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Using Your Home as an Investment

Is Your Primary Residence an Asset or Liability?

Put simply an asset is something that makes you money while a liability costs you money. If you own your home in the traditional sense it’s probably a liability. Why do I claim it could be your best investment opportunity? Why not just buy an investment house that is an asset? The answer is simple, you have to live somewhere. That means you either own a home or you rent a home. Will the money you make from your investment reduce your home liability enough? It absolutely could, but the two large benefits of turning your primary residence into an investment is you can buy the home with lower a down payment and you also have somewhere to live. Some loan programs such as VA and USDA-RD could help you purchase your primary home with absolutely no down payment, but if those aren’t a fit for you an FHA or Conventional need only 3-5% down. Whereas most loans for investment homes will need a minimum of 20% down or more.

Should I Buy or Rent?

It depends. For some it may be make more financial sense to rent and buy a separate investment home. For others owning a home creatively may yield a better result.

The Cost of Renting

The only way to find out is to just run the numbers. Most of us will start our adult life renting in some manner. Some of you may be lucky to live with family that doesn’t charge you any rent but for most of us that won’t be the case.

How much would it cost you to rent for five years? Why five years? Real estate investing takes time and often up front money. Rent will almost always be the less expensive in the short term. If you are looking to invest in real estate it should be a long term endeavor.
I’ve chosen a subject property for this that was sold recently in my market, Fairbanks Alaska. Before it sold it did have a tenant in place so it makes for a great comparison.

Subject House Information

  • Purchase Price – $300,000
  • Rent – $1,950
  • 3 Bedrooms
  • 2.5 Bathrooms
  • 1,504 sq.ft.
  • Built in 2007
  • Excellent condition
  • 0.2 Acres
One Time Expense
Year One Monthly ExpensesYear Two Monthly ExpensesYear Three Monthly ExpensesYear Four Monthly ExpensesYear Five Monthly Expenses
Total Monthly Expenses$2,435$2,542.83$2,655.80$2,774.17$2,898.19
Yearly Total Expenses$29,220$30,513.96$31,869.60$33,290.04$34,778.28
Five Year Total Expenses Including One Time Expenses$161,671.88
*Rent for this unit at the time of sale was $1,950. After looking at the comparable rentals in the area it seems that $2,000 was closer to market rent. Tenant pays all utilities. Historically in the USA we see rent rates increasing 3-5% annually. Recently it’s been much higher than that in my local market and I don’t see that slowing down anytime soon. We’ll use a 5% increase annually.
** For electric, water/sewer, and fuel I’ve increased each with the USA’s ten year inflation average which is just under 1.8%. I understand our energy costs and inflation have risen drastically in the past years, but I’ll use the same increase for our variety of buying options so it won’t favor one over the other.
*** In Alaska most people heat their homes with fuel.

The Cost of Buying

One Time Expenses
Down payment*$9,000
Closing Costs**$8,000
Year One Monthly ExpensesYear Two Monthly ExpensesYear Three Monthly ExpensesYear Four Monthly ExpensesYear Five Monthly Expenses
Total Monthly Expenses$2,679.28$2,691.61$2,704.89$2,716.94$2,729.95
Yearly Total Expenses$32,151.36$32,299.32$32,458.68$32,603.28$32,759.40
Five Year Total Expenses Including One Time Expenses$179,272.04
*Most first time home buyers are using a conventional loan these days over FHA. You can commonly get 5% down payment for a primary residence and in some cases you can get that as low as 3%. We will use 3% down. This percentage won’t affect our overall cost since the down payment goes directly to the equity of the home. It’s more a consideration for funds needed to purchase a home.
**Closing costs vary widely based on your area, lender, and what’s negotiated in the contract. This is average for my market.
***Mortgage includes principal, interest(3.25%), taxes($4,624/annually), insurance (1,200/annually), and PMI(1%).
****This is a very squishy number and will always be a guess. A good rule of thumb I use is 1% of purchase price for annual maintenance. Adjust for age and condition. This is a fairly new home in great condition so we will keep it at 1%.

At first glance it appears that owning a home is more expensive than renting. However this doesn’t tell the whole story yet.

