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

[soholingo]

Gang,

I am on my way to getting 100k.  I can do two things with it:

1.  Buy my residence for the next 20 years. Making me 2 million at the end of that 20 years (assuming an increase.

or

2.  Use it to invest in Real Estate.  Making me ???? at the end of that 20 years.

The obvious advantage to number 1 is that I can enjoy my lifestyle and lock in the interest rates of today (historically low).

Thanks,

Jay

[fdjake]

Jay,

Do you mean PAY OFF your family home (like you owe $100K on YOUR house)??

Or use the $100K to BUY a $1,000,000 house??

[stevie-o]

Jay,

Do you mean PAY OFF your family home (like you owe $100K on YOUR house)??

Or use the $100K to BUY a $1,000,000 house??

Hehehe. I think he meant the latter.

I would tell you to do #2, or at least put part of it as a down payment on a smaller home and use the rest to invest in RE. You'd probably be better off with no mortgage honestly...

[phlemboy]

Well I feel that when money gets in your hands, you should send it down a path where it goes to work for you. If I had 100k, I'd stuff 25k in the bank/CD. Then I'd buy as many rental properties with the remaining 75k as I could.

[soholingo]

Well my thinking is that another 100k and then some is coming, so I want to enjoy the journey.  If all my money is tied up, how do I enjoy it?  When do I get to spend it?    I mean I have REALLY thought long and hard about this.  I buy a 1 million dollar house, I enjoy the house and the lifestyle AND in 20 years I have 2 million dollars maybe 3 million if the house is paid off.  And all I have to do is live, and in the mean while I have enjoyed the home, and my kids have a place the call "my parent's house".

Now depending on where you live $1million may seem like a lot for a home, but in my neck of the woods its about 4500 square feet, 1 - 3 acres and 5Bed / 4.5 bath, 3 Car garage.  And that's enough house for me, the kids, and an occasional guest for the next 20 years.  Currently we are living in a 3 bed town house and the kids are getting bigger and the house is getting smaller.

At any rate I live in the house, and make 2 million.  That's hard to beat...

[rookieNYC]

soholingo,
  I couldn't disagree more with your entire last post..I won't go into detail but I feel you need to have an outside opinion..Possibly a certified financial consultant...There are so many holes in your thinking it's impossible to start to answer..I mean no disrespect either...

[phlemboy]

If buying a house because of the increase in value in 20 yrs. is a good idea, why not buy multiple properties that give you CASHFLOW for the next 20 yrs. When they're paid off, you have assets that give you cashflow AND equity. It's your money, the choice is yours.

[soholingo]

soholingo,
  I couldn't disagree more with your entire last post..I won't go into detail but I feel you need to have an outside opinion..Possibly a certified financial consultant...There are so many holes in your thinking it's impossible to start to answer..I mean no disrespect either...

rookie, no worries.  At least start to poke holes. 

The bottom line for me is that we will need to move in the next 3 years.  No question about it, interests rates are low, housing prices are low, and a house of that magnitude will suite me for the rest of my life.  (The house I am currently living in was bought to assure my kids a good public education, and keep me from having to pay private school).

I could buy less house now, and buy something better in 7-10 years but at what cost?

We mainly speak investment, real estate, but what this is really about is life.  We are here because we want to live better.  Do you live better now and in the future?  Or do you sacrifice now and hopefully live better in the future?  I used to think the latter, but I am really seeing that when I do the former, I make more money and I enjoy life.  The one thing I do that's different is I ALWAYS save some of my money 10% at a minimum.  If I can pay my bills and enjoy the rest so be it.  (so if I have 100k to put down on a home, I already have another 10k that's not going to get touched...)

Lastly, I have always found that my life has worked like this... HUGE HERCULEAN EFFORT, BIG PAY OFF, rest, repeat...  Slow and steady is probably good for some, but my satisfaction and greatest profits have come from really big effort.

Jay

[Dave T]

soholingo,

Just for the sake of argument, let's say you buy your home for $1MM with 90% financing on a 20 year amortization at 6.5%.  If your house doubles in value in 20 years, you will have a free and clear $2MM property.

Your monthly loan payment will be $6710.16.  At the end of 20 years, the principal and interest payments alone will have cost you $1,610,438 out of pocket for your $2MM property.  If property taxes and hazard insurance run around $15K per year, then that is another $300K out of your pocket over 20 years.  If you add the $100K you put down, to the PITI you will pay over 20 years, you will have spent $2MM to own a $2MM house free and clear.

What if you just took that $100K and bought rwo $50K rental dwelling units that each generate a $500 positive cash flow each month.  Your taxes, insurance and repair costs are all paid by your tenant's rent.  You pay nothing out of your own pocket and still have $500 per unit income each month.  After 20 years, at the same rate of appreciation, your $50K properties will be worth $200K (combined) free and clear.  AND, during that same time, you will have collected $240K in free and clear rental income.

Would you rather spend $100K to have $440K in cash and equity at the end of 20 years, or, spend $2MM over 20 years to end up with just $2MM in equity.

You choose.

[Tien]

How much cash do you have now and how much cashflow do you get per month?

[gpre]

Dave T

I've seen this question, in some form or another, come up on this board and others.  This is by far the most thorough and convincing argument I've seen to date.  Kudos for breaking that down so well.

[soholingo]

Dave T,

That makes a lot of sense.   I will run through the scenarios.  But I can't shake the idea that buying my family home now makes a lot of sense, and it takes one worry off my plate.  Its not just a financial exercise its a life exercise.

Jay

[phlemboy]

Here's a radical idea. Why not purchase enough properties that will buy that home for you with their cashflow. With 25k in reserves and 75k, you could purchase some rental properties that produce cashflow. By using that cashflow to earn more cashflow(more properties). That 75k could be put to work to earn more money, then keep reinvesting the cashflow. By delaying instant gratification for long term wealth, you could have your tenants paying for your instaed of you..

[soholingo]

I have my answer.  I need/want a bigger home.  I will get one in the same neighborhood but where I can have my 4/5bed-3/4 bath.  Should cost half as much as the home I was contemplating.

What ever is left will be used for investing.

Jay

[fdjake]

Your answer is THE reason you're successful!!!!

How many times here have we seen people get EXCELLENT advice and they ignore it.

The mark of a TRUE investor is perfectly displayed in your willingness to CHANGE your plan for a benefit that will create wealth instead of short term satisfaction.

GREAT CALL!!!!!!!!!!!!!!!!!!