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Posted almost 10 years ago

Is the Primary Residence Always a Liability?

It seems that perhaps I've been felled by the false notion that I can purchase a home that will act as an asset as opposed to a liability...

My co-workers believe wholeheartedly that my plan for purchasing a home is not only ill-conceived, but is generally unrealistic and impractical. In fact, an overwhelming number of acquaintances I've surveyed agree! Now I'm not sure that my plan is fool proof, however, I don't see the major flaw in my thinking...

...About a month ago, I decided that I was tired of spending a large chunk of my hard-earned income receiving nothing in return; "I don't want to pay for rent," I thought. And, while it may seem childish to most, I believe this statement will be the catalyst to a new-found success.

After a little introspective thinking, I decided that perhaps I don't have to give in to societal pressures and "just accept" that my primary residence has to be a liability instead of a potential asset. And, so now I am diligently searching for a home with a minimum of three bedrooms and two bathrooms, with the idea being I will rent out the additional rooms, using the added income to help pay off the mortgage more quickly.

I know that I cannot rely solely on rent-generated income with regard to paying my mortgage. I also know that issues arise, and even with a comprehensive rental agreement, tenants are about as reliable as you can throw them. However, I have over two years of personal experience in acting as the defacto landlord to the roommates I've shared my last couple apartment rentals with.

I have budgeted for my income and expenses, and have determined that I can appropriate $1600 per month (without overextending myself) to paying off a mortgage. That, coupled with a low interest rate (3.25% APR) and an inexpensive home (< $120,000), I should be able to own my home outright in under seven years if I maintain a $1600/month payment schedule, and just under five years if I add $600/month (my conservative estimate of average rental income per month, assuming $450/month per room, taking into account losses from taxes, vacancies, and refusal or lack of ability to pay).

For calculating cost, length, or cumulative interest paid for a mortgage, I used the following website:

http://www.ultimatecalculators.com/mortgage_calculator.html


Comments (3)

  1. Samuel:

    Instead of simply 2-4 bedrooms, look for 2-4 units.   Buying a duplex, triplex or quadraplex turns your primary residence into a cash flow machine.   Done correctly, not only will someone else be paying the mortgage, but much of your monthly operating costs could be covered as well.

    ... then, if you still wish to rent out the other bedrooms in your unit, go right ahead.


  2. HI Sam,

    I suppose it depends on your definition of a liability. The accounting definition for a home or real estate property is an asset but some will say its a liability because it removes cash from your pocket. The counter argument would be the Rent Vs. Buy analysis to so you can compare the after tax (depends on your income scenario) of renting versus the after tax cost of buying. Leaving emotional factors out, if the cost of buying is less expensive then it is to rent then its a good decision to buy. Of course some people will value the emotional factors as well but that is another discussion.

    I think alot of times we dont look at the opportunity cost of your down payment as business capital that could be reallocated else where to earn a return and while its used as a "down payment," for your primary residence it loses this ability so its important to consider that as well in your cost of owning.

    These are just some thoughts, but feel free to let me know if you'd like to discuss.


  3. I am currently stationed with a Master Chief who purchased a 3 Bed/ 2 Bath every time he PCS'ed INCONUS. He now only buys multiplexes and has quite the passive income.