Four Ways Real Estate Makes Money

The value of homes can rise or fall. In the long run most homes will appreciate as long as they are maintained
Amortization of your Loan
This benefit is two fold.
You can leverage your money with a loan.
A portion of your monthly payment will go towards principle and you can realize that money if you sell or refinance.
Tax Benefits
I’m not a tax guy and I don’t want to give anything that resembles advice, but depending on your financial situation there are a multitude of ways to lessen your tax liability with real estate.
Renting out your property in some manner to earn money.

Five Years Later

Let’s assume that you either moved out of your rental or you sold your house after five years.

Five Year Cost$161,671.88$179,272.04
Money makers
Tax Benefits***NANA
Deposit Refund-$2,000NA
Cost to Sell/Vacate
Real Estate Agent CommissionNA$21,378.35
Closing CostsNA$5,000
Total Cost Adding Back Any Money Makers
or Additional Expenses
*This is another huge variable. Homes can appreciate or depreciate especially in the short term. Over the long haul real estate has pretty much always gone up. The average home appreciation in the USA is 3.5% annually so we will go with that. Although if you look in our market in the past two years it has gained quite a bit more. After five years this house would be valued at $356,305.89. Giving us a positive gain of $56,305.89.
**In five years you would pay $29,996.69 in principle, and you paid $9,000 down which went straight to principle. Since we have the full payment as an expense we need to add that principle back in.
***This is so individualized that I’ll leave it blank.

So I Should Buy Right?

It would seem if you just trusted those numbers completely that buying the same house over renting would cost you about $50,000 less over a five year time frame. Well in a perfect world I could just say yes. We don’t have that perfect world though. You have to apply what your situation is to see if it will work for you. Owning gets better the longer you can hold on to it. If you want to own for two years or less, I think you should be very clear on how you will make money on the other end. But if you intend to own your property for as long as possible it’s probably going to be a good idea to buy. Just be aware of what you are buying before you close the deal.

Going forward I would like to run the same numbers for a variety of tactics you can use to either lessen your primary residence’s liability or turn it into an asset.

Buying Cheap

This is a fairly obvious and simple to understand tactic. If you can buy something under market value then the minute you close you have instant equity. You can obviously see how that would reduce your liability. However, how many home sellers are looking to sell under value? I refer to this as the friends and family discount.

Look at your current relationships and see if you could leverage any of them to get a great deal on a house. Maybe an uncle has a rental that he is always complaining about or you work with a contractor that will give you a discount. There is not much you can do proactively to get a great deal, but I would recommend that you let people know you are looking to buy a house and listen for the deals when they come your way.

I’ve been able to do this once before and it all came from my relationships. I sold houses for builders and when I needed my house built they were able to do it much cheaper if I brought the money and they didn’t have to pay investors. Also as a real estate agent no commission was needed from them. Lastly the land was owned by another real estate agent friend of mine who gave me a great deal for six acres on the top of a hill. All in I had a new construction that I had paid $160,000 for. This was meant as my primary residence but I ended up moving five months later and sold it for $209,000.

Just for fun let’s run the numbers for a situation where you got lucky and were able to buy something cheap. I’ll use a situation my brother came into. He bought my parent’s house and they gave him $30,000 in equity. So we’ll act like we had been able to buy that $300,000 house for $270,000.

One Time Expenses
Down payment$8,100
Closing Costs$8,000
Year One Monthly ExpensesYear Two Monthly ExpensesYear Three Monthly ExpensesYear Four Monthly ExpensesYear Five Monthly Expenses
Total Monthly Expenses$2,528.39$2,540.72$2,554$2,566.05$2,579.06
Yearly Total Expenses$30,340.68$30,488.64$30,648$30,792.60$30,948.72
Five Year Total Expenses Including One Time Expenses$169,318.64

Adding this to our comparison chart.

RentalBuyBuying Cheap
Five Year Cost$161,671.88$179,272.04$169,318.64
Money makers
Tax BenefitsNANANA
Deposit Refund-$2,000NANA
Cost to Sell/Vacate
Real Estate Agent CommissionNA$21,378.35$21,378.35
Closing CostsNA$5,000$5,000
Total Cost Adding Back Any Money Makers
or Additional Expenses
*I added the gift of $30,000 to this field since technically they bought the home for $270,000.

