How to build wealth

For reference, my wife and I are in our mid-30s, with no kids. We plan to have kids soon. We both work full time.

Things have been going well for us and I recognize that we’re very, very fortunate. We’re beginning to think long-term about how to build wealth for our family. We’ve been saving and investing for as long as we’ve been together (since our mid-20s), but this was mostly untargeted, into index mutual funds. We also own our own home. We have no debt aside from our mortgage.

Our income-to-expense ratio is getting to the point that we hope we can make our money work for us in a more significant way. Right now we save or invest about 15% of our after-tax income. We’re thinking very strongly about buying a small property somewhere outside the city and suburbs to get some rental income. We live in the DC area, and we’re thinking to start very small, looking for something in the range of $60-80K (which would mean at least an hour or two away from DC, most likely). I’m pretty sure we could afford the mortgage for a place this small essentially in perpetuity even without a renter, since we wouldn’t be comfortable buying a place that we couldn’t afford without renters. We’d probably get a local property manager and see how this went for a year before evaluating whether being landlords is something we want to do for a long period of time. If it went well, we’d consider additional properties depending on how our income were to grow and what it could handle.

Is this a reasonable way to start to build long-term wealth, or is it pie-in-the-sky? How risky is it? What are other ways to seriously build wealth, with no more than moderate risk? What else should we be thinking of? What are your experiences?

I’ve long heard - and believed - that buying income property is likely the most realistic way for an average person to build wealth. Often cited is the perchase of a 2 flat for a first home.

Only real downside is the potential hassle of being a landlord (NOT inconsequential.)


However, I would consider being your own manager. Why build someone else’s wealth?

Think about a duplex, or fourplex, or a small apartment complex. Multiple rent checks coming in to cover a single mortgage.

I can think of a few people who are now millionaires by doing this.

Sounds good, but I don’t think it’s feasible where we live, at this point. We’d have to move pretty far to afford this, I think, which would make our commutes a nightmare.

I would caution against your plan for something “somewhere outside the city and suburbs.” The nice thing about remote locations is that they are cheaper. The bad thing is they don’t appreciate. If there is plenty of vacant land, your own property is not going to increase in value; it is not a scarce resource. If building wealth is your goal, you need something that will grow in value.

You are better off spending the same money on something smaller in a denser neighborhood. There will be many more people looking to rent it, and rents (and property rates) will rise over time. And I strongly urge you to get a property manager. When I hired one, he raised all my rents enough to pay for himself overnight. He also saved me much hassle and prevented me from tossing in the towel.

Thanks. We definitely plan to get a property manager. As for location, it doesn’t look like we can afford a rental property in any of the “dense” parts of the DC area. But out towards Richmond we might be able to afford something, and I think that area is also growing, if perhaps more slowly than the DC area.

I have often considered income property as an investment, but when you’re starting out while real estate may be good as an idea, the one you pick is essentially an undiversified investment channel. I would consider a single real estate investment to be high risk until you have sufficient capital to spread across multiple properties.

That makes it kind of a catch-22, though I think we’re comfortable with this sort of risk as long as the property is small enough – we could absorb a loss/failure of a $75K house (though it’d probably set us back a few years).

But are you particularly likely to make more money buying residential real estate and renting it out (with all the hassle and risk) than by just putting that money in investments?

I mean, there’s nothing magical about buying a lot & house, other than it’s just another way to invest your money.

It’s the power of leverage (debt) that makes the returns on real estate investing very attractive. If you are borrowing 75% of your investment amount at lower mortgage interest rates, you can roughly double your return on investment.

Unfortunately, I think this is right. It’s why I couldn’t pull the trigger myself. That, and bay area pricing means that $75K is not even close to a down payment, let alone the house itself.

Yeah - good questions. And I’m no expert. I guess you’d have to compare historic RE vs market appreciation, as well as income and tax benefits from each. You could pick a property that doesn’t appreciate or attract tenants - or a dog stock.

I think the 2-flat (at least what I’ve heard in the Chicago area) is appealing because you can get a mortgage as a residence, and have the income subsidize your mortgage. Then you can use the property to qualify for mortgages on additional properties. Also makes it easier to manage property where you live.

I don’ t want a second job, so it’s mostly indexed funds for me! I think the main thing is to live below your means, pick SOMETHING to invest in, and continue contributing on an ongoing basis throughout your working years.

Having a baby is sure fire way to knock the wind out of your budget and investment plans. I’d talk to any friends you have in the area that have kids to get an idea of how much daycare costs. You’ll also have at least your wife and maybe both of you off work for weeks or months which may affect income. Losing a renter around that time could cause some big problems. Just something to consider as far as timing goes.

I don’t think there’s anything wrong with just continuing to invest in index mutual funds. And from my point of view, there are advantages of such passive investing compared to owning a rental house/apartment. Your mutual fund isn’t going to suddenly need a new roof, or the refrigerator replaced or the toilet unclogged. And using a property manager is going to reduce your profit.

The management is something of a bind, ISTM. You really shouldn’t be buying anything remote without handing over the management to someone local. (Also, you’re an entry-level investor and these people are professionals.) But OTOH, you’re talking about a pretty small property, and the rents are not going to be that high. But the costs of managing it are not going to be all that different than hiring a manager for a more expensive property. Essentially the costs of management are going to be a much higher percentage of the gross costs than the average, I would think.

That said, I know a lot of people who make a living managing these types of properties, so I guess it must be workable.

The real problem you have these days is that everything is overpriced. The Federal Reserve has been keeping interest rates very low for some time, which pushed up the price of bonds, and this has the impact of pushing up the costs of all other investments, as people searching for yield have bid up the price of other investments too. Real estate itself is also significantly higher priced than it was a few years ago.

But if you do feel that real estate has more room to run, you might want to invest in a REIT. I myself own some shares of Vanguard’s REIT fund (VGSLX). It pays about 4% or so annually. But I bought this when it was in the low $90s and it’s now about $120, so I don’t know how much more it has to run.

Be aware that mortgage rates, which are probably about 100bp higher than they were a few years ago, are higher for investment properties than they are for owner-occupied properties, probably by about 50 bp. (Insurance rates are also higher, though that’s not as high a percentage of your costs.)

Depending on your situation it might make some sense to pay off some of your current mortgage. Eventually the economy will crash as it always does, and at that point you can refi and buy investments that would likely be lower-cost than they are today. But there’s risk in that too, as you never know what might happen, and it’s possible that at some point we will enter a highly inflationary period and those who have high mortgage balances (assuming they’re fixed rate) will cash in big time. Meanwhile, if there is high inflation then the dollar cost of alternative investments might never really come down.

Only thing I can add is that if you can find a cyclical investment that happens to be at a low point in the cycle, it might be a good idea. Good luck with that, though. :slight_smile:

I second this. I have done well with a low-cost, buy-and-hold approach.

At your age, a 15% savings rate should do well for FIRE.

WTF is “FIRE”?

Financial Independence Early Retirement. Great forum at link above.

It depends. We own a single condo in the building we used to live in. Most maintenance is handled by the building, but we are responsible for anything within the walls of the condo. Maybe about twice a year, I have to deal with some minor issue like fixing a toilet valve or the renters poured mashed potatoes down the sink drain and clogged it up. When tenants move out, we spend a couple hours cleaning and half-assedly slapping some white paint over any obvious dirt or smudges.

Owning an entire building like a duplex or small condo would be a different story. Something like that, you would probably need a dedicated property manager and you would be responsible for all sorts of repairs (roof, plumbing, septic, all that stuff).

Thank you for that. I really didn’t have time to read through an entire forum just to parse one acronym.