Earned Income

Earned income is what most of us do every day. We trade time, energy, or brain power for money. We go to the job site, check into the office, go to the firehouse, or our shop and get to work. We get paid for what we produce or do. If we don’t produce or do, we don’t get paid. We work in order to get money.

Passive Income

Passive income isn’t generated directly from our work. Passive income is money working for us. Passive income is interest from a savings account, interest from a bond, a dividend from a stock, or cash flow from a real estate investment. Passive income is produced whether or not we take an action.

The trick to getting a huge passive income is accumulating lots of investments. A $300,000 investment earning 3% returns $9,000 to the investor. A $3,000,000 (million) investment returning 3% returns $90,000 to the investor.

If you would like to discuss opportunities to start accumulating investments using real estate, please call me at (925) 385-8798.

The author and radio host Dave Ramsey has said that a home or personal dwelling is a stake in the ground to which the owner is chained. Your life will most likely revolve around the area where you buy a home. You will work nearby, play nearby, and raise a family where you plant this stake. What if you want to change any of these items?

Often, professionals just beginning their career do not plan to spend their life in the same location that they find their first job. The energy of big city life is not as appealing when you have to raise a family. Their first job is a dead end and a graduate degree is required for advancement. Or you find great success in your career but the next promotion is in another state or another country. What do you do with that condo or fixer of a home you bought?

Financially Wise

Imagine instead that you bought a fourplex (a single building with four separate living units). This fourplex in Concord, CA is a current example. Argyll Avenue – Fourplex

The property is listed for $375,000. According to the listing agent the property has 2 -2 bedroom units and 2 – 1 bedroom units. Let’s figure 3% for closing costs and fees for a total of about $386,000. Our first-time home buyer decides to make an offer at list price with 10% down. Their loan amount will be $347,000.

A loan of $347,000 at 5% interest will have a payment of $1,863 per month. Property taxes and insurance will add roughly an additional $612 per month. If our home buyer mows his own grass and does repairs himself, he likely won’t have many other expenses beyond the occasional repair or vacancy. The total expenses for the property will be roughly $2,475 per month.

According to the listing agent, the 2 bedrooms rent for $1250 each per month and the 1 bedrooms rent for $850. To be safe let’s knock $150 off of each of those and say that the 2 beds will fetch $1100 and the 1 bedrooms will get $700. Our industrious and frugal buyer doesn’t have a roommate and decides to live in a one bedroom unit. His gross income from the property will be 2 x $1,100 = $2,200 plus $700 = $2,900. If we imagine that each of the rented units will be vacant for 10% of the year, this would reduce his gross income by $242 per month. His or her gross income will be $2,658 per month.

In review, our home buyer will be receiving $2,658 per month in rent and expenses will be roughly $2,475 per month. The net income to our home owner will be $183 per month and he will be living rent free.

Besides living rent free there will likely be some tax benefits to our home owner. Cost recovery or depreciation can be claimed on the rented units. The owner may be able to offset taxes on earned income.

If our intrepid home buyer decides to pay down the mortgage by paying “rent” of $700 per month, the home buyer could apply $883 to principal each month ($183 in cash flow).

Assuming the fourplex does not increase in value at all the value would be $375,000 at the end of 5 years. The outstanding principal would be a shade under $260,000. The home buyer has equity of almost $115,000. Calculating selling and closing costs at 8% of the gross fourplex value ($30,000), our investor has net equity of $85,000 to roll into his next purchase. Our investor could refinance the property at 80% LTV and pull out $40,000 in equity to purchase the next investment property.

Flexibility

Buying a fourplex has provided the investor with some flexibility. We assumed that the investor lived in a 1 bedroom unit. If the investor gets a roommate or marries, they could move to one of the two bedroom units without having to buy something else.

If our first-time buyer needs to relocate, the property should have enough income to pay all property expenses when fully rented. Our first-time buyer can safely transfer to another city without worrying about selling a home first.

 Conclusion

The fourplex purchase allows our hypothetical buyer a financially fit decision and a level of freedom that a SFR does not allow. It appears that an investment property, is far superior to the single family home purchase for our first time buyer. (Please do not construe this as a hard and fast rule or investment advice.)

Call me at (925) 385-8798 to see if we can find a duplex or fourplex that fits your investment needs.

