I am 26, live in Nashville, and just bought my first place. I am doing great, but I’m not sure of what to do next. I am in a 30-year mortgage, which allows me to save a nice portion of my paycheck after my expenses are paid.
However, I already have a nice lump sum of cash just sitting in savings. While this is a nice problem to have, I know I should be investing. But where should I put my money?
Should I put my money into the stock market or save for another down payment on a rental property? I am young and ready to learn.
You’re right. Having a nice lump sum of cash in savings is an excellent place to be, and we know many people who’d love to trade places with you.
You’re a young homeowner (these days, anyway, when the average age of a first-time home buyer is about 32) and that bodes well for your financial future. Studies over the years have shown that the younger you are when you buy your first home, the wealthier you’ll likely be later in life.
What you need now is an investing strategy that allows you to maximize your retirement savings — including salting away enough cash to get any match your company offers and opening up a Roth IRA. Both of these types of qualified retirement accounts should be invested in index funds that allow you to have wide diversity in the total stock market, a total bond fund, and some exposure to international markets.
With the rest of your cash, you can either invest in rental properties or do more investing in the stock market. Which way you go depends on your tolerance for risk (do what allows you to sleep at night) and how involved you want to get investing in real estate.
One way to accumulate your first few pieces of real estate is to rent the property you own and then buy another to live in. If you can cover your expenses in your current home by renting it out, then it may make sense to convert the property into a rental and buy a second property to live in. That way, you’ll get a less expensive interest rate on your loan with lower costs.
You could also buy a two- or three-family home, live in one and rent out the others. Or you might educate yourself about investing in other types of commercial property, including strip malls, shopping centers, warehouses, industrial complexes and office buildings.
By the way, owning investment real estate is not for everybody. You truly have to understand what it takes to own and manage it, and to figure out whether you have the time and energy that it requires.
People often say it’s easy to make money in real estate, but you can also spend a lot of time and effort and not make money. What you buy, where you buy, how long you hold onto property and a host of other factors can determine whether you’ll make money at it.
You have another option for what to do with your cash, which is to use some of it to pay down the mortgage on your current residence. If you go in that direction, remember to keep at least six months of mortgage payments, utility bills, insurance premiums and property taxes on hand in cash in case you take a hit to your income.
When you prepay your mortgage, the goal is to build up your equity so that if you sell the property, you’ll have even more cash to put down on your next home and will pay much less in interest. Making two extra payments per year will shave at least 10 years off a 30-year mortgage. Or you could refinance your 30-year loan to a 15-year mortgage for 3.25 percent (or less), using your cash to help qualify. That will help you save even more because you’ll be paying a lower rate of interest.
Interest rates are still at historic lows — which is forcing people to look for other investment opportunities to maximize their returns. However, with those higher returns come higher risks.
Some investment advisers argue that you should take out as large a mortgage loan for as long a term as possible and use today’s money to buy other investments. The theory is that when you borrow at a low fixed rate of interest today and invest that money in other areas, you will be better off.
The reality is that many homeowners will keep money in a savings account earning little or no return. In that case, they would probably be better off paying down their mortgage than losing money to inflation. At least they will shorten the length of their loans and save money at the back end of their mortgage loans.
Spend some time thinking about what kind of investor you want to be and how much work you want to put into your investments. All investments require work — but investing in real estate can require a lot more. If you’re interested in learning the basics about investing in real estate, check out Ilyce’s “Intentional Investor” series at ThinkGlinkStore.com or her book “Buy, Close, Move In!”
Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.