciating, say $6,000. You put in $40,000 and year one went up $13,560 (almost 40%). Net worth is now increased $46,000.
Consult your mortgage documents (or ask your loan officer) and determine what is the seasoning period for the mortgage that enables me to convert the house to a rental. One to two years is common. It is important to honor the seasoning period.
Now consider relocating from that property and converting it into a profitable rental.
- Determine what the house could rent for. SouthCoast Properties can help with that.
- Determine what your expenses would be. The mortgage statements will make that easy.
- Estimate the tax benefits from the property deductions.
- Monthly Cash flow?
- Makes sense as a rental?
Identify the new home as primary residence and make the purchase at the favorable interest rate and down payment terms.
Many investors plan for a part of their retirement income this way. Say you are 50 years old. Thinking of retiring at 65. You have 15 years to get ready. If you bought a “new” home every two years to convert to a rental, you would have seven rental properties. Seven units of cash flow, seven units of deductions, seven units of net worth growth. Investors also refinance the homes along the way to further increase cash flow.
Perhaps you are 35 years old, planning for retirement at 65. Thirty years of investing could yield around 15 rental units. A huge amount in net worth. Fifteen units of cash flow. See what your CPA says.
Leave a Reply