Here are three reasons you should not buy a house/condo if you are in this stage of life:

Real Estate Ties You Down

You decide to buy a nice little home in Walnut Creek, CA. Your career starts to take off. A headhunter contacts you with your dream job in Boston. You would love to take it, but what do you do with your home? Do you sell it? Can you sell it? Do you rent it? Do you want to be a landlord on a home in California while you are in Boston?

As one radio host said, “Owning real estate is placing a stake in the ground.” It is a financial obligation that can limit your options and limits your freedom.

Your Spouse Won’t Like It

Let’s say you buy that little two bedroom house in Walnut Creek. One day while walking your dog in the Dog Park, you see the most beautiful creature on two legs. Your whirlwind romance leads to a proposal and wedding plans.

As you begin making plans for life after marriage, you are deciding on where to live. Your spouse begins to point out the deficiencies in your first house. It only has two bedrooms, where are you going to put Jack and Jill when they come along? The kitchen is too small. The bathroom only has one sink. Where are the in-laws going to stay when they visit? Why did you paint the kitchen that shade of blue?

Your options are to remodel or to sell your existing house and buy something new. Do you really want this hassle while planning a wedding?

Odds are that the person you marry won’t have the exact tastes that you do. The house you thought was ideal, is not their ideal. It is a much better decision to buy something together that you both enjoy.

It is Not the Wisest Financial Choice

Imagine a young farmer. He just bought his first plot of land. He needs to plant his fields for the harvest and he needs to build his first house. However, he only has enough capital (money) available to do one or the other. Should he buy seed for his fields or buy lumber to build the home? Which would you choose?

Hopefully, you chose the seed. Seed provides more income for the coming years. Seeds will allow the farmer to have a future in the farming business. Lumber may have provided shelter, but it didn’t produce any lasting return to the farmer.

In many ways buying a single family house is like a farmer buying lumber. It provides shelter, but the long-term benefit is mitigated.

There is another answer that makes sense for a young professional. If you would like to hear more about this solution call me at (925) 385-8798.

Almost without exception the degree of risk is rated based on the guaranteed return of the principle, not how much earnings the investment might yield.

The key factor in evaluating an investment’s risk is: Will I get my money back?

An investment that could lose lots of money, should provide the investor with a greater reward for their willingness to take that risk.  Conversely, “safe” investments provide less reward to investors, because they have a greater certainty of getting their money back.

This explains why savings accounts are bearing such a low rate of return. The federal government has guaranteed that savings accounts up to $250,000 will be made whole, by the FDIC. Investors in savings accounts are taking almost no risk, so they get almost no reward or return.

If you are interested in earning a higher yield on your savings, please feel free to contact me at (925) 385-8798.

Today, Laura Rowley had an article entitled Starving for Yield on Savings. She writes:

Americans who chose to save instead of buying homes they could not afford or cashing out their equity to splurge on luxuries during the real estate boom need a Robin Hood at the Fed, because they’re the ones getting robbed to pay for the recovery. Conservative places to park cash — savings, money markets and certificates of deposit — are still paying well below the inflation rate of 2.2 percent. As of this week, savings accounts are averaging returns of 0.20 percent; one-year CDs are yielding 0.77 percent, according to the Federal Deposit Insurance Corporation.

“The Fed is determined to keep rates very low, and while it’s painted as fiscal stimulus I think it’s really a stealth bailout of the banks,” says Richard Barrington, a certified financial analyst and expert with the bank comparison site Money-Rates.com. U.S. savers have lost $140 billion in purchasing power to inflation over the 12 months ending in March, according to a Money-Rates study released last month.

A Hidden Tax

Effectively, the government through the Federal Reserve has placed a hidden “tax” on those of us who save money. The saver’s hard earned cash is being used by the government to grow the balance sheet of banks across the country.

I was introduced to this idea through a Maura O’Connor, a veteran real estate attorney speaking at an event in Oakland, CA.

The tax takes money from the savers and investors and transfers it to the banks. Banks use the deposits in savings accounts, CD’s, and money market accounts to borrow 10 times the deposited amount from the Federal Reserve at 0.25%. The banks then invest that money in US Treasuries and earn 3% on the larger amount.

Would you pay $3.50 to earn $26.50? I sure would! And the banks will too!

