Would you hold on to cash or purchase another house?

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lisinopril

lisinopril

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Say you're a pharmacist...salary around 140K /year (100K net). Your monthly mortgage now is 1700. Your student loan is 700. Now in your bank has 50K and your 401K has 40K,....would you buy another condo/house for renting out? Or would you rather just hold on to cash with this bad economy for now??
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how much money do you owe in student loan? what is its interest rate?
 
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lisinopril said:
70K left and 4% interest rate.
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Use your money to pay back your student loan. Right now, 4% is high and you are using your AFTER tax money to pay for it. In addition, since you are making more than > $70s k a year, you don't qualify for interest rate tax deduction.
 
Have you considered additional principle-only payments on either the student loan or your current home?
 
All4MyDaughter said:
They were talking about interest on student loans...

The only "huh" is your reading comprehension skillz... :smuggrin::p
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Oh LOL... thought he was talking about mortgage interest rate deduction. I was like WTF he was talking about LOL

2nd home is still deductible up to $1M total loan. Investment property is not.
 
Momus said:
Oh LOL... thought he was talking about mortgage interest rate deduction.

2nd home is still deductible up to $1M total loan. Investment property is not.
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That's what I thought. Since the OP seems to be talking about an investment property, the interest on that wouldn't be deductible.

I think he should reduce that 70K loan balance while keeping a sizeable emergency fund in the bank. Plus not touch the 401K.
 
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Erm...just so you know, interest on a loan attached to an investment property is completely tax deductible as a business expense.
 
lisinopril said:
Say you're a pharmacist...salary around 140K /year (100K net). Your monthly mortgage now is 1700. Your student loan is 700. Now in your bank has 50K and your 401K has 40K,....would you buy another condo/house for renting out? Or would you rather just hold on to cash with this bad economy for now??
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1. Buy I-Bonds $10k/year to save for emergency purposes up to 1 year of emergency cash. No reason to hold large amount of cash earning 0...
2. Get more return with the rest of your cash
--- Invest in stocks ~7% return
--- Pay down debt (your mortgage ~3.5% return or student loan ~2 to 6.8% return)
 
Dr Wario said:
Erm...just so you know, interest on a loan attached to an investment property is completely tax deductible as a business expense.
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Yup - offset your rental income
 
Momus said:
1. Buy I-Bonds $10k/year to save for emergency purposes up to 1 year of emergency cash. No reason to hold large amount of cash earning 0...
2. Get more return with the rest of your cash
--- Invest in stocks ~7% return
--- Pay down debt (your mortgage ~3.5% return or student loan ~2 to 6.8% return)
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which stocks?
 
Long time SDN member here... take my advice and get a Nissan GTR
 
lisinopril said:
Say you're a pharmacist...salary around 140K /year (100K net). Your monthly mortgage now is 1700. Your student loan is 700. Now in your bank has 50K and your 401K has 40K,....would you buy another condo/house for renting out? Or would you rather just hold on to cash with this bad economy for now??
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Depends on the house/condo. Rates will never get better, and if you can be at least revenue neutral initially it could be a good investment. Things to consider most commercial loans require a 20 yr term vs 30 for a typical residential loan. Also they will want 20% down for sure and the rate will be about 1% higher, or 4.5% now.

A way to get around that is to move and rent out your existing place. Most loans only have a restriction on renting for the first year. This way you get the residential rate and the 30 year term. Stay in your new place a year or so and then move again. This has the added benefit of having a bit more principle being paid down each month, which makes your break even point lower.

A house is more maintenance but can attract better quality renters, and quality renters is your number one concern. A condo has low upfront costs but the association fees are an unknown future expense. You can be socked with a 5k special assessment if the unit are getting old for repairs.
 
