Buying a House With Income Potential

We?re going to go back to the future ? or is it the past ? with this idea. Now that we?ve experienced the mortgage meltdown and the real estate collapse, maybe it?s time to re-examine the whole concept of home ownership. I?m going to make a radical proposal here: the next time you?re looking to buy a house think seriously about buying a house with income potential.

This is of course the exact opposite of how people have purchased homes for nearly a human lifetime. Most houses today are purchased based on three primary characteristics:

  1. Location (desirability of the community, quality of schools, proximity to employment/public transportation, etc.)
  2. Features of the home (size, layout, room count, etc.), and
  3. Potential for price appreciation (the likelihood of being able to sell it at a higher price in the future)

Buying a House With Income Potential
Buying a House With Income Potential
The real estate collapse happened primarily because Reason #3 failed. House prices pulled a mind scramble on both homeowners and mortgage lenders ? instead of rising as they had reliably in the past, they fell. When they did, the entire dynamic changed.

Notice that Reason #3 is also the only one that is economic in nature. And yet it is the key to the entire housing market. Now that we know that house prices can fall as well as rise, we may have to look for a different economic reason to own a home. If we do, we already know what that alternative is ? it?s buying a house with income potential.

And it is not a new idea.

The idea of a house as strictly shelter is a relatively recent concept

If you think that buying a house with income potential is an idea that is either new or radical, it?s actually the way people bought property for most of human history.

Since World War II houses have become more like trophies than assets in the business sense. We?ve seen the mass production of millions of often nearly identical tract homes, none of which having any economic capacity other than the promise of future price appreciation. But here?s a news flash: prior to World War II ? and certainly World War I ? people didn?t buy tract homes; they bought tracts!

Tracts as in land. Land were you could grow crops, raise livestock, cut timber, mine for metals or fuels, run a shop out of, or partially rent out to either tenants or travelers. Traditionally, families conducted business out of the same place they lived. The property not only provided shelter, but also a means of earning a living.

We?ve long since gotten away from that entire concept. In fact, most people don?t even believe it?s desirable, if they think that it?s even possible. We simply can?t have the type of economic opportunities in our homes today that people commonly had up until the early part of the 20th Century.

Or can?t we???

Now that price appreciation is hardly a guarantee, we may need to come up with some new economic reasons for owning a home that will give it more lasting value than room count or a location close to public transportation will.

Here are some ideas relevant to our time on how to buy a house with income potential – in addition to providing shelter?

A property with rental income potential

This is the simplest and most obvious income potential for a property. You can either buy a house that has two or more living units, and you can live in one unit and rent out the other(s). Or you can buy a home that has potential to rent out individual rooms. In days of old, these were referred to as rooming houses or boarding houses.

One of the problems with this strategy today is that much of suburbia has the zoned out these kinds of property, especially boarding houses. In general, they are considered bad for price appreciation, which is largely what the suburbs are all about. (My feeling has always been that there?s a strong racial/socio-economic component as well, but I digress.) If you want to buy a property with rental potential, you?ll have to move to a community where such dwellings are allowed.

I don?t have any statistics on this, but I?d be willing to bet that few owner-occupied 2 to 4 family residential properties were among the millions of foreclosures that have taken place in the past few years. Having rental income effectively lowers – or even eliminates – your house payment. And once the house is owned mortgage-free, the house itself actually provides a steady income – no price appreciation is even necessary.

A property with a business use

A few generations back this could have meant owning a property with a storefront on the first floor and a living unit on the second. You ran your business out of the storefront and lived upstairs. It could also have meant a property with a house and a separate shop where you could run a business, such as a repair shop or even a small foundry.

While this kind of property is available in some downtown suburban areas, they?re more common in cities and rural communities. However, today?s home businesses typically don?t require a large, dedicated space. With computers, the internet, cell phones and fax machines, you can run a business out of a typical suburban home . The only modification requirement might be that the house have an extra room to run your business out of.

However if you would like to run a business that is not a ?clean business? – meaning one that does require specialized equipment, inventory and other items that may be considered an eyesore in a suburban neighborhood ? you might want to consider buying a mixed-use property. That?s actually a real estate term that means the property can be used for both residential and commercial purposes.

