Monday, January 19, 2009

Building Real Wealth

For many fist time buyers, the next 6 to 9 months could be the best possible time to buy a home in the past 25 years or so. Not for everyone. But maybe for you.


If you're pretty sure your job is secure, can emotionally handle the potential of a falling home value for a year or two before you start building equity, can afford to make a downpayment of at least 3.5% and still have some savings left over, and most important, if you plan to own the home for 8 to 10 years plus....


There are tons of homes to choose from, prices are as low as they've been in 3 to 5 years or more, and interest rates have dropped into the mid- to high-5's....


For many first time homeowners, now might be the perfect time to buy your first home.


It might also be the perfect time to begin building some real wealth into your future golden years. See my earlier post about current pricing for a typical starter home. Don't want to click over and read a whole other post? In that case, let's start with some assumptions:


A starter home is 3-4 bedrooms, 2 baths, 1400-1600 square feet with no pool and a 2 car garage. Depending on location within the Valley, this home will cost you about $85,000 to $130,000. Willing to do a little true fix-up work? You can get it for less.


Let's further assume a purchase price of $110,000 with 3.5% down payment, $33 per month in HOA dues, $38 per month in homeowners' insurance premiums, and $100 per month in property taxes, and the seller will pay your closing costs up to 3% of the total price. Your total cash outlay is $3,850 and your monthly payment is $795.


"Hey! That's less than my rent," you're probably saying. Exactly!


But let's say you don't think you can picture yourself living in that starter home for 10 years. You're young. You might get a job transfer or promotion. You might fall in love and get married, have kids and need a bigger house. Here's where the wealth building comes in.


Live in your new house for a couple of 3 to 5 years. Then move on and rent it out. As the years pass, you'll continue making mortgage payments (which will probably be mostly or completely covered by the tenant's rent), paying down the mortgage, and eventually the house will begin paying you back.


Rent rates for this sort of house today are about $850 to $1100 per month, depending on age, location, condition and so forth. Over the long haul, rents will increase. That's just the nature of inflationary pressures on the cost of living. "Average" inflation is about 2% to 4% per year. In 30 years, given an average inflationary rate of about 3%, your tenant will likely be sending you about $2,000 per month. Your living expenses will have increased likewise, but having money coming in every month in addition to your salary is nothing to sneeze at.


Thirty years from now, you'll have paid off the mortgage and all that rent money your tenant pays you will become just another source of income. Who knows? If you can budget carefully over the years and buy a 2nd (or even a 3rd or 4th) investment home...  maybe that tenant "income" will be enough to help fund your early retirement.


Think this sounds far fetched? It's what "Rich Dad, Poor Dad" financial guru Robert Kiyosaki has been preaching for years.  Is building real wealth easy? Of course not. Nothing worth attaining is easy. There are a lot of variables in being a landlord. It's not something you should do without serious thought and planning. But it's not as wildly out of the realm of possibility as you might think.


This scenario is attainable. And you could start down that road to real wealth just by looking at a few starter homes for sale this month.