Fire the Landlord!

Does your landlord give you a gift each Christmas or send you Birthday cards? Why not? Does he send you ‘thank you’ notes each time he makes a car payment or send a kid off to college? Don’t you think he should? You’re paying down his mortgage and you’re giving him money each and every month. You might as well get deposit slips and make a trip for him each and every month.

It’s time you start investing in yourself. It’s time you Fire the Landlord! I’ve sold homes for nearly twenty-two years and I’ve seen people purchase houses and invest in rental properties. I’ve also seen people rent for years at a time. I own and manage properties for some tenants who have lived in a rental house for over ten years. If you’re a landlord you love these types of tenants. They are paying down your mortgage and creating cash-flow.

How do you Fire the Landlord!? You start by saving some money each month. If you plan properly you only need to save about 4% of the price of the house. If you’re a Veteran you can purchase a house with no money down. I’ve seen some people get a ‘gift’ from a mom and dad and make their dream come true. I’ve also seen people borrow from their 401k to purchase a house.

When you own a house you are paying down the mortgage each month, probably enjoying appreciation in value, and you’re writing off the taxes and interest against your taxable income. If you’re an investor you’re also writing off depreciation. So let’s look at an example I have seen personally.

I purchased one of my rentals in 2006 for $75,000 and rented it for $950 per month. My total payment to the bank is $705. That’s a profit of $245 per month and I’ve seen the house value climb to over $115,000. I’ve realized a net value increase of over $40,000 and have made about $20,500 in net rental income over that time period. Rents have increased to over $1,150 per month thanks to the tougher requirements to get a loan and more people moving into the area (pushing prices upward). Due to a few property tax increases the payment is now $725. Why couldn’t the tenant do that for himself?

There are only a few reasons why someone should rent. The first is you are saving for a down payment and you’re improving your credit situation. The second is because you’re not sure that you’ll live in the area for more than three years. Another reason is because the market values are in a period of decline. You can consult an experienced Real Estate Agent for advice.

In the above example, if the tenant had invested 3.5% down on the property and purchased it in 2006, their payment would have been about $650 (investors pay a higher rate), $300 lower than the prevailing rent. That’s a forced savings account deposit of $300 per month! Each year they would have been saving $3,600. That $3,600 could have paid for a nice car or could have been invested. And if the interest and taxes on the note would have been higher than their IRS deduction that $650 mortgage payment would have really been around $550 per month because of the tax breaks. They didn’t Fire the Landlord! They chose to give this money to the landlord. They chose to pay $950 in rent, live there for multiple years and now the rent is higher ($1,150) and the landlord now has an investment that is worth $115,000 and his mortgage balance has gone down to $68,000. If the tenant had invested in themselves and purchased the house they would have enjoyed a profit of $47,000 (current value minus current mortgage balance) and would have saved or invested over $3,600 per year. Over six and one-half years that’s over $23,400. Combine the $23,400 with the current equity of $47,000 and you get $70,400. If you’re there over six and one-half years, that’s over 78 months of paying rent. $70,400 divided by 78 is $902.56 which would have been the realized investment value. That equates to getting paid $252.56 per month to live there. If I told you that I wanted you to live on 123 American Way, Allen, Texas and I’d pay you $252.56 per month, wouldn’t you jump on that opportunity?

Let me give you another example with a twist. Let’s imagine you purchased that same property in 2006 for $75,000 but the value went down to $70,000; the market was horrible for a few years and it’s just now climbing back up. Your mortgage balance is $68,000 so you have $2,000 equity but you still paid $300 less per month because the rents for similar houses was $950. You still realized a benefit of over $3,600 per year! That’s $23,400 over the 78 month time period. That equates to a mortgage payment of $350 per month ($650 payment minus the realized savings per month).  If I told you that I wanted you to live on 123 American Way, Allen, Texas and all you had to do was pay $350 per month wouldn’t you jump on that opportunity?

It’s time to Fire the Landlord! It’s time you invest in yourself!

James DeLaGarza, B.B.A, Real Estate Finance

Licensed Real Estate Agent since 1992

972-390-2000