Real Estate versus Mutual Funds Scenario Analysis

[Abdul Azeez]

Folks - I just wanted to seek some input on an analysis I ran to get your thoughts to compare between two scenarios to see if I have missed anything out. If not, I would really appreciate some inputs / alternate points of view.

Scenario A

1. Assume retirement assets in Mutual funds of $772k in Year 1 grows by 10% to Year 2 while invested in the market. In Year 2, reduce this by $250k to $522k due to the purchase of primary residence and compound this at 10% per year 

• Total Cost - $530K, Mortgage (53%) - $280k, Downpayment (47%) - $250k

2. Assume also that there is an existing rental valued at $80k that does not impact the above

3. Assume an yearly savings of $35k from Year 2 compounded at 10% per year

4. At the end of 16 years, the total net worth is $4.5M assuming the primary and rental are paid off by then

Scenario B

1. Assume retirement assets in Mutual funds of $772k in Year 1 grows by 10% to Year 2 while invested in the market. In Year 2, reduce this by $394kto $378k due to the following transactions and compound this at 10% per year

• Purchase of primary residence with Total Cost - $530K, Mortgage (53%) - $280k, Downpayment (47%) - $250k
• Purchase of 9 additional rentals with Total Cost - $720k, Mortgage (80%) - $576k,  Downpayment (20%) - $144k

2. Assume also that there is an existing rental valued at $80k that does not impact the above

3. Assume an yearly savings of $35k from Year 2 compounded at 10% per year

4. At the end of 16 years, the total net worth is $4.72M assuming the primary and rental are paid off by then

The difference between Scenario A and Scenario B is the added acquisition of 9 rentals (conservatively assumed no appreciation in out of state turn key markets) and the difference between the two scenarios where you take on 10 rentals in Scenario B is only $22k. Given this small difference, is it really worth going into rentals? Why not just have the money in the market and achieve the retirement goals? I have copy pasted the analysis below if you want to drill down into the numbers.

Regards,
Azeez

[Terrell Garren]

I think Dave Ramsey provides good counsel to people with low financial skills or deep in bad debt. I grimace when Dave advices someone to sell a cash flowing property to be debt free or to save cash to buy the first investment debt free.   There is a sweet spot between no debt and maximum leverage that each person needs to find based on their personal risk profile.