Radical use of real estate leverage? A.k.a. Buying and Living in the place you rent (or the parking space)

[TopHatFox]

Not sure how realistic this is, but:

1. Build excellent 750+ credit (done!) and secure A+ loan
2. Find a 100-200k apt. or house that is likely to appreciate over 1-5 yrs
3. Optimize, minimize, or eliminate taxes, closing costs, deposit, agent, insurance, and other costs.
4. Live in one room or closed off common room and rent as much of the remainder of the space as possible, at a slight premium (due to excellent maintenance, done by you).
5. At end of accumulation phase in ~5 years, either sell the bought off home or the large equity you and your tenants have built up. If market is down, rent fully and go travel until market reverts to mean (hopefully).

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If you end up spending ~5k/yr on your part of the mortgage cost with this strategy (what you'd be spending on rent anyway), worst case scenario the house depreciates in value or goes up in flames, partially or completely losing the money you'd have paid for rent anyway; best case you pocket the equity built by your tenants and you when you sell. Extra points for building a garden, bicycle clinic, and e-repair station with tenants.

Hell, it'd even be possible to live in a van in the parking space afforded by the home and rent the whole damn place out.

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To be clear, this would likely end up being a part time job, but that's okay with me for now~

Thoughts? : )

[TopHatFox]

Maybe something like this, with low cost, close to city centers, nice place, and lots of bed rooms. I could live in the "extra insulated shed"

https://westernmass.craigslist.org/reo/5917500831.html

Or maybe something even closer and easier to maintain:

https://westernmass.craigslist.org/reb/5891684461.html

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I'd definitely have to look into all potential out-flows, in-flows, my own labor cost (including finding tenants), and opporunity cost, as well as potential catastrophe scenarios. Then how to optimize all of these and make some decisions!

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Also, wow! 130K can get one a whole house (1 bedrooom), ~forever? I feel so rich. c:

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I wonder what books are availble using more radical real estate strategies; so many new questions!

[wood]

I think its a good idea to consider such options while one is young. I'm (only) 31, but I am already starting to feel like I'm done with roommates after more than 10 years with all sorts of roommates. Be aware that you might also change and therefore you should allow for some flexibility, e.g. could you throw out all roommates and live alone in the house during a financial downturn (?)
I believe we all have a "roommate tolerance jar" and you don't want yours to run out at an inconvenient time.

Buying and going for this option seems to increase financial risk, but also increases your expected return. Its a brilliant solution if you ask me.

I considered your solution a couple years ago. But because my jar felt half empty I didn't feel comfortable with the risk. I hope yours is still full:)

[wood]

I read about a guy in the local newspaper last year. He spent about 1 year worth of room rent to build his own mini house on wheels. He basically circumvents all property regulations because its not considered property. It's basically a mobile trailer. I'm tempted to try the same, especially if the building costs can be kept at 2 years worth of rent maximum.

Question would be where to put it though. I'm going to reach out to the guy for tips. Is it best to just try find someones backyard and rent a small plot there? Land rent + maintenance should be carefully considered.

[7Wannabe5]

I believe this strategy was suggested as next-best alternative to Treasury Bonds in the revised edition of YMOYL. I think it is a good idea, but you will need to enact and strictly practice some boundaries in the realm of keeping housemate-tenants well-distinguished from polyamorous partners. For instance, you don't want to lapse into some sort of situation where you give one housemate a break on the rent because she is supposed to take care of the chickens and tidy the kitchen in the morning, and then when you call her on not performing this task, she says something like "Oh, sorry, but you kept me up too late cuddling and playing Scrabble." Then 30 years pass and somehow you have turned into the creepy old guy who lures young strippers into his house with the promise of free use of his washing machine and dryer.

[Riggerjack]

This seems like the right way to vandwell, if you ask me.

Buy a house with existing garage, rent out house, minus garage. Live in Van in garage. Utilities would need to be addressed...

Old houses are best for this, having garages detached, and facing the alley. Make any alterations before renting, to accommodate your needs.

I would rent with water/sewer/garbage included, and make clear to potential renters that I use the garage, and credit rent for electricity used at highest rate. Then meter my power usage.

Living in an attached garage would violate the boundaries of many renters.

[saving-10-years]

If you could manage to have people living there who are acquisitive of high end items and discard these quickly from boredom, lack of batteries etc. than perhaps you can have some Ego-esque gains through selling on (see Something for nothing thread).

[Kriegsspiel]

I believe this strategy was suggested as next-best alternative to Treasury Bonds in the revised edition of YMOYL. I think it is a good idea, but you will need to enact and strictly practice some boundaries in the realm of keeping housemate-tenants well-distinguished from polyamorous partners. For instance, you don't want to lapse into some sort of situation where you give one housemate a break on the rent because she is supposed to take care of the chickens and tidy the kitchen in the morning, and then when you call her on not performing this task, she says something like "Oh, sorry, but you kept me up too late cuddling and playing Scrabble." Then 30 years pass and somehow you have turned into the creepy old guy who lures young strippers into his house with the promise of free use of his washing machine and dryer.

