As I approach the closing date on my first property, I wanted to discuss a possible strategy for my future investments.
When I bought my sport business last year, I went through the stages of getting a loan. I'm not sure why, but I think I've always been intimidated by the idea of borrowing money. Maybe it had something to do with my parents ingraining the idea that debt is bad, which is good advice considering something like 73% of Americans have credit card debt.
But in the past few years I've recently opened my eyes to the benefits of good debt. A couple years ago I got my first credit card after my friend told me he was able to pay for vacations just on the points he received for spending money he would normally spend.
My instinct when he told me he had a credit card was to tell him that that was a bad idea, but he corrected me and told me he made sure to pay the balance each month and that completely reversed my thinking. So as long as I made sure to not spend a single dollar more than I had in the bank, I was able to actually get a return on my spending. In fact most of my travel expenses in the past four years have been paid completely with points earned by credit card spending.
After realizing the benefits of such an exchange, I then proceeded to get a second credit card, but this time it would be for my business. On-top of getting even more travel points, a business credit card provided even more benefit in the fact that it corrected my cashflow problem.
In my line of work, often times I only get paid when the job is finished, so unlike a W2 employee this usually means getting paid on a very inconsistent schedule. This sometimes became a problem when the deadline on my bills didn't fit my pay schedule.
For example if I knew payments were on the way or if I was waiting days for the bank to clear a large check, I could safely pay my bills and not worry about my account over-drafting.
Now this is just very simple rotating debt and last year I expanded my knowledge of this when I applied for a loan to purchase my sports business. Again, I'm not sure why I was so scared of this process in the past, but now that I've gone through it, borrowing other peoples money is a game changer.
There was absolutely no way I could save up $125,000 to purchase this business, but instead I was able to pay only $13,000 and use someone else's money to buy the business. Prior to owning this business, I was basically living pay check to pay check and for my long time subscribers, this actually fucked me over last summer and forced me to move back home with my parents for six months.
But now owning two businesses that both generate a pretty nice profit, I'm in a much better financial position. My first business basically pays my break-even salary which covers my living expenses and a simple livelihood. Then anything I make on the second business is essentially profit once I take money out to pay the loan. So I could either use that money to reinvest in the business, I could pay myself or I could use that money to further my financial resources, like buying real estate.
The latter of those items is my current focus. Even despite being shut down by COVID-19 this year, I still made a decent return in a few months which is currently helping me pay for my down payment and closing costs for my first house. Being that I've been renting since I was 18, finally moving into a place where my money is going towards paying down an asset, just adds to my financial well-being.
But again, getting a mortgage was a new form of debt that I have learned about. As I'm taking my real estate course and educating myself along the way, I've learned a lot about the powers of using someone else's money. Once again, I'm paying only about $8,000 to purchase a $170,000 home.
While running the numbers on this, I've learned that in this neighborhood, the market rate for rentals is about $1,300. So considering that the home I'm buying is on the high-end as far as bells and whistles, I could still easily turn my home into a source of passive income. With only 3% down, my monthly payment is roughly $1,100 ($300 cheaper than what I'm paying in rent right now). That would make the house net positive.
Although, that's on the high-end.
Typically houses in this neighborhood go for roughly $125-$150,000. And if I purchased it as an investment, I would need roughly 20% down. So on a $140,000 home, I would need to come up with about $30,000 cash and my monthly payment would be about $700. In a market where I could then turn around and rent for $1,300 you might understand my excitement.
Especially since my second business is set to generate about $40,000 in additional income for me each year. With that sort of cash, I could likely purchase several properties in the next 5 years.
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