Ms GuMi's case reminded me of a topic I would love to share with you my thought on. How to practice sequential investing strategy in this high price market?
Let's say that I bought my current home 5 years ago. This current home doubled in value. In 2002, I bought it at 400K, now it rose to 800K. However, the market rent is not very high. I can only rent it out at 2600 a month.
Now, I find a new home builder near my home is offering a huge discount to their quick delivery homes. They offer about 25% discount on them. Or, the announce public auction to liguidate some of the inventories. Eiter way, I can't resist the temptation to buy another new home. But the problem is, even after 25% discount, I still can't make this new house cash flow positive. Let's say Pulte home is offering me 25% discount on a 600K home. My final negotiated price will be 400K. Paying 400K for a new home with granite counter and hardwood floor is such a bargain for me. I really want to own it for my long term investment. But no matter how I calculate, I can't possibily rent it out high enough to cover 400K loan (assuming I want to have 100% financing as a primary residence).
What can I do?
I would leverage the existing house which I bought at very low price years ago. My mortgage payment on my existing house is only 2500 a month (including P.I.T.I everything). After market research, I find I can easily rent it out for 2600 a month. I decided to rent this current home out for 2600 a month with a small 100/month positive cash flow.
I will move to this new home from Pulte. Get a 100% financing. Although my monthly payment is now higher, the good thing is, I will have pay increase every year, 700 more a month in month payment is not going to be a big burden.
After this move, my total asset is now increased substantially.
Before the move, I have only one house worth 800K market value.
After the move, I now own (control) two houses with total asset value $1.4 million (800K + 600K). I not only substantially increased my asset holding, I locked in a potential 200K equity in my new home because the discount I got from Pulte.
The bottom line is, my family is happy because my family can enjoy another brand new house with better amenity, community pools, club house, tennis courts and etc. This school is the same as my old house. After this move, I turned one leverage into 2 leverages:
1) Leveraged the positive cash flow only possible on the old house. 2) Leveraged my income to compensate the cash flow impossibility on the new house.
I expect that I will repeat this game as soon as the rent increases for my region and I start to accumulate equity in my new house. Maybe 5-7 years later, I will sequentially move to my third house, and rent out my second home.
