so picking the right place and having the home appreciate faster than the mortgage interest builds up is a risk. Great if ya pick the right
area, with the current trend is towards "walking into a town" - convenient train station. Where is next? Plainfield? Most home prices are not going up a bunch,
because supply is high in most areas. there are always exceptions.
Short term rentals might be even worse. Consider the clientele. Then throw in seasonal short term where the peak season has to carry the year.
I'll come at it one other way -
If it is such a viable investment strategy, then the prices would automatically adjust to reflect it (the price of the home rises because of the income it can produce)
more than likely it is going to be negative cash flow with some sort of backed-up loss because of depreciation.
Unless there is one making money, and one losing, the loss can't be taken because it is passive (unless you are in the business of real estate rentals,
and there are some new laws this year about taking some of the loss) The loss is taken against the gain when sold. note that paper loss does not make money.
too much stuff has to go right to make any real money for the effort.
Let's run a quick scenario -
purchase a $400k condo in surf city (consider this all in, ready to rent after you purchased at auction, and put in the time/$$ to get it ready)
you pull the equity out and have a $300k mortgage (cause of you had $400k laying around, it could have made you $24k in an income fund
yielding dividends at a preferred tax rate, and reinvested so doubling in 15 years (rule of 72) producing $50k/yr in dividends) - this is an income
fund, not a market fund (traditionally market does better)
The mortgage now looks like $5,000/month cause it isn't your primary home, so you couldn't get the better rate.
It is at the beach, and the insurance is $3,000/yr taxes $5,000, principal, interest. condo assoc fee. so $60k out per
year, for 15 years.
The main income time is 100 days, can you get $600/night clear after the rental co charge, cleaning and linen charge, electric (heat and/or a/c)?
maybe there are a few more nights around holidays, to add income, but it won't be close to that number. Then up-keep, increasing condo fees/taxes.
appreciation on the house, your time.
So it seems good right? You invested $80,000, managed cash flow as well as you could for 15 year, you now have a $500,000+ condo you hope,
and something that generates $60k/year in rental income. less ~$15k in expense. you are hoping you could step away at any time and
cash out somewhere between the $80k and $500k in equity, depending on how far in? see mortgage table for answer - too lazy to generate one.
but the $80k investment would have generated $350/mo, $300 post tax, reinvested. it would have doubled, the cash return would double+,
you had little risk, and didn't have take a chance to get to year 15 where the money really starts, and no unclogging toilets or fixing holes in the walls.
that was a lot. i'll check the math, see if i can turn it into graphs so easier to digest.