Real Estate As An Alternative

While we could debate the ethical nature of this scenario, we won’t do that here. The question for the savers becomes: Are you going to take this?

If you have been keeping your money “safe” in a CD, money market, or savings account, you have alternatives to the low return you are getting on your cash. There are a variety of real estate investments that you could own that would generate a higher return than what you are getting now. They also are a better hedge against inflation than cash.

If you are interested, please call me at (925) 385-8798.

P.S. You can invest money in IRA accounts as well.

This is a post I began writing in June 2009. I thought it still had merit and should be shared.

Social Security’s Inadequacy

According to the 2009 Social Security Trustees’ report if you plan to live for the next 19 years, your Social Security benefits will be dependent on the income tax deduction from those in the workforce. Projected demand for Social Security benefits between now and 2016 will surpass any excess and begin to deplete the “trust” account held on the Treasury Department’s books.

The trust fund will be totally depleted by the year 2037 according to projections. This will require a decrease in Social Security Benefits or an increase in taxes to cover this shortfall.

Bruce Bartlett, a former Treasury Department economist, writes in The 81% Tax Increase:

Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled “Social Security trust fund.”

The problem is that by law 100% of these “assets” are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It’s as if you wrote an IOU to yourself; no matter how large the IOU is it doesn’t increase your net worth.

This fact is documented in the budget, which says on page 345: “The existence of large trust fund balances … does not, by itself, increase the government’s ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the government as a whole.”

Prudently including Social Security benefits should be a part of a plan to achieve Retirement Freedom. However, to rely solely upon Social Security will most likely produce a pauper’s retirement.

Real Estate Investments for Retirement Income

There is hope to counteract the pauper’s fate provided by Social Security. Purchasing real estate in growth regions, using prudent leverage can produce solid retirement income.

The Benefit of Control

Social Security’s weakness for an investor is the lack of control. The average U.S. citizen does not have control over how the funds are invested or whether they are invested at all.

Investment property offers an investor much more control. An investor can choose where to invest, what type of property to buy, whether to use debt or not, how a property is managed, and when to pull money out of the investment.

The Benefit of Capital Growth

Social Security benefits are similar to the returns of annuity. When an investor buys an annuity they plunk down a pile of cash and expect to earn a specified payment over time. The amount of return is solely dependent on how much cash is invested up front.

Social Security pays retirees the same way. Retiree benefits are dependent upon their contributions during their working years.

Real estate investing offers the ability for investment growth. An investor may start with $50,000 initially invested. Over time with prudent choices based on prudent advice, $50,000 may grow to $200,000. Invested wisely $200,000 can generate a lot more income than $50,000.

The Benefit of Tax Shelter

Social Security benefits may be taxable depending on retirement income.

Real estate investors use favorable tax laws to provide greater after tax cash flow from their investments and other sources of  income. More cash flow allows greater freedom to pursue their dream retirement.

I would love to hear your thoughts on social security and real estate. Which do you think is better?

If your ready to free yourself from dependency on the government’s handout for your retirement goals, contact us for your free consultation.

Passive owners, as opposed to active owners, generally don’t want to deal with the three “T”s of real estate investment ownership; toilets, tenants, and trash. Passive real estate owners are not the “hands on” investor. They allow others to manage the day to day activities while there investment produces income for them.

What do property managers do?

A property manager, manages property. They provide oversight and administration so that a property meets the investment objectives of the owner.

A good manager will find and screen tenants, maintain an investment property, collect rents, evict non-paying tenants, and pay bills related to the real estate under management. They perform almost all of the tasks that an owner would normally handle.

How are property managers paid?

Most property managers receive a percentage of the gross income from a rental property. This can range from 2% to 10% of gross operating income depending on the standards for a geographic area. In some cases a property management company may charge a flat fee for individual rental homes.

How does a property manager help a real estate investor?

Daily Management Issues

Property managers can add value to owners that are unable or unwilling to handle the day-to-day activities of a property personally.

Thanks to the Second Law of Thermodynamics we know that things break down. Pipes and water heaters break, toilets and drains clog, and roofs can leak. A property management company takes these calls rather than the landlord. This leaves the landlord free to pursue other interests and invest in other projects.

