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Is mortgage ever a good idea for a fastlaner? [ADVICE NEEDED]

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TreyAllDay

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I'd love some insight, as I keep zig zagging between what I think is the smart move. My Fast-lane business will do about $125k next year minimum and I expect this to double each year following. As of march, I'll have about $9k excess every 2 months to do what I please.

I currently rent my condo with the lease expiring end of year. My girlfriend put the idea in my head that maybe we should purchase a small home ($275k) as I'll be able to make a $25,000 down payment with savings. However i'll need to forgo my summer plans once again which were to vacation a bit, get a convertible, take a couple vegas trips, etc.

Although I do love the idea of not wasting $1,200 a month on rent, and rather investing in property - the kind of place we could afford would likely only be a good fit for me for maybe 3 or 4 years. If you can own property, is it ever a good idea to get a mortgage for a place you may not see yourself in long term?
 
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Scot

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Oh man, you opened up the Fastlane Forum can o worms on this one.

You're going to get both camps here chiming in.

We recently (February) purchased a home with a mortgage. For us, it made sense. With my military service, I was able to get a VA loan, which allowed me to buy without a down payment, mortgage insurance, and many other benefits. In the area where we live, compared to the rest of Florida, its a higher cost of living.

We could either pay $2,000/mo for a rental, or pay a little bit more for our own house.

Here's why I went with mortgage. I personally feel like paying for a rental is just paying some elses business. They get to enjoy the appreciation of value of the home when they sell it, you don't. To me, its just tossing money in the fire. We don't really plan on moving. The house with bought with our future family in mind, enough bedrooms to fill with kids. Honestly, even if I do "go fastlane" I don't plan on getting a bigger or fancier house.

I guess it depends on what you're doing. If you think you'll end up moving in the next 5 years, don't buy. If you plan on staying in it long term, then buy.
 

TreyAllDay

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Oh man, you opened up the Fastlane Forum can o worms on this one.

You're going to get both camps here chiming in.

We recently (February) purchased a home with a mortgage. For us, it made sense. With my military service, I was able to get a VA loan, which allowed me to buy without a down payment, mortgage insurance, and many other benefits. In the area where we live, compared to the rest of Florida, its a higher cost of living.

We could either pay $2,000/mo for a rental, or pay a little bit more for our own house.

Here's why I went with mortgage. I personally feel like paying for a rental is just paying some elses business. They get to enjoy the appreciation of value of the home when they sell it, you don't. To me, its just tossing money in the fire. We don't really plan on moving. The house with bought with our future family in mind, enough bedrooms to fill with kids. Honestly, even if I do "go fastlane" I don't plan on getting a bigger or fancier house.

I guess it depends on what you're doing. If you think you'll end up moving in the next 5 years, don't buy. If you plan on staying in it long term, then buy.


Interesting take. yes for me I don't even see the home as an investment however I do feel it would be smarter to not burn rent payments while I grow my business and possibly have an asset to sell at a later date.
 

TreyAllDay

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Where is Edmonton at in the real estate cycle?

Good question. Everything is selling low at the moment because we're working our way out of a slight recession.
 

ZCP

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You have $125k in sales and $54k in profit (does this include your salary?) and you are putting together a spending list?

Have you made your tax payments?
You already have a plan in place for 100% sales growth for years 3 and 4?
Are you putting the cart before the horse?
Are you pre-spending hope?

Might be time to get back to work.

[Do you have a job or other business that pays the bills? I did not check before typing the above reply. Is the $54k (minus taxes) just extra money? If so, then decide if you can rent it out when you are ready to move up to the place that fits you. If so and the local real estate market looks good, then it might be a yes.... if you can cover the cost if your fastlane business were to fail.]
 

TreyAllDay

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You have $125k in sales and $54k in profit (does this include your salary?) and you are putting together a spending list?

Have you made your tax payments?
You already have a plan in place for 100% sales growth for years 3 and 4?
Are you putting the cart before the horse?
Are you pre-spending hope?

Might be time to get back to work.

[Do you have a job or other business that pays the bills? I did not check before typing the above reply. Is the $54k (minus taxes) just extra money? If so, then decide if you can rent it out when you are ready to move up to the place that fits you. If so and the local real estate market looks good, then it might be a yes.... if you can cover the cost if your fastlane business were to fail.]


$90k salary, after taxes take home $5000/month and use up about $1300 on personal expenses, leaving between $4500-$5000 savings.
 

biophase

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$90k salary, after taxes take home $5000/month and use up about $1300 on personal expenses, leaving between $4500-$5000 savings.

