Better to leverage personal assets, or reduce monthly expenses?

Question

I know this is more of a personal financing question, and it could go either way, but I was curious to get some thoughts on the matter.  I currently live in the crazy state of CA, and always have in the back of my mind the idea to cash out and move somewhere much more affordable.  I would use the equity I have from my house and other assets that I sell in CA, to give me a big jump start on my real estate investing career in the more affordable area.  The question I have is, would it be better to purchase with cash (from my CA asset sales) my personal house and cars in the the more affordable state which would reduce my monthly expenses, but would also take away from my available cash for my rental properties? Or is it better to get a mortgage and finance my cars in the more affordable location and have more cash available for additional rental properties?  Put another way, is my money better spent working for me in rental properties (which would ultimately help pay for my personal house and cars), or reducing my monthly expenses?  Thanks for any insight in advance.

Trevor Ewen · Answer

@Tyler Blodgett

The ratio is inevitably personal. Some people do very well in this business extracting every ounce of debt they can obtain. There's other people who like to get everything paid off. I use a blended approach like many portfolio managers use with stocks and bonds. When I am investing cash in a new equity project, I take 15% of the same amount and pay down an existing debt (usually highest interest). This keeps me honest.

Here's the other question you should ask?

Why do you need to buy a primary residence in your new town?

I understand that you want to buy real estate there as an investor, but your primary residence is a different question. I would suggest it's not insane to rent for awhile while you get the business on its feet. Some of the advantages I see (and still see in NYC, where I live):

* You can probably live in a great neighborhood for lower than the cost of mortgage, taxes, and insurance for the same place. This is especially true if you're headed to a high tax state (which is unlikely if you are retreating from CA).

* You pay for and do no repairs on your place.

* YOU'RE NOT STUCK! This is such a huge one, as your business changes, and you actually realize that your best investment market happens to be 2-3 hours away, you can just move. This happens all the time, especially when you're moving to a completely new part of the country.

* First 8 years of a 30-year mortgage is mostly interest payments. You throw money away when you rent, but you also throw a lot of money away living in a house you're not going to keep beyond this mark.

The big caveat I would make to the above statements is if you plan to buy a house that has a good rent / value ratio. In that case, you really are on the right side of the market, and can just rent it when you want to leave. In practice, I have found it's rare for investors to live in the exact same neighborhoods as their tenants. Many tend to live in an area with better amenities, school districts, and access to transportation. All these things are great, but also tends to the reduce the rent / value ratio of the property in question.

Good luck, interested to hear what market you choose.

Corby Goade · Answer

Why not do both? I love the idea of selling your house and moving to a place with a lower cost of living to get a jump start- you should check out the Boise, ID area. Low cost of living, relatively low entry point for investors and it's growing like crazy. Idaho is the fastest growing state in the US.

But I digress...you mention your financing your cars, plural. I don't know your financial situation, but cars and car loans will kill more real estate dreams than anything else. Cars loans kill cash flow. Cash flow that every underwriter will be analyzing to see if your DTI can afford another mortgage. My (unsolicited) advice would be to start with getting rid of any cars you owe money on, buy something reliable that will get the job done and start your investing career.

Best of luck!

Calvin Lipscomb · Answer

The answer is.......it depends.  You want to look at what your initial plan is for your real estate investing career.  For example you could be purchasing a great 4 family unit commanding strong rent in a rapidly gentrifying area and living in one of the apartments.  Or, you could purchase a property for strictly rental purposes while living elsewhere.  One last thought.  What are your plans on how to finance your first deal?  That will have impact on what path you may take.

Alex Deacon · Answer

@Tyler Blodgett I think the idea has merit. Live below your means and invest wisely. Anytime you can finance at a low percentage rate and free up cash I feel is the best move.

Veronica Frieling · Answer

Hey Tyler, I listened to Alex Charfen's podcast yesterday about The Hidden Cost of Debt and he touched on this very topic. Alex was a multi-millionaire with several rental properties and basically lost it all during the recession. The episode is pretty insightful. Hope it helps.

Better to leverage personal assets, or reduce monthly expenses?

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