Help me invest?

[savemachine]

*In Dr. Nick's voice*
Hi everybody

I'm 26 going on 27 this year.
I have ~14k in my 401K
I have 4k in my ROTH IRA as this is my first year
I also have ~4k in my saving account, and planning to up that to 10k.
Lastly I have ~650 dollars in my ETF

Car payment for me is about 300 dollars a month
My mom and I bought a house in Las Vegas for investment and split the cost. Now someone is renting the place, so I'm paying about 350 dollars a month for the mortgage. We're also paying off the second loan soon (within this year for 33k).

My conundrum is that I need to get out of my house before I'm 30, and would like very much to invest/save toward the downpayment of a townhome in Southern California which can run up to 600k as the worst case scenario. I however, am looking to get one at around 450k or less. Maybe in 2009, the price would have dropped considerably.

So how do I invest?
IE. How much do I put away per month and where? Stocks, mutual funds, saving accounts?

Oh and I make about 2594 dollars per month after tax, 10% deduction for 401K with 4% company matching, after the car payment, and house payment.

Regards,

[disneysteve]

Can you clarify something? You are half owner of a rental property but the property has negative cashflow so you still have to pay $350/month, right? That doesn't sound like such a great deal if you can't charge enough in rent to cover your expenses. How long do you plan to hold that property and how much have you already invested in it? Can you sell that in 2 years and use that money as your downpayment. On a 450K home, you should have 90K as a downpayment (20%). Will selling the house, plus any additional savings, get you to that level?

As for where to save, if your timeline is about 2 years, you need to stay in low risk instruments like high yield savings or CDs. You can't get involved in the stock market with so little time before you need the money. I also wouldn't raid the Roth for downpayment money.

What I would not do is borrow from the 401K for the downpayment. That is a bad idea and really impacts the future value of the account.

What you should do, if you aren't already, is first invest enough in the 401K to get the full match, then fully fund your Roth, and then go back to the 401K.

[sweeps]

For the money you need in 3 years, you're not going to want to invest in stocks. Stocks are by far the superior investment -- but only when your time horizon is 10 years or more. Stick with high-yield savings accounts and/or CDs.

[savemachine]

disneysteve

It doesn't sound like a great deal does it? The plan is to hold this property for as long as we can until the property's value appreciate, or just pay off the house and have this place be a source of a residual income. It might take a while, but we're paying off our second loan at around 33k by the end of this year. This would lower our monthly payment a little. I'm planning to add more money each month toward the principle.

Maybe I'm too optimistic in trying to buy a house in a couple of years but I do hope it can happen.

So high yield savings, and CD it is.

Regards

[jIM_Ohio]

I'm with the others- if you are losing $700/month on a rental (split 50-50 @ $350/person), then any "future gain" really does not matter. If you invested that $350/mo ($4200/yr... ~$13,000 in 3 years), that would do better than the chance you could sell the rental for a $90,000 down payment.

Why do you NEED to have a condo in 3 years? What is so special about that 3 year mark?

I would also suggest giving a more complete picture- what are your goals with investing, retirement, and finances in general. Make a goal, then find a way to financially achieve it.

[savemachine]

This is scaring me quite a bit regarding the property now.

I'd like to hold the property and make it another source of my income as a rental property in the future.

If that were my goal, am I not approaching this correctly?

[jIM_Ohio]

I have looked into renting. IMO it is a way for the rich to get richer, but not a way for the "starting investor" to make loads and loads of money.

RE investing requires "high overhead"- in form of down payment/startup expense. In addition if you own one/rent out one property, you are 100% reliant on that property being 100% utilized to generate whatever income needed.

IMO in a situation like that you want that unit to be "cash flow positive" each month. If property costs you $1300/month, the rent should pay for the property ($1300) and generate a profit (10% would be GREAT) so $1430/month is what I would consider renting it for.

Where I live I have looked at buying a condo (for $150k) and being able to rent it for more than $1200/mo (6.125% loan suggests payment of $900, + around $200/mo taxes).

The issue is it costs me 40k to buy the condo, plus I need 4-8 months "cash on hand" to cover repairs, plus have a reliable way to find tenants.

