Paydown Debt or Continue Investments?

General Real Estate Investing
1

I’m a newby here, but have been reading these forums for a while. Here is my situation that may help readers to better understand my question.

I’m 25 years old and my finances are as follows:

9-5 job: $2,200/month after tax income
Side business (stock options trading) : $4,000/month after tax income
1 rental property: $1,000/month pre-tax income

Expenses are as follows:

Mortgage plus insurance and tax on rental: $750/month ($90K principal balance)
Mortgage plus insurance and tax on primary residence: $1,100/month ($140K principal balance)

I have been stocking away all my savings for about a year now and have accumulated $25K in cash. My dilema is I am torn about whether to throw that money down on principal and pay the debt off as soon as possible, or leverage the $25K and generate some additional monthly cashflow?

This seems to be the biggest question I have from my short experiences in RE investing…do I keep taking on projects and be short in liquidity and equity or use the extra CF from existing projects and income to paydown debt and take on another project once the debt is significantly paid down? Hopefully I am articulating this clearly enough. Any and all input would be appreciated!

2

Since you have no other debt than mortgages, I would use that 25K to buy a foreclosure duplex or house from a bank. You should be able to find a good deal in this market.

Furnishedowner

3

Furnishedowner, if you don’t mind me asking, how did you approach your progression in real estate…take out more debt to finance more and more projects or stick with just a few, wait till they are paid off, and then move onto the next one?

4

I would get a mortgage consultation to find out just how much more debt your current income can support. If the answer is none, then your options are limited to either saving up enough to pay cash for your next property or use your discretionary funds to pay down existing debt to improve your net income.

If you decide to pay down debt, you won’t see an immediate reduction in your monthly mortgage payment unless you have an adjustable rate loan. If you have an adjustable, then the monthly payment may decrease at your next adjustment.

Perhaps there are other investments that would be better vehicles for your capital that will let your nestegg grow. There are some preferred stocks paying 9%, there are some corporate bonds that pay handsomely if you are willing to accept the risk.

5

If your debts only consist of mortgages on 2 homes, one of which being your primary and the other a cashflowing rental I absolutely would not pay either of them down. Hint: no one has ever gotten rich by paying off debt.

The key is having the right kind of debt, which you have. However, there are obvious problems with getting mortgages in your name and then renting the houses out: 1. you can only buy so many before the banks cut you off, 2. you’ll have to put up huge down payments to get the mortgage, and 3. you’re personally guaranteeing the debt which risks all of your assets if things go wrong.

The solution? Simple…there are many ways to leverage your $25k but if I were you I’d learn how to buy homes “subject-to” (which means you buy the house but the loan stays in the seller’s name). No personally guaranteed debt, no down payments, no sucking up to lenders, you can literally buy as many homes as you want this way, and the risk stays with the seller (where it belongs). Since you’re already a landlord with a good cashflowing property you already have some expertise in this arena. May as well keep the momentum going and learn to do it properly.

With so many motivated sellers out there today it’s not hard to find someone who will sell their house and leave the loan in their name. You may have to give them a few thousand for moving money and you may have to catch up a few payments. However if you turn around and sell these houses on a lease purchase or seller financing you can get 3-5% or more upfront from the tenant/buyer in the form of a non-refundable option fee with them being responsible for ALL maintenance & repairs…eliminating virtually all potential landlording headaches.

Just close them with a knowledgeable attorney, make sure you’re using good numbers, and that you know what you’re doing.

As a side note, I wish I would have been as well-positioned and financially astute as you when I was 25. You deserve a KUDO. lol

6

Another tip - buy Robert Kiyosaki’s Ca$hflow board game. 101 and 202. There’s a computer version too.

Someone in your shoes could not only learn a ton about investing, but you could actually DO some of the things you’ll learn as it relates to investments. Whether you know it or not, you’re already on the “fast track” meaning you could quit your job anytime you want to and focus on wealth building. Those of us who have played the game know what I’m talking about.

