I believe there are 3 ways to making money. Work hard for it (which I’m sure we all do via a “9 to 5” job), make your money work for you (by way of investments in stocks, bonds, etc), or let your good credit make you money. With good credit and a steady job, you’re able to borrow money from a bank to make large purchases (like buying a house). A house is one of the few things that you can buy and make money on by renting it out.
I feel like real estate is an “easy” way to make a fortune. It’s not immediate, but over time you can accumulate a lot of wealth. I put “easy” in quotes because… well, it’s not really that easy. There are certain things you’ll have to accomplish to be able to get in the game. I don’t know all the odds and ends of it, but I do know how I got there…. or getting there I should say… I call it the poor man’s path to getting rich.
WARNING: This is just the path we took. There are many ways of attaining rental property, but I just wanted to share how Sheena and I did it. I hope you find it helpful!
Sheena and I bought our first house right after we came back from our honeymoon. You can read about our house history here. The intent was to buy a house to turn into a rental property after a few years. That’s what we did. If you’d like tips on how to buy a house, click here
As time progressed (roughly 1.5 years) I started to look for our second house. I asked tons of questions to a mortgage lender as to what we needed to do to position ourselves to buy the 2nd house and still keep our 1st house. His advise was to pay off any debt that we might have. And that’s what we did. We used any “extra” money we had to pay off everything, except for the house, which is our largest debt. The whole goal was to position ourselves to make the next move.
We found a house we liked and made our move. With our credit in good shape and both of us having steady jobs, we were able to make it happen. Sheena and I both had very average salaries when we purchased the second home, so don’t feel that you’re not able to do this. At the same time, we did have 2 incomes, which greatly assisted in the ability to do any of this. If I were doing this solo, I probably would have to scale things down (in regards to what type of property I could purchase), but I still believe it would be possible. In the process of buying our second house, we simultaneously got the 1st house ready to be rented out. The rental market was good, so it didn’t take too long for us to get a tenant.
While we lived in the 2nd House, life happened. We needed a new car, we needed new furniture for the 2nd house, babies were born… Generally, expenses went up, so a little debt came along with it. And with that, we repeated Step Two and did our best to pay off all debt. Again, this was in an effort to position ourselves in purchasing the next house. You might say to yourself “but Sajan, now you’ve got 2 mortgages (large debt). How are you going to get another loan with all that debt?” In a prior blog called How to Purchase a Home, I talk about “Debt to Income Ratio”. This is what banks consider when giving you a loan. They want to know if your income allows you to cover your debt on a monthly basis and still pick up a new mortgage note. After 2 years of the first house generating money via rental income, the bank views it as a wash. This means, the rental property’s income is paying for it’s debt. Since the First House is paying for itself, that doesn’t mess with our Debt to Income Ratio, keeping us in the clear to get another loan.
So now we’re basically repeating Step Three. I would love to do another flip and create another rental property in a few years, but the house we currently live in might not be a fun rental property to manage. It’s larger than I’d like to deal with as a rental. The bigger the house, the more you’ll have to fix as a landlord. More carpet to change, more walls to paint, etc… Ideally, I like a rental property to be smaller than 2500 sqft and 1 story sitting on a relatively small lot (less lawn maintenance). Also, we’ve got 2 kids and the current house seems to be a good fit for all of us. Everyone’s got space to spread out. The schools are good. We’re in a good location… so we’re not in a rush to move.. but I’m still always on the hunt!
The best thing you can do to meet these types of goals is to live below your means. Being able to accumulate money is a key factor to being able to accomplish these type of goals. This may mean you would have to sacrifice a few things along the way, but in the long run it will be worth it. My next blog post will explain the benefits of being a landlord in more detail.
I believe in living a balanced life. You have to enjoy your life and that calls for spending money, but at the same time you have to plan for your future as well so that you can continue to enjoy your life when you’re not working anymore. Need some ideas on how to start saving? Click here to see how Sheena and I cut up our finances!