Earlier this week, I came up with a new game plan for building up passive income. Something new to set my sights on and while my expected return may be a little high (thanks for some of the valuable comments from readers), it got me motivated again. And boy, did it get me excited. I stayed up late doing the calculations while my wife had turned off the bedroom light.
I don’t mind staying up and working on a fun project. I definitely wasn’t going to be able to sleep when I was this excited. As I related my new goal to my wife, she had a ton of questions and just as much doubt. I tried to explain that it was the best case scenario. In the middle of the conversation, she asked how this would affect our plans to buy a home in the next few years.
I stumbled to find the right answer. Instantly, I was aware that buy buying a home would alter my plan, but I wasn’t sure by how much. I told her that I would find out. Back to the drawing board…
Why Buying a Home Affects Our Passive Income Goal
When thinking about investing aggressively in order to build up a lump sum, from which we can supplement our business income, it’s common sense that the more money we invest now, the faster we will grow (assuming positive returns of course). In other words, if I invest $10,000 every year, I will accumulate wealth much faster than if I were investing only $5,000 each year.
In its most basic form then, it seems that if we were to buy a home, which would be an added expense, it would reduce the amount of money we could invest. This would then slow down our progress. Spending $60,000 on a down payment for a $300,000 house, for example, would tie up a lot of our capital. Talk about delaying our growth. Not to mention the cost of home insurance. Luckily, there are options such as aarp online Auto and Home Insurance that will save you money when you bundle them. .
But buying a home isn’t a complete waste of money. It’s not like we are buying a depreciating asset like a car. Homes hold their value and typically increase in value over time. Buying a house is another great way to build up wealth. In other words, it is just a different investment vehicle. So, while it may delay my goal towards passive income (because it’s not actually bring in money), it is still working towards increasing my net worth.
What is My Goal Anyway? Income or Cash Flow?
Buying a home has been one of my goals for a long time. I see it as a great way to lower your expenses in retirement. By paying off your mortgage before retirement, you can live with significantly lower housing costs than you could if you were renting. Paying rent can definitely take out a huge chunk of the income you have coming in.
Thus, it makes sense to develop this goal of mine. While $8,000 of passive income has a nice ring to it, having a larger cash flow sounds much better. That’s what it’s all about, right? The freedom to do whatever you want.
To bring it all together, I do plan on buying a home. It will delay my passive income goal (unless my business takes off sometime soon), but in the long run, it will allow me to have a larger cash flow and ultimately more financial security.
Hmm… this is where you get into the realm of “there’s more to life than money.” For women more so than men, having a home of your own is important. More important than some nebulous money making scheme (the way the one wanting the home views any competing proposal).
But… the best time to buy a house is when the market is at its bottom. Nobody can predict the future but it’s probably a safe bet that by the time you can buy a home, prices will be a lot higher than they will be next time the market crashes. And it always does. It seems like it happens once a lifetime, but it happens every 7-10 years… and we’re already 2-3 years from the last bottom. I know it doesn’t feel like that, but we are.
All’s to say your best wisdom is: the best way to get our home is to
(a) wait till the market drops again – that’s a $20-50,000 bump to the drop dead money fund right there – and
(b) make as much money as we can in the meantime to make sure we take on as little debt as possible when we buy said house.
It might not FEEL like the best option (I don’t want to wait a moment longer for my house than I absolutely need to). And it might not be the surest option (what if this scheme doesn’t work out?).
But it is the option with the best shot at long term financial success. And that, incidentally, is the answer to your wife’s question: why isn’t our house the first investment priority?
Does that make sense?
Stinks you live in such an expensive part of the country. I got a 2 bed 1.5 bath townhouse for less than 80k down here. Much lower down payment.
After saving aggresively for the past three years, my wife and I finally bought a home…in cash!
We originally planned to save up a massive down payment and then purchase a $200k house in Saint Paul, MN. However, as we began running the numbers, we felt horrible about holding a 30- or 15-year mortage for the remaining $150k (we had saved up $50k).
One night, we sat down with our financials and did some brainstorming. We finally decided that, instead of pursuing the American standard of a nice, spacious, three-bedroom house with 2000+ sq. ft, we’d purchase a foreclosed home that needed some work. This would provide the stability of a home (owned outright, no mortgage payment) and the opportunity to earn passive income quicker (no mortgage payment so more cash flow).
In June, we bought a small, 1500 sq ft home in Saint Paul for $55k. Over the next year, we’ll probably put $20k into repairs and rennovations. We’ll still end up way ahead. At this pace, we should be ready to buy another house like this in 3-4 years. At that point, we’ll have two homes that are completely paid off, one of which will be generating $1000/mo in passive income.
We are in the exact same boat… we want to save for a home in about two years or so, but I know this is the best time to be saving up money for passive income (I am 25)… I max out my Roth and contribute to my 401K, but I would like to get started with other type of investing as well. However, planning to buy a home makes all of that very tricky.
I am investing in dividend stocks and investigating other passive income streams I can get into, either sometime soon or after school. But one thing I really want to do is buy a house as soon as I can reasonably afford it. It seems that in 6 or 7 years when buying a house might be feasible for me that prices must be lower than this supposed bubble Canada is talked about being in. So what I am doing is saving as much money as I can and investing what I do save, but I know in my mind that, while I would like to hold my stocks forever that it is also an option to sell my investments when it comes time to buy a house.
[...] @ Passive Income To Retire writes Buying a Home (Someday) and Why it Delays My Passive Income Goal – Find out how buying a home will affect my ability to develop passive income [...]
[...] @ Passive Income To Retire writes Buying a Home (Someday) and Why it Delays My Passive Income Goal – Find out how buying a home will affect my ability to develop passive income [...]