I'm sure there is some type of formula for this but thought i'd post it here for some feedback. I am trying to determine which of the following 2 options gives me the better return on my investment. There's a good chance I'm leaving out some relevant information so please let me know if I forgot something relevant.
I have money in mutual funds that has given me a 2.1875% return a year.
I am in the process of purchasing a condo that will be used as a rental.
I am trying to determine whether the money in my mutual funds account would be better utilized as a higher down payment or remaining in my mutual fund account.
With 25% down payment the property is going to produce a cash flow of $424 a month. The more money I put down obviously the higher the cash flow will be.
How do I determine how to optimally use my funds? Hopefully that was understandable lol. Thanks for the help.
Welcome @Brett Fox
Going over your questions:
1) 2.1875% return ... Is that for 2015 alone? If so, you're right on par with the S&P. If that is for the past several years, you funds are underperforming ~ by a long shot. (For reference ~ I invest heavily in Total Market Vanguard Funds, and I believe last year I was right under 13%) Average safe withdrawal in retirement is roughly 4% (Adjusted for inflation). This really isn't a question geared towards BP. I've gotten most of my investment information from www.bogleheads.org Great resource, much like BP for Mutual Fund/Lazy Investor investing.
2) More details on the Condo are needed to tell you whether or not its a good deal, or what may be better.
If you decide to move forward in REI, plan several exit strategies if need be prior to getting started. Join a local REI club or association and attend some of the meetings. Learn your local market inside and out and go from there. Make sure to do your DD (Due Diligence) on everything.
Can you provide details. Present value of the mutual fund? Value of home loan, interest rate, down payment, rental revenue or met income monthly our annually estimated for simplicity.
Also, any upfront payments, agent, points for loan. Provide what you can.
Just for more clarity, I will be living in this home for the first year or so then it will turn into a rental property.
Purchase Price $200,000
Association Fees $250/Month
Property Taxes $3,700/year (will be reduced to around $3,100 after first year)
Interest rate 3.75%
As far as my mutual funds go they were basically low risk "SHORT-TERM BOND-C."
It has gone from $80k to $87k in 4 years time.
I think the answer to what I'm asking is that if I had to choose between investing in the same funds or putting more money down in the condo the correct answer is the condo because the rate of return on the mutual funds (2.1875%) is less than the interest rate of 3.75%. Is that correct?
But really the optimal thing is to stick with the 25% down and just invest the mutual fund money in something that will show better returns?
Thanks for the feedback.
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