patrick.net

I'm in the same position you are, and I see no reason to buy anytime soon. Might as well just keep saving cash. Prices have nowhere to go but down.

i would take the cash flow. plus it'll give you some experience owning a house. It's always nice owning at least one house even if it's a rental. you might think you donnt want to live there now but you never know what may happen in the future that fixed $500/mo payment could end up being a nice fall back.

Thanks for the comments, in the area I'm looking to buy a rental, prices are bottomed, really can't go lower.

Just in the nice area I wish to live, its still too high from where I think it should be

Thats a good point toothfairy, if shit ever hits the fan, its a really cheap place to fall back on.

Will I be able to get a second mortgage when I do want to buy my primary? How long will I have to show rent before the banks are willing to give me a second loan?

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

No, it'll be like you're moving up. Since you won't be selling the rental, you'll need to produce leases, which the bank will take at 2/3 the monthly income. This shouldn't be a problem. Further, someone with your income should have no trouble saving 20%.

UAVMX says

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

Well, realistically speaking, you should get dinged on the first purchase for intending not to occupy the house -- higher interest rate at minimum, if not a higher down payment in addition. The second one, you will owner-occupy.

corntrollio says

UAVMX says

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

Well, realistically speaking, you should get dinged on the first purchase for intending not to occupy the house -- higher interest rate at minimum, if not a higher down payment in addition. The second one, you will owner-occupy.

Realistically, how will they know I don't intend to occupy the house? Once they hand the keys over, what does it matter what I actually end up doing? I can go through the process with the "intention" of moving in....jessica says

Also, when I buy a second home are they going to require me to buy it with 20% down because its an "investment property" not my primary (as far as they see it, because its a second home

No, it'll be like you're moving up. Since you won't be selling the rental, you'll need to produce leases, which the bank will take at 2/3 the monthly income. This shouldn't be a problem. Further, someone with your income should have no trouble saving 20%.

Can you elaborate on the "2/3 the monthly income". Do you mean that if my cash flow is $600, they will only take it as $400?

Also, I know I can save 20%, not worried about that. But with money being available for so cheap, I might not want to put the 20% down, and use it elsewhere

This is just my humble opinion. You're 26 which is quite young. At this age you should be doing some heavy investing in your 401k, mutual funds, and so on. Real estate over the long run has not come close to matching what the same amount invested in stocks will do. The key is that the younger you start the more you will have in the end due to the effects of compounding. You're making a very good income for your age and you will want to maximize the best use of that money. Real estate probably isn't the best use.

Let me put it this way, and I know to others on here this will sound like a broken record. For over 100 years stocks have averaged 7-8% annual return over the long run. Real estate- 3-4%, or barely above inflation. Real Estate seems like something you can hold but historically stocks do a lot better.

But in any regard you should consider talking to a financial adviser and get their opinion.

They will take 2/3 of the rent on the leases. So by your $1000-$1400 estimate, this would be $667-$934. If that amount covers the monthly outlays of you "primary" residence, then it won't detract from your ability to get a loan and they won't consider your new house an investment property.

Yes, technically your rental should be an investor's loan. You would be lying on the loan docs by calling it a primary residence and not having any intentions of living there. BUT since you are not a homeowner presetnly, they have no reason to believe that you wouldn't live there. Further, if you put the water/sweage bill in your name, that's pretty reasonable proof should they ask it, which they won't.

I've gathered this by the little research I've done on the subject because I've thought of doing the same thing. However, I haven't done it yet so who know what snafus are out there.

UAVMX says

Realistically, how will they know I don't intend to occupy the house? Once they hand the keys over, what does it matter what I actually end up doing? I can go through the process with the "intention" of moving in....

1) fraud is fraud -- if you intend not to live in the house, you are committing mortgage fraud, proceed at your own risk
2) sometimes banks actually do check
3) if you intend to buy a home in the future, the fact that you committed fraud may come back to haunt you

edvard2 says

Real estate probably isn't the best use.

To underscore what edvard said, you need to figure out your real return here based on realistic numbers -- i.e. realistic vacancies, realistic maintenance, realistic wear and tear, and all-inclusive cost (including taxes, insurance, etc.). Often I see people who are willing to take substandard returns, even though cash flow positive, that aren't reasonable for either the size of investment or the risk being taken. Cash flow positive shouldn't be the only qualification.

