Many homeowners believe their home is their greatest asset, a symbol of financial stability and success. However, what most don’t realize is that sitting on home equity while paying bills and expenses often results in a negative yield on their investment. This financial drain means your supposed asset could be less beneficial than you think.
Current Owner-Occupier State:
- Average Home Value: $375,000
- Average Home Equity: $187,500 (50% of home value)
- Mortgage Balance: $187,500
- Annual Mortgage Interest: $7,500 (4% on $187,500)
- Property Taxes: $4,125 (1.1% of $375,000)
- Home Insurance: $1,200
- Maintenance Costs: $3,750 (1% of $375,000)
- Utilities (Electricity, Water, Gas): $3,000 (estimated $250/month)
- Other Ongoing Costs (Internet, Trash, etc.): $1,500 (estimated $125/month)
- Total Annual Expenses: $21,075
- Net Yield = -11.2%
Turning the Situation Around:
Step 1: Downsizing Your Home
- New Home Purchase: $250,000
- New Home Equity Used: $125,000
- Annual Expenses for New Home: $14,250
- Net Yield from New Owner-Occupier Home: -11.4% (still the same negative yield though on less equity)
Step 2: Invest In Rental Property
- Rental Property Purchase: $187,500
- Equity Invested: $62,500 (33% down payment)
- Mortgage Balance: $125,000
- Annual Mortgage Interest: $5,000 (4% on $125,000)
- Property Taxes: $2,063 (1.1% of $187,500)
- Home Insurance: $750
- Maintenance Costs: $1,875 (assuming 1% of $187,500)
- Utilities and Other Ongoing Costs: $1,500
- Total Annual Expenses: $13,688
- Rental Income: $15,000 annually
- Net Income from Rental Property: $1,312
- Net Yield from Rental Property: 2.10%
New Total Financial Picture
- Total Cashflow: -$12,938
- Total Yield: -6.9%
By downsizing and buying a rental property, the cashflow picture starts to turn positive reducing financial drain and accelerating wealth building through passive income and asset appreciation. Download PropertyCard, rinse and repeat to get financial freedom.
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