Where to save money for a future all cash purchase

Question

My wife and I are interested in purchasing rental properties on a buy-and-hold basis when we settle down in Northern California in about 9-10 years. She is currently a medical student and obligated to serve 8 years in the Air Force starting next year. Our goal is to settle between San Francisco and Sacramento and build a real estate portfolio while she practices as an attending OB/GYN.

Starting in mid 2015, we should be able to set aside $10,000 a year to save for real estate. We should be able to add $5,000 a year to that amount, so $15,000 in year 2, $20,000 in year 3,  etc. While I'm aware of the power of leveraging, part of keeping a happy wife means keeping any business activities paid for in cash.

For a 10 year timeline, should I just put the money in CD's, savings accounts, etc? Or should I look at something like a low tax, low fee S&P 500 index fund? Volatility is a concern, I don't want my investment to drop in half at the same time the real estate market takes a dive like in 2008.

David C. · Answer

@Ian Lord ,

If you or your wife can get a VA loan, you might not need to save up much for down payment.

If you think your current cash flow is tight, you may buy property with extra rooms or basement to rent out.   I am not sure if you have already bought a primary residence, but it is a good way to build equity until you are ready to move.

Also, if you depend on saving $5000/year to buy real estate in bay area, if the market keep appreciating, your $5000/year saving might not be able to keep up with the market appreciation, by waiting for 8 years, you might get priced out.

There are pockets of areas between Sac & Bay area you can still buy at a reasonable now.  I hope this help.

Andy Kaye · Answer

When the general public like you doubts the market rally, it usually means stocks will keep going up.

When the general public thinks its a good time to buy stocks, it usually means a major market correction.

J. Martin · Answer

I was just going with the assumption that you were only going to pay cash, due to your wife's perspective on it. But I agree with David. I did FHA on my first 4plex, and was a great way to get started.

My favorite broker joke, but has some truth to it in this market:If the market is down, BUY!If the market is up, BUY NOW!!

Elizabeth Colegrove · Answer

@Ian Lord

Welcome to Biggerpockets!

Why are you waiting till you wife leaves the military. My husband is active duty Navy. We have turned a transient career into a great way to add to our portfolio. The VA loan allows 0% down. You can reuse this as long as all of your loans don't exceed the max guarantee for the area (most areas it is 417k). We used the VA loan to buy 2 houses. Once this loan is exhausted you have access to conventional 5%. When we transfer we than rent out our personal house as it is now an investment. We supplement this strategy with pure rentals. We save up this money in a savings account.

We also invest in tsp. Our goal is to have enough cash flow from our houses in 15 years to live off the cash flow. I talk all about our strategy, success and how to self manage from afar on my website located in my signature.

Pm me if I can be of any assistance. I look forward to seeing you around the forum.

J. Martin · Answer

It sounds like you are relatively risk averse (with some influence from your wife..), so I'm thinking probably something more on the conservative side. If there were a stock market collapse, and you lost 40%, how would you feel? What would your wife say? You want to invest in real estate, but you couldn't even hold on to the money you wanted to invest in RE?... Just think about what you can stomach..

Would I advise putting it in Bank CD's for 10-30 years? Hell no! But if you need that cash for your investments, you don't want to lose it.

I've considered putting some of my idle cash in REIT's. I figure that it is a property substitute, so if it's down, then I'll probably also be getting a better deal on any real estate purchase. If the RE market is up, I'll have to pay more for RE but should have a little more cash from the REIT increase too.. Of course, will the REIT performance match your property performance? Are they really substitutes? Hmmm.,.,.

@Johnson H. knows REIT's better than anyone I know if you're interested on some specifics.

Carlton Kohler · Answer

Hey Elizabeth,

I PMed you about that VA home loan options. I'm looking forward to hearing from you!

Ian Lord · Answer

Thank you everyone for the help. I spoke with my wife a bit this morning and I think she might be softening up on her attitude towards taking out a mortgage in the California market. She is used to the Hampton Roads market where we could buy a perfectly nice rental house for a bit over $100,000. Being from Napa, I know that doesn't even buy a crack house in many parts of California.

To add a bit more background, my wife and I will be moving three times in the next nine years. Wherever we wind up is bound to be mostly at the discretion of the Air Force. The good news is my wife will be a physician, so after the initial four year residency we will be in a great position to save up cash. Median pay for OB/GYN's is over $200K a year and she will not have a student loan because of her contract with the military. We just have to get through the first 8 years at a substantially reduced rate of pay, and it is during that time we will only be able to save $10-20K per year.

We own our current home, and have about 28 years left on a VA mortgage. I have remaining eligibility and my wife will have her own eligibility starting in 2016. Our general plan has been to rent out our previous residences with each change of station and use property managers. Once we settle down, hopefully in Northern California, we want to transition to more local and possibly self managed properties. We see real estate as a way of getting some tax and small business benefits beyond maxing out tax sheltered investment accounts (TSP, IRA's, 401k, etc).

Bob E. · Answer

I wold by the front end payments on some performing notes.  You don't have to become an expert on notes and since you are buying just front end payments you can keep your investment to value ratio low.

Stan Hill · Answer

I am certainly no stock market expert. That said, the market increase seems unsustainable to me. The economy has been pretty anemic for years. The fed is printing hundreds of billions, if not a trillion in paper money each year. These are strange economic times with regards to the stock market and commodity prices, but I sense a major correction coming. My .02 worth.

Where to save money for a future all cash purchase

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