Ndtyhij

I have $50,000 saved and I'm paying $760 on rent right now. All my relatives are telling me to get a mortgage so I don't "throw money away on rent", but I just don't like the idea of getting in debt and not being able to move any time soon. I'm 28 and I don't have kids or a girlfriend, so I can do whatever I want.

So which one is better, in terms of building wealth:

1. Buy a small property (retail or industrial) for $50,000 in cash, that I can rent out for $300/mo, or around $275/mo net. That's 6.6% ROI, not counting the asset appreciation (which is around 3% per year on average for the past 50 years or so?). Also debt free. As additional benefits here - I can use that property to get a loan for another real estate? Or that's not how loans work?

Summary:

• $275/mo - rent from new property


• $125/mo - property appreciation (am I calculating this correctly? seems way too much - 50000*0.03/12=125)


• -$760/mo - my rent

TOTAL:

-$360/mo

2. 
   

   Get a mortgage so I don't "throw my money away on rent":

   
   
   
   
   
   • I go in debt for 20 years
   
   
   • $50,000 down payment
   
   
   • Property costs $150,000, I borrow $110,000 and end up paying $175,000. $225,000 including the down payment.
   
   
   • $663/mo mortgage
   
   
   
   

Summary:

• -$663/mo - mortgage


• -$100/mo - property taxes, maintenance


• $414/mo - equity (663*(110000/175000)=414 is that correct?)

TOTAL:

-$349/mo

From those rough calculations it seems that my cash flow will be surprisingly similar, but I'm not sure how both options will affect my net worth in 10/20/30 years?

Also which option will put me in a better position RIGHT NOW to get into real estate investing?

I can use that property to get a loan for another real estate? Or that's not how loans work?

That's not how secured loans generally work. You could get a mortgage on your rental property, but they sill most likely ask why you are getting a loan (to find out if it is because you are in financial distress). You might as well just buy the second property with a mortgage (which I would not recommend either).

Get a mortgage so I don't "throw my money away on rent":

Correct. Instead you'll be throwing it away on interest and other expenses (taxes, maintenance, etc.). One common mistake people make is assuming that the entire mortgage payment is "paying yourself in equity instead of the landlord in rent". Which is partially true. You do build equity, but all that does is turn one asset (cash) into another (home equity). You're not building any wealth just from a mortgage payment. You build wealth through income or through investing. Borrowing destroys wealth through interest.

$414/mo - equity (663*(110000/175000)=414 is that correct?)

No, that's not correct. The interest is calculated based on the total amount due and the interest rate, so it decreases as you pay down the mortgage. At the start of the mortgage (say at 4%) your interest will be (110,000 * 0.04 / 12) = 367. The rest of your payment goes toward the principal. As the principal is paid down, the portion of your payment that is interest goes down as well.

If you are content renting, then keep renting. If you want to use your cash to buy a rental and earn more income, then do that. If you want to invest in something else, then do that. Tacking on a mortgage to an "investment" limits what you can do with the investment, and increases risk.

You've really answered your own question, without even needing to go into the financial details. "I just don't like the idea of getting in debt and not being able to move any time soon." If you want to be able to move at short notice, home ownership is not for you. OTOH, if you plan to stay where you are, like gardening, auto mechanics, woodworking, or any number of other things that you can't do in an apartment, then it probably is.

Financially, I have to disagree with those who say it's a bad idea. My experience is that it can be good, though you have to look at the long term. Historically, you can expect rents to rise over time, while your mortgage payment (on a conventional loan) will remain fixed, except for property tax increases. You can also expect the property to appreciate. Say for example, I bought a house 20 years ago for $150K, with a mortgage payment that was about the same as renting a decent apartment. Now it's worth about $350K, the mortgage payment is maybe 1/2 - 2/3 of apartment rental, and in a few years it'll be completely paid off, so my monthly cost will be only a few hundred for taxes & insurance.

As for real estate investing, IMHO don't do it unless it's something you think you would enjoy. Like investing in individual stocks, it can be a lot of work. Put your money in mutual funds, and relax :-)

I would not factor in appreciation of the property, especially because you applied it on one property and not the other (where it would have made far more of a difference). If you pay off the far more expensive property and the appreciation works the same way, you'd end up with a far more expensive property.

Barring that, though, you're only calculating two options. If you were being more comprehensive with your comparisons you'd be able to get a real sense of what you can do with that money. Imho investing in real estate is not something for beginners. You need to be able to see if a property is a good one for investing, you need to have a good sense of what kinda rent you can get and more importantly (as D Stanly said) you need to get a good sense of how much of the time the property is going to sit empty and cost you money.

I would be far more interested in what kinda money you can get via index fund or other diversified investment.

I ended up buying a house because it was around the same amount of money as renting (mortgage payment includes taxes, mortgage insurance, homeowners insurance.... rent does not). It's very much dependent on the situation in your area.