Don’t buy if you are staying only 5 years unless you can rent the place out for cash flow and want to be a landlord. You will lose more money than renting.
 

JM35

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Interesting take. yes for me I don't even see the home as an investment however I do feel it would be smarter to not burn rent payments while I grow my business and possibly have an asset to sell at a later date.
Keep in mind not just the mortgage payments but the maintenance and tax expenses as well. If the A/C goes out, and its $3K to fix it...you don't really have a choice, you have to fix it.

If these "additional" costs of home ownership are going to eat away at your investment budget and the amount of money you are going to be able to put back into your business/es then I would personally keep renting until you have enough of a cushion to account for all the extra costs of home ownership.
 
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Kjbinatl

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I'd love some insight, as I keep zig zagging between what I think is the smart move. My Fast-lane business will do about $125k next year minimum and I expect this to double each year following. As of march, I'll have about $9k excess every 2 months to do what I please.

I currently rent my condo with the lease expiring end of year. My girlfriend put the idea in my head that maybe we should purchase a small home ($275k) as I'll be able to make a $25,000 down payment with savings. However i'll need to forgo my summer plans once again which were to vacation a bit, get a convertible, take a couple vegas trips, etc.

Although I do love the idea of not wasting $1,200 a month on rent, and rather investing in property - the kind of place we could afford would likely only be a good fit for me for maybe 3 or 4 years. If you can own property, is it ever a good idea to get a mortgage for a place you may not see yourself in long term?

Hi TreyAllDay,

I just happened to have completed a similar analysis on our mortgage (Actually decided to pay it off in full for reasons similar to my advice below). I put your numbers into the spreadsheet to show you something.

Rather than investing in property, you will be initially paying bank interest that's more than DOUBLE the principal going to the property. Because you only have about 10% down, you'll also be paying PMI or a HELOC. Even after 10 years you'll still be paying more to the bank than to the property.

Also keep in mind that when you sell your Realtor will want 6% or so. That's $16.5k if the value of the property doesn't change. That's roughly equivalent to 3 years of your principal investment. Someone else also mentioned maintenance expenses.

And when you move to a new home you will restart the majority-payment to the bank all over again.

Here is a screen shot of the amortization first page.

My recommendation is to keep renting and pay for your home in cash instead. And I'm putting my money where my mouth is. We're divesting our retirement over the next few years (minimize tax impact) to pay the house off. Every web site and financial advisor I talk to advises against it. But owning the house outright NOW instead of still having a mortgage when I'm 70 will be enough of a justification. And part of the plan to transition from employment to freedom.
 

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Envision

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TreyAllDay

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Hi TreyAllDay,

I just happened to have completed a similar analysis on our mortgage (Actually decided to pay it off in full for reasons similar to my advice below). I put your numbers into the spreadsheet to show you something.

Rather than investing in property, you will be initially paying bank interest that's more than DOUBLE the principal going to the property. Because you only have about 10% down, you'll also be paying PMI or a HELOC. Even after 10 years you'll still be paying more to the bank than to the property.

Also keep in mind that when you sell your Realtor will want 6% or so. That's $16.5k if the value of the property doesn't change. That's roughly equivalent to 3 years of your principal investment. Someone else also mentioned maintenance expenses.

And when you move to a new home you will restart the majority-payment to the bank all over again.

Here is a screen shot of the amortization first page.

My recommendation is to keep renting and pay for your home in cash instead. And I'm putting my money where my mouth is. We're divesting our retirement over the next few years (minimize tax impact) to pay the house off. Every web site and financial advisor I talk to advises against it. But owning the house outright NOW instead of still having a mortgage when I'm 70 will be enough of a justification. And part of the plan to transition from employment to freedom.
THANK YOU for this. This is the kind of stuff I was interested in seeing.

Sent from my SM-A520W using Tapatalk
 

Envision

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THANK YOU for this. This is the kind of stuff I was interested in seeing.

Sent from my SM-A520W using Tapatalk

I dont think anyone is going to argue that having a house paid off in full is a bad idea. However, depending on your current financial situation it could be. If you pay a house in full the opportunity cost of the 250k (for example) could have been used in many different ways to return you a better profit on that money. I would never pay a house in cash and I dont recommend renting long term either because you are just assisting someone elses fastlane strategy.