Local Management

An owner with real estate in a another city or state will find it valuable to have a local management company collect the rents, screen tenants, and perform routine property maintenance. A real estate manager can help establish competitive lease rates from their local market knowledge.

Efficiency

Investment property owners with multiple properties may benefit from the efficiency a real estate manager can offer. An investor could continue working a 9-5 job while still reaping the benefits of owning multiple real estate investments, without having to deal with management responsibilities.

Legal  Knowledge

The legalities of being a landlord vary from city to city. Rent control and tenant rights, if mishandled, can open a property owner to risk of a lawsuit. A knowledgeable property manger will keep a property in compliance with local, state, and federal laws.

Caveat Emptor: Buyer Beware!

Not all property managers are equal.

Unfortunately, property managers are tempted by greed like the rest of us. Some real estate managers may have unscrupulous arrangements with outside contractors that charge property owners above market rates for repairs, then pay a kickback to the real estate manager for using their service. Investors should “trust their gut” and go with managers that they feel are honest and trustworthy.

An investor should make sure that a property management company adequately maintains properties. Checking a few of their properties to see how well they maintain properties is a good idea.

When selecting a property management company ask for references or client testimonials.

The Institute of Real Estate Management (IREM) is a source for education, resources, and membership for real estate management professionals. IREM allows owners to search for IREM members.

(Photo: Front_Corner_Perspective_Landscape by Chad Jones)

On September 23, 2008 Mr. Buffett’s company, Berkshire Hathaway, invested $5 billion in Goldman Sachs preferred stock. Goldman offered a 10% annual return on the investment in preferred shares, $500 million per year. In addition, Berkshire Hathaway was given the option to buy $5 billion in common stock at a price of $115 per share. One year later the investment would have returned almost $3.1 billion to Berkshire Hathaway not including the annual, perpetual return on the preferred shares. (As of January 8, 2010 the investment would be worth $2.58 billion at $174.31 per share.) This is a return of 40%-60% in one year!

View Your Investment as Ownership of a Business

Warren Buffett writes in his 2008 letter to Berkshire Hathaway owners:

We like buying underpriced securities, but we like buying fairly-priced operating businesses even more.

In his 2007 letter to investors Buffett writes:

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

A real estate investor must realize that they are buying a business when they buy rental property. Businesses must market and sell a product to customers that are ready, willing, and able to buy in order to make a profit.

As a real estate investor your product is space and your customers are your tenants. For the apartment or multi-family owner their product is living space. The retail real estate owner offers storefronts to other businesses. The office building owner offers other businesses office space.

A successful real estate investor will market the space to their customers or tenants. An investor must offer it for a reasonable price or the tenants will not be interested. Investors must decide which tenant is most likely to rent the space and advertise where that tenant will see their advertisement. Maintaining a property that is appealing to potential tenants is part of the business of real estate.

A stock investor must analyze the competitive strength of the business they are buying. Will it be protected from outside competition? Does it have adequate cash flow? What is the demand for their products? What event may damage their business? How likely is that to occur?

Real estate investors should ask the same questions about their real estate investment. Is this property above or below the competition? Are new developments coming on line? If so, how will that affect my investment property? What economic factors contribute to the health of the local economy? Do people want to live near my investment? Who are the major employers?

Invest Based Upon Value Not Price

Warren Buffett learned much of his investment philosophy from Benjamin Graham, author of The Intelligent Investor. Benjamin Graham stressed value investing. In Mr. Buffett’s most recent letter to Berkshire Hathaway investors and this quote was on page 5:

Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

Two things stand out from this quote. First, value is more important than price. If you invest in a piece of junk with no lasting value, it doesn’t matter what price you pay for it. Inversely, what price would you pay for the Hope Diamond or the Mona Lisa?

Mr. Buffett describes intrinsic value in the Berkshire Hathaway owner’s manual on page 5 as “the discounted value of the cash that can be taken out of a business during its remaining life.” Mr. Buffett goes on to say that intrinsic value may very from one investor to the next and even varies between himself and Charlie Munger, his business partner.

In real estate, investment properties provide cash flow through rent and offer the owner the ability to sell at a future date. Once the value of these cash flows has been determined (through discounted cash flow analysis), an investor can determine a price at which the value is worth an investment.

Second, price declines are advantageous to investors with cash to acquire new real estate. Price declines make valuable real estate more affordable.

