Making Your Home Your Gold Mine
If your home is your best asset, as David Bach asserts, then imagine the gain from owning two homes. In a three-part series on The Early Show, the best- selling author of "The Automatic Millionaire Homeowner" has led viewers through the steps for turning real estate into a personal gold mine.
In part one of the series, Bach offered advice to renters on how and why to become homeowners. The second part focused on how to pay off a mortgage more quickly and increase equity in your home.
In part three, Bach
"As long as you are alive, you have to live somewhere. The secret is to own where you live first and then own a couple other homes that people rent from you. If one home is good, two is better, three is great," he told co-anchor Rene Syler.
Bach says people need to get into the automatic millionaire mindset by breaking away from traditional patterns. "Here's what most people do. They buy a home. As their family gets larger, as they make more money, they go from one home to a more expensive home," he said. "What I suggest people do is this. Buy a home and start paying it down early. Then look and see if your home will rent and if the rent will cover your mortgage payments. If the answer is yes, pull some equity out of your first home, rent the home you're living in now, buy another home."
Bach points out that although becoming a landlord makes obvious financial sense, it can be difficult to handle tenants, and he suggests a few steps for making the job easier, such as hiring a property management company. "For about 5 percent of what your rent is, you can get somebody else to deal with all the headaches."
He also recommends setting up an automatic system for collecting rent. "When you have a tenant, you can insist in the contract that they deposit their checks automatically every month into your paycheck. So you can actually pull out of their checking account your rent and it goes right into your account," he told Syler. "That's why we call it the automatic millionaire homeowner mindset."
In fact, Bach says one out of every four homes purchased in 2004 were for investment properties. And for those who want to join this trend, Bach lays out the steps.
Qualify for a second mortgage
"Go see if you have equity in your home you can use to buy another piece of property. That means going into the bank and saying, 'Can I get a second mortgage or refinance and do what's called a cash-out?' Pull a little equity out of your first piece of property. Use it as a down payment on a second piece of property. The equity you have in your home is your equity," not the bank's.
"The key is to use your equity, though, to build wealth. What many Americans are doing is living on their credit cards; they're pulling equity out to pay off their credit cards," says Bach. "You want to use your equity to build wealth. The rich get richer by leveraging the wealth they already have."
Find property with positive cash flow
"The name of the game in real estate is cash flow, cash flow, cash flow. What I mean by that is, don't buy a piece of property hoping you're going to buy it and flip it. That's how people get busted in these booms," says Bach. "When the market slows down, you'll get crushed. The key to real estate is cash flow. That means that you can rent your property and the renter will cover your mortgage, your insurance, your taxes and your maintenance."
Bach points out that it's critical to know before you buy the property, "Can you get rental income in that area that will cover all those things. If the answer is no, you should not be buying," he says.
Create a rental emergency fund
It's "critical that you have enough money in an emergency account set aside to cover yourself in case the renter doesn't come right along," according to Bach.
Check out David Bach's Web site for information about the author and to see whether he will be speaking in a city near you.
To read an excerpt from "The Automatic Millionaire Homeowner," click here.