Big Decision to Make

4 Replies

My wife and I are just starting out as Real Estate Investors and are looking for our first deal. Trying to get creative with our financing we ended up selling our house. However thinking that we should get settled first we have a new home under contract to purchase. It hasn't been built yet. Since we haven't paid the full deposit on it now we are considering walking out of the deal and using the profit of our townhome sale to buy some rental properties out of state. We are concerned that, since we are both w2 employees not buying a property will kill us on taxes and that the rental properties won't be enough to offset that. Should we buy our home so that we don't have to worry about it or rent ourselves so that we can use the money to buy 1 or 2 rental properties probably in Texas or Memphis. What do you guys think? Thank you very much.

That is a very broad question. I am assuming that you have significant W2 income to be concerned about taxes? You left out your goals, what are you trying to accomplish?

I would suggest that you rent. Personal residences are not an asset. Personal residences tie you and your resources up. 

How much in taxes are you talking about? If you are concerned about tax advantages versus investing then that is a math problem. If owning a personal residence saves you $7,000 in taxes on an annual basis but investing in real estate gets you a return of 15% on $100,000 then you should be able to make a decision based on the math. Rental properties have their own tax advantages.

Goals- define what your goals are.

Plan- work backwards from your goals to define your plan to reach those goals.

Good decisions- base all of your decisions on math and not emotions.

Personally I would not recommend buying a personal residence until you at least have the passive income from other investments to make the payments on that residence. Personal residences used to be a retirement vehicle, but I think they are now the biggest obstacle to wealth building. When pensions and social security was considered dependable then owning a personal residence was a way to store up equity. Neither pensions nor social security may be there for anyone but the boomers. Everyone else needs to accumulate wealth at a faster rate than previous generations and owning a personal residence is not the appropriate vehicle for that, unless it fits within your plan.

DIY Retirement

Step 1: Passive income pays mortgage on personal residence (Social Security Replacement)

Step 2: Passive income replaces W2 income (Pension Replacement)

Step 3: Accumulate other wealth to leave to heirs (Legacy wealth)

If you can get to step 2 while still being employed then you can retire at anytime.

The old mentality was work until 62-65 and save 2 million for retirement, and live off of the interest of $100k per year. No one gets wealthy by saving, they just survive. The new mentality is to replace all active income with passive income of about $8,400 per month using the $100k model. What is easier to do and can be done sooner saving 2 million or replacing $8,400 per month in passive income with rental properties? Buying a personal residence and dumping resources into it puts you on the 2 million track. That 2 million may be gone by the time you die and your heirs will get the junk left in your house and they will be running the stupid rat race themselves. Or you can build passive income that pays for your lifestyle, and you can leave your heirs everything that you have built so that they can hopefully build on it more. You can also use 75-80% of other peoples money (banks) to go the 8400 route. The 2 million route is money out of your own pocket.

The American Dream and 401Ks are the biggest frauds perpetrated on Americans. People in other countries build wealth by owning businesses and meanwhile in America we just buy stuff like houses that we cannot really afford and think we are making good decisions. Meanwhile the average American has less than a $1,000 dollars in savings. Very few people could see the housing crisis in 2008 until it happened and in hindsight everyone asks why didn't we see the obvious signs? Wait until GenX and GenY retire on the 401K myth, if we don't change our thinking we will be in a world of hurt.

Hopefully that helps. If not feel free to ignore it.

Leland Barrow thank you so much for your response.  It definitely helps us a great deal.  In terms of our goals as investors long term is definitely buy and holds to build enough passive income to work because we want to not because we have to and to have the freedom to travel and do the things that most people think they can only do when they are older.  I would like to start buying rentals now, my wife is more interested in flipping first.  We do make decent w2 income.  Right now between interest and property taxes we were reducing our taxable income by around 20k.  We both are putting 10% of our income towards retirement and using the FSA for Health and Dependent and we are still owing money on taxes.  I have a part time personal finances business that helps us with taxes but I want to transition out of that and just do Real Estate.

I think you hit the nail on the head when you mentioned math vs emotion. The idea of the house was to give our 3 year old stability and have our house to just focus on the business from then on but in reality the house would give us less leverage and freedom. The house is obviously the emotional decision vs renting and buying 1 or 2 rentals would be probably the one that really puts us towards our goals and dreams.

This particular house is on an area that's booming and we thought that for the price that we are getting it it was a good deal long term but it will take our money instead of providing us with income.

Thank you.

@Leland Barrow had a great response for determining your goals and objectives. One option I'm a big fan of is the two year flip. Buy a fixer upper, live in it as your primary residence for two years and then sell it without having to pay taxes on the first $500,000. If you don't want to live in a fixer upper you can finance a property with a 203k loan and move into a finished renovation.

I don't think new construction is the best option, mainly because if the houses are in a development they tend to go down in value the first few years before they start appreciating (provided you are in an area that is not ripe with speculation).

Best of luck.


Thank you Tamara.  We are meeting with a CPA today to discuss all the tax implications for every option but we are leaning towards not buying and renting for a while and with the money for the down payment either:

- buying a rental property or two

- buying one rental and looking for a fixer upper with a 203k loan

Our main concern now are schools for our daughter because she only has one year left before going to kindergarten so we have to be in the are of the school she will be attend by early next year.

We definitely need to make the decision that our priority will be our Real Estate business and not our W2 jobs and take the option that provides us the most flexibility and make the best of it for our daughter.  Thank you