Generally, I like to be more diversified. Look at your assets overall. For mortgaged property, you can count just your equity or the full market value. But if you buy another investment property, then I think your total portfolio will be way too heavy in real estate, which would be devastating if another RE bubble and bust happens again. Personally, I think my house is more than enough exposure to the capital gains side of RE and I have no desire to increase exposure by chasing the income side through rental properties. So I try to diversify and even it out by investing ALL of my remaining money in stocks and bonds, not just in my 401(k) and IRA, but outside of them as well. Right now my overall assets in home equity : stocks : bonds is about 1 : 1 : 0.7.
 
pezdispenser said:
Personally, I think my house is more than enough exposure to the capital gains side of RE and I have no desire to increase exposure by chasing the income side through rental properties.
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Fair point, but I would point out counting your primary home as any type of an investment is a mistake. You will always need somewhere to live. Having one home is not "investing" in real estate.

Even if you buy a huge home, and then plan on downsizing and believing that the additional equity in the unneeded space is some type of investment that you will be able to downsize out of in your later years, you will lose your arse in the additional real estate taxes over the years.
 
You want to buy property to rent out to other people or you want to buy a house for yourself? The former is an investment, the latter is not. If you cannot envision having your wake in your house then it is not for you. THERE IS NO SUCH THING AS A STARTER HOME.
 
BenJammin said:
You want to buy property to rent out to other people or you want to buy a house for yourself? The former is an investment, the latter is not. If you cannot envision having your wake in your house then it is not for you. THERE IS NO SUCH THING AS A STARTER HOME.
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You've posted this before, but I have no idea what it means. Please elaborate.
 
All4MyDaughter said:
You've posted this before, but I have no idea what it means. Please elaborate.
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The concept that there is "no such thing as a starter home" is generally being used to refer to the idea of a starter home as a financial instrument which is used as a 'buy in' to a real estate market, with the idea of upgrading down the line using the equity gained from appreciation as leverage for the next purchase, and so on. A corollary to the concept is the idea that you should generally plan to own a house for a minimum number of years in order to break even (acting under the assumption the house will not really gain much value at all).

There have to still be starter homes in the sense of your first house is cheaper than something you would buy later in your career.

Seems like the basic idea should be to buy a house you would be comfortable living in for a long time and not to buy with a plan in mind to sell.
 
type b pharmD said:
The concept that there is "no such thing as a starter home" is generally being used to refer to the idea of a starter home as a financial instrument which is used as a 'buy in' to a real estate market, with the idea of upgrading down the line using the equity gained from appreciation as leverage for the next purchase, and so on. A corollary to the concept is the idea that you should generally plan to own a house for a minimum number of years in order to break even (acting under the assumption the house will not really gain much value at all).

There have to still be starter homes in the sense of your first house is cheaper than something you would buy later in your career.
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Exactly. There are starter homes. Very few people remain in their first home for their entire lives.

Seems like the basic idea should be to buy a house you would be comfortable living in for a long time and not to buy with a plan in mind to sell.
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This I can agree with. Friends who have bought just for short time periods have not done very well financially. If you're just planning to hang out somewhere for a few years, it's probably better to rent.
 
N974 said:
Fair point, but I would point out counting your primary home as any type of an investment is a mistake. You will always need somewhere to live. Having one home is not "investing" in real estate.

Even if you buy a huge home, and then plan on downsizing and believing that the additional equity in the unneeded space is some type of investment that you will be able to downsize out of in your later years, you will lose your arse in the additional real estate taxes over the years.
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BenJammin said:
You want to buy property to rent out to other people or you want to buy a house for yourself? The former is an investment, the latter is not. If you cannot envision having your wake in your house then it is not for you. THERE IS NO SUCH THING AS A STARTER HOME.
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You both sound very traditional and old-school. Buy a house on a 30 year mortgage. Pay it off. Retire with no more mortgage payments. Die. Pass the house on to your kids. Nothing wrong with that. It is the generally recognized as safe thing to do.

But there are many options available to use your home equity. Unfortunately, most of them have a bad stigma attached because they have been abused (home equity used for a vacation), people have been burnt (now underwater), or ripped off with fees (e.g. reverse mortgages). Just saying that if you know what you are doing, you can still take advantage of your home equity, and it does not have to be considered as 'dead weight'.
 
pezdispenser said:
You both sound very traditional and old-school. Buy a house on a 30 year mortgage. Pay it off. Retire with no more mortgage payments. Die. Pass the house on to your kids. Nothing wrong with that. It is the generally recognized as safe thing to do..
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Not saying that at all. I rent out the the second home I bought, I built my 3rd home with my own two hands from the ground up. That home is now on weekly vacation rentals. Currently in another home which will be rented once we move. Much of the building dollars for my 3rd home came from a second mortgage on my second home.

