QUOTE (gwasser @ Oct 13 2009, 02:52 PM) Hi Paul,
My response maybe slightly different from previous posts. This probably because of the skimpy data provided. First of all, it sounds like you bought your personal residence and use renters to help cover the bill rather than an investment property.
Assuming this is the case, you have to look at your overall investment plan.
When considering your personal residence, my first rule of thumb is that you don`t buy anymore than you really need. This reduces your cost of living and increases your savings potential.
Secondly, I would like to change the statement: "Your home is your castle" into "Your home is your financial fortress (or better base)". It will probably represent your largest personal expenditures but it is also a place for locking in a large part of your personal equity and thus a potential source for FUTURE capital. I say future, because first of all I like to protect my financial base (i.e. fortress).
If your house represents cost of living than your interest payments are costs of living. I used to say once my mortgage was paid off, "that I saved enough to buy every month a new dishwasher". In other words money for investments because really, who needs every month a new dishwasher.
Also, your residence is differet from a rental property in that all capital gains made on disposal or sales are tax free. You will have only one of those!
Having room mates to pay off your mortgage ASAP is, in my eyes, the smartest thing you can do. My favorite tactic was to build up cash reserves in your personal account - this way you have a cushion for emergencies and when `the coast is clear` you make your annual lumpsum payment. This way, I payed my mortgage on my first house off within 5 years and after that the dishwashers kept on coming.
This approach requires discipline, because you may be tempted to use the cash buildups for a nice new car or a Mexican vacation because they happen to be so "cheap", etc. Don`t fall for that, because spending investment money that may accrue at 10% per year is a very expensive vacation payment (think compound interest). Reward yourself the occasional vacation buying paying it from an unanticipated windfall, such as a bonus or pay raise (but always ensure that enough is left for new savings! Especially ensure you do not spend the pay raises (after the initial reward splurge) on anything else than savings.
If you`re used to a modest lifestyle, spending new money on new gadgets is the worst thing you can do!. Consider it this way "When you are happy with cheap wine and you try a more expensive wine just for the hell of it, guess what? You won`t like the cheap wine any longer and now the more expensive wine is your baseline!"
Now you can use your savings to accumulate a downpayment for a real estated investment or put it in more liquid investments. That is completely up to you. Others may say that now you have a lot of dead equity locked up in your house that doesn`t work for you.
That is not true! Remember the dishwasher you can buy yourself every month? And... if you lose your job or your future wife needs plastic surgery, guess what... as long as you don`t touch the equity in your house - nobody can take it away from you.
Now here comes the clinger! If your savings are not enough to buy your next investment, you can, when you truly find a worthwhile investment, take out a `home line of credit` secured by your residence and an excellent credit rating, thus you get variable rate financing at the best interest rates possible. That is much better than a 5yr mortgage amortized over 40yrs. Now, talk about being smart!
my latest motto "Investing is for the long term - short term trading is more expensive than the casino".
Hope this helps,
A final thought about savings:
You can save the $60,000 you spend on that new BMW and instead invest it a 10% for when you`re more mature like this author. The you money has accumulated by that time can buy your a BMW every year out of your investment income. Meanwhile the guy that bought the BMW first, he has the final expense of towing a pile of rust to the land fill! But NEVER ever save so much that you don`t enjoy living today and remain healthy.
I agree with this statement as well. I want to add my own 2 cents though.
Many of the comments on these forums from investors suggest that paying off your debt is NOT a good way to increase your networth or cashflow. I always respond by saying that it "depends".
You always have to start with where you see yourself in the future. Wether its 5-10-25 years...it doesn`t matter. You have probably day dreamed and visualized having X amount of $ each month or year to live off of and provide for the kind of lifestyle your dreaming about.
I would venture to say that most of us visualize a lifestyle that would require at least $100,000.00/year. For some it may be much higher. I`m sure there are some who would be happy with less. In the end, your number is what you have come with.
In this case, lets use the $100,000.00 after tax dollars example. So what we`re talking about here is passive income. This income is something that continues to come year after year, and probably increases with annual rent increases. So ask yourself a question...what would it take to achieve that? If 1 single family home brought you $10,000.00 per year of after tax dollars, you would need 10 of them. If each one cost $150,000.00 then you would need $1,500,000.00 to buy them or have the bank help you by lending a large portion.
Let`s say the bank lends you 75% of that, and it takes you 25 years to pay them off. After 25 years, you have the lifestyle you always wanted!
However, lets say that each property was bringing in positive cashflow (as they should!), and lets say that you don`t need the cashflow because your still working your day job...then putting the cashflow to pay off the debt means that you could have your lifestyle sooner than 25 years. What if you did the math and it was going to be 12 years instead of 25...would you do it? Would you keep your day job to support yourself and your current lifestyle and use the positive cashflow from each property to pay off the debt and have the lifestyle you dream of in 12 years instead of 25?
This is only meant as an example because this scenario would mean that you have roughly 25% of the $1.5 million needed ($375,000.00) to make this happen from day 1.
Let me take this one step further. Let`s say that you won a lottery worth $1.5 million and decide to purchase all these single family homes (to maintain the example), you would have your lifestyle instantly! Granted, if you have never been a landlord, you would have a whole learning curve, but this is an example relating strickly to numbers. Basically, anyone who says that paying off debt is not a way to gain wealth or increase cashflow, is only partly right. You always have to ask the person in question...what are they visualizing in the future? That`s the only way to figure out what they should do today with what they have available...Most of us needs to borrow money from banks or equity to work towards our dream...unless you win the lottery.
