Savings&Mortgage or No Savings&No Mortgage

[Jafari RastaMan]

How much would you invest in real estate as a young professional with no wife or child?

 

[SlumTodd_Millionaire]

Interest rates are at incredible lows. Putting down a big down payment makes no sense. In fact, I'm opposed to putting down anything more than a minimum down payment until interest rates top 8%. Unless you're a complete dolt, you should be able to exceed 8% from your investments. That said, when paying a small down payment, you also have to factor in the cost of PMI, which can be significant. Remember, you can't get rid of the PMI until you're down to 80% loan-to-value, which could take a good long while, depending on which part of the country you're in. The lower your down payment, the higher the PMI. Factor that in when figuring whether the investments produce more income, or the greater down payment would. But, with interest rates well under 4%, even a 5% down payment's PMI is probably far better than losing the investment returns.

As far as real estate in general, buy now! We're at the very leading edge of a rebounding real estate market. Get in now while both prices and interest rates are low. Don't liquidate your stock portfolio to do so, because it's unlikely that real estate investment returns will exceed equities over the long haul, but if you have cash available for a real estate down payment, go for it.

 

[rframe]

I recommend having 1-2 months in immediately accessible cash/savings. Then 6 months in a money market where you can write a check and have access quickly.

I would not buy a condo, they are notorious for poor return on investment. I'd buy a decent duplex. Learn how to screen quality renters and you can have someone else paying your mortgage and/or giving you a stream of cash flow every month. Later if you get married with kids and want something more private, you can rent both sides and have double the cash flow and they will pay for the mortgage on your new house.

 

[SlumTodd_Millionaire]

Then 6 months in a money market where you can write a check and have access quickly.

I've never really understood why people recommend this so often. Having six months of income sitting practically idle all the time is just heresy to me. For someone making $100k per year, that $50k in cash sitting in a money market basically represents half a million dollars after 30 years of investment in a moderately conservative portfolio of equities and bonds. I would say $450k in returns is a lot to sacrifice for the marginal increase in liquidity that having it in a money market provides.

I keep a couple of months' income in cash, and everything else goes into investments. If something dire comes along, I can sell stocks or treasuries and have access to the money within a couple of days. And really, what's going to come along where you need access to half a year's salary right now? To me, it just seems like mild paranoia.

I would not buy a condo, they are notorious for poor return on investment. I'd buy a decent duplex. Learn how to screen quality renters and you can have someone else paying your mortgage and/or giving you a stream of cash flow every month. Later if you get married with kids and want something more private, you can rent both sides and have double the cash flow and they will pay for the mortgage on your new house.

I pretty much agree with this, although I would recommend a property manager handle tenant screening and management of the property if you're not going to be living there.

 

[Cessnaflyer]

I agree that you should pick another property and mortgage it. It is an amazing free money time right now. I even bought a car because of the free money. Normally I like to buy everything up front or with few payments but it just makes more sense to use the extremely low rates to your advantage. By the end of May I hope to have my brokers license so I can get on some of this real estate action.

 

[SteveC]

Usually when I hear that kind of advice they are talking about a reserve to cover a number of months of expenses, not income. For some of us there is a substantial difference in those two numbers.

[/side-note]

 

[SlumTodd_Millionaire]

Usually when I hear that kind of advice they are talking about a reserve to cover a number of months of expenses, not income. For some of us there is a substantial difference in those two numbers.

[/side-note]

Sadly, I don't know too many people who would have a different number for each, Steve.

 

[Cessnaflyer]

Also is this a fee simple or a leasehold?

 

[SlumTodd_Millionaire]

By the end of May I hope to have my brokers license so I can get on some of this real estate action.

Smart man! FYI, the man pictured in my avatar has purchased real estate brokerages all over the country over the past year, now holding enough brokerages in Berkshire Hathaway to account for 75,000 real estate agents nation-wide. He's also gobbled up companies and equities in industries that benefit from housing construction. When Warren Buffett goes into real estate in a big way, when he's never really touched it before in his career, people should take notice.

 

[Cessnaflyer]

Sadly, I don't know too many people who would have a different number for each, Steve.

Ugh ,that makes me sick. I think living in Hawai'i shaped my wife and I for the better. We realized how few material things and space we needed to live in.

