$100k - Buy a family home for $1 million or use it to invest in RE?

[ogibson_atl]

Its not just a financial exercise its a life exercise.

Jay

Based upon Dave's math, it will cost you 330K to "enjoy" the next 20 years.  Life is worth investing in - even if you only have memories as a return on your investment.  I say go for it!

Keep in mind, it may not make financial sense.  Perhaps you could buy a 1MM home that may have been valued at  2M during the housing boom.  Perhaps if this house would be worth 4-5M in 20 years, you would get more folks around here encouraging you. 

In the best scenario, you would buy your owner occupied home - at the same "discount" and scrutiny as you buy your investment properties.  Then you can enjoy and invest at the same time.

[Dave T]

Based upon Dave's math, it will cost you 330K to "enjoy" the next 20 years. 

I don't see your logic.  Based upon my math it will cost soholingo $2MM to enjoy the next 20 years AND he will forfeit the opportunity to add $340K to his wealth.  So I guess you could say that it will cost him more than $2.3MM to enjoy the next 20 years when you total the cost of the luxury house and the cost of the opportunity he has missed.

If soho is considering a $1MM home purchase, then we must also assume that he has the $8000 or so in monthly income that it would take to make the house payment.  If he buys a $500K house, does it follow that his housing expense will be $4000?  If so, then he has $4K each month in discretionary income to use for real estate investing should he purchase a $500K house.

What if soho rented instead?  I bet he could rent that $500K house for $2500 - $3000 per month and have even more money to invest in real estate.  While he is renting, he has the bigger house he wants for his family with none of the costs of ownership.  His landlord will pay the property taxes, hazard insurance, and the cost of repairs and maintenance.

Maybe soho could get that same house on a lease option for three years.  Pay less rent than he would pay to own the house, but lock in his purchase price now.  If he also got a nominal rent credit, so much the better.

[soholingo]

Based upon Dave's math, it will cost you 330K to "enjoy" the next 20 years. 

I don't see your logic.  Based upon my math it will cost soholingo $2MM to enjoy the next 20 years AND he will forfeit the opportunity to add $340K to his wealth.  So I guess you could say that it will cost him more than $2.3MM to enjoy the next 20 years when you total the cost of the luxury house and the cost of the opportunity he has missed.

If soho is considering a $1MM home purchase, then we must also assume that he has the $8000 or so in monthly income that it would take to make the house payment.  If he buys a $500K house, does it follow that his housing expense will be $4000?  If so, then he has $4K each month in discretionary income to use for real estate investing should he purchase a $500K house.

What if soho rented instead?  I bet he could rent that $500K house for $2500 - $3000 per month and have even more money to invest in real estate.  While he is renting, he has the bigger house he wants for his family with none of the costs of ownership.  His landlord will pay the property taxes, hazard insurance, and the cost of repairs and maintenance.

Maybe soho could get that same house on a lease option for three years.  Pay less rent than he would pay to own the house, but lock in his purchase price now.  If he also got a nominal rent credit, so much the better.

Dave,

Funny you mention renting as that was my plane two years ago.  Sell my overpriced house, and pocket the cash, rent, and use the windfall for investing.  It kills me to think of how much time I have lost because of that lost opportunity, but I am going to leave those thoughts behind.

Tha said, you have a great idea.  Rent/lease with the option to own, and I know some of my neighbors are going to feel the pinch soon.   That's a good strategy to keep in my back pocket.  In the mean while I have work to do... 

[rookieNYC]

soholingo,
  I thinks its very admirable how you think of making your family comfortable first...You are what a parent should be, selfless...Its a decision my father would make as well...You will be in that home before you know it..

[Deal Hunter]

Ahh, to be young again.  To feel invincible and have no doubt that you can and will have the capacity and opportunity to earn money all along the way.  To have that irrepressible optimism about the constant appreciation of real estate, the strength of the U.S. economy to consistently employ you and provide you with a source of income.  I remember those days.  *sigh*

[Brons]

I disagree with your decision.  I know you already made up your mind before posting this thread but I'm going to comment anyway.

Some things you should know about the equity in your home.

First of all: you pay for it yourself. It's some sort of forced saving through mortgage payments.