Hey, same problem here... 27yo with 150k base, wanting to borrow as much money as I can at 4% and lock it in long term before inflation really hits. My area means there is nothing I could stomach living in for under 400k, so would need 100k cash to cover DP and closing. This has kept me from buying a rental first so far, as coming up with another 100k downpayment in a year or two would be challenging. What I am doing until I figure things out though, is buying into the stock market on large cap decent div yield stocks. I also enabled my brokerage for margin, so if I need to put together a downpayment, I can always borrow from my 401k first, then from my portfolio at 7.5% if needed (with the dividend yield at 3.9%, 100k invested pays the loan interest on 50k borrowed).

What I think may be really helpful to you is to understand the differences in tax and liability between buying a rental or primary. This is something that has concerned me a little bit. First off, for Liability purposes, you would want a rental to be owned and managed by 2 separate LLCs. This way, if the renter trips and breaks a leg, they can only sue the management company, which folds, and you still own the owning LLC, safely separate. In a lot of states, LLC's have a minimum required tax, quite often somewhere around $800. So covering yourself legally via corporate shells should be an expense accounted for.

Also, from a tax perspective, rental vs primary are fairly different. A primary allows you to tax-deduct the interest on your mortgage and the taxes you pay on the property. A rental property you would tax deduct the depreciation on the asset over (around) a 30 yr period, but every dollar you sink into the house in maintenance and improvements adds to the depreciable base. Once you sell the property though, as a primary you would pay gains on everything you sell it for above the value you purchased it for, or defer gains by buying another one within 6 months. For a rental, you would be liable for all gains above the value you have depreciated it down to. On the up side though, you also have a lot of freedom to tax deduct expenses through your corporation now that you do not have before you get that cash flow. ie., your car is now partly a business expense, as is your computer, right? as are some business lunches, gas, and a trip to the bahamas for a company meeting or investment research...

Also worthy of adding into the model is a 3% per year maintenance cost. Things break, and you need to account for them. I use 3% in my models, but it really depends on the house price. The other thing you might think about, and this is one that applies to me in spades - What is your time worth? If you are grossing 100k/yr, you are making around $50/hr before taxes. How much time are you going to sink into managing a rental and dealing with the BS that comes with it? Is it worth your time? I usually factor in the cost of having a management company worry about that stuff, which can be widely variant, but about 8% of rent should be reasonable. You also need to factor in things like vacancy rates - you may need to carry it for a month or two between renters, and that can eat into returns quick.

When it comes to primary vs. secondary though, I think there are 2 questions you have to answer independently: 1. do a rent vs buy analysis for yourself - is it better for you to rent or buy. This model should include everything you can add into it including maintenance, tax, opportunity cost on the downpayment, and equity being built. 2. What is the ROI on an investment property, and how does that compare to what else I could be doing with that money? ie. could I invest in the stock market and expect a higher return? Once you have built these two models and answered these two questions, you can easily come to a decision. If is better to buy your own place than rent, how much money per month is it better by? if the ROI on a rental is better than you can get elsewhere, how much money per month is that going to make you? Whichever option maximizes the return on investment is the one you should do. it is also completely possible to come to the conclusion that you should not buy either, and instead commit that capital to more productive uses.

Another thought, if you buy a primary first, would you buy something comparable to what you live in now, or would you stretch to buy something larger? For me, I live in a one bedroom, but would only buy a two bedroom or larger, which is not apples to oranges.

anyway, my $.02

but every dollar you sink into the house in maintenance and improvements adds to the depreciable base
Just to be clear, repairs (painting, fixing a leaky faucet, etc) are a deductible expense for the year in which they occur.

Rich4 says

First off, for Liability purposes, you would want a rental to be owned and managed by 2 separate LLCs. This way, if the renter trips and breaks a leg, they can only sue the management company, which folds, and you still own the owning LLC, safely separate. In a lot of states, LLC's have a minimum required tax, quite often somewhere around $800. So covering yourself legally via corporate shells should be an expense accounted for.

If you personally are negligent, you will still be liable personally. People often misunderstand how LLCs work. If you personally engage in negligence, an LLC will not protect you.

Rich4 says

Another thought, if you buy a primary first, would you buy something comparable to what you live in now, or would you stretch to buy something larger? For me, I live in a one bedroom, but would only buy a two bedroom or larger, which is not apples to oranges.

This is a very astute comment. Sometimes people are willing to compromise for a non-ideal property when renting, so they pay less. Then, when they want an ideal property, they typically do have to pay more money for that. Maybe you're willing to rent a 2BR house, but you'd buy a 4BR house. Maybe you're willing to live without a garage or a certain type of backyard, but you wouldn't buy without those features.

