Investing with a ~600K Net Worth

[Leo Kane]

I am new to this site but have been looking at a variety of threads and wanted some advice. I just turned 25 and recently bought and currently own a brand-new, $1M house with 20% down in an area that is likely to appreciate a lot. I was planning on living here, but the space is too big for me, so I am renting it out for around $5,000 per month around 9/1 (city I live in is well-developed and this property is centrally-located) (60K (rent) – 10K (taxes) - 2.5K (HOA) - 1K (Misc) = ~45-48K more or less. I could pay down my loan a bit more so that I essentially break-even but would like advice on this versus investing in other pursuits. The rent will increase significantly here as nearby developments will make this area very desirable.

My first mortgage payment is due next week, and I have about 400K otherwise (mostly liquid and will be fully liquid in the upcoming months). 

I have been reading a lot about investing this past week and am now reading a book on it. It has inspired me a lot. The area I am from, unfortunately, does not have the highest capitalization rate (one of America's most dense and developed cities). I am only interested in investing in places that will earn me a higher return on investment.

How would you suggest I invest my remaining funds? I know this is extremely hard to determine, but I will give you choices:

A. Should I purchase ~3 100K - 130K properties and have no mortgage on these and have positive cash flow?

B. Should I do the same but put 20% down on a variety of these properties (maybe 4 or 5 if that is an option)? 

C. Should I pay off my house more so I have net 0 cash flow for the first year and when rent rises in the subsequent years, it will be positive. 

What would you do?

[Dan Guenther]

Hey @Leo Kane - welcome to the BP community! 

I'm not a financial advisor, but I can offer some general thoughts that might help you make a decision.

Diversification: Diversifying your investments is usually a good strategy. Option A and Option B involve investing in multiple properties, which can spread risk and potentially offer different returns depending on your exit strategy (STR, MTR, Rent by the room, LTR, assisted living etc). If one property's value doesn't increase as expected, the others might make up for it. Option C involves focusing solely on your current property, which might be riskier if the local market takes a downturn.

Risk Tolerance: Consider your risk tolerance. Rental properties come with management responsibilities, market fluctuations, and potential vacancies. You'll need to be prepared for these challenges if you choose to invest in additional properties.

Return on Investment (ROI): Analyze the potential ROI for each option. Option A might offer higher positive cash flow since you won't have a mortgage, but you'll have more properties to manage. Option B might offer slightly lower cash flow due to mortgages, but you'll have more properties to work with over time.

Opportunity Cost: Think about the opportunity cost of paying down your current house vs. investing in new properties. If you use your funds to pay down your mortgage, you're essentially locking that money into your property. If you invest in other properties, you might have a chance to earn higher returns, but it comes with more risk and responsibility. Look up Return on Equity on YouTube and I think you'll learn quickly that one of the best parts of real estate is leveraging equity to continue the process of building that portfolio. If you dump all of your money into the first property, how are you going to continue to grow? 

Local Market: While your current area might not have the highest capitalization rate, it's important to consider the overall health and growth potential of the local real estate market. Nearby developments that you mentioned could indeed make your current property more desirable and profitable in the long term.

I'd take some time to run multiple scenarios. For example, buying 3 $100K properties might sound appealing but what do the numbers really look like on those properties? At those price points, it's pretty typical to expect slower appreciation, potentially less qualified rental candidates, and overall lower cash flow. 

Liquidity: Keep in mind that real estate is less liquid than some other forms of investment. If you tie up your funds in multiple properties, you might have less liquidity available for other opportunities.

If you haven't already I did recommend reaching out to various professionals out there (lenders, agents, financial advisors, tax consultants etc). This should help you narrow down on the overwhelming amount of options you have available for you. You're in a great spot to make some serious moves towards your future!

Reach out if you want to get on a strategy call to talk more about these options and the pros/cons of each. 

Good luck!