Use your home equity as you see fit. My point was actually the opposite to the claim that having one home can be too much real estate exposure. My point about a large expensive first home is that there is no real investment there at all, you have to take into account real estate taxes, a TRUE INVESTMENT is taking in all available information in the expectation of a return on your money....what people often do is take SOME of the information as an attempt to justify a large home purchase, that is not a true investment, not saying not to buy the big home, but just to be honest with your reasoning. If you take the additional amount you spend on the higher mortgage and taxes and add that up over the years, most likely the appreciation in the home value will not keep up. Almost all of my homes have had real estate taxes in the 3% range each year. That is about the average home appreciation over 30 years, so the taxes alone will knock out the "investment" portion of your primary home, not counting the additional principle and interest. There is no way to make money on a home you are living in.

Now instead of buying a 400k home, you buy a 280k home and a 120k rental or vacation home, you still have the same overall exposure, the same available equity, but you have many more avenues of making money, which is the goal of any real investment. Rent out the small home weekly or monthly rentals, move to the small home and rent out the bigger home. If you lose you job or have a kid and the wife wants to stay home now you can sell one of the homes.

Final point. The additional money you are paying each month in a large home is tied up (with the exception of a second mortgage, but you can't get a new second mortgage every 6 months to reflect the additional equity). It also goes against your debt ratios on your loan application possibly limiting you on future investments in two ways: 1) just having less money banked to begin with and 2) the inability to leverage that money with a loan because of debt ratio limits. A rental home that does NOT affect your debt ratio, only if there is a loss, and only the amount of that loss. For easy math lets say you gross 10k a month, that allows you to spend 40% (bank rule of thumb for good rates) of that on debt, homes, cars, student loans etc. A 400k home will eat of about $3500 of that $4000, add on loan payments etc you are already over the 40% debt ratio and additional loans of any type will by tough and expensive to come by, even with great credit.

Now if you buy TWO 200k homes, only the primary home will count against your debt ratio, $1750 instead of $3500. That leaves you an additional $1750 a month to borrow or use for leverage. Why? Because the OTHER $1750 you are spending for the second "rental" home, even if it is never rented out will not be a $1750 hit against your debt ratios for several tax reasons, the primary reason be forced deprecation.

I personally love the starter home idea, because nobody stays in the same home anymore. Especially if your are single, I would buy a home to live in with the intention of renting it out. Never sell your old home, just rent it out once you are done. Now is the best time in 60 years to be getting into real estate. There is a floor, and the floor is the cost to build a home. Houses have been selling for $60-$70 a square foot, problem is you can't build homes for that, especially with energy prices....that is the floor. Prices will have to come back a bit. Just think about how expensive energy adds cost to home building, from the chain saws to cut the timber, to the delivery trucks and plumbers truck to the copper in the pipes.
 
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All4MyDaughter said:
You've posted this before, but I have no idea what it means. Please elaborate.
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People my age (20s) seem to have been sucked into this idea that buying a house, selling it at a time when the market is ripe, then buying the house you really want is a smart decision. I think it is one of the dumbest things you can do with your money. Does nobody remember the housing crisis about 5 years ago? People were buying houses they couldn't afford with money they didn't have so they could flip them and try to make fast cash. It was an absolute disaster. My opinion may be old school but "starter homes" are a crock. That's why I say there is no such thing as a starter home.
 
pezdispenser said:
You both sound very traditional and old-school. Buy a house on a 30 year mortgage. Pay it off. Retire with no more mortgage payments. Die. Pass the house on to your kids. Nothing wrong with that. It is the generally recognized as safe thing to do.

