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Leveraging house equity to increase investment cash flow

Posted on 2006-10-23
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Last Modified: 2008-03-06
I have been thinking about buying residential property in order to rent it out to students.  The issue, is that this rental property would not cash flow.  The money that I would bring in would equal the money I spend on the mortgage and maintenance.  However, I will still be getting equity on the principal of the loan that I am slowing paying off as well as appreciation of the property.

Assuming I purchase a half million dollar 5-plex that doesnt cash flow, how can I use this asset to increase my cash flow in another investment?  What type of investments do any of you have positive experiences with that you would like to share?  Does this make sense to take on a huge mortgage just for the sake of equity in the long term?

Thoughts?
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Question by:mintsii
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8 Comments
 
LVL 6

Expert Comment

by:zwseemm
ID: 17791486
If you can truly break even when you include all of your income and expenses and you have a good sense that the market is still increasing than it is a good idea.

expenses:
5% vacancy rate (average)
potentional court cost for evictions
extra insurance for liability (ie umbrella policy)
normal maintenance
credit and rental history check - Do not skip this, the last thing you want is a dead beat. www.saferent.com

Me and a friend got in when the market was perfect for us. We had positive cash flow from the start and have doubled our property value in 3 years and have an ROI in excess of 400% so far.

I look at it like this. I bought the properties when I was 35 with a 30 year mortgage. In thirty years, if I hang on to the properties, I will have no mortgage and only minimal expenses. So if I am getting say $900 per property now I will get that plus inflation when I retire.

If your gut and the numbers tell you it is smart than go for it. Don't listen to the naysayers, that don't have any property, when they tell you that it is too risky.
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LVL 31

Expert Comment

by:Scott C
ID: 17791651
Don't forget that even though you are only "breaking even" you will still get to claim the interest paid on your taxes.

There is some positive cash flow right there.

You never know what the market is going to do, but there will always be students needing a place to stay and the longer you rent it out the more equity somebody else is putting into your property.

Just be sure to screen your renters as carefully as possible and don't be shy about asking a fair amount for the security deposit.  If a renter is wanting a sizable deposit back, they won't be so quick to treat your property poorly.
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LVL 22

Expert Comment

by:_TAD_
ID: 17791767

Owning rental property is a double edged sword.  If you can manage the proerty, find the right renters, and have no real issues with the house, (and a little luck doesn't hurt).  Then owning rental property can be a boon.  Otherwise it can just be a lot of headaches and problems for very little gain (I personally have never heard of anyone taking a loss on owning rental property - only that it was too much work/hassle for such a meager gain).


Renting property to college students can be even worse (or better depending on what you care about).   College students generally care less about the aestetics than "normal" people.  But they are also more reckless with your house.  

If your main focus is turning a profit month-to-month, you can get away with sub-standard living for students (most won't care). On the other hand, if you actually care about the property and hope to sell it someday for a profit... I suspect you will find owning rental property to be more work than you are willing to put into it.
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LVL 22

Expert Comment

by:_TAD_
ID: 17791768

Owning rental property is a double edged sword.  If you can manage the proerty, find the right renters, and have no real issues with the house, (and a little luck doesn't hurt).  Then owning rental property can be a boon.  Otherwise it can just be a lot of headaches and problems for very little gain (I personally have never heard of anyone taking a loss on owning rental property - only that it was too much work/hassle for such a meager gain).


Renting property to college students can be even worse (or better depending on what you care about).   College students generally care less about the aestetics than "normal" people.  But they are also more reckless with your house.  

If your main focus is turning a profit month-to-month, you can get away with sub-standard living for students (most won't care). On the other hand, if you actually care about the property and hope to sell it someday for a profit... I suspect you will find owning rental property to be more work than you are willing to put into it.
0
 
LVL 22

Expert Comment

by:_TAD_
ID: 17791769

Owning rental property is a double edged sword.  If you can manage the proerty, find the right renters, and have no real issues with the house, (and a little luck doesn't hurt).  Then owning rental property can be a boon.  Otherwise it can just be a lot of headaches and problems for very little gain (I personally have never heard of anyone taking a loss on owning rental property - only that it was too much work/hassle for such a meager gain).


Renting property to college students can be even worse (or better depending on what you care about).   College students generally care less about the aestetics than "normal" people.  But they are also more reckless with your house.  

If your main focus is turning a profit month-to-month, you can get away with sub-standard living for students (most won't care). On the other hand, if you actually care about the property and hope to sell it someday for a profit... I suspect you will find owning rental property to be more work than you are willing to put into it.
0
 
LVL 5

Expert Comment

by:rwj04
ID: 17793666
heheh.  triple post.
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LVL 3

Accepted Solution

by:
maharlika earned 500 total points
ID: 17796138
I'm pretty sure you can not claim the interest paid on commercial property as a tax deduction. It has to be the home you live in, not investment property, to claim this.  check www.irs.gov.  Main thing is to be sure you are building equity so that if you just break even from month to month (income generated from rents > = cost for maintenance, insurance, utilities, interest, taxes, transaction costs for buying and later selling the property, etc) so that when you sell it, any appreciation is your net profit.  Make sure the property isn't something likely to depreciate in value in the next few years, as there are many housing markets in US that are overvalued and prices will drop sharply in the near future.

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