Why You Should Treat Even Your Principal Residence as If it Was a Rental

I ask the people I coach on how to be successful real estate investors to treat even their own homes as if they were rental properties. 

Why?

Well, first of all, one day, they may move out and rent it. So it could become a rental property especially since I preach buy and hold not buy and flip.

I also believe everything you own should work for you instead of the other way round–you working to buy them.

“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy,” Marshall Field, department store owner

It’s why I convinced my middle daughter Mimi (I have 5 great kids–3 girls and 2 boys) to buy a semi-detached home with a walkout basement last year. We converted the basement into a nice, legal one-bedroom apartment, which rents for $1,230 per month. Mimi lives upstairs in a 3-bedroom, 2 and ½ bath home with a roommate who pays her $675 a month. 

So today, she lives in her own home for about a net cash cost of $400 a month, a lot less than she was paying in rent before ($1,000/month).

image
image
image
image
image
image
image
image
image
image
image
image

So here’s the process:

1. determine the HABU (highest and best use) for each property you are going to purchase, even your own home

2. think about how you would animate/renovate/increase the value of your property

3. ask what will each part of its functional program (for residences, you are talking about: the main part of the home, an in home suite, a coach house, a workshop, a storage shed, a garage office…) rent for

4. build a spreadsheet valuing the property three ways–a) on a cost to complete basis less depreciation, b) on an income basis based on actual and FMV cap rates, and c) on the basis of comparables

5. figure out what your IRR, internal rate of return, is

6. share this spreadsheet with your appraiser so you can support higher valuations and improve your chances of getting decent financing and refinancing. 

7. make sure your head (the analytical part of you), your heart (whether you are passionate about the place) and gut (your instincts) are all in alignment; if so this is probably a good decision

“Don’t wait to buy real estate. Buy real estate and wait,” Will Rogers, actor

8. then buy the place, and live happily ever after…

If you have time, please listen to what Rich Dad Poor Dad Robert Kiyosaki says in his video, 60 Minutes to Getting Rich. While I don’t agree with everything Robert says, he’ll certainly convince you (I hope) that investors beat savers each and every time, and that there is such a thing as good debt (as well as bad).

I love his definition of an asset: an asset is anything that produces cashflow (via passive income) for you even after you stop working at your JOB. A liability, on the other hand, is something that sucks money out of your jeans, whether you are working or not. 

So, according to Robert, your principal home is, of course, a liability… in his world view. Naturally, if you animate it the way I’ve described above, it’ll become an asset as well as a storehouse of value (which happens because your are “forced” to save by paying down your home mortgage). 

“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth,” Theodore Roosevelt, US president

I encourage people to buy a principal residence that performs double duty. Obviously, this rules out buying homes that are vast suburban ornaments–those clearly are money suckers, not investments. That’s also called “over investment”.

Don’t let that be you.

I think people have misunderstood some of Robert’s messaging, particularly around “no money down” deal making. I actually think he’s referring to self capitalization of real estate deals via such methods as seller take back mortgages or resorting to credit cards (!) for downpayment.

And he’s not talking about flipping properties either. He has a (mostly) build and hold philosophy, which I agree with.

I would also de-emphasize alternative investments like 401(k) plans in the US or RRSPs in Canada or mutual funds and insurance since many of us have experienced significant disappointment with those types of “investments”.

“Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk,” Armstrong Williams, political talk show host

The other thing I would add to Robert’s teachings is how to manage property properly (a core competency) and how to add value and differentiation to your real estate (via some of the animation techniques I teach, of course!) 

One other thing I like from Robert’s Rich Dad Poor Dad thing is that he recommends that you should retire on debt not savings. This counter intuitive concept actually makes sense I believe. 

If you save, say, $100,000 and get 1 or 2 points from your bank, that nets you $1,000 or maybe $2,000 in income per year. If, on the other hand, you borrow $100,000 to buy another income property, and it gets you a cap rate of say 6% plus some inflation protection plus some paydown of your mortgage by your tenants, you probably will see an IRR (internal rate of return) of more than 24% pa. 

So skill testing question: what’s better–1 or 2% ROI or 24%? 

If you’re not going to put money in real estate, where else?” Tamir Sapir, Manhattan real estate investor

Bruce M Firestone, PhD, real estate investment coach, Century 21 Explorer Realty real estate broker, Ottawa Senators founder

txt 6137628884

email bruce.firestone@century21.ca

Blog Archives

Tags