I understand this is probably not a realistic option for most, so let’s look at some more proactive tactics.

Forced Value Add

In the last section when we spoke about buying cheap it may have occurred to you to buy something that is distressed, or needs renovation/updating. I’ve separated this only because when I say buying cheap you are buying under market value. A distressed home is less expensive than a perfect turn key house, but I would argue that it’s still the market value. The work and money it takes to fix these homes drive the value down and many buyers won’t mess with it. 

Live in Flip

Another easy to understand concept that says it all in the name! You buy a distressed home and you fix it up as you live there. Bonus to doing this method is the that you don’t have to buy/rent a place to live while you fix this up. The big negative is that you are living in a work zone and that can be a nightmare for some, especially if you have young children.

There are a two ways to go about a renovation:

  1. You can buy the property and use cash to fix it up.
  2. You can use a loan to purchase the property and pay for the repair costs.

The latter is what many will go for if you don’t have tens of thousands of dollars laying around.

What loan will allow you to buy a really rough house that needs repairs and will help you finance it? VA, FHA, USDA-RD loans are strict about the condition of the home and frequently won’t be an option for a fixer upper. First option is to do a construction loan. Let’s get a brief overview of what that looks like:

  1. Get an offer accepted on the house you want.
  2. Obtain bids from a contractor to fix/update the house.
  3. Bank does a “paper” appraisal that puts an “after repair value” (ARV) on the home.
  4. Bank gives you certain percentage of that ARV as a loan amount. This is referred to as “loan to value” (LTV). Generally the LTV is 80% of the ARV. 

Example: You get an offer accepted at $60,000. Your contractor gives you a $20,000 bid to complete repairs. Appraiser gives you an ARV of $100,000. Bank is willing to give you 80% LTV of the ARV which comes to $80,000. Hunky dory you were able to cover the purchase price and repair cost. The only out of pocket cost in this scenario would be the closing costs.

Generally these loans are high interest (6-8%), one year term, with interest only payments. At the end of one year you should have the project complete and you will need to refinance into a 30 year mortgage when it’s all said and done. This is not a bad option but again depending on the situation you may need to bring extra cash to closing as well as having to pay for closing costs twice.A better option is to talk to a lender and see what other rehab loans they may offer. There are variation on the VA, FHA, and USDA-RD that would allow you to rehab a property. I can’t speak to those since I’ve never had any experience with one. However, here in Alaska we have a program through the Alaska Housing Finance Corporation that allows for rehab. I know this will only apply to those who are buying in AK, but again check with your lender and you probably have something similar that you could do in your area.

Let’s breakdown what this loan would look like:

  1. Get an offer accepted on the house you want.
  2. Get an engineer’s report.
  3. Obtain bids from a contractor to fix repair items from the engineer’s report.
  4. Bank does a “paper” appraisal that puts an ARV on the home.
  5. You pay 5% of the purchase price not the ARV as a down payment.
  6. Once closed you have two months to complete safety repair items and six month for the remaining repair items.

A few bonuses of this method is that they don’t have a strict LTV. As long as you put 5% down of the purchase price they could go up to 100% LTV of the ARV. Also the interest rates are more aligned with conventional financing, and lastly it’s a 30 year loan from the beginning so you won’t need to refinance once the repairs are completed.

Let’s break down the cost and pretend that the $300,000 house was in need of $30,000 in repairs so we were able to snag it for $240,000 using an AHFC rehab loan.

One Time Expenses
Down payment$12,000
Closing Costs$7,000
Year One Monthly ExpensesYear Two Monthly ExpensesYear Three Monthly ExpensesYear Four Monthly ExpensesYear Five Monthly Expenses
Total Monthly Expenses$2508.17$2,520.50$2,533.78$2,545.83$2,558.84
Yearly Total Expenses$30,098.04$30,246$30,405.36$30,549.96$30,706.08
Five Year Total Expenses Including One Time Expenses$171,005.44

Comparison Chart

RentalBuyBuying CheapLive In Flip
Five Year Cost$161,671.88$179,272.04$169,318.64$171,005.44
Money makers
Tax BenefitsNANANANA
Deposit Refund-$2,000NANANA
Cost to Sell/Vacate
Real Estate Agent CommissionNA$21,378.35$21,378.35$21,378.35
Closing CostsNA$5,000$5,000$5,000
Total Cost Adding Back Any Money Makers
or Additional Expenses

Combining Strategies

Many of the strategies can be stacked so that you can receive the benefit of both. Let’s just say for instance you were able to buy that fixer upper that would have sold on the open market for $240,000 but you got another discount down to $210,000. Well that brings us to our next strategy.

