I am an advocate of buying houses to turn into rentals. Whether they are immediately rentals or eventually become rentals later after they are lived in doesn’t matter. As an empire builder of seven houses and counting, I am not only a true believer that owning lots of houses can have positive effects on your net worth. I have illustrated this many times on my blog and how personally it has allowed us to gain $400,000 in 4 years.
I am also realistic when I tell you that someday I will become a tenant again. At this point in my life, owning homes has to be an asset. It has to be a financial gain that adds value and helps me grow my financial position. Here are five things I look for when thinking about renting or buying a home at our next duty station…
Things We Look for When Renting or Buying:
1. We Try to Put as Close to 0% Down as Possible.
Our goal is to put as little down as possible in our houses. While investments require 25% after five homes, we strive to put 5% down on our personals.
2. When We Know Owning is Cheaper Than Renting.
If we can rent a home that’s significantly under the price (mortgage) of buying a house then it doesn’t make sense to buy. This is especially true if the principle amount exceeds the savings. For example: If I can rent a home for $2,000 but my mortgage is $2,600, and the amount I am paying off my loan is $300 then I should always rent.
3. We Immediately Rent For More Than Our Mortgage
I only buy a house that I can immediately rent out for more than my mortgage. That is my exit plan. For me this has been key and will probably be the number one reason why I rent instead of buying. There will always be some areas where it does not make sense to buy financially.
4. They Must Meet Our Core Requirements.
We buy houses that I can self-manage from a distance no matter if it is five miles away or 3,000 miles away. I have a specific market demographic and area that I appeal to. If a house does not fit my 7 building blocks then I will not buy the house.
5. We Don’t Buy on Pure Speculation That Prices Will Increase.
The one thing we have not done is buy a house purely with the exit plan that the houses will increase in value. While I take pride in buying in areas that I foresee long-term growth and value; I do not buy in areas that wouldn’t clear a profit from day one.
While there are always exceptions to rules, at this time there are only two reasons I would break any og these rules. Here they are:
- Goal of a placeholder. If we knew we would want to end back up in a good area and the numbers were just slightly off, we would buy. This would happen whether or not there were only a few houses that were cheaper to rent than buy. We would make sure that we would not lose much and that we foresaw growth there. Then I would buy because it meant that we had a place to come back to for years to come.
- Retirement Home. We have debated buying in an area that will just barely make sense with the goal of the tenants paying off the home over the next 15 years. This way when we do retire from the Navy, we have a home in the area we want to live. While it may be a placeholder or the actual retirement home, the goal is that we had a place in the area we wanted to end up.
Personally, I have the goal of only renting the houses out. Your goal might be to do whatever make sense for you at the time. Check out my article on Selling or Renting, to learn which make more sense for your specific situation.
What do measures do you use to evaluate do help decide if renting or buying is a better decision?1
Hi Elizabeth! I own and rent out a townhouse only because I can’t sell it due to it being under water. I lived there for almost 9 years and the area is slightly economically depressed. I’m fine with renting it out for now. I’m not sure what will happen long-term and I’m not too worried about it anymore but in the beginning it really ate into my finances. So, now I’m a renter but readying myself to purchase a home. When I first moved to this state for a job, I wasn’t ready to buy a house and I’m just in that state of mind where I want to purchase one and I’ve been here for 5 years now. Sometimes, I feel like I should have already bought a home and sometimes I’m just like whatever. So, now that I’m ready and this will be mid-next year sometime before I can buy, do you have any tips for me as a landlord with a house in another state and soon to be a homeowner with no plans to ever rent out a house again? Thank you! I love your work!
Elizabeth Bennett Colegrove says
Thank you! My only advice would be to have an short term backup exit plan. Although know you don’t plan on ever renting your house out again, I would be hesitant to take out a 30 year mortgage on an asset that wouldn’t make a good rental. I have found out the hard way that Murphy loves long term plans. Therefore I would make sure you have an exit plan so your house stays an asset and not a liability!
Austin Clark says
I’ve been reading every single article on your blog and i love all the advice! I am also a land lord in Pocatello Idaho. I am 22 years old. I have 5 rentals. 4 single family homes and a duplex i live in now. The four single family properties are paid off and im using my cash flow to pay the balance down as quick as possible on my new duplex. A very different strategy from you guys!
My question is…. How do you possibly have a net worth of $400,000 ? with 1.1 million in debt ? You add up your assets and subtract your debt and that is your net worth ? So are you saying from a stand point of having $400,000 in equity is how you are calculating your net worth ?
We should really get in contact 🙂 i would love to chat sometime. My goal is to have 8 properties paid off and cash flowing me $4000 profit by 25 so i can start my family and run my business full time!!
Elizabeth Bennett Colegrove says
I am so happy to connect with you! We have a net worth of $400,000 when you add up the house value and subtract the mortgages. We have bought in appreciating areas and it has served us well.
That is amazing that you want 8 paid off houses by 25. I love your cash strategy. We have found that leverage has allowed us to sustain our desire growth. I look forward to connecting with you!