What was different during the boom is that people were paying excess money for the non-ideal properties that they would have tolerated as renters, but that most reasonable home buyers would not tolerate (e.g. too few rooms for future family expansion, missing features such as a garage or other rooms, up 40 steps to the front door, etc.). This was all in the hope of unsustainable appreciation in prices, which all had to end at some point. You could see this when people were buying studio and 1BR condos that they knew ahead of time they might not be living in within the next 5-7 years.

edvard2 says

Let me put it this way, and I know to others on here this will sound like a broken record. For over 100 years stocks have averaged 7-8% annual return over the long run. Real estate- 3-4%, or barely above inflation. Real Estate seems like something you can hold but historically stocks do a lot better.

Very good advise. More over you can shift in/out of industries. Tax benfits, even with loses, are more favorable for equities.

Forget the 7% return on stocks over 100 years, when the US grew from overabudance of natural resources and a home grown manufacturing employment. The last 10 years, 2001 to 2011 shows a stock market total return or 10%, $100,000 in stock in 2001 grows to $110,000 in 10 years.

Investing in a break even rental house will save you tax wise on a $100,000 income at least 15%, around $15,000 write off on your $100,000 gross income. And if you can pay the mortgage off in 30 years or less, you will have a solid annuity for the rest of your life.

Ok, color me curious, where do you live and what type of work do you do? Is it steady, any chance of layoff coming up? Seems an income like that compared to average housing price is high.

Can you find something you want in the 200k range? Simple calculation at a low 4% 30 year loan would be about $800 for mortgage and taxes/insurance $200-400 a month depending on rate/coverage. So about the same for your current shared rent. Could even rent a room and make it cheaper since you seem to be Ok sharing.

Hell, with that income it's not a stretch to pick up both a house and a rental unit.

Rentals may not be as dependable as one would think. There are a lot of variables. One of the being finding tenents and also the tenents themselves. That can be highly undependable. Being stuck with a mortgage is something you should consider when renting.

Its not as easy as you think. In addtion as a noob and I mean noob. Its going to take some hard lessons and faluires before you become successful if indeed you can make it that far.

Sound like discouragment from me. Its not. I'm really not trying to do that at all. I am just preparing you for the reality of renting. Which can be a very tough run especially when your new at it.

wow so many comments, thank you so much, I'm not even sure where to start or what to say...so I will start here

edvard2 says

Let me put it this way, and I know to others on here this will sound like a broken record. For over 100 years stocks have averaged 7-8% annual return over the long run. Real estate- 3-4%, or barely above inflation. Real Estate seems like something you can hold but historically stocks do a lot better.

But in any regard you should consider talking to a financial adviser and get their opinion.

Okay, I understand that, and it makes sense. But does that also include if you factor in NEVER SELLING IT? Does that include owning the property outright, collecting the positive cash flow and having the 100% equity that you can use, or sell the house, etc? The thing that entices me about real estate is that it would be not only a cash flow, but a long term savings account that someone else is paying. So if that house is worth lets say $150k in 30 years, and I want to buy a new toy in retirement, I just sell that house and use the cash.

The stock market historically making 8% lets say is great, and your money compounds, but there are also stretches of 10-20 years of being flat isn't there?

The other concern with the stock market is right now I see it as being high, higher then where it should be. Also the fear is I KNOW NOTHING about the stock market, what to invest in, how to invest in, etc.....I think there is a lot more risk and I think it's rigged in so many ways. Real estate, if I end up with 5-10 rental units that are eventually paid off, that I have control of that really, nothing can cause me to lose everything (such as the stock market is) out of my control....

This rental unit I see paying off quickly, and moving on to another one. Or pull some equity for the next one, etc.Rich4 says

Also worthy of adding into the model is a 3% per year maintenance cost. Things break, and you need to account for them. I use 3% in my models, but it really depends on the house price. The other thing you might think about, and this is one that applies to me in spades - What is your time worth? If you are grossing 100k/yr, you are making around $50/hr before taxes. How much time are you going to sink into managing a rental and dealing with the BS that comes with it? Is it worth your time? I usually factor in the cost of having a management company worry about that stuff, which can be widely variant, but about 8% of rent should be reasonable. You also need to factor in things like vacancy rates - you may need to carry it for a month or two between renters, and that can eat into returns quick.

thank you for your long insight. Those are absolutely some things I have to include in a model. I was considering one month a year not being rented and 1% maintenance costs. I mean, even worst case scenario, if the mortgage and all other factors (management cost is another good one to consider) let's say its $800 a month costs or $900. If it can be rented for a minimum of $1000 (depending on the house could be up to $1300-1400) there's still buffer in there. And I'm considering building a stock pile of rental homes, not selling them. Look for the long term outlook (having it paid off in less then 15 years) and using it as retirement income.

