Living on income is the dream of many, even those who do not know what it means …
13 min read
The opinions expressed by employees are personal.
Living on income is the dream of many; even of those who do not know what it means; But, thanks to popular culture, we know: there is no better state for an adult human being.
So, is it possible to live on income? Or is it just one of those feudal fantasies that became extinct along with the French monarchy.
We always hear stories about the cousin of a friend of an uncle who “lives off the rents of his buildings” and is dedicated to traveling around Asia and playing guitar at a kiosk in Barcelona; The person who lives on income has become a myth. But if this is possible, then why don't we all do it? And is it really enough for so much? Or just to live a comfortable enough life.
Before I find out, I will explain the process in which it would consist, hypothetically, of living on income. 1) A property is purchased on credit; 2) this is rented at a price that covers the monthly payment of said credit or similar, plus the extra expenses of the property, such as maintenance and taxes; 3) “the house pays for itself”; 4) When the time of the mortgage ends, one keeps the money they pay monthly rent … and lives happily.
It would be really wonderful if this were true; In fact, if it were true, I don't understand why not everyone I know would do it. Next, I am going to remove the pink lenses so you know everything you need to consider before launching to live off the rent.
1. Has its responsibilities
Buying to rent is very different from buying to live. Renting is a business in itself and, like any business, you will have customers. You should see yourself as an administrator with legal responsibilities.
2. You must have a capital
I think that buying to rent, in part, is a sport; You must have an initial capital to request your mortgage loan and a “mattress” for contingencies that yes or yes you must attend on time. When a water pipe is broken in the apartment that you rent, you must solve it at the same time by contractual obligation, in addition, you must be happy with your “customers” (tenants), because if your property remains empty it is no longer a business . It's not like at home, that you can prioritize and wait for certain arrangements if you don't have the money at the moment.
As for the initial capital, you can get a very good deal for your credit if you give yourself the task of looking for it, at Bancompara we take care of doing this every day, so we know that the difference between a successful rental business, and one that makes you lose money, may be in the initial conditions of your credit; as interest rate, time and mode of monthly payments.
In addition to the initial costs, you must take into account the general maintenance of the house or apartment that you rent, that is, of those “cat's hands” that you will have to give to the property so that it does not devalue over time.
Finally, I do not want to scare you, but you should consider the possibility of any of the following scenarios: 1) That your tenants do not pay on time, 2) That you are forced to rent below your minimum rental price, and have to complete your monthly payment or, 3) Let no one rent your property for some time. The bank is not to blame for any of these situations, so you will have to pay your monthly payment on time without excuses. It is when one of the previous 3 situations happens that the business begins to lose its appeal.
On the friendly side, once you have more than one property, things will be simpler, since you will not be a beginner in the subject. In the end, renting a property is not as complicated as nuclear physics.
3. Look at the clauses
Some credit institutions establish that you will not be able to rent the property for the duration of the credit. They do this in order to make sure that whoever lives in the property is the same person who put it in guarantee for the credit. If you are going to process your credit with a broker or with a company like Bancompara, be sure to give this information, so that they take it into account when comparing your credit options.
Another of the things you should keep in mind is if you are already paying another mortgage loan with a Bank or with an entity such as Infonavit. Some banks may have restrictions on the total loan amount.
From sight …
Like any administrator, you will have to worry about beautifying your business and your products. Your property must be in the best conditions if you want to obtain a reasonable income that meets your needs.
Keep in mind:
The golden rule of those who claim to succeed in the real estate business. It is what will determine your success in the beginning. Find out if the property is near main avenues and if you have access to different public transportation systems. If your property is near offices and is intended for executives, for example, you already did it. Or, if you are going to rent a family home, keep in mind that your customers will want security, peace and guest parking. Each case you should review it separately and with a magnifying glass: imagine that you are living there, consider all the needs you would have; and then make a decision.
As for you and your business vision, the location will help you gain surplus value, which is really the heart of the business of “living on income.” If this concept is not clear to you, make accounts of what happens if you buy your apartment in a million and sell it in one and a half a year later.
I know I just named it, but it is definitely something that deserves to be named twice. How can you know if the price of your property will rise? This gives for a separate column, but in principle you can take into account things like the colony, the nearby infrastructure; if there are, or if they are going to build soon, schools, hospitals, businesses, shopping centers.
