My Dad, William, used to say, “Greg, buy land, they aren’t making any more of it.” While that is true, what Dad didn’t tell me was that if a person owned land he could retire rich. The simple plan I will describe in this short article can help everyone achieve real wealth through real estate ownership.
I credit this plan to a book called The Automatic Millionaire Home Owner by David Bach, which is still readily available. Mr. Bach’s thesis is very simple: buy and live in your own home, pay down the mortgage as quickly as you can, take equity out of your home through a refinance and buy another home. You then rent out one of the homes and live in the other. Repeat as often as you can until you retire.
Once you retire you can live very well off the income from all of those renters paying you every month. You could even sell one of your investment properties if you need extra fun money.
The key to this plan is to not sell your properties, but keep them for the long term. During that time other people help you build wealth by paying down your mortgage. You may even be fortunate enough to experience increased property values over time. If this happens you can use the appreciated value of your home to leverage even more money for other purchases.
The beauty of this plan is that you are forced into a savings plan by having to pay your mortgage every month. When your mortgage is paid off you can live in a home for just the cost of utilities and a few repairs now and then. If you own and rent out a second home you use other people’s money (OPM) to save for you and increase retirement income.
We all have to live somewhere, so why not buy the home you have to live in? With declining home prices in the Okanagan (finally), extremely low mortgage rates, and high inventory levels the time is right for home ownership.
It’s true that to buy a home you have to have a steady job and be able to come up with a down payment. In this economy, that can be a tall order; however, if you and/or your spouse have reasonably good jobs, with a little patience and a regular savings plan, the down payment won’t be too far off.
If you can’t scrape up a down payment look into a rent to own program. It will allow you to find a home you like and live in it while you build up a down payment. First time home buyers can even take money for a down payment out of RRSP’s to get started.
There are potential challenges and risks to this perfect plan that I might as well lay out on the table.
What if you don’t want to be a landlord?
The simplest solution for that challenge is to hire a reputable rental management company. It will cost you a percentage of your income every month, but you won’t have to worry about landlord duties.
What if the property value declines rather than appreciates?
All real estate markets are cyclical and you could buy in an up-market like 2007. We are in a down market now, but the market will recover eventually as it always has. When the market does recover, the low point of the present cycle will likely be higher than the previous down cycle low point. Your property will appreciate and likely at a rate that far outstrips inflation; but remember this plan calls for a long term view, not a quick flip.
What if the rent doesn’t cover the expenses?
A property that doesn’t pay for itself is a poor investment. The key to owning any investment property is to have all costs paid for by the tenant, plus some extra money in your jeans every month. You can now find properties in the Okanagan that when rented out at a fair market rate will meet those criteria.
There you have it – a great, simple plan for building real wealth through real estate ownership. If you have equity in your home, leverage it and use other people’s money to make you rich. Remember what Dad said, “Greg, buy land, they aren’t making any more of it.”