SingleSpaced says

Ok, color me curious, where do you live and what type of work do you do? Is it steady, any chance of layoff coming up? Seems an income like that compared to average housing price is high.

Can you find something you want in the 200k range? Simple calculation at a low 4% 30 year loan would be about $800 for mortgage and taxes/insurance $200-400 a month depending on rate/coverage. So about the same for your current shared rent. Could even rent a room and make it cheaper since you seem to be Ok sharing.

Hell, with that income it's not a stretch to pick up both a house and a rental unit.

Rather not say. But the work I do and the pay I get is NOT THE NORM for the area I live. Pretty much my company and what I do is the only one around. Its a low income area (the area I want to buy the rental) but where I want to live is nicer and a little more expensive, but not separated by more then a 30 min drive. It's very steady, no concerns about layoffs. It is probably sustainable for another 5-10 years minimum. If I want to change jobs, or move, does that change this whole equation?ArtimusMaxtor says

Rentals may not be as dependable as one would think. There are a lot of variables. One of the being finding tenents and also the tenents themselves. That can be highly undependable. Being stuck with a mortgage is something you should consider when renting.

Its not as easy as you think. In addtion as a noob and I mean noob. Its going to take some hard lessons and faluires before you become successful if indeed you can make it that far.

Sound like discouragment from me. Its not. I'm really not trying to do that at all. I am just preparing you for the reality of renting. Which can be a very tough run especially when your new at it.

with the bare minimum that would be required to keep the house, insured, etc....would be what, $300-500 a month on a $80k mortage? I would be able to maintain that while renting.corntrollio says

This is a very astute comment. Sometimes people are willing to compromise for a non-ideal property when renting, so they pay less. Then, when they want an ideal property, they typically do have to pay more money for that. Maybe you're willing to rent a 2BR house, but you'd buy a 4BR house. Maybe you're willing to live without a garage or a certain type of backyard, but you wouldn't buy without those features.

The place I rent is of similar size and quality of what I would buy FWIW.

ArtimusMaxtor says

Its not as easy as you think. In addtion as a noob and I mean noob. Its going to take some hard lessons and faluires before you become successful if indeed you can make it that far.

That's what makes me not want to do the rental....buy the primary and learn on that, have security on that...then expand out. But then what do I do with my money in the mean time until prices come down to where it needs? I would need something more liquid, and my 1% ING account is doing me no good...

What's the matter with this group of commenters?

Why doesn't ANY of you tell this person to pay off his student loan and his car before he assumes more debt?

when I see a graph like this....how can you tell me in 30 years that I will have made money? There is an exponential climb in the market.

Does it have no ceiling? The high that was 14k, theoritically, it will need to be 8% higher then that to have really made a good investment.

Or with the market at 11k now, and I buy now, when I retire, it will need to be higher then 11k. When looking at a graph, how can it not be seen as a bubble?

Look at the market from its inception, until the 40's. Then from the 60's to the late 80's. How much of an increase is that? Who's to say we won't at LEAST stay completely flat for 30 years?

This is what makes me inclined to just procure many rentals

I recently spoke with a mortgage broker friend of mine.
Using rental income to go against your debt to income rental is a thing of the past, according to him. You used to be able to deduct 75% of your rental income from your debt to income ratio, but not anymore, according to my friend the mortgage broker. They won't even consider renal income as a means to reduce your debt to income ratio. If anyone has experienced differently in recent months, please do share.

corntrollio says

1) fraud is fraud -- if you intend not to live in the house, you are committing mortgage fraud, proceed at your own risk
2) sometimes banks actually do check
3) if you intend to buy a home in the future, the fact that you committed fraud may come back to haunt you

You said it all above IMHO. Again, there are issues coming up on here lately I find to be unethical, law breaking, greed based ...just highly disturbing. I just don't get some people anymore or what the hell they are thinking.

az_lender says

What's the matter with this group of commenters?
Why doesn't ANY of you tell this person to pay off his student loan and his car before he assumes more debt?

Exactly! Precisely! THAT is another part I just don't get, and I am glad you brought it up because much of this is appearing agenda based to my eyes.

az_lender says

What's the matter with this group of commenters?

Why doesn't ANY of you tell this person to pay off his student loan and his car before he assumes more debt?

That's the other part I've considered, but lets assume no one lives debt free....why not get the cheapest money possible to use, while paying off anything that is higher interest then what you can stand to make as an investment. What if by taking on a mortgage (debt) that brings in cash flow that will allow me to pay off the other debt much faster? Can't some debt be seen as good?

commonsense says

corntrollio says

1) fraud is fraud -- if you intend not to live in the house, you are committing mortgage fraud, proceed at your own risk

2) sometimes banks actually do check

3) if you intend to buy a home in the future, the fact that you committed fraud may come back to haunt you

You said it all above IMHO. Again, there are issues coming up on here lately I find to be unethical, law breaking, greed based ...just highly disturbing. I just don't get some people anymore or what the hell they are thinking.