But there are many options available to use your home equity. Unfortunately, most of them have a bad stigma attached because they have been abused (home equity used for a vacation), people have been burnt (now underwater), or ripped off with fees (e.g. reverse mortgages). Just saying that if you know what you are doing, you can still take advantage of your home equity, and it does not have to be considered as 'dead weight'.
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You think people in general are as smart as you or me or anybody else here? Lots of people used their home as a personal piggy bank and got destroyed a couple of years ago. If you play with fire then sooner or later you'll get burned.
 
BenJammin said:
People my age (20s) seem to have been sucked into this idea that buying a house, selling it at a time when the market is ripe, then buying the house you really want is a smart decision. I think it is one of the dumbest things you can do with your money. Does nobody remember the housing crisis about 5 years ago? People were buying houses they couldn't afford with money they didn't have so they could flip them and try to make fast cash. It was an absolute disaster. My opinion may be old school but "starter homes" are a crock. That's why I say there is no such thing as a starter home.
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Well, there is a middle ground between the foolish behavior you attribute to your friends and your "no starter homes" doctrine. But others have adequately described it.

My husband and I bought a home 12 years ago, and never planned for it to be our permanent lifetime house. It was fine for us as a childless couple, but now with (almost) two kids, it's getting stretched. We have a ton of equity in it and could rent it out for at least twice the monthly mortgage obligation. Once we're ready to buy a bigger home we'll be in a good position whether we sell it or use it as rental property. It's really not that difficult.
 
N974 said:
Not saying that at all. I rent out the the second home I bought, I built my 3rd home with my own two hands from the ground up. That home is now on weekly vacation rentals. Currently in another home which will be rented once we move. Much of the building dollars for my 3rd home came from a second mortgage on my second home.
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Actually I see you leveraging you primary home quite well. That is why I argued that in this sense at least, one should count their primary home as an 'investment'. Otherwise, it may appear to 'pop out of the clouds' when you convert it to a rental or leverage equity to invest in other things. In fact, this is what I intend to do myself but I think I confused everyone when I said I have enough real estate exposure in my own house. I should have added, "at this current point in time", because later as my other stock and bond investments grow, I don't want them to dominate either, so THEN it would be the time to increase my real estate exposure through rental properties, not my primary home.

And that was also my advice to the OP. Conservatively, I just think it's a little bit early to be investing in rental properties with a balance sheet of:
50k cash
40k 401(k) (stock?)
a not-stated amount of home equity
70k student loans

and we don't know the complete cash flow situation either. Perhaps later when the student loans are gone and the stock investments are more substantial.

I guess my point should be about diversification. Everyone is bound to know someone who got slaughtered in the property bubble because they went 'all in'. I know a pharmacist who quit his job to go buy rentals and flip houses. He is now of course bankrupt and can't even get a full-time job in pharmacy either. That's why you need to have stock and bond investments too.

Also, I definitely have no intention of having all my real estate exposure in just my primary home. I've seen that as well. My friend's parents are retired with no 401(k) because they put all their money in their 7-figure mansion. So now my friend has to give them money to buy food and pay the bills. :eek: That's why you need to split it up over several properties, like you described.

Are we on the same page now? :)
 
pezdispenser said:
Actually I see you leveraging you primary home quite well. That is why I argued that in this sense at least, one should count their primary home as an 'investment'. Otherwise, it may appear to 'pop out of the clouds' when you convert it to a rental or leverage equity to invest in other things. In fact, this is what I intend to do myself but I think I confused everyone when I said I have enough real estate exposure in my own house. I should have added, "at this current point in time", because later as my other stock and bond investments grow, I don't want them to dominate either, so THEN it would be the time to increase my real estate exposure through rental properties, not my primary home.

And that was also my advice to the OP. Conservatively, I just think it's a little bit early to be investing in rental properties with a balance sheet of:
50k cash
40k 401(k) (stock?)
a not-stated amount of home equity
70k student loans

and we don't know the complete cash flow situation either. Perhaps later when the student loans are gone and the stock investments are more substantial.

I guess my point should be about diversification. Everyone is bound to know someone who got slaughtered in the property bubble because they went 'all in'. I know a pharmacist who quit his job to go buy rentals and flip houses. He is now of course bankrupt and can't even get a full-time job in pharmacy either. That's why you need to have stock and bond investments too.

