So I'm an Engineer and my wife is a Nurse. We are 28 & 25. We are wanting to get a jump start on retirement. Right now we are paying down a Condo in Utah. We both decided that our dream retirement home would be near Kalispell, Montana. Other than the Condo we have 0 debt. We also have about $60,000 in savings.
I found a plot of land up there that is about 20 acres for a reasonable price. I wanted to start a mortgage on it and pay it down over the next 10 or so years. This is feasible for us because we live 100% off of my income, and everything my wife makes is savings / expendable. We also have a 401k plan established under my income.
What I want to know is are there any flaws in this kind of plan? I still need to research how to get a house built on a plot of land. We are pretty set on retiring here.
Wed Jul 29, 2015 6:44 pm
oldguy Senior Member
Cash: $ 715.00
Joined: 21 May 2006
Sounds great, that's a beautiful area. We, too, are an engineer and RN.
When we were young we bought rental houses, 3bd2ba, whenever we could qualify we would scrape up a down payment add another house. We 'pyramided' them, when a house built up equity, we would refi, take out the equity, and use it for a down payment on another house. We leveled out at 4, and kept them for about 35 years.
But we continued to refi them as they built equity - and we invested the equity in an SP500 Index Fund. It turned out that real estate and stocks provides a very well diversified portfolio. Some yrs the houses went up, some years the stocks went up, and some years both went up - and seldom did they both go down.
Aside - at lunch, I would sometimes share w/ other engineers that I got a new mortgage a house that we had paid-off. lol - when you do that people look at you like you are crazy "you put a loan on a house and used the money to play the market??"" - so I learned to quit sharing that story.
Here is the concept that I developed. Refi and add $25,000 to the loan. That costs about $134/m to the payment, (ie, $48,000 over 30 yrs). Place the $25k at 11%/yr for 30 yrs = $550,000.
I always used 30 yr, fixed rate loans, no ARMs, no balloons, no 15yr or 20yr terms, no designer loans. I needed to be able to rely on my capital supply - I could manage the ups/downs of the RE market, but I couldn't allow capital to be recalled at the same time my houses were underwater.
Law of investing - risk and return are directly proportional. That applies equally to stocks and to real estate - some think RE is safer cuz they can "see" it, but not true.
A nice feature of our RE/stocks portfolio is that you can dial in whatever risk level that you like - eg, if you want to add risk you refi a house, remove some equity, and move that money over to the stock side of the portfolio. That adds leverage to your houses.
This site shows the return on the SP500 over history. Check a few 30-year blocks of time, the usual answer is abut 11%/yr. The stock market std dev on annual basis is about 15%, ie it fluctuates wildly year-to-year. And it is unreliable as a 5-yr investment, or even 10 yrs - but over 30 yrs there is time for statistical averaging and it typically converges on 11%/yr. And 30 yrs fits well with human life - you can use the first 30 yrs of your career for wealth-accumulation, then transition gradually to wealth-preservation (bonds, paid-for RE, etc).
As for the 20 acres in MT - I would keep it as raw land. I've seen folks put up a house for retirement, then watched it age for 40 years, or worse yet, trashed by renters. And, from a money standpoint, better to keep it in stocks - eg, rather than tie-up $100k in a house, leave it in stocks for 30 yrs, grow it to $2.2M, and build anything you want - it will be brand new, modern, up to code, furnishings, modern building materials, etc. The "location" is what you want to nail down, not the house.
You probably know the Rule of 72? Money doubles when rate X years = 0.72. At 11%/yr, it doubles in less than 7 yrs. Derivation: Factor = e^(rate x years).