I envy you! Congratulations on doing things the right way!

7

@ furnishedowner: I’ve looked at some nice duplexs in the area and I would agree. There are properties which assess at $40-50K SEV (State Equalized Value) here in MI, paid $90K in 09 or 2010, some already updated available now as foreclosure for $29.9K, heres a link to one I was eying and the parcel lookup page…close to the University :cool

http://public.grar.com/public/ePubRecn.mac/start?MLS=10045530

https://www.accesskent.com/Property/

@ Dave T: I agree D/I ratios are key. I currently work as a Credit Analyst in commercial banking and our guidelines are favorable at <40%, we will allow higher if the individual shows additional assets, has a relationship with the bank, or demonstrates liquidity, which is key. All liquidity is being verified per new federal financial regulatory review. Based on only my monthly LTD/I described above, $1,875/$7,200 = 25%, including other living expense (car insurance, personal utilities, food, gas, cell phone, girlfriend) it rises to probably closer to $3,000/$7,200 to the 35-40% range. I’d like to keep it under 50%, hence I was hoping for mostly a cash offer deal here…or possibly creative financing.

@nsu: Thank you for the feedback! Since I only own one property that I purchased as a foreclosure, I don’t yet understand some of the topics you discussed. I know the concept of Subject-To and Seller Finance, but I have never done it. I want to! In the link I posted above, this property is owned by a Bank, are Subject-To or Seller Financing possibilities in this situation, or are these approches strictly for motivated personal sellers and those looking to get out from under a property?

In this area I think its 4 or 5 mortgages and your cut off… :bs homes are cheap but ur right downpayments still require a lot of Cash, and you bet that is debt personally guaranteed :frowning:

I would absolutely love to quit my j o b. But, it is stable and I am…well mostly scared to walk out the door with the insurance and bennies offered. I’m very interested in the idea of a non-bank motivated seller and would like to check this out more. Using those ideas combined with maybe a low price cash duplex puchase, I just might, someday, be able to say goodbye to 8-5. I will definetely pick up that boardgame. Hopefully it will guide me down the steps of wealth creation and one where I can have a flexible day while still providing for myself.

Thank you again, and all for the great advice!

8

You’re welcome!

To answer your question you’ll need to deal with motivated individuals to get subject-to deals. Foreclosed homes owned by banks will require all cash.

There are many great resources dealing with how to do sub-to’s…personally I learned from Ron LeGrand. He has his Quick Start Package (Cash Flow Systems and Quick Start Real Estate School) http://tinyurl.com/2fqmj58 They go into subject-to in great depth, from locating & prescreening prospects all the way through to cashing it out at the end.

If you buy a handful of good properties sub-to within the next few years you’ll make some good money now and end up a wealthy man once this market turns around.

9

ckorn

Take this with a grain of salt, for I have not started RE investing yet so am not speaking from experience nor can back up anything with a personal financial statement…

I think nsu gave some great advice except for saying paying down debt doesn’t make you rich. It absolutely can… because I know some old-school guys who are. But, using leverage is definately a strategy that works.
Im familiar with Kiyosaki’s stuff, and fall somewhere between his teachings and Dave Ramsey’s (no debt). Maybe you could read both men’s materials and form your own opinion? (Only meaning their take on having debt)
Ive been learning about wholesaling and subject to’s… I would recommend looking into these since you’re already interested in real estate. Sounds great to me… A lot of control with little risk.
Anyway, I suggest educating yourself in other areas of real estate and then forming a strategy?

I wouldn’t recommend quitting your day job anytime soon, but you’re definately on the right track!
Good job dude!

