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Spending 100k on townhouse, good or bad?

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TreyAllDay

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I would be very thankful to get some further perspectives on this - my company has grown exponentially. 2017 - $30,000 profit. 2018 - $150,000 profit. 2019- $200,000+ estimated.

My Money Discipline Problem
I made a post recently about how I can NOT seem to trust myself with my profits, last year I spent my $80,000 salary on seemingly nothing, so my idea is: if I invest into something large I will have no choice but to live within my means.

My Fix
I have approximately $140k right now set aside with no outstanding debts. My thought is - I should just buy a townhouse or condo, as the market is so RIDICULOUSLY great in my city. Properties are selling for 33% below what they will be in a few years. I have been renting for the last two years because I was starting a business, throwing away $45k in rent. I've told myself I won't buy my dream home until I can pay cash, which seems a few years away still.

This seems like a good short term investment strategy? Especially considering I can sell it for profit, rent, and it's also important to me to have a place for my parents possibly long term as neither have planned for retirement.

Am I missing anything?
 

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Kak

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You might be missing property taxes and insurance per month.

But other than that I see the reasoning and don't see a problem with it especially if you are blowing 45k a year on rent.

We all need a place to live. Making an extremely affordable choice in order to continue building without personal finance worries is always what I would recommend.
 

steelandchrome

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Sure, why not? I would amend it though to just put down 20% and have a 15 year mortgage. That way you still keep cash in your account if it is needed for expenses but you get rid of PMI costs and the 15 yr mortgage will give you slightly higher payments to force you to put that money to the home vs spending elsewhere. If you aren't worried too much then still do 20% down and a standard 30 year mortgage and put the other $80k in a semi safe investment like VTI or something similar that you may earn a bit off of and be able to liquidate quickly if you needed the cash.

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Red

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Properties are selling for 33% below what they will be in a few years.
It never hurts to set yourself up to be disciplined where you perceive a weakness, extra bonus if you can live cheaper that way & have all you need. But definitely don't count on the above statement or factor that in to your decision making, as it's an unknown variable.

If the home helps you budget responsibly & meets your needs, it sounds like it might be a good thing for you.
 
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MJ DeMarco

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It's a financial decision based on an asset purchase.

Work the numbers and the "what ifs" of rental continuation or purchase.

If you say the market is somewhat undervalued as you claim, I think the #s will give you a clear idea what you should do.

Remember, no matter what you do in life, you will ALWAYS need a roof over your head. And its the biggest expense of our lifetime.

Also keep in mind your business's capital needs for growth. If you might need the cash later, I wouldn't.

I've told myself I won't buy my dream home until I can pay cash, which seems a few years away still.
You can keep this goal and still live in a townhouse you bought for the interim.
 

Michael Burgess

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Have you considered "house hacking"?

You could buy a duplex, triplex, or 4plex, and rent out the other units while living in one. It would be a great way to capitalize on your market situation right now, build equity instead of "throwing money away" on rent, and you could build additional equity if you get a fixer upper and improve it.

Also, if / when you move on to the better dream home, you could keep that building and rent the whole thing out to various tenants! If you only have one townhouse to rent out, and a tenant stops paying you, you don't get any income. If a tenant stops paying you in your 4plex, you still have 3 other units providing you income. Just food for thought!

"Don't wait to buy real estate - buy real estate and wait..."

Good luck either way :)
 

biophase

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Is the townhome $100k or $300k? What does it rent for?
 

Mutant

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Do you guys have offset mortgages in the States?

This is where a savings account is linked to the mortgage, & the amount in savings is “offset” against the amount owed on your mortgage. So say you had a 100k mortgage, & 40k in the linked savings account, your mortgage payments would be calculated only on 60k. This can mean lower payments, or you can keep paying the same level & it will shorten the term.

The great thing is those savings in the linked account are not locked away. You can have at them any time if your business hits cash flow issues.

I don’t know if they’d give you the product if you have 100k mortgage & 100k in the savings (cos they’d have nothing to charge interest on) but if you could have, say 95k in those linked savings, you’d a) pay very little interest & b) be able to tap into almost the entire value of your property at any point without taking out a new mortgage. Your own line of credit - at mortgage rates!


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Mark Mueller

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This is confusing to me....$80k profit, you feel you are throwing it away, but you saved $140K? Then you can't possibly be throwing it away. I'd say well done to be able to save. But I'm questioning the math there. I'd love to throw away money to the tune of 6 figure savings. :)

Also, 33% below what it will be? You don't know that. It could be 33% less. I bought 3 houses last year, one earlier in the year was 20% higher than almost the identical house I bought a year prior. By the end of the year, the same house would be 20% more. I had to change strategies but the math has to work. Biggerpockets has some tools there. I can't buy any now, because they priced themselves out, and my market tests with rent are not supporting the purchase prices, so I have to stay put cause the math isn't working. Had I seen that coming, I would have purchased way more aggressive two years ago.

