Big Decision to Make

[Jose Garcia]

My wife and I are just starting out as Real Estate Investors and are looking for our first deal.  Trying to get creative with our financing we ended up selling our house.  However thinking that we should get settled first we have a new home under contract to purchase.  It hasn't been built yet.  Since we haven't paid the full deposit on it now we are considering walking out of the deal and using the profit of our townhome sale to buy some rental properties out of state.  We are concerned that, since we are both w2 employees not buying a property will kill us on taxes and that the rental properties won't be enough to offset that.  Should we buy our home so that we don't have to worry about it or rent ourselves so that we can use the money to buy 1 or 2 rental properties probably in Texas or Memphis.  What do you guys think?  Thank you very much.

[Leland Barrow]

That is a very broad question. I am assuming that you have significant W2 income to be concerned about taxes? You left out your goals, what are you trying to accomplish?

I would suggest that you rent. Personal residences are not an asset. Personal residences tie you and your resources up. 

How much in taxes are you talking about? If you are concerned about tax advantages versus investing then that is a math problem. If owning a personal residence saves you $7,000 in taxes on an annual basis but investing in real estate gets you a return of 15% on $100,000 then you should be able to make a decision based on the math. Rental properties have their own tax advantages.

Goals- define what your goals are.

Plan- work backwards from your goals to define your plan to reach those goals.

Good decisions- base all of your decisions on math and not emotions.

Personally I would not recommend buying a personal residence until you at least have the passive income from other investments to make the payments on that residence. Personal residences used to be a retirement vehicle, but I think they are now the biggest obstacle to wealth building. When pensions and social security was considered dependable then owning a personal residence was a way to store up equity. Neither pensions nor social security may be there for anyone but the boomers. Everyone else needs to accumulate wealth at a faster rate than previous generations and owning a personal residence is not the appropriate vehicle for that, unless it fits within your plan.

DIY Retirement

Step 1: Passive income pays mortgage on personal residence (Social Security Replacement)

Step 2: Passive income replaces W2 income (Pension Replacement)

Step 3: Accumulate other wealth to leave to heirs (Legacy wealth)

If you can get to step 2 while still being employed then you can retire at anytime.

The old mentality was work until 62-65 and save 2 million for retirement, and live off of the interest of $100k per year. No one gets wealthy by saving, they just survive. The new mentality is to replace all active income with passive income of about $8,400 per month using the $100k model. What is easier to do and can be done sooner saving 2 million or replacing $8,400 per month in passive income with rental properties? Buying a personal residence and dumping resources into it puts you on the 2 million track. That 2 million may be gone by the time you die and your heirs will get the junk left in your house and they will be running the stupid rat race themselves.  Or you can build passive income that pays for your lifestyle, and you can leave your heirs everything that you have built so that they can hopefully build on it more. You can also use 75-80% of other peoples money (banks) to go the 8400 route. The 2 million route is money out of your own pocket.

The American Dream and 401Ks are the biggest frauds perpetrated on Americans. People in other countries build wealth by owning businesses and meanwhile in America we just buy stuff like houses that we cannot really afford and think we are making good decisions. Meanwhile the average American has less than a $1,000 dollars in savings. Very few people could see the housing crisis in 2008 until it happened and in hindsight everyone asks why didn't we see the obvious signs? Wait until GenX and GenY retire on the 401K myth, if we don't change our thinking we will be in a world of hurt.

Hopefully that helps. If not feel free to ignore it.