Second: how sure are you the housing prices are at the bottom right now? If you buy it now and we have another year of falling housing prices you will likely not make that 2mil. If the housing prices fall 5% (fictional number) you will need more than a 5% increase the following year to BREAK EVEN. That are 2 or 3 lost years.

Third: what are you going to do with that equity when it's mortage free? Take up another mortage or something? I'd rather have an increasing income stream the coming 20 years than paying of a mortage for 20 years only to take out another.

Fourth: inflation. So you home is worth 2mil in 20 years, it's only worth, lets say, 1,5mil 2008 dollars. Don't underestimate this.

So all in all I'd rather live in a 300k house for a few years than lose money on a 1000k house. I don't know what luxury you and your children expect from you but I can get a lot of decent houses for 300k.

[phlemboy]

I disagree with your decision.  I know you already made up your mind before posting this thread but I'm going to comment anyway.

Some things you should know about the equity in your home.

First of all: you pay for it yourself. It's some sort of forced saving through mortgage payments.

Second: how sure are you the housing prices are at the bottom right now? If you buy it now and we have another year of falling housing prices you will likely not make that 2mil. If the housing prices fall 5% (fictional number) you will need more than a 5% increase the following year to BREAK EVEN. That are 2 or 3 lost years.

Third: what are you going to do with that equity when it's mortage free? Take up another mortage or something? I'd rather have an increasing income stream the coming 20 years than paying of a mortage for 20 years only to take out another.

Fourth: inflation. So you home is worth 2mil in 20 years, it's only worth, lets say, 1,5mil 2008 dollars. Don't underestimate this.

So all in all I'd rather live in a 300k house for a few years than lose money on a 1000k house. I don't know what luxury you and your children expect from you but I can get a lot of decent houses for 300k.

I believe he changed his mind on the original idea. He's looking to purchase or rent a home in the 500k range and use what's left for investing. Like Dave T said. Soho must have the ability to make a the pmts. on a 90% LTV loan on a $1M home ($8000). If he cuts that in half, He should have $4000/mo. to invest.

[dr_white]

The most ironic thing I always hear from people that want to make money is that they have no plan on how they will enjoy all that money they make. They all know that they want to make lots of money, but they don't know how, or on what, they will spend it to enjoy having it. I suppose someone may receive enjoyment from having lots of it, but just having a quantity of money doesn't equate to enjoying the benefits of that accumulation.
So, I think I can see soholingo's dilemna. Does he enjoy the benefits of money now or later? It would seem the overall general jist of real-estate is to build that money accumulation over time. Aside from slick talking salesmen that have a book or program to sell you. Mortgages usually run you 30 years, sometimes 15 if you can work it right. Renters pay off your mortgage over those 30 years. You sell down the road when it appreciates. Etc. Etc. Most people that get into real-estate may initially dream about the $19483187418732487817341626387132989 dollars to be made in real-estate per month, but once they get in, and if they stay in, they realize that real-estate is gonna be a long-term activity. True, there are people that make real-estate their job/business and they move properties quickly. But, even here on these forums, I would say its about half and half. Outside of these forums, I'm sure we all know many, many people that come and go yearly, if not monthly or even weekly, on the get-rich-from-real-estate bandwagon. The whole point being that real-estate is, for the most part, a long-term activity.
Now, soholingo has an opportunity to enjoy the benefits of real-estate quickly. That being living in a nice house for most of the rest of his life. It all comes down to a balancing game of when do you want to enjoy the benefits of money from real-estate. True, you can turn $100,000 dollars into multiple millions of cash in your pocket when you are 60+, 70+, 80+, but what are you going to be able to enjoy with that money? Bingo at the casinos? Shuffleboard on a boat? A "nice" retirement home? Golf? *YAWN* At 70+ one most likely won't be able to enjoy a 300+ MPH car. Going 4x4'ing over boulders in backcountry. Heli-skiing on remote mountains. Big-game safari's in Africa. Rock climbing and rapelling. Waterskiing. Scuba diving. Parasailing. Spelunking. And last, but most definately not least, sex in exotic locations.  True, there are those few older people that are amazingly active past their 70's, but the majority of people just won't be able to enjoy things in their 80's that they could have enjoyed in their younger years. Even a huge house, when you're in your twilight years, you don't want to clean that thing. Arrange all the furniture. Walk up and down all those stairs. Do the yard work.