If you plan to remain in the area, and think you may want to own rental property in the future, it makes sense to buy something lesser than your dream home that will be appealing to a future renter, then when you buy your home later, keep that and rent it out.

Now, if you have no desire to rent out a place, then it's a different analysis in how fast properties are moving and how you feel you can do. It's better to buy than rent in most cases, but not all. If I were renting, I'd try to rent the cheapest place I reasonably could to fast track the business to get the dream house sooner, though. Renting the Taj Mahal while you save for a dream house is not a wise decision.
 

DustinH

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My thought is - I should just buy a townhouse or condo, as the market is so RIDICULOUSLY great in my city. Properties are selling for 33% below what they will be in a few years. I have been renting for the last two years because I was starting a business, throwing away $45k in rent.
So, has your market gone down already? My understanding is that real estate all over Canada heading toward or already in a downturn. I know Edmonton isn't as volatile as Toronto or Vancouver but it is always a systemic effect. If so, then buy.

I would put 20%-30% down and put it on a 30-year fixed mortgage. Interest rates are still pretty low. If they go any lower then you can always refinance. Do not put all your cash into one property. Keep that cash to buy more real estate or build more businesses.

Also, I would go into it thinking that you will never sell it. If you do sell it you exchange it into a new property.
 

Real Deal Denver

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Did you miss something? Yes, you missed the boat completely.

I am amazed at how people want to pay off a property, or worse yet, get a 10 or 15-year mortgage so they can pay it off as quickly as possible. Bad, bad, bad.

Why is that? The cost of money. Your mortgage costs you what? 4.5%? You could make double that by investing it and doing nothing. You could make double your double amount by investing it into your business. But, but, but - you're throwing money out the window.

Enter plan A. Live cheap. Live free is even better. Below is some excellent advice on how to do that. You can only be in ONE room at a time. Do you need 8 rooms in a nice house? How about 3? Yeah, you can easily manage with 3. Why would you do that? So you pay NOTHING for your housing expense - while at the same time having an asset you can sell for what you paid for it, if not more.

You could buy a duplex, triplex, or 4plex, and rent out the other units while living in one. It would be a great way to capitalize on your market situation right now, build equity instead of "throwing money away" on rent, and you could build additional equity if you get a fixer upper and improve it.
Now, with Plan A running on autopilot, you can move on to Plan B. Use that money to leverage whatever you do in business. Making good money with 4 products? Good - then make it 8. Have a good location that is bringing in the business? Good - open another one.

Cash flow is king. Think of it as seeds. How much money can you make by planting 1,000,000 seeds? Not too damn much if you don't have the LAND to grow them. So get more land, and then you can plant more seeds, and then you can double, triple, your harvest.

I have a business plan in place whereas when I establish 12 accounts, I hire a manager - and I step out of the picture. Then I build another block of 12 - hire, and step out. And so on. It is very important to me that my customers have great service and support, so I'm not going to push it by servicing 20. With 12 being the magic number, it works great for everyone. That's my PLAN. Get a plan for whatever it is that you do. And then put it in motion and work it.

The more time you have, the more can focus on your plan. The more money you have, the more fuel you have to feed into your plan to grow it faster - bigger - better.

But throwing away your "power" to "invest" in something to save/make a paltry 4.5% is ludicrous. Give me your money to invest in my business, and I'll pay you 50% MORE than the 4.5% you'll be saving, and we'll both be happy!

Do not put all your cash into one property. Keep that cash to buy more real estate or build more businesses.
Think success.

Next lesson: leverage. The best way is to leverage both your time and money together. But this is a post, not a book - so we'll save that for a rainy day.

40142331023_a0ec6b91bf_b.jpg
 

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TreyAllDay

TreyAllDay

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@Real Deal Denver

Thank you for this great post. I often forget this part. I turned $10k of savings into $250k of profits, obviously harder to duplicate when you're not in the pitts but I get what you're saying.

I kind of came from the background that all debt is bad and if you can pay something off, you should. But what you posted + a lot of the posts the guys had done (bought a Ferrari for $0, etc) have really shown me how debt/money can be put to work. Still learning a lot I guess!
 

fishgodeep

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I have been renting for the last two years because I was starting a business, throwing away $45k in rent.
$22,500 on rent annually in Edmonton is insane. I've got a place on Whyte for $1000/month which I think is ridiculous. You must have a wicked though ;)
 

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