Should I finance rental property or own outright?
To answer some parts of the question which are answerable as-is: Yes, mortgage interest is deductible. So is depreciation. See this question and others. It would be a good idea to put some money away for tax season, just as you should save some money to cover unexpected property expenses. But as @JoeTaxpayer says, this is a good problem to have, assuming you own the property, it's low-maintenance, your tenant is good, and your rent is at market levels. In general you do not want to show a taxable gain on rental properties if you can avoid it.  One of the more beneficial advantages of owning cash flowing rental properties, is that the income is tax deferred because of the depreciation.  I say deferred, because depreciation affects the cost basis of your property.   Also since you are considering financing, it sounds like you don't need the cash flow currently.  You usually can get better returns by financing and buying more rental properties, especially with investment mortgages at historical lows (Win via inflation over time)
"the most important information that you provided was ""I'm 25 years old"". You have a few years to save for a rental property. Taking a loan against your 401k only invites a lot of paperwork and a good deal of risk. Not only the ""if I lose my job I have to pay it back (in 60 days)"", but it effectively locks you into your current job because changing jobs also causes the same repayment consequences. Do you really love your job that much that you would stick with it for the loan you have? (rhetorical) One could argue that real estate is a good way to diversify away from the stock market (assuming you have your 401k invested in stocks). Another way to get the same diversification is to invest in REITs through your 401k. Owning rental property isn't something to rush into. You really have to like it.The returns and headaches that accompany it can be a drag and it's harder to get out of then stocks." Wow! First, congratulations! You are both making great money. You should be able to reach your goals.  Are we on the right track ? Are we doing any mistakes which we could have avoided ? Please advice if there is something that we should focus more into ! I would prioritize as follows: Get on the same page. My first red flag is that you are listing your assets separately. You and your wife own property together and are raising your daughter together. The first thing is to both be on the same page with your combined income and assets. This is critical. Set specific goals for the future. Dreaming and big-picture life planning will be the foundation for building a detailed plan for reaching your goals. You will see more progress with more sacrifice. If you both are not equally excited about the goals, you will not both be equally willing to sacrifice lifestyle now. You have the income now to be able to set yourselves up to do whatever you want in 10 years, if you can agree on what you want. Hire a financial planner you trust. Interview people, ask someone who is where you want to be in 10 years. You need someone with experience that can guide you through these questions and understands how to manage your income stream. Start saving for retirement in tax-advantaged accounts. This should be as much as 10%-15% of your income combined, so $30k-$45k per year. You need to start diversifying your investments. Real estate is great, but I would never recommend it as this large a percentage of net worth. Start saving for your child's education. Hard to say what you need here, since I don't know your goals. A financial planner should assist you with this. Get rid of your debt. Out of your $2.1M of rental real estate and land, you have $1.4M of debt. It will be difficult to start a business with that much additional debt. It will also put stress on your retirement that you don't need. You are taking on lots of risk here. I would sell all but maybe one of the properties and let it cash flow. This will free up cash to start investing for retirement or future business too. Buy more rental in the future with cash only. You have plenty of income to do it this way, and you will be setting yourself up for a great future. At this point you can continue to pile funds into any/all your investments, with the goal of using the funds to start a business or to live on. If all your investments are tied up in real estate, you wont have anything to draw on if needed for a business opportunity. You need to weigh this out in your goal and planning. What should we do to prepare for a comfortable retirement and safety You cannot plan for or see all scenarios. However, good planning will give you more options and more choices. Investing driven by fear will set you up for failure.  