The thing to do is always collect 100% of the rent, then pay tenants for any services rendered.

[El Duderino]

it wouldn't be ERE if this thread didn't already include mentions of tiny houses, car holds and vans.

You're right about it being a part time job. Yet you are the boss too and it does feel good to know that you're working to maintain and improve something that is working back for you. I doubt someone could retire on one property using this method, but probably would be do-able with 2 and it all depends on the number of units. Living in the same unit with a roommate would mean this could be done on a lot smaller budget, I'd think.

Personally, I chose to live in a separate unit to avoid most contact with the tenants/renters. Just call me when there's a problem and keep the checks coming on time. And rather than get to 5, sell for a payoff or go full rental, I may use it as a low-cost headquarters for later on when I'm more on the move, if that ever happens. Gotta have somewhere to put all my shit, right? Plus, moving is a pain in the ass.

It's only been a few months on my own live-in landlord experiment, but all seems well and I'm really enjoying the lower 'rent' I'm paying. The income from the units more than covers the mortgage interest and real estate taxes. Those, aside from closing costs, are the only money you never get back. The rest goes to loan principal, so counts towards assets on the balance sheet. This of course assumes that the property won't decrease in value and you will have costs for maintaining that shouldn't be ignored. My place, for example, well it's a real shit show that will take a while to sort out. All part of the fun and if you really want that asset to increase in value, it helps to buy low when some basic maintenance will go a long way.

[classical_Liberal]

bla

[ether]

If you are mortgaging a property you have to pay Loan Origination fee (1-2% of value), Appraisal fee, Inspection, Attorney, Survey, Escrow, and get good property insurance. If you pay cash you can easily save $5-10k.

When buying property make sure you know:
-Property Tax rate
-Historic utility costs
-Age of building
-Type of construction (so you know what the most common repair issues)
-Age of roof, HVAC, plumbing, electric, foundation
-Existing debt leans by contractors, banks, or local governments

The general rule of thumb is collect 2% of the property value per month in rent. So @ 100k you want 2k/month cashflow.
The reason you want 24% ROI is to pay for these costs:

Opportunity cost of capital [What you would make just investing] (6%)
Vacancy risk premium [Expect a 20% vacancy rate in the long run] (4.5%)
Maintenance & Depreciation [HVAC & Roof normally last only 20 years] (4%)
Property taxes (1.5%)
Water & sewer (.5%)

20.5% of property value is spent every year just in maintenance and capital costs!

Therefore 24% - 20.5% = 3.5% of total investment is positive cash flow per year = $3500/yr profit, which compensates you for all the work you do maintaining the property, dealing with tenants, and filling extra long tax returns

P.S. The name of the game is buying a distressed property REALLY cheap. Look into tax auctions, foreclosures, and for sale by owner.

[banker22]

If you are mortgaging a property you have to pay Loan Origination fee (1-2% of value), Appraisal fee, Inspection, Attorney, Survey, Escrow, and get good property insurance. If you pay cash you can easily save $5-10k.

When buying property make sure you know:
-Property Tax rate
-Historic utility costs
-Age of building
-Type of construction (so you know what the most common repair issues)
-Age of roof, HVAC, plumbing, electric, foundation
-Existing debt leans by contractors, banks, or local governments

The general rule of thumb is collect 2% of the property value per month in rent. So @ 100k you want 2k/month cashflow.
The reason you want 24% ROI is to pay for these costs:

Opportunity cost of capital [What you would make just investing] (6%)
Vacancy risk premium [Expect a 20% vacancy rate in the long run] (4.5%)
Maintenance & Depreciation [HVAC & Roof normally last only 20 years] (4%)
Property taxes (1.5%)
Water & sewer (.5%)

20.5% of property value is spent every year just in maintenance and capital costs!

Therefore 24% - 20.5% = 3.5% of total investment is positive cash flow per year = $3500/yr profit, which compensates you for all the work you do maintaining the property, dealing with tenants, and filling extra long tax returns

P.S. The name of the game is buying a distressed property REALLY cheap. Look into tax auctions, foreclosures, and for sale by owner.

Sorry, I'm not following: how is the 20.5% calculated?

Also, assuming the 20.5 is correct, your return is 3.5% over 6% provided by the market, so 9.5% cash flow / yield.

This also doesn't take into account:

- favourable taxation - deductible interest and depreciation mean taxes are close to 0
- ability to easily leverage to enhance returns (with added risk) if desired
- much less volatility than equities
- much less liquid than equities
- appreciation potential which isn't factored into the 9.5% at all (although 6% market returns as your hurdle rate is just assumed to be true?)