This of course would require purchasing a house in a part of town, or in a community, where such properties are common. But if you do, you?ll be both living in the property and earning your living there. That will give the home far more economic value than just the hope of future price appreciation.

At a minimum, I think most of us could make this happen with a ?clean business? – in just about any home in any type of community.

A property where you can produce or grow food

OK, with large-scale agribusiness, most of us are not going to become farmers. But that doesn?t mean that you can?t grow your own food. There are rural communities and exurban areas on the edges of large metropolitan areas that still have agricultural uses. If you want to grow your own food, and maybe even raise some chickens and a dairy cow or two, you can buy a house on a few acres and have at it.

You will be living in the property, but also producing much or maybe even all of your food, which is definitely an economic use. This seems to be a growing trend since the recession began, but is also becoming more popular as a way to grow food organically.

The social impact of buying a house with income potential

Not many of us think about the social impact of the house that we are buying. At the same time, we’re often quick to bemoan the loss of community where we live. But what caused that lack of community in the first place?

In the past five or six decades, with the disappearance of economic use as a factor in the purchase of the family homestead, the only financial real estate play is price appreciation. That shift has effectively turned the typical home into a commodity. Much like stocks, we?ve come to see a house as an asset to be traded at opportune moments. And we might trade them every few years as a way of buying a higher priced unit and building up our wealth.

That may be good for our bank accounts, but it is a disaster for communities. There can be no community where people are moving every few years.

If people buy their homes with a greater emphasis on the economic value ? that is the ability of the property to generate an income ? they?re more likely to stay in the property for a lifetime. People who are living in their homes for decades are far more likely to take pride in the community, to do what?s necessary to improve it, and to develop the kind of relationships that border on family.

I don?t know if this is important to you, but I see the idea of buying a house with income potential as addressing three needs at the same time: shelter, income, and community.

That looks like a concept we seriously need to revisit.

Do you think that the time has come to reconsider the concept of buying a house with income potential? It may be radical to today?s thinking, but it?s hardly a new idea.

( Photo from Flickr by Oakley Originals )

6 Responses to Buying a House With Income Potential

  1. This is a comprehensive post, which takes care of each and every aspect which needs attention in the event of buying the house. Indeed the purchase should be made taking into account the income potential of the property. Thanks for sharing the valuable information.

  2. I think it is a very interesting concept Kevin and one that I would consider if we choose to move again. I have run across several properties in looking to purchase rental real estate where the previous owner had been living in the house but renting the land to people who needed barns and space to board horses or other livestock. You live in the house and provide them with the facilities and land they need. Sounds like a win-win.

  3. Hi Brian–The situation you describe is exactly what I had in mind when writing this post. Mind you, this isn’t a concept that I see people flocking toward, but more a shift that will be brought on by necessity. The soft housing market and the weak employment front are crying out for practical solutions. Owning a house with income potential nicely addresses both.

  4. We are in the process of buying ourselves a new house and I am glad I ran into your post. Thanks for sharing the cost effective tips.

  5. Hi Kevin. This post brought to mind my late sister’s situation. She loved horses but lived in the suburbs and couldn’t afford/didn’t want to move. She and a friend boarded their horses at a person’s home who owned the barn and land. They were an older couple with a beautiful home, but they didn’t have the inclination to keep up the barn. My sister and her friend boarded their horses there and they kept up the barn and cleaned the stalls daily and even had a very reduced rate because they did the care of the animals themselves but just leased the building and land from the owners. They loved it because they came and went every day, got to enjoy the barn, the land, and their horses, but didn’t have to move, and it was income for the older couple who were very happy to have two young women coming to “visit” every day. Win/win for all. Just another creative way to get needs met.

  6. Hi Bev – When people are free to work out their own solutions, good things happen. Your sister’s situation is a perfect example. Her and her friend got use of the facilities, and the older couple got a needed extra income. As you said, it’s a win-win. The fact is we ARE free to make those decisions, but most people don’t. That’s because they’re held hostage by group think.

    Your sister’s experience also proves that we’re all creative, just in different ways. We all need to follow her example and get what we need at prices we can afford. The System convinces us that we’re powerless without The System. That isn’t remotely true, which is why The System spends so much time and money trying to convince us otherwise. I’m sorry your sister is gone, but that’s really a good story for the rest of us.

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