To invest or not?

Question

We are still trying to determine what is the best route for us. We have a huge amount of equity in our home and can be debt free in less than 8 years. Then we can put all that money into savings and have a net worth of at least $700,000 at retirement. (not counting retirememt savings).

We thought we wanted to take advantage of this great buyers market, but the more properties we investigate, the more we wonder if we should go that route. For example, we would have to pull $$ out of our home (at less than 5% interest) to buy into a multifamliy property.

We have found a great triplex in a decent area that has great cash flow. However when I compare the numbers for where we'll be in 12 years - (stay with what we're doing now, or invest) - the numbers for total net worth are very close. So what's the point in having all the hassle of dealing with a rental?

If we buy this triplex, we could have it paid off in 10 years and have steady cash flow, but we would still owe on our home at retirement. I'm not sure how much debt I want to have when we retire.

How much does appreciation factor into your decision? I see it was brought up in another topic recently. We are in Southern California, and as an example, our home was purchased in 2001 for $220,000, then soared to a vaule of $550,000 at the height of the market, and now we'd probably get about $350-400,000 out of it.

If we could buy this triplex and I could count on more appreciation, then I might be tempted to go ahead and take the plunge. But you can't guarantee a thing in this economy. Crystal Ball, anyone?

Any comments, suggestions, etc would be really helpful!! Thanks! Kathy

K W · Answer

Thanks everyone, for your input. As the owner of a 12-yr old business, as well as another business that I just sold last year, I'm familiar with hard work and working towards my goals.

I guess I just need to figure out my goals! I'll do the additional research you've all suggested and keep plugging away.

K

Mark N.A · Answer

Succesfully investing in real estate is a job that takes work.

Succesfully investing in equities is a job that takes work.

Succesfully investing in foreign currencies, antiques, an ice cream parlor or whatever -- is a job that takes work. You get the idea.

Whatever you invest in make sure it's the type of job you enjoy working at. If you want easy money become a Congresswoman.

Larry Seith · Answer

KW,

You mention the term "net worth" several times in your post. That must be very important to you. High net worth alone in retirement isn't necessarily a good thing. You could own a $4,000,000 home free and clear but not have any money for food and property taxes.
On the other hand, you could control 80 rental properties that bring in $8,000 a month in cash flow but still owe on all of the mortgages. In which situation would you be better off? I think it was Robert Kiyosaki that talks about "putting money to work" and not letting in just sit idle doing nothing for you.
Of course you don't want to be in debt for more than your investment properties will pay for but you don't need to be afraid of debt. Again Robert Kiyosaki mentions that there is a big difference between "good debt" and "bad debt." I hope you reach your goals whatever they may be!

Michael Rossi · Answer

That's impossible! If you buy a rental that will cash flow (with real world expenses), you MUST buy at a discount to market value and your loan to value must also be low. So, you WILL have instant equity if you buy a rental that will cash flow. In addition to that initial equity, the tenants will be paying down your principal. So, at the end of a 10 year period, you MUST have more equity that you would have without the rental.

I agree with Jon that it doesn't sound like you understand the rental business and I also strongly suggest that you read one of the 50% Rule threads (in the General or Landlording Forums. There is also an article entitled "The Dirty Little Secret about Rental Property" in the Articles section.

Good Luck,

Mike

Jon Holdman · Answer

Yes, in some sense, it is.

IMHO, having one's home paid off is an outstanding goal. Its my personal goal. No matter what anyone says, a home is not an investment, its a doodad. If there comes a time in your life when you feel like you have too much money tied up in your house, sell it, and buy a cheaper one. A $350-400K house in SoCal doesn't really sound like a mansion, so I don't really think you have too much invested in your house.

Read in the Rental Property forum about cash flow and rental expenses. From the way you ask this question, I have a feeling you're thinking cash flow is Rent - PITI. Its not. That's not even close. A better estimate of true cash flow is Rent / 2 - P&I. Calculate P&I assuming 100% financing, even if you're going to put in a down payment. If you can find properties in SoCal that cash flow with that equation, I'd consider buying them.

There are numerous ways to buy houses with little money down. One method is to buy junkers with hard money, fix them up, and refi into a permanent loan. Another is owner financing like subject to, lease options or land contracts. All these topics are discussed in the forums, so do some searching and reading. Wendy Patton also has a couple of books on the topic that will give you a good introduction. If you have good income and credit, you may be able to get a business line of credit that you could use instead of the hard money.

You don't really need a crystal ball if you do rental properties right. Forget about the speculation that worked well in years past. Focus on buying deals that are significantly below what you could sell for right now, and that cash flow. The cash flow formula is above. I think you have some more pain to endure in SoCal, so I'd want to buy (plus fixup) at no more than 50-60% of the price you could sell for it if was fixed up.

If you think you have a deal, don your flame proof suit :D and post the details (price, fixup, rent) in the Deal Analysis forum.

Account Closed · Answer

Do you own any rental property now? It doesnt sound like you have any real world experience in being a landlord. I dont believe that buying one small property and running it as a side line is smart allocation of your time and resources. I own and manage 44 units which I aquired over about 5 years, this is not a business to "dabble" in. In my opinion, this is a lot of work and requires more dedication than most people are willing to allocate. Joine your local real estate investment club and meet other local investors. It can be rewarding, but this is not paper assets. Please make you decision with your eyes wide open.

K W · Answer

So just way too broad of a question for anyone to reply?

Thanks

To invest or not?

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