Renting is good business, but for me to replace my current income, I would need to run around 20 units like this (generating about $150/profit each month). I would be highly leveraged to do this (mortgage property 1 to fund property 2, mortgage 2 to get 3...). There is less risk if I do my day job and just set aside an extra $100/month and invest it in the market.

[autoxer]

My conundrum is that I need to get out of my house before I'm 30, and would like very much to invest/save toward the downpayment of a townhome in Southern California which can run up to 600k as the worst case scenario. I however, am looking to get one at around 450k or less. Maybe in 2009, the price would have dropped considerably.

Oh and I make about 2594 dollars per month after tax, 10% deduction for 401K with 4% company matching, after the car payment, and house payment.

If you bought a house around 450k, with 20% down (90k), then you would have a mortgage for $360,000. The mortgage payment would be around $2,150 not including property taxes, insurance, or utilities. I don't think that will work if you make about $2600 per month.

[savemachine]

If you bought a house around 450k, with 20% down (90k), then you would have a mortgage for $360,000. The mortgage payment would be around $2,150 not including property taxes, insurance, or utilities. I don't think that will work if you make about $2600 per month.

Hopefully I get a raise autoxer.

After the car payment, it will be around 3300 per month not including my annual raises and bonus.

[disneysteve]

If you bought a house around 450k, with 20% down (90k), then you would have a mortgage for $360,000. The mortgage payment would be around $2,150 not including property taxes, insurance, or utilities. I don't think that will work if you make about $2600 per month.

I didn't even think to check the numbers. That changes things, doesn't it? OP, are you anticipating a significant change in your income between now and when you are hoping to buy that home?

[savemachine]

I have looked into renting. IMO it is a way for the rich to get richer, but not a way for the "starting investor" to make loads and loads of money.

RE investing requires "high overhead"- in form of down payment/startup expense. In addition if you own one/rent out one property, you are 100% reliant on that property being 100% utilized to generate whatever income needed.

IMO in a situation like that you want that unit to be "cash flow positive" each month. If property costs you $1300/month, the rent should pay for the property ($1300) and generate a profit (10% would be GREAT) so $1430/month is what I would consider renting it for.

Where I live I have looked at buying a condo (for $150k) and being able to rent it for more than $1200/mo (6.125% loan suggests payment of $900, + around $200/mo taxes).

The issue is it costs me 40k to buy the condo, plus I need 4-8 months "cash on hand" to cover repairs, plus have a reliable way to find tenants.

Renting is good business, but for me to replace my current income, I would need to run around 20 units like this (generating about $150/profit each month). I would be highly leveraged to do this (mortgage property 1 to fund property 2, mortgage 2 to get 3...). There is less risk if I do my day job and just set aside an extra $100/month and invest it in the market.

I think I'm getting a hang of this and the more I think deeper into this, the more it's turning out that the property is not that great of an idea. Our plan is to pay off the second loan of 33k by the end of this year and it would lower our payment considerably, but we'll still be taking a negative income.

I thought all this time, that the more money you put into the house, the more equity will be built up, and while that might be true the cost might eventually run more than the profit in the end? I'll have a discussion soon, and see how we reach the conclusion.

Regards,

[jIM_Ohio]

I think I'm getting a hang of this and the more I think deeper into this, the more it's turning out that the property is not that great of an idea. Our plan is to pay off the second loan of 33k by the end of this year and it would lower our payment considerably, but we'll still be taking a negative income.

I thought all this time, that the more money you put into the house, the more equity will be built up, and while that might be true the cost might eventually run more than the profit in the end? I'll have a discussion soon, and see how we reach the conclusion.

Regards,

Can you raise the rent? Simple problem, simple solution. You are leveraged and realizing that is hurting you- so you are paying down the debt.

Are you realizing the tax advantages of renting? See an accountant if you are not.

You have the basic concept correct (if you owned the property, the rent would be 100% profit), the realistic side of this is that the reason renting is so profitable is you can leverage yourself and not need this type of deal (owning property to make 100% profit).