So, one has to decide what they want from the benefits of real-estate profits. Do you want to enjoy the wild, energetic things of youth? Or do you want to enjoy the peace and calm of the later years? Figure out which one you want and then direct your money from real-estate onto that path.

From the sound of it, I would say to soholingo, burn it now, because you may not be able to enjoy it later.

In my case, I would say, burn it now, because I may not be able to enjoy it later in the way that I want to now.

 Dean

[Brons]

The only thing he gets from buying the house is... a house. If he wants to buy a new flashy car or go on a nice vacation he can't do it from the appreciation of his home. Just something to thing about.

[Dell Investor]

Forget CD's by the way......A nice annuity will get you a better return, not taxed every year, can access up to 10 to 15 percent w/o penalty nor loosing acquired interst(try that with a cd)  JMHO!!!!!

[Bluemoon06]

in my neck of the woods its about 4500 square feet, 1 - 3 acres and 5Bed / 4.5 bath, 3 Car garage. 

You need to move.  In my neck of the woods that house should cost you $300k. Here you can be rich and actually live like it.

[phlemboy]

So, with 100k, you can put yourself in debt for 900k for the luxury of living in a nice $1M home. In 20 yrs. he would have paid a total $1.5M from HIS OWN POCKET. Not to mention the taxes,ins. and maintenance from that same pocket. Wealthy people become wealthy by purchasing assets that provide cashflow to provide the lifestyle they desire. The wealthy don't "work" for money. Their money works for them. If there's an asset you want, find an asset/assets that will provide the cashflow to purchase it for you. That's just my 2 cents.

[rookieNYC]

Guys,
 Soho already said he was going to hold off on this purchase until a later date..I think he was fully aware that this wasn't a great monetary investment but it was a choice to make his family more comfortable..IMO there isnt a price for privacy and peace and quiet...

Early in my career I lived in a nice condo in NYC and I hated it..I heard and smelled everything..After moving out to the suburbs and into a nice home I can say there isnt anything better..If you have it to spend a nice home is really a great thing..But only if you have deep pockets,leverage is not the answer...

[soholingo]

Dr. White has it right.  I am constantly asking myself when do I enjoy the money?  I know I can earn a good living, but when do you spend it.  I have a habit of buying the best I can get and then holding on to it, for a LONG time.  Which is why I like the idea of buying a house now.  Low interest rates, and appreciation.  And one thing I keep hearing is the house will be worth two million in 20 years.  Its more likely that it will be worth 4 million in 20 years.  But I would enjoy the house, the kids could always come back to their 'room' from college (like i used to do), and we would even be able to take in an inlaw.

That said, there is the law of diminishing returns...  For twice as much money do I really live twice as well?  Who knows?

Besides, I am not buying the house, unless I can get it for 500k. 

Jay

[Roger J]

Jay, you've already hit the nail on the head with money.

As your property, buying a $500K house doesn't mean you'll only get 1/2 the house of a $1M property, especially if you learn to look for the real deal.  You may even be able to get a $1M house for $500K.

Same with the money really.  It's not, and shouldn't be, save now, spend later.  Of course, it shouldn't be spend now and save nothing, either.  The best course of action is to do both.  Where you're at in your life and what you plan to do determines how much of which you need to be doing at the time.

If you haven't yet, the first thing one should do is to create a cushion, or reserve, fund.  How much again depends on you.  Some like 3 months of income/bills, some 6.  Others may want 10 years of it.  Your ability to generate cash and your current lifestyle/bills/etc should determine.

After that, determine how you want to invest then make a method to use your money to do it.  I've seen varying theories on percentages, but most agree that you set aside a certain % of income to investing, saving, bills, and "fun" money.  Example:  60% to paying bills, 20% investing, 10% savings, 10% fun.  The fun money is yours to blow on whatever you want, whenever.  One book on the subject even makes a point that you HAVE to use it in the month you make it.  You decide.

Using only $10K of that money can reap big rewards if handled correctly.  Just one way (since this is a REI site) is to use it as a downpayment/operating funds to buy a property with an ARV of $100K for only $50K.  Sell it for $75K and you've got $25K in place of $10K.

Raj