I never said anything about being fraudulent. I did not KNOW how the bank would see the mortgage if I didn't live in it .I didn't know if that would be fraudulent, or if the banks cared. I have a vested interest because of my job to NOT being fraudulent or causing any financial concerns.

ordphx says

I recently spoke with a mortgage broker friend of mine.

Using rental income to go against your debt to income rental is a thing of the past, according to him. You used to be able to deduct 75% of your rental income from your debt to income ratio, but not anymore, according to my friend the mortgage broker. They won't even consider renal income as a means to reduce your debt to income ratio. If anyone has experienced differently in recent months, please do share.

That's good to know, can anyone else elaborate with experience? So your saying if you have that mortgage as debt, it doesn't matter what your making on it? I find it hard to believe that they wouldn't see true income as income.

commonsense says

az_lender says

What's the matter with this group of commenters?

Why doesn't ANY of you tell this person to pay off his student loan and his car before he assumes more debt?

Exactly! Precisely! THAT is another part I just don't get, and I am glad you brought it up because much of this is appearing agenda based to my eyes.

Whats the agenda?

UAVMX says

Whats the agenda?

That is what I am asking. I have no idea but as only one pointed out logical advice to pay down debt and stay out of debt that type of advice appears to always be countered by the opposite. Someone tell me.

And right off today's Patrick.net here is a reality check http://www.sacbee.com/2011/08/29/3868485/generation-of-homeowners-stuck.html?source=patrick.net

Sounds like you have the intelligence to understand mutual funds. My personal opinion is to spread the risk and not try to hit the homerun on one property. Max out your retirement accounts first. 401k/SEP IRA/KEOGH/ ROTH/Traditional IRA first. The tax benefits here are pretty generous. No need to lump sum it, you can cost average it over the course of 2-3 years. I think when the equity at stake for a rental is around 20%-25% of your invested assets, then you should pull the trigger.

I don't regard rentals as investments as they are inflation hedges. What their rent and appreciation does depends loosely on the money supply(inflation) and the local economy. This might be a moment in time where a rental's return might outpace stocks for few or so. But the way I look at it is this, rentals don't get bigger and chase more profits, stocks at least attempt to.

I am so out of here guys. I find this is a waste of my time.

commonsense says

UAVMX says

Whats the agenda?

That is what I am asking. I have no idea but as only one pointed out logical advice to pay down debt and stay out of debt that type of advice appears to always be countered by the opposite. Someone tell me.

In your opinion that's the logical advice, but not everyone's apparently. Instead of criticizing and just saying that's logical, bring some arguments, some facts....actually contribute to the topic. Have you never had debt in your life? Is taking on debt to potentially increase income bad? Explain

commonsense says

And right off today's Patrick.net here is a reality check http://www.sacbee.com/2011/08/29/3868485/generation-of-homeowners-stuck.html?source=patrick.net

I don't see how that applies to my situation...I'm not buying at the top of the market, I have enough money to put a down payment, I'm looking at properties that are well within my means and budget. I'm smart enough to have waited this long when everyone was telling me 3 years ago to buy...then two years ago the prices dipped a little and I was told now's the time...

That's why I posted this, for advice and opinions. I'm not sure what the best path to take is and that's why I'm asking for help rather then just making a decision on a whim and screwing everything I have worked for and continue to work for.

burritos says

Sounds like you have the intelligence to understand mutual funds. My personal opinion is to spread the risk and not try to hit the homerun on one property. Max out your retirement accounts first. 401k/SEP IRA/KEOGH/ ROTH/Traditional IRA first. The tax benefits here are pretty generous. No need to lump sum it, you can cost average it over the course of 2-3 years. I think when the equity at stake for a rental is around 20%-25% of your invested assets, then you should pull the trigger.

I don't regard rentals as investments as they are inflation hedges. What their rent and appreciation does depends loosely on the money supply(inflation) and the local economy. This might be a moment in time where a rental's return might outpace stocks for few or so. But the way I look at it is this, rentals don't get bigger and chase more profits, stocks at least attempt to.

