More and more people are turning to renting instead of owning their own home in 2019. There are some that decide to rent vs purchasing for any number of reasons. I have heard everything from they don’t want to deal the day to day maintenance and upkeep of owning a house or they want to live in the newest trendiest building downtown. While I do not agree with this premise, I understand the thought process. The other side of the coin here is, though that there are plenty of people out there that would love to own their own home but they either think that they can’t afford to do so or just continue on renting because they don’t know where to start. As an active Real Estate Investor in the Philadelphia and surrounding areas I have come across all sorts of situations and stories, and I can tell you from personal experience you can pay less for your mortgage then you can pay to me for rent.
The average rent for a 2-bedroom house or apartment in Philadelphia is $2,039 per month plus utilities as of the writing of this article. While the average house price in Philadelphia is still just $154,000. There are programs out there such as FHA, VA and Home Ready that can get you into a house with little or no money down. FHA requires just 3.5% down and the Home Ready program just 3% down plus closing costs. That means that at $154,000 you could purchase that house with just $4,620 down, or about 2 months rent. While lenders have tightened up their lending practices after the collapse of the real estate market back in 2008 and 2009, it is still not as hard as you might think to qualify. Those applying for FHA can do so and still put just 3.5% down with a credit score as low as 580, while the Home Ready program has a minimum score requirement of just 620. With rates back down to yearly lows (well under 4%) now is a great time to speak with a loan officer to get qualified.
Now I understand that we are dealing with averages here and the area you want to buy in may have an average sales price much higher than $154,000. That’s ok, I can help with that to. It’s called House Hacking! House Hacking means you live in one of the multiple units of your investment property, a duplex, triplex or quadplex as your primary residence and have renters from the other units pay your mortgage and expenses. You have the ability to offset your mortgage and living expenses by living in 1 unit and renting out the others. This process can even allow you to qualify for a house you may not have normally been able to afford by using the rental income to offset your monthly mortgage payment. The best news is you can still qualify for a traditonal mortgage if the proeprty has 4 or less units.
To break it down let’s look at a real-life example of a property that is for sale right no in my market. This property is a duplex that is listed for $270,000. Unit 1 is a 4 bed 1 bath and we will consider this as the owner unit. The second unit is a 1 bed 1 bath and it is the rental unit. Assuming that you used the Home Ready program to purchase this house (3% down) that would mean you put down $8,100 and now have a mortgage amount of $261,900. After factoring the taxes and insurance for this property your monthly mortgage payment comes out to about $1,863. The average rent for a comparable 1 bed 1 bath unit in the area is $1,200. That means that you can own your own home and your monthly housing costs would only be $663 per month.
Lastly, I want to talk about the tax benefits of owning your own house. Most people don’t know that some, or all your interest and any points you paid to get your loan may be tax deductible, meaning you can apply what you have paid towards reducing your tax owed come tax time to the IRS. The other major advantage is that when it eventually comes time to sell your house your capital gain on the property, or the amount you sold the house for over what you paid in tax free up to $250,000 for individuals and $500,000 for married couples. To qualify for this exclusion, homeowners must have lived in and used the home as their primary residence for at least two years out of the five years before the sale date. There are not many other investments you can make and earn $500,000 tax free.
As always, remember that building wealth is a choice and there is not easier way to build wealth then through real estate. Whether you own 1 property to call your home or have a portfolio of hundreds of units it is always better to pay your own mortgage then to pay someone else’s.
Joe Pietrzak is the writer of this article. Feel free to email me at joepietrzakproperties@gmail.com with any questions or comments.
Disclaimer: I’m not a lawyer or accountant, and this is not legal or accounting advice. This information is based off my own opinions.
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