Today, I’ll show you how to use your primary residence to get started and grow.
Most people think you need a massive savings account or rich parents to get into the game. Not true. Your primary residence might be the rich dad you’ve been longing for.
Why?
The typical American homeowner has 70%+ of their net worth tied up in their primary residence. Look again, you probably have major $$ in equity.
Housing typically accounts for 26% of your income. If you can offset this expense, you have extra cash every month to invest.
You already have it! It’s a potential investment you already own. And if you don’t own one yet, it’s the easiest property you’ll buy.
Now, before you hit me back saying but Luke, isn’t it risky to use my primary residence? Yes! Of course there’s risk. Involving a primary residence isn’t for everyone.
That said, you have to take on some degree of risk to grow, but there are still ways to offset the risk and still set yourself up for success.
I just keep reminding myself that the alternative to growth through ownership is working for 45 years only to retire and find that your savings have been crushed by inflation.
Okay, but what if I don’t own a house?
Buy one. Don’t get hung up on buying your forever home, don’t worry what your friends think. The journey to wealth is rarely sexy and after 6 months you’re going to find stuff you don’t like about any home. This property will be your easiest purchase and will give you the momentum and leverage you need to jump to your next property. Take advantage of the low downpayment and favorable terms that come with a primary res.
So how do I get in the game?
1. Leverage your home equity
Leverage is one of the most powerful tools in real estate. It’s the power to purchase a lot with a little. The key to leverage is unlocking equity (market value - what you owe = equity) that’s tied up in your home and using it for your next investment. If you purchased a house before the pandemic, you likely have a lot of it ;). You can unlock the equity in your home through a cash out refinance or home equity line of credit (HELOC). Which option you decide to go with will depend on rates and valuations at the time you use it but in most cases I prefer the HELOC because you can unlock 80-100% of your equity easily without changing your interest rate. Use the capital you pull out to make your first investment.
2. Erase your home expense
If your home payment is your biggest expense then erasing part or all of it can free up valuable capital you can use to invest. There are a few ways to erase your home payment but I’ll focus on one: House hacking. This means finding ways to generate income from your property - renting your basement, spare rooms, extra space, and whole home (via short term rental on Airbnb or VRBO). It can also mean buying a small multi family property (2-4 units) living in one unit and renting the others out so that the tenants pay for your mortgage.
My family and I house hacked when we moved to North Carolina. We Airbnb’ed our first home in Utah which covered the mortgage and gave us a good return. We also Airbnb’ed the North Carolina home on weekends and holidays which offset most of the mortgage cost. Between the income from both properties we covered all costs and used the extra cash to put towards a duplex… and triplex… but that’s another story!
So much more to dig into here and I wish we had time for more. Let me know what you want to double click on and I’ll write about it in a future issue!