Remodel primary residence or buy rental..$50k Question

[Fiora P.]

Hi everyone,

I’m new here, right now just reading and learning. My husband and I are very interested in starting out, but at the same time, we want or have to do ( Shocking right!!:-). Our biggest dilemma right now is if we should use money for home improvements on our main residence or buy a rental property. Let’s say we have $50k to spend…

Would what you do?

Here’s some background…

We bought our house in 2008, a single home in Lower Bucks County, Pennsylvania. The house is perfectly livable, but we want to add some living space by building an extension to our kitchen area and remodel the kitchen. This would increase the value of the house too, but that's not very relevant because we are looking to live here for a very long time.  We haven’t gotten any estimates yet, but we are thinking $50k might be enough ( or not..will see..). 

We are looking at RE investing as a retirement investment tool, rather than monthly income (of course, only if there is cash flow, but we are ok with minimal cash flow). The only way a rental is going to work for us is with a turnkey property. We don't have the time, the connections or the knowledge to do any flips. Now, from what I've read around, it doesn't seem like you can do much with $50K in Philadelphia area, or at least in NE Philadelphia and surrounding areas, therefore we are open to C neighborhoods too. We have excellent credit, so financing through a bank would be possible (as scary as a second mortgage sounds right now). We have enough income from our W2 jobs to cover second mortgage if property is vacant.

We don’t have any debt expect our mortgage on our house. We paid $32k in student and car loans last year. We also have around 6 months of expenses in our emergency fund. Right now, we can very easily save $25-$30k a year from our W2 jobs. So if we choose one option, the other one can be done in couple of years...what would you do?

Thank you so much!

[Zach Kidd]

Yes on all of the above answers.

If you haven't yet (and if not, why haven't you!?!?!), read Rich Dad Poor Dad.  Follow-up with the section of the 4 Hour Work Week where he discusses Dreamlining.

I'll sum up here:  Buy cash-flowing assets, use them to pay for your liabilities. In your case, invest in rental properties, use that cash flow to pay for your home improvements. 

Focus on maximizing your leverage (smaller down payment amounts) and buying as much property as you can for X amount.  

I can't remember the specifics of this example at the moment, but with $100k, you can buy one house outright, get $1000 monthly cash flow. That sounds good, but the vacancy is an all-or-nothing situation. Losing one tenant takes you completely out of any cash flow.

Take that same $100k, split 5 ways, buy 5 $100k properties (leverage). After paying the mortgages (debt service) each unit only produces $300 / month cash flow, but your overall cash flow is $1500 a month.  Losing one tenant out of 5 is manageable.

Then take your cash flow and make your home repairs and improvements. After the improvements, you'll still have that $1500 / month coming in. 

There are other important considerations (minimizing taxes, insulation through a corporation, etc.), but most critical is understanding the overall strategy.

I also want to address using your real estate as a "retirement investment tool, rather than monthly income". 

That sounds like you are a bit stuck in "traditional" thinking, and I want to disrupt that before you throw the baby out with the bath water. 

Retirement means you no longer need to work. That your savings, investments, Social Security, etc., hopefully pay you at least as much as you earned in a W2 job.  

Take my above example, total cash flow of $1500 / month.  

Simply do that ten times.

You will have $15,000 / month income.  Taxed at a much lower rate than W2. 

Could you live comfortably off that? I don't know, but I'm guessing so.

If that scenario is more than your W2 status, guess what?  

You're done. 

You only go to work if you love it or are bored out of your mind. 

You can hire a housekeeper and bounce to Thailand for 6 months and not care.

That's better than any retirement plan I've ever been pitched by a "professional".