My niece, Cecilia, who is 15, has become interested in Real Estate after her exposure to all cable TV has to offer. They sure make it look noble, glamourous, and profitable on these flipping home shows. Although, I have no interest in these types of shows, I’m glad R.E. has entered Cecilia’s understanding and intellect. The number one need of all humanity is shelter. So why doesn’t the school system teach kids about home ownership? There are programs for nursing, dentists, and welding but not banking or real estate. The biggest purchase an American will make will be a home, with a 30yr. mortgage, education is mandatory with such a substantial debt, but not all debt is bad, so don’t JUMP!
When I first got my R.E. license in Florida, 2003, the market was insane! While interviewing for a brokerage I asked, “What’s the annual appreciation rate?” The broker’s response, “19%,” so if I have a home purchased at 100k, in one year it has gained 19% or $19,000.00 in value. The logical side of my brain not blinded by greed, or right place right time, thought, how can an average working man afford a home in 2 years? Obviously, we were taught a lesson during the Great Recession but real estate will always remain a CHOICE investment for the simple fact, it’s mandatory for all, an endless customer base, and physical. So how does a young person in debt from school and credit cards get out of mom and dad’s basement?
With the Covid-19 shutting down the economy and sending unemployment to record highs millennials can’t catch a break. They are already making 20% less than boomers did at their age, despite being better educated says, Megan Leonhardt, of CNBC. So what’s the best juice for the squeeze on homeownership, when you’re hurting on pay and assets?
I believe your safest bet is a duplex, for its leverage. Let’s keep the numbers simple and say there is a duplex, 2/1, 900 sqft, per unit. The list price is 115K. You’ve saved up 5k and your credit has been fixed over the last year at home, you now post a 640 score; in addition to the 2yrs. employment at Hertz. (2yrs employment is standard unless you do a NINA or Stated loan) If you can get an offer accepted at 105K with 5k down your payment will be slightly less than $1,000/Mo; with taxes and insurance included. Remember, as a buyer, a realtor costs you nothing and they are paid by the owner through the listing agreement. For example, the duplex was listed by the owner, Paul, at 6% with Sarah from Century 21. The 6% is split between buyer and seller agents. 6% of 105K is $6,300, so $3,150 to each agent, costing you nothing.
Now you have leveraged a mortgage payment between 2 people, instead of a single family home. Let’s assume you charge $750/mo. plus $750 security deposit with the first month. Off the rip you receive $1,500. The tenant signs a 1 yr. lease and now your responsibility for the note on the duplex is $250/mo. The whole year the tenant lives there and throws their money at your mortgage, the duplex earns value. Let’s go very conservative at 3% appreciation, earning $3,150 for the year, while the renter has earned nothing but a good referral for their next location.
Now, we must also take into the account a property management firms cost and value. Most firms charge between 10-15%, so let’s assume 15%. The rent they collect is $750, and 15% of $750 is $112.50 per month. This sounds like a lot but don’t let your ego tell you different, “I could do this and save X, Y, and Z,” let the property management firm do their job while you spend valuable time on the next deal. I advise you take that initial $1,500 and put it into an account for unseen repairs, renters break stuff that’s not theirs.
For a young person drowning in debt, a duplex is a smart play for its low out of pocket and leverage. The property earns over time and you write off mortgage interest on your taxes. All while paying 1/3 of the note and taking no responsibility on upkeep and collection. A single family home is one on one. If you can’t make the payment there is no one else helping and your risk of losing the home is increased. Two heads are better than one, especially when the tenants and bank are making you money, for your credit score, down payment, and ability to put a deal together.
With $5,000 down, a 640 credit score, and employment for 2 years you get a 2 bedroom, one bath, in a home, for under $400/Mo. (On the high end), earn $3,150/yr., and write off the mortgage insurance on taxes. This is a win, win, and in 2years you could sell it tax free or keep it earning, your call. Makes better financial sense and is economically conservative over a single family, white picket, in the suburbs for 200k.
