I wanted to spend a little time diving into some of our other investing strategies that will help fuel our retirement in the future. Today let’s dive into how we will use house equity and rental property to create another income stream in the future. Between selling our current house in 10 to 12 years and using our original house as a rental, these are two key assets that will provide over $500,000 in cash flow through retirement!
For those of you that have been with us from the beginning, you will know that having a rental was not always the plan. In fact, this post is a good reminder of how I call the first house one of our biggest financial mistakes. We are trying to slowly turn that mistake into a positive by taking advantage of a rental opportunity.
Just under 4 years ago we decided to take the plunge and build a new house and rent out our current town home.
Town Home Facts (2016)
- We owed $200,000 dollars on our mortgage
- The house value was around $175,000
- The monthly payment was around $1,600 all-in
- Rent $1600 a month
We were able to find a renter right away that would help cover the $1,600 dollars a month. We didn’t trust ourselves to find a renter so we used Renter’s Warehouse which charged us $3,200 for a 4 year lease. One year in we decided to invest another $25,000 in the house to get rid of the home equity loan and start netting $250 dollars per month vs. the rent.
Given that we never put an initial down payment down on the house (this was the great time of ARM loans with no money down), we thought of the $25,000 as finally making our down payment. The goal was always to break even on the rent vs. expenses like the Renter’s Warehouse fee, maintenance costs, and property tax increases. We’ve had our fair share of all of those.
We’ve had two instances where our renters didn’t know how to use the fee box and we had to pay an electrician to flip a switch. 🙁 We’ve had to replace a microwave, which we did ourselves. Our biggest issue was that our first renters decided to break the lease 10 months early. That caused us to need to find another renter, pay another fee, as well as clean the house between renters.
Where do we stand almost 4 years in?
Town Home Facts (2020)
- We owe $144,397 dollars on our mortgage
- The house value was around $242,000
- The monthly payment was around $1,415 all-in
- Rent $1,695 a month
As you can see we have swung from being -$25,000 in equity on the house to almost $100,000 positive in the past 4 years. The biggest piece of that is the house value going up almost 38% over the time frame. Now the market was up 52% over the same time period, but that is the beauty of investing in a home. I didn’t have to have the $175,000 to take advantage of the rise in house price. If we would have sold 4 years ago, that is $67,000 dollars in equity I wouldn’t have.
The other piece is the reduction in what we owe on the mortgage. The key was to make sure the rent was at least covering the mortgage and tax expense which we have. On top of that with the new renters we were able to raise our rent by $100 dollars vs. the previous tenant.
Every month looks like this now:
- Rental payment of $1,695 – $1,416 in expenses for a $279 profit
- Currently paying off $353 dollars of our principal each month
- Total change in equity is $632 dollars per month from this property
Now the problem is that all of those expenses have kept us negative from a rental profit standpoint through year 4. We are still $1,300 dollars behind on rental profit vs. expenses. Which if nothing else happened we could be back to even 5 months. The goal is to break even on that portion and continue to gain on the loan balance vs. house value line.
What’s crazy is that this house will not be paid off for another 20 years!!! However, if we can keep raising rents we may start to see some actual profit from the renters vs. expense line. The house equity line will continue to grow to at least $300,000. Then as we hit 58 the property should start kicking out at least $12,000 dollars a year after expenses as a retirement cash flow.
That will be over $500,000 dollars in rental income if we live to 100 on top of owning an asset worth over $300,000 dollars. What started as a financial mistake can be turned into a huge part of our retirement plan!
The second big asset we plan to utilize in our #FIRE plan is our current home. The current plan is that once the boys go to college we will sell this house and move somewhere else. We will take the profit from the house minus a down payment on a new house to help fund a couple of years pre-59.5.
Now everyone reminds me that my kids will need some place to stay during the summer while they are in college, so maybe we have to wait a couple of more years than I want. I’ve always argued they can just come to wherever we have moved. We’ve been very clear to them that they shouldn’t get attached as we will not be the parents that keep their room as is. 🙂
Current Home Facts (2016)
- We owed $382,284 dollars on our mortgage
- The house value was around $425,000
- The monthly payment was around $1,809 with a $5,200 annual tax payment
This time we were able to put 10% down on our house to have equity to start. We got a great interest rate in the 3.5% range. Finally, we decided to pay our taxes on our own instead of the bank doing it which lets us pay more real time.
Current Home Facts (2020)
- We owe $353,988 dollars on our mortgage
- The house value is around $512,075
- The monthly payment was around $1,716 with a $6,100 annual tax payment
This is how owning a house is supposed to work or what I thought would happen with our first house. Instead of the value cutting in half in 4 years we have seen almost $90,000 in appreciation (based on Zillow). That’s a 20% return over the past 4 years.
The other big key with the low interest rate is we pay off more of the mortgage each month. Almost $682 dollars a month or over $8,000 dollars a year now that we knock off. Through these 4 years that’s almost $30,000 dollars in equity from our mortgage payments.
The combination of the house value increasing and the mortgage decreasing has resulted in equity moving from $43,000 to $158,000. That’s the key to home ownership is that we have taken $43,000 in cash and gotten a 267% return with that money. That’s the value of leverage.
How’s this fit into our #FIRE goals? We need $300,000 in equity 10 years from now to help fund a couple of years of retirement. As you can see in the graph below a lot of this will be taken care of through paying our mortgage. Over $100,000 will be knocked off in 10 years from paying the bank. That leaves just $40,636 of house appreciation needed to hit our goal. That means we only need a 0.8% return annually to hit this goal.
Hopefully this is another example of trying to build a conservative plan to weather storms and things we cannot see.
Hopefully this gave you a good overview of how to factor housing into your retirement plan. Between turning a mistake into an asset and so far seeing solid returns on our current house we have over $800,000 dollars in retirement income coming from these two assets.