Every Monday is Intents and Purchases day at Living Behind the Curve

Dani and I don’t fight about much, but there is one dispute we have yet to iron out: our plan for real estate investment. It’s an important thing to figure out, since investing properly would mean a vast majority of our retirement will be tied up in these properties. We’re definitely of two minds on the subject, and yet our plans work out pretty similarly in the beginning and end, it’s just the execution that differs. Dani thinks we should make our money on rents, and I think we should make our money in the properties.

Both plans start in the same place: careful buying. The common wisdom states that you make your money when you buy, not when you sell, and this is true for any investment purchase. If you buy a house or a share of stock or an oil painting badly, you throttle or completely eliminate your ability to turn a profit when you sell it. So, any real estate properties need to be examined for current repairs, future repairs and rental prices in the area, and all that needs to be compared with the price you can pay and still turn a profit.

Both plans end in the same place, too. After paying off lots and lots of mortgage, we sell the properties, whine about capital gains, find a nice safe place to stick the profits, and live happily ever after.

If I understand her position correctly, Dani feels we’ll be in a better position to buy and hold properties for the life of the loan, refinancing where necessary, waiting for rents to increase and for loans to get paid off, and treating monthly profit as income. This position is pretty safe, relying on inflation and appreciation to make your money. Over the course of 30 years (or less, if you pay your extra principal and refi right), both are pretty much a guarantee. One risk with this approach is that your property turns into an old rented property, and the risk of expensive repairs increases with time. Old rented properties are never as well maintained as old owner-occupied properties, so your house is going to hug the bottom end of the price curve of the neighborhood when you do finally sell. But, the idea of rent going from less than 10% profit to somewhere around 80% profit can be tempting if you’re patient.

On the other hand, I’m a lot less concerned with making profit from rent. My idea is to go a little more short term, and to pay mortgage principal harder. Foregoing the profit in the short term, we get it back when we sell in 3 to 7 years, and try to roll the proceeds from one house into two. If my budget is right, in that time we should have saved up an additional down payment, so that makes three properties plus our residence. Lather, rinse and repeat, upgrading either to bigger properties or multiple properties with each sale. I don’t see a whole lot of potential to profit in rent alone, mostly because rents aren’t very high in our area, I see the profit in the fact that we’re getting someone else to pay off the mortgage for us. In theory, my plan tries to avoid paying expensive repairs on the property, but that’s never, ever guaranteed. It also diversifies our holdings faster, so one month without a renter on any one property will be less of a financial impact. It is riskier, though, subjecting us to the ups and downs of the market regularly, and throwing us at the mercy of interest rates.

Of course, the ultimate goal is to make lots of money. I have a funny feeling that we’ll end up somewhere in the middle, holding some properties and turning others regularly. It’s all in the future, so everything looks bright, rosy and easy from here. We’ll see how it goes.

So, what do you think of our plans? Lemme know in the comments.