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I know where I'm at, but where should I go?
Old 09-06-2011, 05:07 PM   #1
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I know where I'm at, but where should I go?

Hi Everybody,
I haven't been on here in a while and my situation has continued to progress nicely. I am just trying to figure out my next step in life without making too many mistakes. Here is roughly where I am at-
-21 years old
-should make roughly 100-120k this year
-roughly $130,000 in liquid cash
-dont own a home or pay rent right now
-self employed for the last 3 years (real estate agent)
-have a small truck loan (under 10k) at under 4% interest
-no huge bills or payments (cell phone, insurance, entertainment,etc.)
-no college debt

So here are my questions-
-do you recommend that a buy a home cash as a primary residence and continue to save up cash?
-should I buy 2 rental properties cash and take out a mortgage to buy a primary residence?
-should I take out a mortgage on a primary residence and just invest my money elsewhere?

I just need to do something productive with the cash that I have saved so it is not just sitting in a savings account making me virtually nothing. Any insight, ideas or suggestions would be awesome!
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Old 09-06-2011, 07:59 PM   #2
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Obviously you are doing very well at your age. Very odd questions for someone in real estate no? I'd say where you live would be a factor in answering all your questions IMO, but you don't have to say if you don't want to. Owning a home was always considered a no brainer goal, but that's not necessarily true these days in terms of mobility or even the financials, especially at 21. Just read a book that made a good case for renting for most people even if they could afford to buy...
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Old 09-06-2011, 08:51 PM   #3
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Quote:
Originally Posted by kimber6 View Post
-should I buy 2 rental properties cash and take out a mortgage to buy a primary residence?
In favor of this alternative (of your three) are the facts that (1) property values are low, making it a good time to buy, and (2) interest rates are low, making it a good time to borrow.
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Old 09-06-2011, 08:58 PM   #4
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Quote:
Originally Posted by Midpack
Obviously you are doing very well at your age. Very odd questions for someone in real estate no? I'd say where you live would be a factor in answering all your questions IMO, but you don't have to say if you don't want to. Owning a home was always considered a no brainer goal, but that's not necessarily true these days in terms of mobility or even the financials, especially at 21. Just read a book that made a good case for renting for most people even if they could afford to buy...
It is an odd question being that I am in real estate. But I am also considering the fact that real estate investors/agents have been telling people for years that being a homeowner was the best investment they could make, which hasn't turned out well for many. Just trying to make the correct moves in the right order.
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Old 09-06-2011, 09:03 PM   #5
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Good job on the 130k liquid cash. Do you have any invested? Good time to invest some.

For me, I lean toward rentals but what is your experience and/or knowledge of landlording? Do you plan to be in that area long?

Will your rentals be in your name or LLC?

Who will perform rental repairs and maintenance?

Other questions:
What is your retirement approach... any self employed 401k or IRA strategy? This can help reduce your taxable income.

If you are living rent free now, why do you need to own a place? Depending where you are at, real estate will be affordable for awhile IMHO.
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Old 09-06-2011, 09:34 PM   #6
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Originally Posted by Aiming_4_55
Good job on the 130k liquid cash. Do you have any invested? Good time to invest some.

For me, I lean toward rentals but what is your experience and/or knowledge of landlording? Do you plan to be in that area long?

Will your rentals be in your name or LLC?

Who will perform rental repairs and maintenance?

Other questions:
What is your retirement approach... any self employed 401k or IRA strategy? This can help reduce your taxable income.

If you are living rent free now, why do you need to own a place? Depending where you are at, real estate will be affordable for awhile IMHO.
If I go the rental route they would be under my Corp. My family owns a good amount of rental property so I have a couple of good mentors I could rely on. I have 20k invested in a short term bridge loan that pays out in September so that will be off the table shortly. Other than that it's just in the bank doing my very little good. I am rent free right now but need a place of my own in the future.
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Old 09-07-2011, 10:26 AM   #7
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Quote:
Originally Posted by kimber6 View Post
It is an odd question being that I am in real estate. But I am also considering the fact that real estate investors/agents have been telling people for years that being a homeowner was the best investment they could make, which hasn't turned out well for many. Just trying to make the correct moves in the right order.
Greg makes the case for, it is a good time based on past history. The book I read that advocates renting for most is The Great Reset if you want to read what one author thinks. Beside the risk of going upside down, still possible in some areas (hence why where you are considering seems a factor IMO) - he believes mobility will become ever more important in the future (being read to sell and move for work, he contends that part of the severity for the current recession is people who can't afford to move where there is work, they're trapped by home ownership).

What do real estate insiders think? Not to be cynical, but what do they think among themselves when not selling customers?

And HGTV may be a poor source, but they seem to say that rents have fallen (further) below mortgage costs in the last few years.

I wish you well...
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Old 09-07-2011, 10:33 AM   #8
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Rent versus buy, here we go again.