Off Market Deals

I hesitate to put this one in this article because it usually requires that you buy the house cash, but who knows you might stumble across one that you could use one of the renovation loan options we spoke about previously. An off market deal is just what it sounds, a deal that never hits the open market to get the most attention and fair market price. Who would want to sell their house for less than it is worth? There are all kinds of reasons that someone may just want to dump a property quickly, money issues, the headache of dealing with multiple buyers, etc… It’s not super common and there is a whole slew of folks trying to find just these kind of deals. Being able to close quick without asking for repairs is generally the goal of these sellers, so cash is king.

Just to have the numbers let’s pretend you have a family member that is willing to sell you a fixer upper for under market value of $210,000 and it again only needs $30,000 to renovate and you have a house worth $300,000. I know this isn’t a likely scenario but it could happen and I mostly want to illustrate the benefit of stacking these strategies.

One Time Expenses
Down payment$10,500
Closing Costs$6,500
Year One Monthly ExpensesYear Two Monthly ExpensesYear Three Monthly ExpensesYear Four Monthly ExpensesYear Five Monthly Expenses
Total Monthly Expenses$2,360.38$2,372.71$2,385.99$2,398.04$2,411.05
Yearly Total Expenses$28,324.56$28,472.52$28,631.88$28,776.48$28,932.60
Five Year Total Expenses Including One Time Expenses$160,138.04

Comparison Chart

RentalBuyBuying CheapLive In FlipOff Market Deal
Five Year Cost$161,671.88$179,272.04$169,318.64$171,005.44$160,138.04
Money makers
Deposit Refund-$2,000NANANANA
Cost to Sell/Vacate
Real Estate Agent CommissionNA$21,378.35$21,378.35$21,378.35$21,378.35
Closing CostsNA$5,000$5,000$5,000$5,000
Total Cost Adding Back Any Money Makers
or Additional Expenses


We have been primarily looking at ways to increase your appreciation by buying cheaper and improving the condition of the home. These methods actually will make you more money in the short term but less in the long term. The off market renovation that we just calculated would’ve cost you $36,053.32 over 5 years. If you had just fixed it up and sold it after two years (if you live in a home two of the past five years you won’t pay capital gains tax up to a certain amount) you could’ve come out making $2,327.89. By flipping the home you could totally remove the cost of living in your home but the longer you live there the more your costs will accrue and the less you will make.

Cashflow however is a slow burn that may not seem like much at the beginning but can grind on your expenses over the longterm to make you more money. Again don’t forget that you can combine more than one of the money makers to get the best of all worlds!

The most obvious method to get cashflow is to rent out the unit, and there are three main methods of renting.

Long/Mid/Short-Term Rentals

  • Long-term rental is what you are most accustomed to seeing. You sign a lease for one year and pay a landlord monthly whatever fee you have agreed upon. 
  • Short term rentals are more like a hotel transaction. The most popular method to do this for your property is AirBnB. People stay for as little as one night or longer and they pay per night.
  • Mid-term is a bit of a mix. It’s generally a weekly charge or even month to month and usually the home is fully furnished. This could be for traveling nurses, construction workers, or people who just moved to town a temporary place to stay while they find a more permanent option.

The next three tactics we’ll cover involve renting parts of your property out and depending on the situation you may look to use a long/mid/short-term rental. Generally you can net more money the shorter the stay, but it requires more attention.For any of these rental options confirm that your local zoning, covenants, and any other governing body will allow for it.

Using your rental income to help you qualify for a bigger loan.

