The common idea is that buying a home is a forced way to save for retirement. You buy a home putting 20% down, and after 30 years you own your home free and clear. But how did that buy your retirement? Your nest egg is locked into your home. To access this cash you can either refinance or sell your home. Refinancing causes additional payments, and selling your home means you have to find a new place to live. So what to do?
When I spoke about buying a home, what did you think of? Did you think of a 3 bedroom 2 bath house with a yard? I think most readers would have thought of that. Well I was talking about a 4 unit apartment (a.k.a. multi-family home), where you would live in 1 of those units, and rent out the other 3.
Where I live in the Western Suburbs of Chicago you can find 4 flat apartments anywhere from under $100k to $500k. The $100k apartments are located further away from Chicago and let’s say not the best of neighborhoods, which brings in lower rents. The more expensive apartments are located in better neighborhoods with higher rents.
In my example I’m using a 4 unit apartment located in the city of Wheaton. Each of the units are 1 bed 1 bath apartments. This 4 unit is contingent at the list price of $399,900, the net operating income is $33,166. Net operating income (NOI) is the income after all expenses are paid, excluding the mortgage. To calculate NOI add up all the rents, and then subtract the property taxes, insurance, utilities and other expenses your apartment has. The return on investment (ROI) on this property would be 8.29%, based on the total sell price (NOI divided by List Price).
Now you’re thinking, “Wait I don’t have $400,000 to spend on an apartment!” Fortunately you don’t have to fork over the entire $400,000, you can purchase a 4 unit apartment as if it were a regular single family home. Banks consider apartments 5 units or more as a commercial investment, whereas apartments with 4 units or less can qualify for a regular conforming loan.
Putting a 20% down payment of $80,000 at an interest rate of 4.5% creates a monthly mortgage of $1,621 which comes out to $19,452 annually. If you were to evict the tenant with the lowest rent and assume their unit and rent of $850, the apartment would generate an annual NOI of $33,166. Removing the mortgage payment from the NOI would leave an annual Net Income of $13,714. If you decided to forgo paying rent all together, the annual Net Income for the building would be $3,514.
After 30 years the mortgage would be fully paid for adding an additional $19,452 to the bottom line, yielding a total of $22,966 a year in income while living rent free. Here are the advantages of this scenario, you’re generating annual income ($22,966) without touching your equity ($400,000), and you still have a home to live in, all for an $80,000 down payment.
Apartments come in many different sizes from 1 bed 1 bath units to luxury 4 bed 3 bath units located in the suburbs and the city. If living in an apartment for 30 years isn’t what you imagined as your dream home, you don’t have to live there your entire life. The example apartment can fully sustain itself, allowing you the freedom to move into that 3 bedroom 2 bath house with the yard after a few years. Plus you’ll still have additional income to help pay down your new home, and you’re still creating equity in your apartment.
So the next time you start looking up houses, you may want to consider adding apartment buildings to your search.
