Last week we revealed the formula for true wealth formation:
Income – Expenses = Capital (seed money) left over to invest in wealth building assets.
Unfortunately, too many of us believe that investing in our primary residence is the surest path to wealth creation. Now don’t get me wrong. I am a strong advocate of home ownership. But owning a home is about having a place over your head. Your home, however, is not a good wealth building investment.
Consider this for instance: Adjusting for inflation, from 1900 to 2000, the average rate of appreciation for a home in the US was only 0.2%. As Wharton professor Todd Sinai explains in an interview with Business Insider, “Housing is a consumption decision, not an investment decision.” There are more efficient ways to build wealth with your housing dollars.
Build wealth through equity house hacking
Perhaps you’re just not into being a landlord, despite the economic benefits. You can still squeeze wealth out of your housing dollars. Consider equity house hacking. This strategy involves purchasing a home that either needs some fixing up or one you can easily add value to (adding a garage, turning a part of the home into an additional bedroom, improving the landscaping, etc).
The key is that the home must be livable so that you can reside in it while making improvements. When the improvements are done you’ve created instant equity which you can tap into by flipping the home. Alternatively, you can simply enjoy the home you’ve improved knowing that you’ve increased its value.
Convert living space into rental space
One of my favorite shows is HGTV’s Income Property in which homeowners are provided help turning unused space into money making rentals. A basement transforms into a two bedroom rental. A garage blossoms into a one bedroom income suite. Not only does converting existing space into rental property create cash flow, it also adds immediate value to the existing home.
There are more efficient ways to build wealth with your housing dollars.
Play it smart through duplex living
My brother recently had his heart set on a beautiful five bedroom single family home with a large yard. But after running the numbers he realized that the wiser financial decision was to purchase a nearby duplex. He plans to live in one unit while a tenant lives in the other.
After all is said and down my brother will end up paying around $275 a month to live in a $250,000 piece of property. All the while his tenant pays for the lion’s share of the duplex’s mortgage, property tax, and insurance by way of rent. After living this way for four or five years my brother will be in a much better position to purchase the house of his dreams, while still owning an income producing rental property.
Increase wealth through rental property.
After purchasing a modest home, consider purchasing rental property. There are four principle advantages of real estate investing.
You create immediate cashflow: If you do your homework and pay attention to your numbers, you’ll earn a profit on your rental every month because your tenant’s monthly rent should exceed your monthly rental expenses (mortgage, property taxes, maintenance, etc). This extra cash flows directly into your pockets.
Your renter pays down your mortgage. Each month someone else pays down the mortgage on your rental property as you simple sit back and cash the checks.
You earn tax benefits that put more money in your pocket. Landlords are simply entitled to a slew of tax deductions unavailable to the rest of us. These include tax deductions for interest, depreciation, repairs, travel, home office expenses, contractor expenses, insurance, as well as legal and professional fees.
Your rental property will appreciate: Like primary residences, your rental property will appreciate in value. But remember, as with a primary residence this may not be the source of a significant portion of your rental wealth, rather it is often icing on the cake.
Your housing costs represent one of your biggest expenses, but the money most people spend on their homes will seldom create extraordinary wealth. Yet, if you’re willing to be a little untraditional, and play your cards right, you can turn your housing dollars into new wealth building income streams.
BMWK, do you have other untraditional ways to build wealth through real estate?