Rent out Paid Off Home or Finance a House to Rent?

[John Fitch]

So I have decided that I want to invest in real estate. But in order to get my wife on board she does not want to use any equity out of our Paid Off 1976 4-Bedroom 2-Bath 2100sqft Home in Kingwood, Tx. She likes the secure feeling of having it paid off. So I guess my options are to Rent out our Paid Off home and use an FHA or 203k loan to buy our next home(for a hell of a deal of course) or should I just take a loan out to buy a rental home and stay put?

[Michinori Kaneko]

if you have the option to use FHA, I would. I can understand your wife's stand point, but one of the advantages of real estate investing is that you can leverage. For instance, if you invest in a house that is $100k, and your monthly rent income from it is $1000. If you buy it all straight cash, your gross return is 12% (then you obviously expenses like taxes, insurance, etc.). If you finance it 75% then your initial investment is only $25k. Your mortgage on $75K at 6%/30yr loan is $450/month. So your "Gross income net of mortgage" is $550/month which is 26.4% gross income over your $25k investment. so you can clearly see there's a benefit in leverage, NOT to mention you also get tax advantage because you get to reduce your income by interest expense so in the first year you are probably reducing your taxable income by $5000 or so... Food for thought.