turning red into black

[totoro]

I just wondered what ideas are out there for not just reducing your expenses, but making them cash flow positive. 

Here are our top three:

1.  Mortgage on Primary Residence
With a 20% down payment in our neighbourhood you would still be paying $3000 a month for a SFH mortgage including expenses/utilities.  That requires about $45 000 pre tax income each year!  Some might say it is better to rent, but renting the same SFH would only be $400 a month cheaper here, plus the ROI you would get on your down payment.  Still more than $2000 a month.

We have turned our mortgage from red to black though.  How?  We purchased a run-down duplex with carriage house in a nice area, fixed it up, and now live for free.  Rental income from two units pays for the mortgage, taxes, utilities, repairs and insurance.

If this strategy worked for us in our relatively crummy ROI for landlords area, I'm sure there are many places it would work much better and generate additional cash flow.  You just have to find the right place.  The impact on your ability to save more, or work less immediately, is pretty dramatic. I haven't counted principal pay down or appreciation here, but long-term these are significant.
 
I would rather work less than pay for a traditional SFH - it just isn't worth that many hours of my time. We have no intention of paying off our mortgage early, we get a tax deduction on the interest and it is a very low rate.

2.  Car
If you buy a good, used, efficient car you can drive it for free in some circumstances.  In our case, I own a business.  I drive mostly for work.  I charge 50.7 cents a kilometer for business travel as rates are set by a third party.  If you are not self-employed but drive your own car for work you probably receive a similar amount if you are in Canada.  Our car does not cost 50.7 cents a kilometer to own and operate. It costs about 39 cents a km (including gas, insurance, depreciation, repairs/maintenance). This means that our car generates extra money (not treated as income for tax purposes) that can cover non-business travel.  Of course a more expensive new car with lots of depreciation, a less fuel efficient car, or financing charges might change this equation.

3. Mortgage on Vacation Home
I know there was a post on how vacation houses are bad ideas and black holes.  I would agree they can easily be, but they don't have to be.  Ours is cash flow positive and provides us with a nice place to stay that the kids are attached to and we will live in pt later on.  I've posted about how to do this before, but our key factors are location, suiting for dual rental income, high weekly rentals in summer and monthly lease in winter, and managing it yourself. 

Long-term, we plan to keep the home and vacation home.  They will start to generate more income over time as the mortgages are paid down and rents rise.  Eventually they could generate the equivalent of $40-50,000 net a year in today's dollars, plus provide a place for us to live, plus equity of 1.1 million in today's dollars. 

[Another Reader]

Totoro:

Your ingenuity and outside the box thinking have always impressed me.  Love your way of thinking about vacation real estate.  I did the same with a low cost home in Sun City Arizona.  The snowbird rent in the winter covered the operating expenses and most of the mortgage.  I used it in the seasons that it was not rented as an alternative to hotel living when I had business down there.  When the economy softened, I turned it into a full-time furnished rental. 

I just wish I could find the high end furniture and fixtures that you do on our Craigslists here in the states....

[totoro]

Gosh, thanks!  I think the primary residence approach could work so well for people who don't mind living a bit alternatively.  The numbers are just so much more dramatic than the traditional rent vs. buy analysis.  The impact on how much you need to work is bigger than most other things you could do - without relying on luck (ie. inheritance or double digit appreciation).  And you have to live somewhere anyway.

I didn't realized CL differed so much - we find things just by having a list and checking fairly regularly. Having flexible work hours worked. Right now I'm in search of a sofa, a hoosier and a couple of side tables.  Nothing quite right has turned up nearby in the last week, but it will.

I sometimes wish we had purchased in Arizona a few years ago, seems like the market is on the upswing again.  I love the desert climate and it was pretty amazing how much prices dropped.  We haven't experienced that in Canada, despite loads of predictions that it would occur.

[Another Reader]

I bought four in the Phoenix suburbs in 2009-2011.  They are now worth a little under twice what I paid.  However, rents are flat while expenses are on the rise.  So maybe you are better off in the long run by sticking to what you know and have made work so well.