When your property has surplus value, it will not only increase its value, you can also rent it at a higher price. Instead, your mortgage will be maintained with a constant monthly payment or with a lower increase than inflation.
Last but not least, you must take into account the price of the property, because according to this the cost of your monthly payment will be defined and in turn what you will have to charge for rent. Having an expensive house or apartment can be a good business, but you will always be wondering if your tenants will go to a cheaper property or if they will decide to buy their own house. On the other hand, the more expensive the house, the more expensive the repairs it will require; and it may take a few months before getting the tenant willing to pay the price.
Consider your finances and your lifestyle before deciding this.
Another option that you can consider is the purchase of a property to fix and remodel. It all depends on the time and resources you have to dedicate.
To define the ideal cost for your needs, rely on credit simulators, with which you can try different mortgage monthly installments and you can compare them with the income you can charge, until you find the one indicated. Simulators such as Bancompara's were specially developed for this purpose; use them to know how much rent price is enough.
How much to collect from rent?
This is the high point of the matter. In countries like the United States it is said that you must collect at least 1% of the value of the property. This is almost impossible in countries like Mexico, where mortgage interests are above 7.5% and where you can see a building being built on each block in many major cities; that is, where there is an excessively wide and varied offer of real estate. And, since the market is controlled by supply and demand, you must stick to this to set your price.
How do you define this? It states that payment is acceptable to you regarding the price of the property. 0.7% ?, 0.8% ?, 1% ?; Compare this price with the market. Then, define the opportunity cost. This is done by comparing the best investment between the purchase of the property and the investment in products such as CETES. Then you must compare which investment suits you best in a certain time frame.
How do I rent it?
Assuming that you have already made the decision to become a landowner as God commands, consider rent platforms out of the ordinary, such as AirBnB that have different monthly schemes; You can also consider Homie , where you can rent the property monthly. Of course, as I said before, you should have an iron stomach and a lot of optimism, because under these schemes you have less guarantees, both in terms of maintenance and in terms of income stability.
I already said it, but consider the associated expenses
Only someone who is really committed to the life project of living on income knows that they should consider,
- Taxes as property and sales tax.
- Fixed maintenance and preventive and sudden repairs.
- Commissions of real estate agents (do not refuse to work collaboratively, they know your business).
- The fluctuating market situation.
- Casual events such as natural disasters or accidents, which can devalue or close your property for a good time.
- Speaking of disasters, the insurance you must pay.
- Legal advice to review all contracts that involve your property and the tenants who occupy it.
Finally, let's list the risks you have when renting your home
… for you to make a fully informed decision,
That the rental price does not cover your monthly credit and monthly maintenance.
That nobody rents in a good time and you have to pay the monthly payment of your bag.
That your tenants do not pay for services and you have giant debts.
That your tenants do not take care of the property and that you end up having to make extra repairs.
That you cannot sell your property in record time if, suddenly, you need the money.
But all I have said are expenses, expenses and more expenses, when will you start living off the rent?
If what you want is to live off the rent by buying properties with mortgage credit, you must arm yourself with patience. You will see the money when you have paid the property in full and you can pocket the rent money; or when you sell your property and receive more money than you paid to buy it originally, (goodwill).
The good thing is that, if you plan for the long term, once you have more than one property you can use one for sale when you need additional liquidity.
On the other hand, more in the short term, you can deduct the annual interest.
Why buying to rent is a good idea?
In principle, investing your money is always a better idea than spending it on unnecessary things. But, buying with a mortgage to rent requires knowledge that is very expensive to acquire on the fly, so take care that you meet these requirements before deciding to be a “landowner”.
- You have money to invest, but you are not interested in investing in stocks or stock market investments, you prefer to have “tangible” investments such as houses or cars and you will not do otherwise. In clearer words: if you do not invest in a property, your money will be left dusting in an account in the bank.
- You have no liquidity problems and you could survive for a long time without additional income. Nor do you find yourself in situations or circumstances in which you need liquid money, fast.
- You are aware that properties do not always rise in price: sometimes they stagnate or depreciate.
- You are willing to risk everything with your investment.
- You know that renting a property can become a Full Time job and you are willing to meet all the needs of your property. You are going to attend the various condominium meetings and you will be aware of everything that happens in your properties.
- You accept all the costs of having a property. Remember that time also represents an investment; you must take it into account to calculate your return.
You already decided? Buying to rent may be the right decision for some. Living on income is possible, but it is not for the faint of heart.