So are you saying that you would never do rentals? Stick to all stocks?

forget buying for now...instead, use your money to pay down or off your sizeable loans, which would be an investment that has GUARANTEED RETURNS in the amount of the interest that you otherwise would pay on those loans. (My advice assumes you would not be penalized for paying down or off either loan early. If you would be penalized, it may not be worth it.)

robertoaribas says

4. Real estate... blah blah blah... 3 or 4% over the long haul... barely better than inflation. Sure. Notice he is talking about buying places that return in rent around about 10%... check your math skills, but if his return after factoring in vacancy and maintenance is say 8%, he kicks the crap out of your historical stock average of 7%, with no appreciation at all. Add in say 2% appreciation over 10 years, and its a home run...

Here's another crucial piece that you're forgetting to conveniently mention. There is a big difference between real estate and stocks in that real estate until the entire bill is paid is a liability. There are way more risks in owning a wooden house versus stocks tied to corporate profits. You can stop putting money into stocks at any time and invest as little or as much as you want versus a house where the bill will unrelentingly be due month after month plus taxes, upkeep, and so on. Also- a 7-8% annual appreciation in stocks is actually a conservative estimate. If you're young enough and willing to stomach more risk you can easily get more like 10%. Then again you should only do that when you're young.

LasVegasREO says

Forget the 7% return on stocks over 100 years, when the US grew from overabudance of natural resources and a home grown manufacturing employment. The last 10 years, 2001 to 2011 shows a stock market total return or 10%, $100,000 in stock in 2001 grows to $110,000 in 10 years.

You are making long term predictions based on short-term results. 10 years is short term. Secondly, if the US economy is indeed 'done' and we're now entering a period of economic decline then I suppose the same should be said about real estate too- shouldn't it? I mean- if we're all gonna' be poor then I reckon the housing market is also done too isn't it? That would mean that the last 100 years was a fluke in housing and that prices will fall right along with rents- if we use that type of logic. Another thing is that while we as a country may no longer be a manufacturing country that doesn't mean the companies that used to make things here are doing badly. In fact an awful lot of US companies are making giant profits... overseas. A huge number of companies based in the US are making as much as half of their incomes overseas. Naturally this means their stock value goes up and as an investor you own part of those profits.

UAVMX says

The other concern with the stock market is right now I see it as being high, higher then where it should be. Also the fear is I KNOW NOTHING about the stock market, what to invest in, how to invest in, etc.....I think there is a lot more risk and I think it's rigged in so many ways.

You don't have to know a whole ton about stocks. I'm not even going to pretend to say I know about specific companies and their profits. The general idea is to paint with a broad brush. In other words- old fashioned mutual funds and 401k's. Sounds so simple it sounds stupid but that's really the case. The way they work is that you can choose different funds. Some will specialize in Asian and emerging markets. All will have a grouping of companies. Others in large cap and some in small and so on. At any given time one or more can be performing badly and others could be performing well. The principle is that people and companies make money all the time and by spreading the net as widely as possible you can catch some of that.

I'm not at all anti-real estate. My parents owned two rentals when I was a kid and to me they were a pain in the ass. I was constantly helping my parents care for these things. Plumbing would leak. We painted the interiors between renters. The lawns had to be mowed. And so on. They netted a small monthly income and when they sold them they made a little money from appreciation too. But its not like they were these magic instant overflowing piggie banks either. The things took a lot of work. On the other hand I have relatives who had ordinary middle class jobs and simply invested in a couple of mutual funds and 401ks who are now worth a couple million dollars. You would never know it meeting them either. They're just plain ordinary folks who didn't do anything crazy financially or try to get into any get-rich-quick schemes.

My financial adviser I think gave me the best piece of advice: Invest in what makes you feel comfortable. If you just want to save cash- do it. If you want to buy houses- go for it. If you want to invest in stocks, well that's fine too. Whatever makes you comfortable and sleep well at night. Either way, as mentioned before you might want to consider contacting a financial adviser of sorts. Good luck.

Earlier I suggested that the first priority should be to pay off the student loan debt, and the car. The first reply to this (I guess from the original questioner?) was, "let's assume noone lives debt free." Are you kidding me? I live debt free. ABSOLUTELY debt free. Debt is slavery. You can get your "debt is slavery" bumper sticker from patrick.net, I think. If you can borrow at 1% or something, well then, OK. Otherwise, you are playing a dangerous game of leverage, the same game that got all the banks in trouble.

UAVMX says

So are you saying that you would never do rentals? Stick to all stocks?

Not at all. I have four rentals of my own. All SFH's 3bed/2.5 baths. All built 2004 or later. They just weren't my first step in asset/wealth accumulation. At the age of 26, that's when I started working and saving. At the age of 34 after having built up a modest account, I saved enough DP for my first rental. The equity however did not exceed 20% of my total invested net worth.

