Just this week we bought another house! My wife and I closed on a single family home that we are just over the moon about. It’s an older home that needs some TLC, but we’re ready to roll up our sleeves and get to work. More importantly than us buying a new single family home is the home that were moving out of. I wanted to talk about what enabled us to now own two properties. The first, a two family home where we will now rent out both units and the second, our home for our family to grow in.
Acknowledging Privilege
After I graduated from college, I worked multiple jobs at once while living at home and paying off my student loans. From there, I was able to move out of my parents’ home and rent a small 1 bedroom apartment with my then girlfriend. I then saved the gap between my rent and what I’d been paying on my student loans. Yes, my loan payment was more than my rent, a LOT more. This allowed us to start off at a great place financially and start down the path we are currently on.
To get to this point, I worked my butt off, but it is important to note that I was making a solid paycheck ($72,000) at my day job that enabled me to take these steps. There is inherent privilege in the way that I was able to do this. It’s important to know that acknowledging privilege does not meant that things were just handed over. It means that our starting point and pathway had less obstacles than others. It’s just that simple and it’s important to state right out of the gate.
The Two Family Home
The fact that I was debt free when Kayla and I started dating meant that when we got engaged, we could double down on her debts. This allowed us to pay hers off quickly and save even faster after we moved from that same 1 bedroom to a studio when the landlord wanted to raise the rent $200/month! That apartment was cost effective and honestly, we loved that little studio. It was in a great location and was the perfect amount of space for us. From there, we were able to save just enough money for a down payment on a home. The choice to get a two-family home as opposed to a single family home will have a ripple effect that we feel for the rest of our lives.
We lived in the home for just about 3 years. We’ve had tenants for the entire time with an exception of a month or so after we moved in. Our tenants pay for the large majority of our mortgage allowed us to pay less than the market rate for our unit. We even paid less than what we did for our little studio. This was a huge boost to our savings rate. There have been some mishaps along the way with one particular mishap happening just this year. However, the savings that have built up from the rent has been able to cover all of these unexpected expenses (so far).
Math It Up
The two important numbers you want to pay attention to when shopping for rental properties are the 1% rule and your cap rate. The 1% rule is a general rule of thumb for what a property costs (including repairs) and the monthly rent that it is able to generate based on the local market. Easiest example is if you buy a $100,000 home, you want to be able to get at least $1,000/month (or 1%) in rent. This yields a 12% annual return. That’s an amazing return…. wait a minute. Assuming 50% of this is expenses, you’re looking at closer to a 6% return. This would be your theoretical cap rate.
Currently, our cap rate is very low (well under 6%). However, that’s mostly because we have been underpaying for our unit. This is also known as “house hacking.” House hacking enabled us to save for the next down payment. When we bought another house, the second unit of our two family opened up. Adding in the rent from renting out both units, our new cap rate will be just about 8.3% annually, which is pretty great if you ask me.
So, what will we do with this money you may ask?
We will be building up our emergency savings for the property from 6 months of expenses to 12 months. Then we will be using the additional income to further fund our retirement funds, potentially save for future rental properties or pay off this property early. Over the next 20-30 years, even a few hundred dollars/month adds up to quite a lot of cheddah.
It’s All About Options
Having this rental property in addition to our family’s primary home give us options by opening up additional funds. Especially since these funds are from a source other than our 9-5 jobs. On top of this, we will have another level of financial security built into our lives. If everything went wrong and Kayla and I both lost our jobs, we could sell one of the properties or move back into our rental.
We are so excited to have a home that’s just ours (no sharing walls). We’re also very excited at the possibilities that this opens up to us in the future. So, we bought another house, but more than that we bought our new home and allowed for more options than we’ve ever had before.
Have you used real estate as part of your retirement plan? What has your experience been? Let me know in the comments below!
Rental property and a real estate license allowed us to shelter a high salaried income from the IRS. The license allowed for losses to be deducted each year, with not the same restrictions on passive losses as the general public.