Are you wondering if luxury real estate is a good investment? It can be, but it depends on your desired lifestyle and financial goals. If you’ve saved up enough for a 20 percent down payment on a luxury estate and you’re looking to settle down in your dream home for the unforeseeable future, then, yes, it would probably be worth it to buy a luxury property.
However, if you’re looking for the best possible return on investment, you might be better off using the BURL rule to expand your real estate portfolio.
What Is The BURL Rule?
The BURL Rule stands for “Buy Utility, Rent Luxury.” Sam Dogen, a personal finance writer and real estate investor, conceptualized it to help people decide between buying and renting. The rule is rooted in an investing idea that urges people to avoid purchasing a home that costs more than 100 times its monthly rent at the time of sale. Dogen’s BURL rule asserts that investors will get the best value by purchasing utility homes and renting luxury homes.
In this context, a utility home meets your lifestyle needs, while a luxury home features nice-to-have extras like bonus rooms, swimming pools, and premium locations.
Buyers can use the BURL mentality to get the best deal possible and create an easy path out of debt. According to the rule, people who want to live a luxury lifestyle should consider renting over buying. The logic here is that the annual costs of renting a multi-million dollar property can remain lower than the average yearly cost of owning high-end real estate.
Furthermore, the rule pushes owners to recognize the cost opportunity of not renting out their home when rates are high and get the best value for luxury investments.
If your home has appreciated since you bought it, the price per month for renting your home has likely increased, too. In such instances, the most financially savvy property owners would buy a less expensive utility home and enjoy the additional income from renting out their luxury home.
The BURL rule can extend to purchasing multiple rental properties, too.
How To Finance Multiple Properties Using The BURL Rule
The basics of the BURL rule are easy to apply to a single investment property, but what if you want to own multiple rental homes? You can use the BURL rule to finance numerous properties by layering other common investing strategies.
Imagine an investor with enough capital to finance a 20 percent down payment on a luxury property that costs $2 million. Although the property is likely to provide high rental rates and significant long-term appreciation, the home’s total cost makes it challenging to break even.
If their goal is to get the highest possible return on investment, they’d be better off purchasing multiple utility homes and renting them out. The investor could buy multiple houses for the same price, which would likely have lower maintenance fees and property taxes. Furthermore, the combined rental income of the numerous utility homes is likely to be higher per year.
How To Finance Multiple Rental Properties
A few options are available if you’re looking to finance multiple rental properties. The conventional financing route is ideal for people buying four properties or less. Conventional mortgages come with low-interest rates for 30-year terms as long as the borrower has ideal credit and can provide a 20 percent down payment.
However, using conventional mortgages for five or more rental properties can become unwieldy. Investors funding five to ten rentals at once can use the Freddie Mac Investment Property Mortgage, a program that provides large loans to borrowers who meet specific criteria.
To qualify, you’d need the following:
- 720 or higher credit score
- Enough cash on hand to fund up to 25% of the entire loan
- No higher than a 45% debt-to-income ratio
Anyone financing ten or more properties can use a commercial mortgage. A commercial mortgage is a type of business loan that’s backed by the property being purchased. Because they’re considered high-risk, these loans come with higher interest rates than conventional or investment mortgages.
You can take out a home equity line of credit (HELOC) to make things more manageable. This lets you tap into the equity in your home and use it as collateral for a loan. Similarly, cash-out refinancing allows you to use the value of your current properties as down payments. This option is ideal for people who own their homes outright.
Some investors also buy real estate using a self-directed IRA to keep their taxes lower. A self-directed IRA allows people to hold investment properties in this low-tax portfolio as long as the property doesn’t serve any personal use.
Investors can use any of these strategies to disseminate the price of a luxury investment across multiple utility investments and expand their portfolio much faster.
Use The BURL Rule To Divide Your Funds & Grow Your Portfolio
Expanding your real estate portfolio is a great way to secure your financial future and build long-term wealth. The BURL rule can help you make the best decisions for the highest ROI if you can supply a large down payment. Luxury real estate has undeniable value, but the BURL rule reveals a waste-free strategy for growing your real estate portfolio.