United Built Homes

United Built Homes, A Singles Game of Real Estate

This discussion leans toward answering questions asked most often by our youthful men and women in there early twenties. They often begin to ask themselves the question, "Should I consider buying a home, condo/town-home or some other type of real estate that I can call my own?" Due to the fact that housing has up to this point always been provided for or lived in on a rented basis we tend to find that our newest contributing members of society find themselves at a loss for the most beneficial and advantageous way to enter this next phase of self-sufficiency.

Due to the fact that most of us grow up in either a rented apartment or our parent's single family home, it stands to reason that most people, when beginning to ask themselves the question of purchasing their own dwelling, will come to the conclusion that a condo or small house is probably the way to go. That's a result of conditioning and it's a hard mindset to break! After taking the time to talk to or personally guide a respectable number of people in their twenties, I have come to find that firm, direct and accurate information can really adjust the reality of how real estate can be acquired and used to their best advantage starting with property that sets the tone for a much more profitable and rewarding future.

Everyone understands the concept of paying rent, so to begin with a great opening question to our real estate student is, "How would you like to collect that rent as opposed to pay it!" Naturally this question gets their attention and we can begin to open the door of enlightenment. I like to use the duplex example to illustrate the two homes under one roof concept. Some people are unfamiliar with what exactly a duplex is and how it works, so I simply state that quite often you find duplexes composed of one building that has two bedrooms and one bath on each side, all under one roof, some larger, some smaller.

These are as easy to finance as a single family home and in many cases allow you to qualify for a larger loan amount which leads to using leverage and more of other people's money to get ahead faster in life. Using an example lets say you find a duplex for $150,000 (California is higher), your loans interest rate is 6% that would cost $899.33 a month to pay principle and interest back on a 30 year loan.

They would have to insure it, so we use an average of $5 per $1000 of home value to average insurance costs. So $5.00 x $150.00 = $750.00 a year for insurance. We divide that by 12 months to get a figure of $62.50 a month for insurance. We also have annual taxes that are based on what the home is worth multiplied by a millage, or mill rate. Let's use a tax rate of $11.00 per $1,000 of the homes assessed value: $11.00 x 150 = $1,650.00 a year. Now divide that by 12 months to get a monthly tax of $137.50 and by adding principle, interest, taxes and insurance (P.I.T.I), we get a total monthly mortgage payment of $1099.33.

Now when you rent one side out for (in many cases, approximately $750.00 a month) you are left to pay only $349.33 out of your own pocket every month. When I get this point firmly affixed to the gray matter of their brain, it becomes clear that this amount is much lower than the amount of rent they are now paying to live under someone else's roof and rules. Now the questions start coming in the following order. Well? How do I buy something like this? The answer most often begins with, "By getting pre-qualified for a loan," and I go on to say you will need to gather and bring the following things to the bank loan officer to get started:

Copies of three years of tax returns for first time buyers + schedules and W2 forms

Copies of most recent pay stubs within the last 30 days

Copies of your most recent three months of bank statements

A list of all creditors with name, address and account numbers

With these initial documents the lender can begin to process your application for a loan. They will determine your assets and liabilities (net worth) as well as verify where you live now, your credit history and a host of other information that begins to validate your existence and ability to borrow money now and in the future.

Once they've had a chance to review and verify your information they can pre-approve you for a certain loan amount. Once your approved you can begin your search for a home of your own, typically as a first time home buyer you will find that there are programs that let you put as little as 3-5% percent down in order to buy a home that satisfies the lender's guidelines according to its value and conformity. Now on a $150,000 loan the down payment can be anywhere from $4500.00 - $7500.00.

There are ways to lower these costs and a great place to start is by attending a first time home buyer's class. These classes introduce you to the basics and give you further information on programs that are currently available that may offer you the opportunity to buy with nothing down! So with that said, the next step is to get to a free class and get familiar with the process. Often I recommend going to the class before going to see a lender so you don't appear so green and unprepared upon your initial introduction.