At the same age, I had a negative net worth(60k in student loans). You already have 50k. That's a great start. Unless you're the next creator of facebook or google, saving/paying yourself first(monthly) is a great way to accumulate wealth. Even if you just invested your monthly 401k in cash(though you should really be doing stock mutual funds), depending on your tax rate, you're getting an instant 25% return because of it's deductibility. Then do a ROTH. If you make too much for a roth, do a traditional IRA and convert the previous year's contribution a ROTH this year. Wash, rinse, and repeat. If you're gungho on RE, save 20% of your contributions for a DP for RE. The prices of RE ain't going up for a long time. You've got plenty of time.

Rich4 says

What I think may be really helpful to you is to understand the differences in tax and liability between buying a rental or primary. This is something that has concerned me a little bit.

I'm not going to say I'm in the same boat, but I am older, have paid off all my debts, and am still renting. I haven't purchased any rentals yet (in this area it's difficult because good cash-flow properties are being bought in cash transactions and usually above asking) but have you considered purchasing your properties in a corporate structure and then paying rent to the corporation you own?

What would be the advantages or drawbacks to something like that? Let's assume that the mortgage interest deduction is simply not going to be a factor on a primary residence because prices simply aren't that high.

robertoaribas says

1. You cannot "tax deduct" interest on a primary residence. You can itemize, but at the prices he is talking about, without some other large deductions, the standard deduction is bigger. My primary residence mortgage is 180K, and I don't get one penny of tax savings on the interest for that very reason.

- Good point. I live in California, so my state income tax is much higher than the standard deduction, effectively meaning that i itemize everything by default. In lower tax states, this is not the case.

edvard2 says

You don't have to know a whole ton about stocks. I'm not even going to pretend to say I know about specific companies and their profits. The general idea is to paint with a broad brush. In other words- old fashioned mutual funds and 401k's. Sounds so simple it sounds stupid but that's really the case. The way they work is that you can choose different funds. Some will specialize in Asian and emerging markets. All will have a grouping of companies. Others in large cap and some in small and so on. At any given time one or more can be performing badly and others could be performing well. The principle is that people and companies make money all the time and by spreading the net as widely as possible you can catch some of that.

- great point. diversification is extremely important to reduce the non-systemic risk in any portfolio. Another simple option is to consider picking up index funds. Basically an ETF that tracks a market index such as the Dow, S&P, Wiltshire, etc. it is a security composed of all of the components of the index in the same proportions as that index. ie, it allows you to track the performance of the broad index.

az_lender says

Earlier I suggested that the first priority should be to pay off the student loan debt, and the car. The first reply to this (I guess from the original questioner?) was, "let's assume noone lives debt free." Are you kidding me? I live debt free. ABSOLUTELY debt free. Debt is slavery. You can get your "debt is slavery" bumper sticker from patrick.net, I think. If you can borrow at 1% or something, well then, OK. Otherwise, you are playing a dangerous game of leverage, the same game that got all the banks in trouble.

- debt is a tool. it can be used to hang yourself, yes. It can also be used intelligently as a leverage to increase wealth. In general, it is good advice to tackle high interest rate debt as quickly as possible. It is also important to distinguish between leveraging yourself to buy assets vs liabilities. Most of America leveraged themselves more to buy liabilities - ie. increase my mortgage to buy a new large screen TV or a new BMW. Meanwhile, policy created an environment wherein banks were incented to extend more credit to people in more creative ways, and pass on the risk to the government and foreign investors. the increased leverage increased purchasing power which fueled an asset price bubble, as more money could now chase the same assets. with asset prices rising, it then self reinforced the cycle as more could be borrowed against the "asset". Obviously, this did not work forever. Utilizing debt to purchase assets can actually be extremely helpful in wealth creation. If you can borrow money against your house at 4%, then turn around and invest that money at 8%, you are assuming a level of risk, but potentially reaping the rewards of arbitraging and gaining 4% for the cost of assuming more risk. Important to note, a house is not always an asset (in my opinion, it almost never is). Quite frankly, a house can be a liability as well. If you would rent a 1 br for $1000 per month, but only buy a 2 br for $2000 per month, the house is likely more a liability than an asset. In general, I think it is a dangerous fallacy to demonize debt. Debt is not inherently good or bad, it is people's dangerous use and misunderstanding of debt that is bad.

edvard2 says

You don't have to know a whole ton about stocks. I'm not even going to pretend to say I know about specific companies and their profits. The general idea is to paint with a broad brush. In other words- old fashioned mutual funds and 401k's. Sounds so simple it sounds stupid but that's really the case. The way they work is that you can choose different funds. Some will specialize in Asian and emerging markets. All will have a grouping of companies. Others in large cap and some in small and so on. At any given time one or more can be performing badly and others could be performing well. The principle is that people and companies make money all the time and by spreading the net as widely as possible you can catch some of that.