 

[Cessnaflyer]

Smart man! FYI, the man pictured in my avatar has purchased real estate brokerages all over the country over the past year, now holding enough brokerages in Berkshire Hathaway to account for 75,000 real estate agents nation-wide. He's also gobbled up companies and equities in industries that benefit from housing construction. When Warren Buffett goes into real estate in a big way, when he's never really touched it before in his career, people should take notice.

My grandmother-in-law has her own firm and even paid for my online class. I would be stupid not to take the opportunity. I've observed a few of the processes and so far I would've been $10k higher with the two little properties that sold! I can't get through the required 90 hours of study time fast enough.

 

[SlumTodd_Millionaire]

Ugh ,that makes me sick. I think living in Hawai'i shaped my wife and I for the better. We realized how few material things and space we needed to live in.

You'd be amazed how many people I fly with who are making $180k+ per year, living in a place like Atlanta where the cost of living is quite low, absolutely need to have 100 hours of credit each month just to pay their bills. Amazes me.

 

[jtrain609]

Also is this a fee simple or a leasehold?

How do you take out a mortgage on a lease? Or even if you could, why would you?

Or were you asking if it was a mortgage or an installment land sales contract?

 

[rframe]

I've never really understood why people recommend this so often. Having six months of income sitting practically idle all the time is just heresy to me. For someone making $100k per year, that $50k in cash sitting in a money market basically represents half a million dollars after 30 years of investment in a moderately conservative portfolio of equities and bonds.

Perhaps I wasn't clear. An emergency fund is not 6 months of income, it's 6 months of essential expenses: things like mortgage payments or rent, utilities, insurance dues, food, auto expenses. Admittedly, 6 months is arbitrary, but its a pretty reasonable buffer for most people.

Now, sure, having that money sitting in a better yielding investment making returns seems great, right up until you need that money and the market has dropped and you need to pull your money out at a loss. Diversification starts with cash, and increases in potential and risk from there. Most people get into trouble when they dont have cash available.

One of the things the financial downturn taught many people was that tomorrow you might be without income, and getting another source of income isn't as easy as it has been in the past. What could be just a difficult situation can become a full blown financial emergency if people dont have the cash to roll through tough times.

I worked for Mattel when they laid off 10,000 workers globally, I had some friends who went straight into emergency panic mode. Thankfully due to my wife an I planning ahead, I was able to patiently find the right job that made sense for my career because we were comfortable and could live without any income for a year or more... it was a low stress time and I found an even better job.

 

[Cessnaflyer]

How do you take out a mortgage on a lease? Or even if you could, why would you?

Or were you asking if it was a mortgage or an installment land sales contract?

I'm not talking about taking out a mortgage but they see a condo listed and sometime it's a leasehold property for that price.

 

[jtrain609]

Indeed. If I lose my job, the entire economy has likely tanked, taking my investments with it.

 

[SlumTodd_Millionaire]

Perhaps I wasn't clear. An emergency fund is not 6 months of income, it's 6 months of essential expenses: things like mortgage payments or rent, utilities, insurance dues, food, auto expenses. Admittedly, 6 months is arbitrary, but its a pretty reasonable buffer for most people.

I still disagree. The lost investment returns over a lifetime of compounding returns on that money is astronomical. I keep a portion of my portfolio in treasuries, which won't tank with the overall market, and they are also reasonably liquid. If money is needed quickly, they can be liquidated and spent within three days. For anything needed more quickly, I maintain plenty of revolving credit, but again, the situation that requires tens of thousands of dollars to be spent right now is practically nonexistent. Passing up the investment returns is just something that makes no sense to me. It seems to be more of an emotional need to feel secure rather than actually being more secure.

 

[rframe]

I still disagree.

That's OK, we disagree on a lot

 

[Ian_J]

It sounds like you two actually agree. It sounds like ATN has an e-fund available, just not in a cash savings account. Actually, he said he has a "couple of months" in cash, and the some in very low-yield, but low risk, treasuries.

 

[SlumTodd_Millionaire]

It sounds like you two actually agree. It sounds like ATN has an e-fund available, just not in a cash savings account. Actually, he said he has a "couple of months" in cash, and the some in very low-yield, but low risk, treasuries.

True. A couple months of expenses in actual cash in a local checking account, about 10% of my portfolio in intermediate and long-term treasuries, and everything else in equities.