Most people have a goal of someday owning a home. This is true whether it is a condo or a house. Even in these difficult times, everyone would rather own their home. There are three major obstacles to home ownership which are credit, down payment and the ability to handle the monthly payment. Credit is usually identified by FICO score. This is a measurement of how responsible you are with credit cards, car loans and other financial responsibilities. The down payment is generally 20% of the price of the home. Savings over time can generate that down payment. Lastly, the ability to pay the monthly payment is paramount. The monthly mortgage payment, property taxes and home insurance should not exceed one third of your monthly income. There are occasions to make exceptions, but this is a conservative guideline.
So, you saved, maintained good credit and can make the monthly payment. You bought your first home! Congratulations. After living in home for five or ten years, your family expanded or you would like a larger home. You earn a lot more money and you can afford to buy that bigger home. You have a lot of equity (sales price minus what you owe) in your home. If you were saving your money during that time, you could buy another home and keep your first home as a rental. What does this do for you? Presuming you paid $300,000 for your first home, ten years later it is worth more and you could rent it and break even. That is the rent you receive covers your mortgage, property taxes and insurance. It may even cover your maintenance and repairs. Over time, you could enjoy earning a profit, but more importantly the mortgage eventually will be paid off and your renter paid for it. Many people could own a number of properties and generate a substantial income. You could sell the property and invest the proceeds into another rental property. Congratulations you have become a mini real estate mogul.
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