Seriously, to the OP, at 21 do you know you're going to be living in the place you want to be in for a long, long time? If you eventually marry and have children, do you know this is where your spouse will want to be, and is it a place you'd want to raise your kids in?

If you aren't rock-solid certain that you will be in the place you want to live for a long time -- like a decade or more -- then I wouldn't buy a primary residence at this point, especially at an age where a lot of "life changing events" are still in the future. In general I take no side over the war of "rent versus buy" other than that it's very situational and one isn't always better than the other.
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Old 09-07-2011, 10:56 AM   #9
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If you aren't rock-solid certain that you will be in the place you want to live for a long time -- like a decade or more -- then I wouldn't buy a primary residence at this point, especially at an age where a lot of "life changing events" are still in the future. In general I take no side over the war of "rent versus buy" other than that it's very situational and one isn't always better than the other.
That's what's meant by "mobility" and why the rent vs buy debate may be a little different this time. Boils down to whether we just went thru a garden variety recession or a reset...I believe it's the latter, but who knows.
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Old 09-07-2011, 10:57 AM   #10
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I would take out a mortgage on primary residence when you find the deal.

It looks like you have enough exposure on rental property to decide for yourself.

I would also call around to some credit unions and start a CD ladder with all that cash. Might as well get 2-3% on that money and consider it an Emergency fund.

Do you have a way to shelter some of that income via sep, ira, or other tax deferred acct?
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Old 09-07-2011, 01:11 PM   #11
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Do the math and find out what your ROI on a rental would be. If it's 5% a year, could you reasonably beat that in stock investments?

Depending on your area, buying a home could be a good decision. If your circumstances change, you can always rent it out. Don't forget the maintenance and taxes you will pay.

If you're self employed, you should have an individual 401k. You can dump 15K+20% up to 50K of your income tax deferred.
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Old 09-07-2011, 06:52 PM   #12
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Do the math and find out what your ROI on a rental would be. If it's 5% a year, could you reasonably beat that in stock investments?

Depending on your area, buying a home could be a good decision. If your circumstances change, you can always rent it out. Don't forget the maintenance and taxes you will pay.

If you're self employed, you should have an individual 401k. You can dump 15K+20% up to 50K of your income tax deferred.
I know the real estate game quite well but I am not very well versed in stocks, so that makes me a little nervous. When I buy a home I do plan on staying for quite some time so I really don't think renting makes any sense for me. My dilemma comes in at the point of whether I should pay cash or not for a primary residence. Basically, if I pay cash I will have to wait a while before I have the cash again to do any significant investing. If I take out a mortgage for my primary residence I will be able to do more investing right away. I don't really know how confident I will be doing any higher risk investing (fixing/flipping/building) if I have a mortgage on my primary house hanging over my head. I know most people my age take out mortgages because they have to. I am not in that position so it is difficult to make the wise decision because I really have no other past experience to base it from.
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Old 09-07-2011, 07:20 PM   #13
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Paying cash for your home would be awesome, but yes, you could always take some of your nest egg and invest it so that your money grows. It depends on your risk tolerance. Where do you live? How stable do you feel your job is given the real estate situation in your area? Why not split the difference and put 50% down in order to have a low mortgage, and then use the remaining capital for an emergency fund and investments. If you do the individual 401k, which you absolutely SHOULD do, you're going to be forced to put close to $40,000 per year into savings or stocks/mutual funds in order to shield that income from taxes.

I know you're familiar with real estate, but it may not be the best place to invest given all of the other options out there. I would recommend exploring different investment avenues to find the best places to put your money for the next 2-5 years.
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Old 09-07-2011, 07:26 PM   #14
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Would you suggest fully funding that individual 401k before investing in any sort of rental property?
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Old 09-07-2011, 07:33 PM   #15
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Yes, you should always put as much money into tax shelters as you can before putting it towards other things. You'll probably have plenty of money left over to begin buying rental properties anyhow. At this rate, you're most likely going to be very well situated with plenty of retirement income, as well as rentals by the time you're 30.
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Old 09-08-2011, 10:38 PM   #16
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Thanks to all of you for your advice. It has been much appreciated!

Now to take some sort of action...
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Old 09-10-2011, 01:48 PM   #17
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I suggest buying one rental house now with a mortgage and living in it. So if you find one you don't love but would make a good rental buy as a primary residence with a mortgage of 80% or less. Then move in and get settled. Buy your lawn mower and furniture and plan to stay for a while like one year. There are cost to starting out so give yourself a year to get established as a homeowner.

Then move to a new rental house the same way except maybe paying cash and find a renter for the first house. Give it a year to get settled in.

Then move to the home you wish to live in for a decade or more. Find a renter for the second rental house.

This will give you two years, low mortgage rates on any mortgaged homes and time to get used to dealing with houses and renters and owning more lawn care and other outdoor things.
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