For those of you with a larger down payment to leverage you may want to look into including the rental income from the property to drive up the amount the lender is willing to lend you. Let’s say the lender looks at your income, credit score, and overall financial position and says you are qualified to buy up to $300,000. If you were to use an FHA loan you would need 3.5% for a down payment which comes to $10,500. You however have $50,000 that you have available to invest in real estate. In this case your income is keeping the bank from lending you anymore money. You can effectively increase your income by showing the lender that what you are buying will create more income for you. This is very much determined by your lender and what they allow but you could really push that purchase price up and use more of your money for a down payment thus leveraging further and maybe making you more able to purchase more units that will give you even more cashflow than just the $300,000 options you were looking at.

Room Rental

This subject house has three bedrooms. What if you are only using one and have another for a guest room. Maybe you have an extra room that is just waiting to be rented out! The subject property even has a bathroom attached to the third bedroom, aside from the master suite. For this example we will use it as a short term rental, although you could use any of the options you feel would work for you.

In my local market you could expect to rent that room for $60/night, and to have an occupancy of about 18 days each month. Same as the rental we’ll increase this at 5% annually. If you decide to clean it yourself you could charge about $25 and expect to clean it about 8 nights of the month. AirBnB is the most popular site and they charge 3% of your rate and cleaning fee. Lastly you need to furnish the room. We’ll set that at $1,500 which should be more than adequate.

One Time Expenses
Down payment$9,000
Closing Costs$8,000
Furnishing $1,500
Year One Monthly ExpensesYear Two Monthly ExpensesYear Three Monthly ExpensesYear Four Monthly ExpensesYear Five Monthly Expenses
Total Monthly Expenses$2,844.28$2,859.58$2,875.14$2,891.01$2,907.15
Yearly Total Expenses$34,131.36$34,314.96$34,501.68$34,692.12$34,885.80
Five Year Total Expenses Including One Time Expenses$191,025.92
*I’ve added an extra $100/month for electric to account for the extra laundry, and dishes you will do with the rental.
**$15/month extra for water/sewer
***$50/month extra for maintenance

Comparison Chart

RentalBuyBuying CheapLive In FlipOff Market DealRoom Rental
Five Year Cost$161,671.88$179,272.04$169,318.64$171,005.44$160,138.04$191,025.92
Money makers
Deposit Refund-$2,000NANANANANA
Cost to Sell/Vacate
Real Estate Agent CommissionNA$21,378.35$21,378.35$21,378.35$21,378.35$21,378.35
Closing CostsNA$5,000$5,000$5,000$5,000$5,000
Total Cost Adding Back Any Money Makers
or Additional Expenses

The comparison chart may leave you feeling sad since it still cost you almost $40,000 to live in the house for five years. We need to change our perspective though. You have to live somewhere and if you had just bought traditionally you would’ve payed $70,000 more to live in the same house! A penny saved is one earned in this case. And with cashflow the longer you have it working for you the better it will be. Just imagine if you stacked a renovation deal with this room rental you probably could be living close to free.

House Hack

A room rental is a form of house hacking but I wanted to separate this out on its own. We’ll define a house hack as two separate living spaces such as a duplex, triplex, or fourplex. Most primary residence home loans such as FHA will only lend up to 4 units for primary residence. We’ll need to switch our subject property now to a multi-family.

I’ve pulled a fourplex that sold in our market for $365,000. Two of the units have two bedrooms and rent for $1,100/month. The remaining two units have three bedrooms and rend for $1,250/month. The documentation on this particular sale was a little slim so we will have to make some assumptions. As the landlord in this situation you’ll pay for fuel and water/sewer bills for all units. Each tenant will pay their own electric bill. With that in mind I think these rates are below market value so we are going to raise the two bedroom units up to $1,200, and the three bedroom units up to $1,350/month. As a reminder we will increase these rates 5% annually.

For this to be your primary residence you will need to occupy one of the units. We’ll put you in the two bedroom option so you can make more rental income. We are going to assume a 90% occupancy rate, which is very conservative for our area. People are literally fighting to get into leases in this neck of the woods. Lastly we’ll use an FHA loan to purchase the fourplex which requires 3.5% of the purchase price for the down payment.