Spend less than you make. Be patient. Be generous. Cheers! You have some of the math right, but are missing a few things. Here's what I can offer - if I leave anything out, someone please expand or clarify. Rental income can be reduced by mortgage interest and maintenance costs (as you mentioned), but also by property tax payments, association fees, insurance costs, landlord expenses, and depreciation. Note that if you don't live in the property for 3 years, you'll have to pay capital gains tax if/when you sell the house. You can live in it again for 2 of the last 5 years to avoid this. Many people recommend only assuming you will get 10 months of rental income a year, to account for transitions between tenants, difficult in finding new tenants, and the occasional deadbeat tenant. This also adds a buffer for unexpected problems you need to fix in the house. If you can't at least break even on 10 months of income a year, consider the risk. I think there are also some cases where you need to repay depreciation amounts that you have deducted, but I don't know the details. Renting out a house can be fun and profitable, but it's very far from a sure thing. I'd always recommend preparation and caution, and of course talking to professionals about the finances, accounting, and lease-writing. Good luck! I used to own a few investment properties, so I'm pretty familiar with this.  As MrChrister mentions, lenders see investment mortgages as higher risk. People who fall into financial trouble are much more likely to let their investment properties go than their personal residence.  Consequently, the interest rates and downpayment requirements are generally higher. Typically a mortgage for an investment property will require 20% down, vs. as low as 3-5% down for a personal residence.  With excellent credit and some shopping around, you could probably do 10% down.  Interest rates are typically about a half-percent higher as well. You'll also find that the more investment properties you have, the harder it becomes to finance new ones.  Banks look at debt-to-income ratios to determine if you are over extended.  Typically banks like to see that your housing payments are less than 20% or so of your income.  However, with rental properties, housing payments generally account for far more than 20% of your rental income.  Other income you have can offset that, but after buying 2-3 houses or so, your DTI generally creeps into the range where lenders are uncomfortable lending to you anymore.  This is why you'll find that many rental properties are bought on land contracts with owner financing rather than with mortgages. A good quick filter to see if a property is worth looking at is if the total rent for the property for the year is equal to 10% of the price of the property.  For example, if the property is valued at $400,000 then the rent collected should be $40,000 for the entire year.  Which is $3,333.33 per month. If the property does not bring in at least 10% per year then it is not likely all the payments can be covered on the property.  It's more likely to be sinking money into it to keep it afloat. You would be exactly right, as you have to figure in insurance, utilities, taxes, maintenance/repair, mortgage payments, (new roof, new furnace, etc), drywall, paint, etc. Also as a good rule of thumb, expect a vacancy rate of at least 10% (or 1 month) per year as a precaution. If you have money sitting around, look into Real Estate Investment Trusts.  IIRC, the average dividend was north of 10% last year.  That is all money that comes back to you.  I'm not sure what the tax implications are in Australia, however in Canada dividends are taxed very favourably.  No mortgage, property tax, tenants to find, or maintenance either. You can explore the scenarios in which it is better to rent or to buy using this application: http://demonstrations.wolfram.com/BuyOrRentInvestmentReturnCalculator/ In the possibly unlikely scenario shown below, at the term of the mortgage (20 years) the tenant and the buyer have practically the same return on investment.  At this point the tenant's savings would be sufficient to buy a house equivalent to the buyer's, and this would be the advisable course of action (based on the figures alone). I assume having real estate in a good popular city is much more secure way of keeping money than having it in a bank account Not at all!  Many things can go wrong with rental property. Renters can be late on rent, they can cause damage to property, you can have unexpected repairs. I'm not saying that you should just let it sit, but rental property is not risk-free my any means. Are you prepared to be a landlord as a part time job (for 500/mo?).  Rental property is not passive income - it takes work to maintain.  You can outsource this to a property manager, but that eats into the 500/mo that you are estimating). I want to stay flexible and have a possibility to change my location whenever I want. That's a perfectly reasonable reason not to buy a home, but what will you do with the rental when you move? It will still need maintenance, you'll still need to interact with renters, etc. I'm not saying you shouldn't do this, but I get the feeling that you are not fully aware of the risks involved in rental properties. "You are a ""strategic"" investor, which is to say that you are in the best position to evaluate the deal because you already live there. Others don't have this advantage going in, which is why they might not be inclined to do what you're doing. Your biggest advantage is that you know at least one tenant. In essence, you are your own ""tenant"" for the top floor You also presumably have a pretty good idea of the neighborhood. These are arguments for owning your own home, although it does get a bit trickier with a second tenant, whom you may not know. Do check credit and references, etc. You might ask the landlord why he wants to sell. Presumably it's because he wants to retire or move, and not a problem with the property. But it does no harm to ask."