Distressed markets do not function efficiently. Usually, this means that there is a shortage of willing and able buyers. Sellers are forced to compete on price for the few available buyers. Prices continue to drop until a willing and able buyer is interested to buy. This shortage of buyers leads to fear and further limits the entry into the market for new buyers.

Distressed markets also have a shortened time-frame. Sellers need to sell quickly or raise capital quickly. This provides unique buying opportunities for the savvy investor with cash available to scoop up discounted properties quickly.

If Possible, Use Other People’s Money

One of Berkshire Hathaway’s first purchases was National Indemnity, a property-casualty insurance company. Insurance continues to be one of Berkshire Hathaway’s major income sources. In Berkshire Hathaway’s 2004 investor letter Buffett writes this:

The source of our insurance funds is “float,” which is money that doesn’t belong to us but that we temporarily hold. Most of our float arises because (1) premiums are paid upfront though the service we provide – insurance protection – is delivered over a period that usually covers a year and; (2) loss events that occur today do not always result in our immediately paying claims, because it sometimes takes many years for losses to be reported (asbestos losses would be an example), negotiated and settled. The $20 million of float that came with our 1967 purchase has now increased – both by way of internal growth and acquisitions – to $46.1 billion. [emphasis added]

In real estate using other people’s money is typically accomplished through the use of a loan. A real estate investor invests a portion of the funds necessary to invest and a lender lends money to the investor for the balance of the purchase price.

Investors often call this leverage. Using a small amount of capital, the investor’s equity, to buy a larger asset. The “lever” is the loaned money. This concept allows an investor to earn a return not just on their capital, but also on the money they have borrowed.

The concept of leverage only works if the borrowed money is less expensive than the return generated by the asset. It is hard to make a profit borrowing money at 12% and investing it for a 10% return.

Pick Management Wisely

One of the the things Mr. Buffett has done extremely well is buy operating businesses. He selects businesses that have excellent management in place. Warren Buffett realizes the value of a quality management team and the benefits it offers to ownership.

In the 2004 Berkshire Hathaway letter to investors Buffett shares his instructions to his business managers:

“Run your business as if it were the only asset your family will own over the next hundred years. Almost invariably they do just that and, after taking care of the needs of their business, send excess cash to Omaha for me to deploy.”

Real estate investors should choose their property management companies wisely as well. A good manager will keep a property well-maintained and full of quality, paying tenants. A poor manager may cost an owner less, but may allow properties to become run down or allow unfit tenants to lease your property.

Feel Free to Say “No” to Opportunities You Don’t Understand

Mr. Buffett is not afraid to pass on investments that he doesn’t understand, even though he may “miss out” on some great investments. Mr. Buffet has repeatedly admitted that he doesn’t understand technology companies, and doesn’t regularly invest in them. This saved his company from incurring some huge losses during the Technology Bubble in the stock market.

Real estate investors should avoid investments that they don’t understand. If an opportunity sounds “too good to be true”, it probably is.

Apply a “Margin of Safety”

A margin of safety limits the risk of an investment. Benjamin Graham, Warren Buffett’s mentor, dedicated an entire chapter in his book, The Intelligent Investor, to the concept of a “Margin of Safety”. Graham writes:

In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, “This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.

Simply put, a margin of safety is room for error. If you think a stock is worth $12, pay $10 instead of $11.50 to guard against a miscalculation of value. Unless you are God, eventually calculations on future events are going to be wrong. A margin of safety helps to preserve your investment when your calculations are incorrect.

As real estate investors, we make many of our determinations based on assumptions about income to be received in the future. Applying a margin of safety allows us to invest with room for error should our assumptions be wrong. Recessions, plant closures, and natural disasters all affect real estate, but cannot be predicted. A margin of safety provides a buffer against these unforeseendisasters.

Conclusion

Real estate investors can benefit from the principles of stock investors like Warren Buffett. Viewing investments as a business, investing based upon value, prudently using leverage, picking management wisely, avoiding confusing investments, and applying a margin of safety will help real estate investors to invest with confidence in any type of markets.