Also, I definitely have no intention of having all my real estate exposure in just my primary home. I've seen that as well. My friend's parents are retired with no 401(k) because they put all their money in their 7-figure mansion. So now my friend has to give them money to buy food and pay the bills. :eek: That's why you need to split it up over several properties, like you described.

Are we on the same page now? :)
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I thought about mutual funds, I bonds, IRA and went with the following because i could:

401(k) - 4% company match 7% my contribution

reinvest most of profits from business into the business. Turn a 20-25% profit on reinvested profit. Compounding shop which includes a sterile room is in the works. large investment, but hoping for a 40-50 % ROI within 6 months to 1 year.

I am looking to buy a condo for 190k, 25% down, 3.75%. after looking at the numbers, ive decided it would not really be an investment. after the interest i would pay, if i took that long to pay it off, id be looking to break even after 10 years, assuming i rented it out and the value stayed stagnant. after the interest id be looking to pay $254000 plus the 25% i put down already. Im gonna buy it just cause i like it and its on the beach. I guess i have been spoiled with business returns between 20-30%, that a condo ROI after 10 years doesnt look to appeasing. Then again, it could be long term growth and i need to put my short term impulses aside and just go with it.
 
Hey Doctor M,
Diversify! The same people in my story with the 7-figure house used to own a very successful retail store inside a mall. Unfortunately, they were run out of business when the mall owner decided to let another business selling the same things but with a more established brand name, open up right next to them. **** happens, so you don't want to have all your eggs in one basket. Of course the ROI from stocks and property are not going to be as much as your pharmacy, but I would still do them for the sake of diversification. Good luck! :thumbup::)
 
pezdispenser said:
Hey Doctor M,
Diversify! The same people in my story with the 7-figure house used to own a very successful retail store inside a mall. Unfortunately, they were run out of business when the mall owner decided to let another business selling the same things but with a more established brand name, open up right next to them. **** happens, so you don't want to have all your eggs in one basket. Of course the ROI from stocks and property are not going to be as much as your pharmacy, but I would still do them for the sake of diversification. Good luck! :thumbup::)
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Ahhhhhh.yes, i bit the bullet and started with the mutual funds and some bonds. small amount, but i will invest little by little. Condo is in the works and the 401 K is coming along. Yes, diversification.
 
Return on investment in a large way depends on the risk you are willing to take. When my dad invested $300k in shanghai realestates, it was a huge chunk of their money back then. He chose to go with my relative's advice instead of the safer route of buying another investment property state side. Well, the risk paid off, made a million on that in less than 5 years.

But here is the second thing, came 2006 he was looking at retirement on the horizon and fearing that shanghai realestates has become a bubble, he chose to do profit taking instead of putting more in, or at least stay put. Well, it might be a reasonable move from the view point of a upcoming retiree, but he missed out on the chance to doubling that money. They still own several properties state side, more than enough for my parents to retire comfortably, but damn I wished my dad had gone for it.

No risk no reward. It's knowing which risk to take and actually stomach it that's hard.
 
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OP, while others provide good advice from a conventional point of view, I want to play a bit of devils advocate.

Diversification. When you go into a business, it's inherently undiversified. You open up a pharmacy, you re gonna be over exposed. You start a restaurant, a big chunk is now in it for better or worse. Going down the path of becoming a landlord is similar. Unless you just want to stop at one or two properties, it's you will be undiversified. And stopping at one or two is in itself undiversified because (1) you miss out on economy of scale, (2) much more subject to one or two local markets, and (3) subject to vacancies.

Most successful landlords own half a dozen or more properties at least. The goal is to generate enough positive income to be able to be self perpetuating. My parents started out as many did, rent out their old house when they moved to a new one. But that's just the beginning, should be the safest way to learn the ropes, not the blueprint on how to reach your goal.
 
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Doctor M said:
Ahhhhhh.yes, i bit the bullet and started with the mutual funds and some bonds. small amount, but i will invest little by little. Condo is in the works and the 401 K is coming along. Yes, diversification.
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I hope they are in index funds...
 
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