For small investors like me, it can pay off big dividends to move into the future rental property that I am repairing. I don’t always do it this way, but I find there are compelling advantages to this technique. These advantages include:
1. Reduce Financial Strain
I don’t have to make house payments on a property that has no tenants paying rent. In other words, living in the house while I repair it is better than having it empty. If I live in it, I make the mortgage payment that I would normally have to make anyway. However, if I tried to repair the house, while still living in another house, I have two mortgages to pay, until I can finish repairs on the new house and then rent it out.
This can be a real strain on the budget, especially when repairs go on longer than anticipated. What I like to do is to turn my former primary residence into a rental and move into the fixer-upper. I usually plan to stay in the new residence for two years.
2. Better loan terms
I get better loan terms as an owner occupant. Interest rates on a loan can be one percent lower if I purchase the house as an owner occupant, rather than as an investment property. The less I pay each month during the repair process, the better.
3. Learn repair skills
Instead of rushing through the repair process and having to contract out much of the work, in a more drawn out process I can take the time to learn new repair skills. It also affords me the luxury of being able to make mistakes and learn from them. For me, at least, that is an integral part of the learning process.
4. Make more money when renting
Because of the lower loan terms and lower monthly mortgage payments, when I later rent the property out, I can turn a tidier profit each month. Or, I can make it more attractive to potential tenants by offering to rent it at a lower price.
5. Accommodates my 8-5:00 job
Feverishly repairing a new rental property nights and weekends, puts a strain on my wife and I, since we both have day jobs. Stretching out the process reduces the stress level considerably.
6. Get to know the house
A slower repair process allows me to really get to know the idiosyncrasies of the house. Later when tenants request repairs, my in-depth knowledge of the house may make these future repairs easier.
7. Reduce taxes if I sell
Although, I believe in the buy-and-hold strategy, if I live in the house for two years and decide to sell, I can sell without paying federal capital gains taxes. If the capital gain is less than $500,000 for couples, the sale of the house is never reported on federal IRS forms.
One caveat. If you follow this strategy and have a family, expect to live under some primitive circumstances for awhile until you start to get things ship-shape. My kids are thrilled at camping out in a new house, and as long as I get the showers working fairly quickly, my wife is happy. If you take the perspective that it’s an exciting adventure, you won't be disappointed.
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3 comments:
Smart man-- and wonderful family!
If we were in a different position, this is exactly what we'd do and it's what I recommend to all young families starting out. Fantastic way to build equity and cashflow at the same time~!
Great tips Terry!
Connie & Maria,
Thanks for the comments.
As I'm sure you both know, if the family situation accommodates it, this live-in approach is really the easiest way to run a fixer-upper business.
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