Many people view the purchase of their personal residence as a “real estate investment”. Rich Dad, Poor Dad author Robert Kiyosaki has challenged this idea through the definition of the word asset. He defines an asset as something that pays you money during your ownership and a liability as something that costs you money while you own it. By this definition, a personal residence does not qualify as an asset as you are not paid for ownership.

As well, best selling author of I Will teach You To Be Rich, Ramit Sethi, has shared reasons for his personal views that buying a house is not always the best advice for a young working professional. Not the least of which is the “phantom costs” of insurance, taxes, and repairs associated with owning a home.

The analysis of both these men is sound. In general, a personal residence should not be purchased for investment purposes. There are certain circumstances where buying a personal residence can in fact work as a means of investment.

Buying a Residence with Investment as a Secondary Goal

For a young, working professional, buying a home and having other people help pay your mortgage can
be a way of investing. What do I mean? You buy a house with three bedrooms and rent the other two bedrooms out to two of your friends. Or buy a duplex live in one side and rent the other side out.

With most fixed-rate 15-year and 30-year mortgages, a portion of each payment is applied to the debt owed, the principal or principal balance. This increases your home  equity. Equity is the value of your residence minus the total debts against your residence.

Home equity is a form of “forced savings”. Home equity is not easily spendable. Thus making a monthly payment towards the principal balance forces you to save a portion of each loan payment.

Having additional people to make your mortgage payment can provide you with extra cash for investment, spending, or to pay down your mortgage.

Using FHA 203(b) for First-Time Home Buyers

For the working professional using an FHA insured loan makes sense. The FHA 203(b) program allows eligible borrowers to qualify for up to 96.5% of the purchase price to be financed. These loans often have a slightly higher rate than a traditional mortgage, but offer the flexibility of a smaller down payment.

Most traditional lenders will look for at least 20% of the purchase price to be paid by the borrower. In high priced areas, like the San Francisco Bay Area, this can be a big hurdle to overcome.

FHA has stricter guidelines for what types of homes qualify. Homes have to be in livable condition and have been owned by the previous owner for at least 90 days.

A Charted Course

To apply this strategy a charted course is needed to avoid trouble.

• Make sure your credit is in order. Pay your bills on time. Don’t run up to much credit card debt. Spend less than you earn.
• Collect adequate savings for a “rainy day”. This should be 6-8 months of reserves. One month of reserves would cover your proposed monthly mortgage, monthly utilities, any other debt payments, food, insurance, etc. Lenders like to see that you have funds available should you be unable to work or are laid off to continue to pay your monthly obligations. It will also help you avoid anxiety and worry.



• Determine how much house you can afford based on your current income. A single professional earning $60,000 per year would bring home about $3,600 after taxes each month. When calculating the amount you can afford to pay you should exclude any payments from your proposed roommates. You want to be sure you can make the payments without the roommates, should they leave for any reason.Lenders usually require that housing costs  should be no more than 28% of your gross monthly income. (It may be wiser to limit yourself to 25% of your take home pay.) Using the lender ratio would provide for a monthly housing costs of about $1,400 including taxes and insurance.Assuming property taxes of approximately $275 per month and insurance of $85 per month leaves $1,040 per month for loan payments. Using an interest rate of 6.50% per year our young professional could afford a house worth $164,539 on a 30-year mortgage and $119,388 on a 15-year mortgage.
• Save for a down payment and closing costs. Notice this is separate from reserves. Once you make the down payment, you won’t have it for reserves. Plan to save between 5% -10% of the purchase price of the home. Each housing transaction has additional costs relating to transfer tax, title insurance, and escrow. Our young professional should save between$8,227 and $16,454.
• Find and purchase your home

The whole strategy will take a number of months to accomplish and building equity in your home will take years. This is not a get rich quick strategy. This is taking the long view, charting a course, and diligently following it till you get the desired results.

Alternative Strategy

The FHA 203(b) mortgage can be used to purchased up to a 4-unit property. Using the same principal you could attempt to purchase a building that will generate income from the other units.

A Note About Investing

The key to any investment strategy is not to risk more than you can afford to lose. If losing your down payment is more than you can afford to lose mentally, emotionally, or financially do not risk it by investing. Each investor has their own risk tolerance. For some investors, they can only tolerate the risk that a CD at the bank offers. Others are willing to take bigger risks. Find the level of risk that is suitable for you and invest accordingly.

(House Photo: james.thompson)