real estate

Invest in REITs or become a landlord?

Don TaylorDear Dr. Don,
My wife and I own a small business that earned about $150,000 this year (after taxes). We've never had this kind of cash before, and we're trying to figure out what to do with it. We live in Arizona and it appears home values are on the rise, so we're wondering: Should we refinance our home, buy a rental property or both?

Our home is worth about $230,000, though we owe about $260,000. If we refinance, we would need to put down at least $70,000 to get rid of our private mortgage insurance payments. We could then use the remaining $80,000 as a down payment on a rental property.

Is it better to do this or to just put it all toward the primary residence and forget the rental idea? We really appreciate any advice!

Best regards,
-- Brandon Bungalow

Dear Brandon,
Is that $150,000 a one-time gain, or do you expect an even greater return as your business grows? If you expect it to continue, I'd suggest using part of your profits to set up a retirement plan for your business -- that is, if it doesn't have one in place already.

Accumulating rental property may not be your best move. As a busy small-business owner, you may not have the time, energy or inclination to be a successful landlord. You already have more than $260,000 invested in your local real estate market. Do you really want to double down? I wouldn't.

As an alternative, you could invest in REITs, or real estate investment trusts. Those are professionally managed, and they could become part of a diversified investment portfolio.

It's true that a conventional first mortgage will require private mortgage insurance, or PMI, if the loan-to-value is more than 80 percent of the home's value. However, you may be eligible to refinance using the federal government's Home Affordable Refinance Program, or HARP, without bringing $70,000 in cash to closing.

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