10

@ Nsu: Thank you for the helpful links, I am definitely going to investigate these topics, I hope to incorporate Subject To financing into the “arsenal” if you will real soon. In the interest of time, banks fire sale’s aren’t too bad for discounts…

@PattGMC: It’s interesting that you bring up Dave Ramsey’s name, because I have listened to his radio show a few times. My father, also kinda old school, really believes in his stuff. I guess that’s where I am torn, and probably fall somewhere in the middle, not 100% financing, leveraged to the hill, but also not adherent to a $0 debt approach as Dave would suggest. I just don’t see how you can get ahead at a fast clip doing that. I can really see the power of the Subject To approach. Well, it’s Monday morning, and back to work…

11

You couldn’t be more correct about the bank owned houses. They’re taking lowball offers left and right. Gotta be able to pay or raise cash though.

I agree with Patt that it’s great to be debt free, and I too am a fan of Dave Ramsey. However I feel that his general message of absolutely no debt is applicable primarily to the “average Joe” so to speak, who works a 9 to 5 and is satisfied with that. On a personal finance level I follow his advice because consumer debt is indeed poisonous. I have no consumer debt at all…6-year old car paid for and no credit card debt. It makes perfect sense to avoid consumer debt at all cost, but at the same time I still believe being debt free in and of itself still won’t make anyone rich…you’ll just be debt free. I’m a perfect example of that. LOL! As you eluded Ckorn, you could take money otherwise paid to creditors and invest it, but that will take a long time.

However us entrepreneurs are cut from a different cloth. Debt is nothing more than another tool we use to make money with. For example if I borrow money to rehab a house I could literally borrow it at 18% interest, pay 10 points, and 3 months interest prepayment penalty and still make a profit that exceeds the average Joe’s entire gross yearly salary. In this example it’s the availability of the money that makes the difference, not the cost. I would never advise an average Joe to borrow on those terms because he’ll use it to buy a new car or a big screen TV. lol. Nor do I advocate jumping out there into any entrepreneurial endeavor not knowing what you’re doing.

12

I agree with that.

13

ckorn,
NOTHING is paid off yet. Wish it were, and I am more than half-way on some of the 12-year loans.

Every time I take on more debt it is scary. Especially since I then need to spend and spend to get the unit fully-furnished to rent out. But I have gotten good at cutting corners.

Now the reason that I am doing more houses is because just today I had 6 more calls for a fully-furnished rental: “Oakwood Apartments, we have a customer for 90 days”…“I’m a new medical resident and I need a place on the 22nd”…“We’re a Travel Nurse Agency and we have a nurse arriving on Thursday who has 3 cats and a small dog”…“Our work crew needs another house.”

If there is a market, and a way to make money with rental houses, just go do it.

Furnishedowner

14

You miss the point. Being rich is not the goal. Financial independence is the goal. If you have enough passive income to support your lifestyle so you don’t have to work for a living, you are financially independent.

In the last years of my parent’s lives, they had no debt. My father even cancelled his credit card (yes just one). My mom died in 2005 and my dad died last year. I just finished settling his estate. My dad was not a millionaire so he was nowhere close to what you might call rich, but he had money in the bank and had stock market investments. His unearned income was greater than his monthly expenses, so he was never going to outlive his nestegg. My dad was debt free and financially independent. He was happy and that was all that mattered.

I am also retired and I am also financially independent. I am working on becoming debt free. I don’t need to be rich, although I already consider myself so.

15

I’m like Furnished with the demand here. I could easily rent another 30 houses and get calls all the time. The rental market demand is strong here. My limiting factor is time to get everything ready and I also think carefully about taking on more debt. I’m comfortable with what we have at the moment.

16

Oh no, I get that point. I am a firm, absolute believer in financial independence. That’s actually how I define being wealthy: the ability to live how you wish to live from the income derived from one’s personal resources. IE passive income. My point is you can achieve that by using debt as a tool. As long as it’s the right kind of debt. On the other hand, a person can absolutely be 100% debt free but still not be financially independent.

A good example would be commercial real estate land development. It’s almost impossible to break in without using personally guaranteed debt. But one deal can create millions in equity, which can then be cashed out & invested to produce income to make one financially independent.