Since I usually find these poor souls wondering and wandering in the land of the lost, the next frown I see come over them is the realization that they just don't have the money required to start. So the question comes up as to where to get it. I usually ask about savings, whether parents or grandparents can help, if they can sell valuable possessions or take second jobs, get grants, gifts, use trust funds, personal loans or co-signers, or a combination of these alternatives with a complimentary loan program usually gets the ball rolling. Options and hard money lenders usually come later as alternative funding and acquisition sources, so I won't confuse any one with those now.

The bottom line is this: If someone wants something bad enough there is always a way!

The nice thing about duplexes is that the lender will take into account the fact that 75% of the rental income from the other side of the property can be used to offset your qualifying ratios, so in this case they can use 75% of the rentals $750.00 income to reduce the amount you must earn to qualify for what appears to be an unaffordable loan. Seventy-five percent of $750.00 equals $562.50. Now subtracting that amount from the original mortgage payment of $1099.33 leaves you with a payment of $536.83 which the bank says you must be able to repay every month out of your own pocket. You can do this!

Can you begin to see how with a little information, effort and belief you can actually own something and pay less than what you are currently paying in rent?

Let's continue on with the way things begin to unfold once you begin the journey. Starting with the day you close the deal and become the new owner you will see that you now have just created a passive income stream that gives you an extra $750.00 a month without you having to punch a clock or trade a certain amount of hours to earn the money. Your new asset works for you day in and day out constantly generating income for you while you go and do other things. This is leveraging your time and money in a very beneficial way!

You also will notice that at the closing of your purchase that the old owners who sold you this property had to prorate or give you a share of the rents due and any security deposits that the tenants had given to them. Now add to that the likelihood that your first house payment won't come due until about a month and a half after you move in and you find yourself with, low and behold, extra money, probably for the first time in quite a while!

Let's calculate it using simple math. Assuming you close on the 15th of the month, you will have 45 days before your first payment comes due, you will be credited with 15 days of rent, you will receive all security deposits of the tenant and you will receive another month's rent on the first of the month from your tenant and you yourself will have no rent or house payment of your own to make for another whole month. What does all that add up to? Let's break it down:

Fifteen days of rent equal to $375.00

A half month's rent as a security deposit equal to $375.00

A full month's rent in another 15 days equal to $750.00

No payment to the bank for another 30 days and you're not paying rent to anyone any longer, so you keep whatever you normally would have had to give to someone else as rent that month (let's say that was $500.00).

Another payment to you for $750.00 from your tenant as well as you having to make your first mortgage payment of $1099.33 on the 1st of the month which comes 45 days later.

Side note: If you decided to rent your second bedroom to a roommate, they would pay $500.00 a month and half your utilities as well, thus your basically living and owning this property for free. Say goodbye to all those student loans as you divert all these freed up funds to pay off loans instead of a landlord!

Adding these up, we get $375.00 + $375.00 + $750.00 + $750.00 + 500.00 not paid to your old landlord. That equals $2,750.00 that you will now have as a result of your first month and a half of ownership. Now subtract your mortgage payment of $1099.33 and you are left with a reserve fund of $1,650.67 in your account. Take your parents out to a steak dinner and celebrate - you've earned it!

Let's review: You decided to buy your own home, you made the choice early to offset expenses by looking at a multiple income property, you went to the homebuyer's class, you went to see a lender and got pre-approved for a loan, you saved or arranged to have the necessary amount required to buy and you hunted, searched and analyzed more than a few properties in order to find a good one that would satisfy your criteria.

Your next phase is to begin to realize that you are now responsible for the welfare of another family or person due to your willingness to become a landlord. Your tenants pay rent and expect you to take care of their housing needs. If you chose a good property by carefully looking at plumbing, heating & A/C, electrical, foundation, structure, roof, location and price, then you should be well positioned to be able to successfully manage these duties. Often, you as the new owner will begin to make improvements to the property such as painting, installing new carpet and doing some inexpensive landscaping and repairs. These are the things that add value to your property and keep your tenants happy while at the same time not breaking the bank!

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