Do you ever have radical ideas about how to make more money in your life? I sure do! It seems like every single day I think of some other crazy way to make money. Often times I just write them down to come back to later (there simply aren’t enough hours in a day to try all these different ways to make more money), but I simply can’t shake this idea from my mind. I’m wondering if it might be a good idea to sell my house and invest the equity in a passive income opportunity.
I bought my house as a foreclosure for $75,000 in August of 2011. I spent over a year making updates (and am actually still making updates yet today – apparently, it never ends) and in its current condition I could probably sell it for $125k. With my loan currently at $55k, this would give me $70,000 to invest in my passive income opportunity.
So what is this passive income idea I’m referring to? I’ve always had a soft spot for real estate, and I would love to try my hand at investing in a quad-plex. In my area, I suspect I could purchase a multi-unit complex for around $170,000. I would put half of my equity down on this property ($35k) to cover 20% of the loan, which would allow me avoid PMI payments on the mortgage. I would put the remaining $35,000 in the bank as an emergency fund on the property.
On average, a 2 bedroom, one bath unit will rent for $700 a month. With all of the units rented out, that would give me a potential income of $2,800 a month, or $33,600 a year. With a 30 year loan on this investment property, I have calculated that I would pay out approximately $700 a month, which includes insurance and property taxes. There will also be other various expenses for these units, which I expect to be about $200 extra dollars a month.
Now, where am I supposed to live?? I suppose I could always crash my parents house for a while, but I think I’m a little old for that, and they would probably rather have the house to themselves now that they are empty-nesters. Most likely, I would rent a small apartment on the outside of town for $600 a month or so.
Rental Income (700 x 4 units x 12 months) = $33,600
Mortgage Expense ($700 x 12 months) = -$8,400
My Apartment Rent ($600 x 12 months) = -$7,200
Net Income Potential = $18,000
Now, this is obviously a best case scenario, but what if I earn only $15,000 instead of $18k? That is still pretty awesome!
There are a few downsides to this plan. The first is the fact that I’ll be paying rent money that I’ll feel like I’m just flushing down the toilet. I’ll be paying $600 a month that I’ll never see again. This might be tough for me to swallow. Second, Instead of only having $55k in total debt, I’ll have $135,000 that I’ll owe the bank (but I do have $35k that is in the bank for emergencies, so I guess I could consider this to be more like $100k). Either way though, I am not a big fan of debt, and I’m not sure how I would feel about increasing my debt load with this crazy scheme.
The obvious positive is the increase in income. An extra $18,000 in fact. Secondly, my renters will not only be providing me income, but they’ll be paying for my new investment property for me. Finally, I’ll be able to begin investing now instead of two years from now (which is my current plan). By investing earlier, I will have more time to compound my earnings and increase my real estate empire.
So what do you think of this idea? Should I seriously consider it?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.