Thank you for your insight, that was a very helpful post. With mutual funds, lets say I want to pull 20% out for a downpayment. Are there penalties? Is there a certain amount of time you have to hold onto them, etc? Is the fund itself the one that's paying you? Or are your shares being sold on the market to someone else that wants to buy them. It sounds like mutuals are a good way to get very diversified.

Do you own real estate as an investment?

uvafitz says

forget buying for now...instead, use your money to pay down or off your sizeable loans, which would be an investment that has GUARANTEED RETURNS in the amount of the interest that you otherwise would pay on those loans. (My advice assumes you would not be penalized for paying down or off either loan early. If you would be penalized, it may not be worth it.)

no penalties for prepayment on my student loans nor the car. I see what your saying, in terms of the return on that money.az_lender says

Earlier I suggested that the first priority should be to pay off the student loan debt, and the car. The first reply to this (I guess from the original questioner?) was, "let's assume noone lives debt free." Are you kidding me? I live debt free. ABSOLUTELY debt free. Debt is slavery. You can get your "debt is slavery" bumper sticker from patrick.net, I think. If you can borrow at 1% or something, well then, OK. Otherwise, you are playing a dangerous game of leverage, the same game that got all the banks in trouble.

And you've always lived debt free? Do you have an education? How was that paid? I didn't receive a golden egg from anyone, as I said earlier, I've worked very hard. My first loans were gov't loans, around $10k with a good interest rate. My second set student loans were private for $30k dollars at about 16% interest because I had no one to co sign for me. Then I ended up with another $20k in student loan debt. All while working nearly full time to afford to live in the bay area paying all my own bills. In 2 years, those loans ended up increases by about $5-6k in interest. Once I got a job, I consolidated and got a better rate. By the time I was done with school I owed around $61k So, I've paid down $30K or so in student loans in 4 years.... The other debt is a car loan, at $18k is reasonable, not extravagant. I'm not ignorant here, I'm not just trying to get as much debt as possible. I'm trying to take balanced approach.

I feel like some of you are just seeing me as some 26 yr old that is trying to bury himself in debt....I'm trying to make the best move to secure my financial security.

I'm here on this site because I DIDN'T DRINK THE KOOL AID

Rich4 says

- debt is a tool. it can be used to hang yourself, yes. It can also be used intelligently as a leverage to increase wealth. In general, it is good advice to tackle high interest rate debt as quickly as possible. It is also important to distinguish between leveraging yourself to buy assets vs liabilities. Most of America leveraged themselves more to buy liabilities

exactly! Thank you, that's what I'm trying to get at, but you've said so eloquently. But others just want to attack.

cc0 says

I'm not going to say I'm in the same boat, but I am older, have paid off all my debts, and am still renting. I haven't purchased any rentals yet (in this area it's difficult because good cash-flow properties are being bought in cash transactions and usually above asking) but have you considered purchasing your properties in a corporate structure and then paying rent to the corporation you own?

What would be the advantages or drawbacks to something like that? Let's assume that the mortgage interest deduction is simply not going to be a factor on a primary residence because prices simply aren't that high.

I have considered it, but I must confess I am no expert here. my first thoughts are that the drawback is likely a higher interest rate, expense of setting it up and maintaining the corporate shell, and potentially more difficulty getting financing. The advantages could include the ability to write off many more of your expenses from a tax perspective, and for me in particular, when i move up to a bigger house it would then be very straight forward to maintain the same financing structure and convert it into a rental. I am dying to talk to a professional about this though, in terms of the cost comparison, and how to go about doing it properly.

That's not how it's typically done.

Have you researched all the costs associated with it, all the work you'll have to put into it being a land lord? All the laws and regulations? Don't gamble. All that late night tv talk is just there to sucker you into buying their cd/book.

double post

FortWayne says

That's not how it's typically done.

Have you researched all the costs associated with it, all the work you'll have to put into it being a land lord? All the laws and regulations? Don't gamble. All that late night tv talk is just there to sucker you into buying their cd/book.

Quality Auto Repair Since 1979

can you elaborate? Whats not how it's typically done? Don't gamble? Aren't all investments a gamble, isn't that how you acquire wealth? Please then, what path should I take?

again, to reiterate. I'm not talking about going out and buying a $400k home for a rental, getting buried in debt etc etc....

The "rental" in question would be around $80k. On an $80k rental, tell me what you would expect your total costs associated to be? And again, the area's rents go for $1000 - $1400/month. Taxes are 1.2%