One Time Expenses
Down payment$12,775
Closing Costs$10,000
Year One Monthly ExpensesYear Two Monthly ExpensesYear Three Monthly ExpensesYear Four Monthly ExpensesYear Five Monthly Expenses
Total Monthly Expenses$3,891.43$3,918.55$3,946.22$3,974.38$4,002.17
Yearly Total Expenses$46,697.16$47,002.60$47,354.64$47,692.56$48,026.04
Five Year Total Expenses Including One Time Expenses$259,548

Comparison Chart

RentalBuyBuying CheapLive In FlipOff Market DealRoom RentalHouse Hack
Five Year Cost$161,671.88$179,272.04$169,318.64$171,005.44$160,138.04$191,025.92$259,548
Money makers
Deposit Refund-$2,000NANANANANANA
Cost to Sell/Vacate
Real Estate Agent CommissionNA$21,378.35$21,378.35$21,378.35$21,378.35$21,378.35$26,010.33
Closing CostsNA$5,000$5,000$5,000$5,000$5,000$7,500
Total Cost Adding Back Any Money Makers
or Additional Expenses

Whoop Whoop! You could call that fourplex as a whole an asset now! And compared to just buying a home traditionally you’ve made $167,617.45 extra or over $33,000/year! Of course we used long term rentals for the remaining three units you aren’t living in but you could ostensibly pump up your profits if you can go mid or short term.

Accessory Dwelling Unit (ADU)

An ADU is a living unit that is on the same property as a single family home. This can be a detached cottage, apartment above the garage, mother in law quarters, etc… When looking for one of these as an options please check your local zoning to make sure that renting them out will be allowed. I’d categorize this under a house hack as well.

For our subject property we can’t use the original single family home because it didn’t have an ADU with it. Finding a sold one is difficult because a mother in law area may not be listed or the buyers could have done augmentation to a house to have an ADU. So what we will do is pump the price up to $375,000 say there was a small attached apartment with its own entrance. Since we have given examples for long and short term rentals this would be a great fit for a mid-term rental. You charge a weekly rate of $350. We’ll assume an 80% occupancy rate since the turn around will be higher than a long term renter. Again we will increase these rates 5% annually. You would need to furnish the unit so I’ve budgeted $6,500 which should be plenty.

One Time Expenses
Down payment$11,250
Closing Costs$10,000
Year One Monthly ExpensesYear Two Monthly ExpensesYear Three Monthly ExpensesYear Four Monthly ExpensesYear Five Monthly Expenses
Total Monthly Expenses$3,261.19$3,275.95$3,290.97$3,306.26$3,321.84
Yearly Total Expenses$39,134.28$39,311.40$39,491.64$39,675.12$39,862.08
Five Year Total Expenses Including One Time Expenses$225,224.52

Comparison Chart

RentalBuyBuying CheapLive In FlipOff Market DealRoom RentalHouse HackADU
Five Year Cost$161,671.88$179,272.04$169,318.64$171,005.44$160,138.04$191,025.92$259,548$225,224.52
Money makers
Deposit Refund-$2,000NANANANANANANA
Cost to Sell/Vacate
Real Estate Agent CommissionNA$21,378.35$21,378.35$21,378.35$21,378.35$21,378.35$26,010.33$26,722.94
Closing CostsNA$5,000$5,000$5,000$5,000$5,000$7,500$8,000
Total Cost Adding Back Any Money Makers
or Additional Expenses

What Now?

To be frank all of the calculations that I’ve done are completely useless to you. Unless you just happen to be buying a house a few months ago in my market. However, I wanted to show you two things:

  1. A multitude of ways to reduce the liability of your primary residence, or flip it into an asset.
  2. How to do the preliminary calculations to decide what strategy you want to pursue.

Four Easy Steps:

  1. Add up expenses for each month and one time costs.
  2. Decide how long you intend to live in the house.
  3. If you are calculating for a purchase add up all the money making benefits.
  4. Subtract the money you make from your total expenses.

*Adjust for inflation, appreciation, or any other factors you think would affect your expenses or money makers.

Don’t work the numbers to your advantage. Be as realistic as you can to get an honest projection.

Calculate the cost of your current situation. In this case not making a decision is still a decision. Where you live is costing you something. It’s best to know that if you need to make a change.


  • I’m not a financial, tax, nor legal advisor. None of what is written here should be taken as advice consult with the appropriate professional for that.
  • I understand where you live is more than just a financial consideration. Most of these methods require sacrifice. You decide what you are willing to give to save or make money.

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