Net-Worth Update

Week 6 NW

Liabilities Value Assets/Cash Value
Student Loan A -0.37 Investments 5,650.33
Student Loan B -5500 Cash 11,738.00
Student Loan C -5500
Total -11000.37 Total 17,388.33
NetWorth: 6,387.96

Something to note is that I finally have enough cash to pay off my student loans in 1 shot.  I’m currently debating as to whether or not to actually kill all of the loans at once, considering that its only a measly 3.375% interest rate after the government tax deduction.  Anyways, this is a topic for another post, lets get on to real estate.

The Duplex- a half liability, half asset hybrid

A duplex is an interesting piece of housing, its essentially an apartment building that has 2 units.  Duplex’s are pretty versatile as far as residential property goes because they can serve as a primary residence , an investment property, or both.  A primary residence is a home you buy for yourself to live in whereas an investment property is one that you buy to rent out and hopefully make money on.  A duplex allows you the option to wear the masks of both a common homeowner (living in a unit) and an investor (renting out a unit).  I’m currently looking into a “plex” for my first real estate purchase.

The liability half

img_0365People often misunderstand the definition between a liability and an asset.  The definition I like to use is as follows: at the end of every month, an asset puts money into your bank account.  At the end of the month, a liability takes money out of your bank account.  In this case, the liability side of a duplex includes the monthly mortgage, repairs, and insurance payments.  In this sense, the duplex is a liability because at the end of every month, it has costs that drain my bank account.  However, the duplex also has the ability to generate money.

The asset half

When I rent out half of my duplex, a tenant will pay me rent every month, thus putting money into my bank account.  It’s pretty self-explanatory.

Execution Plan

Before I go and set out to purchase a duplex, or any real estate property, I need to make a plan.  I need to educate myself about the risks involved with the transaction.  I need to make sure that I get a good deal so as to not ruin my future with a mortgage payment that I can’t afford.  I need to learn how to be a landlord.  Anyways here’s the plan.

Education

It is often very dangerous to start a new endeavor with ignorance.  That is why education is going to be my main risk management tool as I attempt to go through real estate.  Ideally, if I know what I am getting into, I can avoid falling into a trap that ends up endangering my future.

Earlier this month, I read a book called Investing in Duplexes, Triplexes, and Quads, which details why investing in small multi-family homes is a safe way to slowly build wealth.  When buying a “plex” you can live in the building which allows you to apply for residential financing.  Basically, you get to benefit from low interest rates available to people who want to purchase a home to live  in.  If you wanted to buy the property as an investment, financing the property would cost you much higher interest rates.  In addition, it’s easier to get approved for “plex” because banks will take into account rental income when you qualify for a loan.

At any rate, I want to thoroughly understand exactly what I am getting into before I get into a large amount of debt.

Get approved for a loan

The next step is going to get approved for a loan.  I already went to Chase to see what I would get and ended up getting pre-approved for a $350K purchase @ 3.6525% interest provided that I can come up with a 20% down-payment.  Although this isn’t a bad deal by any means, I was looking into paying less money down.  I plan on reapplying for a loan sometime in 2017 to see if I can get better terms.

Save for a down payment

In order to purchase a house, I have to have some liquid capital to use as a down payment.  Since I want to purchase something in the 300-400K range, I’ll need to save about 30-40K for a 10% down payment.  I’m planning on taking out 2 loans, the first will cover 80% of the total amount required.  I will get this loan through traditional financing by going to a bank.  The second loan I take will be a “piggy back” loan, which will be a loan on top of the first one to cover another 10% of the total amount.  I will then use my down payment to purchase the last 10%.

Find a real estate agent

After I have money to make a deal happen, I’ll probably need a real estate agent.  I don’t exactly understand why I need one of these, but every single website I have visited researching this topic recommended going with an agent.  At any rate, I’m hoping to get a “buyer broker” that splits commission with me so that I can save a little on closing cost.

Search for a deal

The hardest part of this plan is to actually find a good deal.  Since I’m looking to purchase in California, it will be extremely hard to find a property that I can rent out to make profit each month.  This is because the  California market is extremely hot and many investors come in to buy properties with all cash because they know that the properties will go up in value a few years from now.  However, this just means that I have to get creative about how I look for my deals.  I’ll probably have to network and look for a special circumstance that lets me purchase a property off market.  My best bet will be to wait for the next housing market correction, which isn’t likely to take place anytime soon.

Make an offer

Once I find a deal, I’ll have to negotiate a price on it.  If I make an offer that gets accepted, I can move on to the next step, due diligence.

Due diligence

After agreeing to purchase a home, I have to make sure that I’m buying exactly what I want.  This means going through and hiring an inspector to look through the duplex to make sure that there are no structural issues, pests, or any other nasty deal breakers.

Close!

If I find that the duplex is still a good buy after my due diligence, I’ll have to close on the deal and sign a bunch of papers to legally transfer the property to my name and start making payments every month to cover my financing obligations.

Find a tenant

Now that I own a duplex, I’ll need to find a person to occupy the other half.  I’ll have to be careful to make sure that I don’t pick a bad tenant, as evictions can be extremely costly and painful.

Maintain my property

The last part of the plan is to simply live in the property while using the monthly rent income from the tenant to offset the monthly mortgage, insurance, and repair fees.  Essentially, every month I live, I’ll get money from a tenant and gain equity in the duplex.  I’ll be getting a little richer each month.

In conclusion

This entire plan is still in its “fantasy” stage, and I don’t know if I’ll be able to act out each and every step.  However, the financial benefits of doing so are great, and I’ll definitely want to consider doing so if possible.  Perhaps I’ll pursue this goal at the end of my 99K challenge, as I should have ample cash to purchase a home.

 

Week 4 Update                                                                                           Week 8 Update