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Your Home is a Weak Asset; Buy Income Property

The American Dream of owning your own home is still alive and well here in the United States. Most Americans believe owning your home is the surest path to wealth and financial freedom. This might be correct, but is it truly the most efficient and profitable way to grow wealth through real estate?

In my opinion, the answer is no. Your home is not a true asset until it is sold.

True assets are earning profits or growing in value regardless of your personal circumstances. If you lose your job and cannot work, you may lose your home if you don’t have savings to pay the bills. If you lose your job and cannot work, you will retain true assets like stocks, bonds, notes, etc. that will continue to pay or grow in value over time.

Property in the South Bay can be tough to earn cash flow, but over time, it will likely bring you more wealth than being a homeowner.

Examples

Here are some examples from a South Redondo Beach property for those truly interested in investing in real estate…

*Considering 25% down, 4.5% rates for homes, and 5% rates for income property.

Homeowner

  • Townhome: 713 N Juanita Avenue #B sold for $1,330,000
    • $5,050 mortgage payment
    • $1,330 property taxes
    • $120 HOA
    • $50 insurance
    • $100 maintenance
    • $100 water/common area utilities
  • Cost: $6,750 per month

Owner-Occupied Income Property

  • Triplex: 315 S Francisca Ave sold for $1,340,000
    • $4,000 rent while living in one of the 2-bed units
    • Less
      • $5,400 mortgage payment
      • $1,340 property taxes
      • $150 insurance
      • $75 gardening
      • $200 maintenance
      • $150 water/common area utilities
  • Cost: $3,150 per month

Non-Owner-Occupied Income Property

  • Triplex: 315 S Francisca Ave sold for $1,340,000
  • Rent: 217 N Lucia Ave #B (3 bed, 1 bath) for $3,000 per month
    • $6,300 rent while living in your rental
    • Less
      • $3,000 rental cost
    • Less
      • $5,400 mortgage payment
      • $1,340 property taxes
      • $150 insurance
      • $75 gardening
      • $200 maintenance
      • $150 water/common area utilities
  • Cost: $4,015 per month

The Breakdown

In the above numbers, the true winner in terms of costs is the owner-occupied income property. This would be even better if the buyer could live in the one-bedroom unit as it would drop the cost to $2,550 per month.

Coming in second is the non-owner-occupied income property. If someone needed more room, renting a three-bedroom unit in a duplex (in a very comparable area) would be a net cost of $4,015 per month.

Finally, coming in last is the owner of the town home. This home is certainly a better living option, but if buying a home was purely for investment purposes, then the income property options are clearly a no-brainer.

Efficiency of Wealth Creation

It is fair to assume that these properties are all in the same general areas of South Redondo Beach, thus, all of the real estate over time should rise together at relatively the same rate.

The big difference is the $3,600 per month in savings between the owner-occupied income property and the homeowner.

Over ten years, that is $432,000 in savings. This money would allow the owner-occupied income property to purchase another three-unit property. Yes, real estate prices will likely be higher, but one can assume that $6,300 per month is invested in stocks or that other assets will keep pace for a proper down payment at current real estate prices.

At the end of ten years, the owner-occupied income property investor will own two properties, and with rental price appreciation, they should cash flow or break even.

On the other hand, the homeowner, will have hopefully earned raises in their job and that $6,750 per month liability now might feel like half of that, which is still more than the $3,150 per month paid ten years earlier by the owner-occupied income property buyer.

If this cycle continues to repeat itself every ten years, the income property investor will create significantly more wealth, not just in property ownership and appreciation, but in a stable growing cash flow.