I've got a decent financial start, but where do I make the money?
Hello everyone! This is my first "real" post around here, and I look forward to seeing what all of you would suggest for someone starting out in this business from my position:
I'm in my mid-thirties, and I'm in a pretty healthy financial position compared to many of my peers. I work in an industry that is completely unrelated to real estate, and I make a healthy income that would probably be considered upper middle class (though I'm by no means rich). I have my home paid off, no debt, and we have approximately $100K in cash in the bank between myself and my fiancé. I'm employed in a government job, which carries a healthy pension with full retirement at age 55.
We arrived at our current position without the original intention of becoming investors. We were both quite frugal with our money early on, having lived through a couple of serious recessions in the time since we finished college. We took the boring and secure approach of paying down our home, and eventually paid the place off about a year ago. Since that time we've been saving cash. We recently came to the realization that our cash "reserve" is getting fairly large, and it's being underutilized in a bank account, where it's only losing value against inflation.
We've debated a few options at this point, and we're both pretty conservative with our desire to explore the fringes of risk. We both feel more comfortable in real estate than we do in the stock market, but it's really hard to decide where to go at this point.
Here are a few of the options we're exploring around the dinner table:
1) Buy the upgraded home we've been considering, and use some of our cash to place a downpayment on that property of at least 20%. We would then rent out our free-and-clear property, which would probably pull between $1,500-1800/month in rent, based on what we've seen locally. We'd then use a combination of the rental income and our salaries to pay down the mortgage on the next place, and move on from there eventually. At least the mortgage interest on the new place would be tax deductible as a primary residence, and we would get a lower mortgage rate on the new property as an "owner occupied" residence. In a few years we could have a couple of paid-off properties, and build our portfolio from there.
2) Continue to live in our current home, and put our cash toward a down payment on a rental property. From what I've seen it's really hard to touch a single family home or duplex in this area for under $250K (at least in decent condition), and the condo market seems a bit saturated to me. But, we could easily put 20% down on an income property if we took this approach, while saving $50K for a reserve, and presumably rent that place with a positive cash flow. Of course, we lose the mortgage interest tax deduction, and will probably have a higher mortgage rate as a result of it being a non-owner occupied property (though I can't say how much higher that rate will be).
3) We could continue to save cash, and likely buy an investment/rental property outright in another year or two (at the most). We'd then have the advantage of not spending any money on a mortgage, and therefore be able to earn more income from the property each month. Of course, that means leaving a large some of cash in the bank for another year or two, which is earning virtually nothing to offset inflation. It also means that we're going to potentially pay at least 5% more for the property we acquire, since the Denver market seems to be continuing to grow, and increase in price.
I'll admit that we're both intrigued by the first option, as we've seen a few places we wouldn't mind living ourselves. We also believe that our current home is likely to appreciate favorably in the next few years.
You'll also surely note that none of the potential paths I mentioned involve using very much leverage. I'll admit that there are some clear advantages to leveraging ourselves a bit, but I'm also pretty leery of doing so (I guess I'm more risk-averse than most). Simply put, we've seen a lot of friends go through hard financial times in the past few years, and don't want to toss away the security we've worked so hard to earn over the past few years. Nevertheless, we do want to provide ourselves with the best future possible, and we're starting this venture with a better profile than most of our peers: good income, decent amount of cash on hand, a paid-off house, and excellent credit.
So, if you were me (us), where would you start?
Thanks in advance for any advice!