Work is going well. You paid off the cars. Your spouse got a huge promotion. Your bank account keeps growing—and you just paid off your house. No more mortgage. You own it completely.
You now face the question: “Where do I invest?”, and you don’t know what to do.
Many people turn to real estate. “It’s the best investment,” they’ve often heard, and usually, it’s right. But investing in real estate comes with both pros and cons.
I often find myself giving advice about this to clients and friends-of-clients. Every situation is different, but I’ll talk briefly about two main strategies: leverage your equity and secure your future.
Leverage Your Equity
If you want to make the most of your equity, and if you want your income to keep growing, invest in real estate. You can sell that house you just paid off, and with that, you can now afford the down payments on two homes. Don’t over-stretch yourself—make sure you aren’t chaining yourself to overwhelming mortgages—but you can stretch a little bit.
Now you can live in one home and rent the other, and you’re building twice as much equity as before. The tax advantages of this strategy can make your wealth grow quicker than any other investment plan. In short, your money is really making money. When you look twenty years down the road, you’re going to be in a very good position—if nothing changes.
The biggest risk of buying a second home lies in the housing market. If there’s a slump, or even if the market doesn’t grow as much as you had predicted, you’ll find yourself handcuffed to your houses—unable to sell them without losing money on the deal, and unable to move away.
Also, making money as a landlord isn’t for everyone. It’s a commitment, and depending on how involved you want to be, a rental property can take up time, money, and flexibility. You can use a property management company, but that eats into your profits. It’s important to weigh all the pros and cons before you wade into this revenue stream.
Secure Your Future
In this plan, once you’ve paid off your house, you’re just about done. You can sell that house and move into your long-term, buy-it-for-life home, or you can stay put for the long haul right where you are. Either way, the point of this plan isn’t to make more money for the future, it’s to secure the present that you already have.
You’re happy with your current standard of living, and you want to spend time enjoying it. Your goals now are to (1) prepare for emergencies (a housing market downturn, getting laid-off, health complications), (2) help those you love (build a college fund, support aging parents, donate to nonprofits), and (3) celebrate life (travel, buy a boat, remodel). The risks and commitment of real estate investment often don’t make sense in this situation. Instead, look to lower-reward, lower-risk places.
We don’t blanket-prescribe Leverage Your Equity or Secure Your Future. It all depends on your specific goals and your unique financial situation.
That’s how we always approach real estate—it’s a unique situation every time. We want to know you first, and we want to develop a relationship. It’s the only way to give advice and guidance that truly fits your goals and personality.
We’re committed to our clients’ best interest, even if it means discouraging someone from selling their house and buying a new one, because we take pride in our work. We take pride in helping our clients make the best decisions possible.
