Think of it this way.
you have 100k today you could go buy 1 - 100k house with all that cash and assuming it meets the 2% rule(hard to find now) you will be bringing in 24k a year on that house
or you use the 100k to buy 5 100k houses and put 20% down on each. now you're bringing in 120k a year across those houses minus the small mortgage payments ~29k ...
which of these seems more like wealth building
Thank you for your response.
I understand what you are saying, and from a purely mathematical perspective, you are right. I have a greater chance of building wealth when I leverage OPM (other people's money). I am not entirely sure I want to put myself in that kind of a situation though. I know I will be making less money in the long term, and I missing out on all the gains, but I will sleep better at night knowing I don't have to worry about house payments.
Here is my strategy:
1. Save enough money to have a very large down payment
2. Buy a new house at the end of this year or early next year
3. Rent this place out (I live in a college town, so I am assuming it won't be too much of a problem)
4. Aggressively pay off the mortgage on the new house (my income + rent income)
5. End up with 2 paid off houses within the next 10 years.
All of this while I continue to max out my 401k and Roth IRA each year.
Boarder makes some good points. You've also left out the most important part of the equation, which is how much do you think you could rent out your current home for? In general, single family homes are not great wealth building investments. You're usually better off buying duplexes to quadplexes for investment purposes. You should also take into account the opportunity cost of tying that money into a single house and not being able to take advantage of tax-advantaged investments in the market. Further, even if you are hitting your IRA and 401k contributions, the market is very likely going to outperform real estate over a long time horizon. Even further, the market is a low tax burden passive investment whereas real estate is a high tax burden incredibly active investment. Not to say you shouldn't invest in RE, but have you sat down and seriously considered the trade-offs between the two?
Thank you for your advice.
At the moment, I am not thinking about becoming a "real estate investor". I am wanting to take advantage of the fact that I have a paid off home, so that I can move into a better home, and eventually end up with two homes.
I live in a college town, therefore I am fairly confident that I should be able to find renters. A 4 bedroom house is renting for around $1400 here, and considering I am very close to the university, I am assuming that I shouldn't have a lot of problem finding renters.
I agree with Boarder. The reason real estate is an excellent path to wealth for many people is not the housing market itself -- it is leverage. If you put $100K into stocks and the stocks go up 10%, you have a 10% return on your investment. If you put $10K down on a $100K home and the value of the house goes up 10%, you have just doubled your money. Meaning that that same $100K, split across 10 homes, with a 10% growth in home value, would bring you $100K in profit instead of $10K. Buying real estate is the one area in which "normal" people get to take advantage of leverage; if you can get a tenant to cover your costs and throw off profit, at the same time that leverage is providing an excellent ROI, it's a win-win.
[All numbers for illustrative purposes only. Necessary caveats about danger of leverage. Etc.]
But if you focus instead on paying off the mortgage as fast as possible, you lose that boost. At that point, your "profits" come from the overall gains in the housing market. And if you compare those historic gains to those of the stock market, the housing market as a whole is a loser -- sure, there are hot areas and periods, just like there are hot stocks and bull markets, but over time, the housing market has historically run closer to inflation, while the stock market has historically thrown off 10% +/-.
You bring up some excellent points. I will definitely give this some thought.
However, my current home paid off, and the plan is buy another home, and rent out this one so that eventually I will have a second paid off home.