Use S/M/L to see how to win at investment homes

this is the time I found these Daniel Johnston t-shirts (famous Austin artist/musician) in a Tokyo record store

S/M/L isn’t just for t-shirt sizing.  It’s also a way to understand how your investment home will make money for you.

S is short-term.  These benefits come right now.  The first is positive cash flow.  Frankly, I rarely see this nowadays in the Austin market, and never expect it.  However, if you find a smoking deal or put down a higher down payment, it’s a big bonus. The second is tax benefits.  You can do what’s called a “cost segregation” on your rental and get a big tax deduction.  If you can qualify as a real estate professional, you can even take that deduction against your w2 income.

M is for mid-term.  I put appreciation in this bucket.  Over the long term, homes go up ~ 4%/year.  Real life never moves in a straight line though, so you’ll have flat years, some down years, and some up years.  So if you’re one of those that likes to buy when the market is down, the up years rise much quicker than the average.  Remember also that the power of leverage is on your side.  If you have 25% down on a home, when the value goes up 4%, your return on the money you put down is actually 16%!

L is for long-term.  These are the benefits that start slow, but really kick in over time.  The easiest one to understand is equity pay down. As your tenant pays your mortgage every month, more and more money goes towards reducing your loan balance (meaning your equity grows).  In the beginning, 15% of the mortgage payment might be going towards equity, while ten years in, more than 25% of the payment will be equity gain.  The other big benefit is dollar destruction.  It’s a harsh name, but easy concept.  Over time, our dollars are worth less and less because of inflation (stated another way, the same dollar buys less and less stuff).  At the same time, the dollar value of your house goes up over time.  However, your mortgage payment stays exactly the same, which means ten, twenty years from now, your mortgage payments and balance are worth much less than they are today.

Did I confuse you?  Let me know what I can do better at explaining, and in the meantime, if you’re thinking about making a move, let’s chat and see what the best road is for you.