For example, if you were interested in real estate with the 250k house paid in cash - you can buy 2 fourplexs in my area with more than 20% down that would cash flow roughly $1k-1.5k/month per property. Theoretically the cash flow on the two properties could pay your mortgage AND you'd get the appreciation, tax benefits, mortgage reduction, all as icing on the cake and in 20-30 years time those properties would be paid off and most likely worth much more.

Another example, if you were interested in ecommerce (thinking of my business for this example) I would pump the 200k into my business - hire, develop new products, create new lines of revenue, and increase our marketing budget drastically which would most likely triple or quadruple my current profits. I'd then use that other 50k to buy a rental property that I lived in and rented out the other units to live for free.

Moral of the story, dont pay your house off as you'd have all this forced cash sitting in an asset that could drop drastically in value. Use leverage wisely and put your money into a vehicle that will actually grow your income and financial position.
 

Greg R

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I dont think anyone is going to argue that having a house paid off in full is a bad idea. However, depending on your current financial situation it could be. If you pay a house in full the opportunity cost of the 250k (for example) could have been used in many different ways to return you a better profit on that money. I would never pay a house in cash and I dont recommend renting long term either because you are just assisting someone elses fastlane strategy.

For example, if you were interested in real estate with the 250k house paid in cash - you can buy 2 fourplexs in my area with more than 20% down that would cash flow roughly $1k-1.5k/month per property. Theoretically the cash flow on the two properties could pay your mortgage AND you'd get the appreciation, tax benefits, mortgage reduction, all as icing on the cake and in 20-30 years time those properties would be paid off and most likely worth much more.

Another example, if you were interested in ecommerce (thinking of my business for this example) I would pump the 200k into my business - hire, develop new products, create new lines of revenue, and increase our marketing budget drastically which would most likely triple or quadruple my current profits. I'd then use that other 50k to buy a rental property that I lived in and rented out the other units to live for free.

Moral of the story, dont pay your house off as you'd have all this forced cash sitting in an asset that could drop drastically in value. Use leverage wisely and put your money into a vehicle that will actually grow your income and financial position.

I agree with @Envision because it pertains to my situation. But that's the thing, it's completely situational. What may be best for someone may not be best for you.

Do your homework until you are satisfied with your findings and make a decision.

If instead of paying off that house, you lost all of your money trying to pursue a Fastlane business, how would you feel then?

Conversely, the EV of making $$$ in a Fastlane business is significantly greater than buying a couple fourplexes.

@snowbank would say to choose the Fastlane businesses before paying off a house and certainly before buying rental units.

I chose to pursue a Fastlane business last year instead of buying another rental property. I lost the all of that money. -25% of my net worth.

I'm choosing to pursue another Fastlane this year instead of paying off my house or buying a rental property.

My wife and I will have to live with that choice if I fail.

What is your risk tolerance? What are you willing to call an acceptable risk? Do you have enough skills to mine the opportunity cost of not paying off your house?
 
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TreyAllDay

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Moral of the story, dont pay your house off as you'd have all this forced cash sitting in an asset that could drop drastically in value. Use leverage wisely and put your money into a vehicle that will actually grow your income and financial position.

I agree with @Envision I'm choosing to pursue another Fastlane this year instead of paying off my house or buying a rental property.

These are BOTH very helpful and interesting takes on this. I supposed there is an opportunity cost associated with using over $200k to pay off a property when this can be reinvested. I suppose I am trying to balance the ideologies, it seems some entrepeneurs - even fastlaners have different ideologies or reinvesting heavily and funneling money out of the business into personal security/assets.
 

Greg R

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These are BOTH very helpful and interesting takes on this. I supposed there is an opportunity cost associated with using over $200k to pay off a property when this can be reinvested. I suppose I am trying to balance the ideologies, it seems some entrepeneurs - even fastlaners have different ideologies or reinvesting heavily and funneling money out of the business into personal security/assets.

Most people's plan on here is to start a Fastlane business, reinvest the profits, reinvest the profits, reinvest the profits, reinvest the profits, cash out, pay off everything in cash, and invest the rest.
 
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Envision

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These are BOTH very helpful and interesting takes on this. I supposed there is an opportunity cost associated with using over $200k to pay off a property when this can be reinvested. I suppose I am trying to balance the ideologies, it seems some entrepeneurs - even fastlaners have different ideologies or reinvesting heavily and funneling money out of the business into personal security/assets.

You gotta realize, a house isnt an asset even when it's paid off you need to pay property taxes. The only way you can turn it into an asset is by renting units/rooms and profitng off of it. If you sink 200k into something that doesnt provide a return and costs you property taxes each year you just own a very expensive liability.
 
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