Forums » Starting Out » critique my plan please!

critique my plan please! 7 posts by 4 users

Jason S.

Posted: 06/19/2008 at 10:34PM

I am 28 years old and have been paying $2350 on top of our $1200 monthly payment on our 120k house (taxes are about 400 a month here) @ 6%.

I was wondering what would happen if i paid it off, but then continued to buy one house at a time as it is paid off too. I figured it would look like this:

after I pay off my house, I can put $1200 + $2350 (like I do now) + $900 (assuming that is what my house would rent for after taxes) = $4350 a month on a house of the same price. After 3 years, I would outright own this, and could put approximately $1100 a month after taxes with what I was paying already, for my next - $1200 + $2350 + $900 + $1100. This would pay off the 3rd in a little over 2 years ....

Doing this about 6 times would give me a small handful of properties I would own free and clear over the course of about 10 years. The cashflow could probably be about $6000 a month or so.

Is this a good plan? Could I then retire at that point??? How would you do it?

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MikeOH

Real Estate Investor
Ohio, Ohio

2665 posts

Posted: 06/20/2008 at 03:49AM

mouschi,

Owning free and clear rentals is a great thing! From that standpoint, your plan is a good one. However, it doesn't look to me like you've included the operating expenses in your calculation. Generally, throughout the United States, operating expenses over time run 45% to 50% of the gross rents. Therefore, if you're getting $900 rent, $450 of that goes to operating expenses, leaving you $450 per month in money that you can actually use for something.

So, assuming that you would own 10 free and clear rentals at the end of the 10 year period and each one had a gross rent of $900 per month, you would have a cash flow of $4,500 per month. Could you retire on $4,500 per month or $6,000 per month - that depends on your lifestyle.

Is this a good plan? ...How would you do it?

Your plan is certainly a valid plan. I did it a little differently because I didn't want to wait 10 years. I bought dozens of properties over a 4 year period by buying at a HUGE discount. I am semi-retired now and will have a very large cash flow when the properties are paid off in the next 15 years. It's a different strategy that yours, but yours is no less valid and yours is less risky.

Mike

Jason S.

256 posts

Posted: 06/20/2008 at 05:47AM

Wow, 50%? So how on earth do people make it? How could there ever be a positive cash flow on rentals? For example - if someone rents the house that I am paying off now for $1300 a month ($400 going to taxes, $900 going to me) that means I can expect to only bring in about $450 a month or something for it?

MikeOH

Real Estate Investor
Ohio, Ohio

2665 posts

Posted: 06/20/2008 at 06:06AM

Wow, 50%? So how on earth do people make it? How could there ever be a positive cash flow on rentals?

People make it by buying property at a HUGE discount to market value.

Mike

Jason H.

Real Estate Coach
Oakton, VA

Author

980 posts

Posted: 06/20/2008 at 06:24AM

Instead of buying one at a time and paying off one at a time, I would buy as many properties as you can as quickly as possible (at a huge discount).Then hold onto them for a few years and sell of the properties you don't really like and pay off the ones you do, so you own them free and clear.

EX: Pick up 20 properties this year....hold onto them for a few years....sell off 10 and pay down the other 10.

Jason S.

256 posts

Posted: 06/20/2008 at 06:33AM

very interesting idea - not that I have the money to do that, but how do i find these deals? where to look? how to determine if they are good deals or not??

Jeremy D.

Accountant
Philadelphia, PA

3 posts

Posted: 06/20/2008 at 11:09AM

This is one of my first posts, but I think that I finallyh have worthwhile insight:
I seriously question the wisdom of paying off a below market rate mortgage when you are planning on getting a new one anyway. You are winning big to having a 6% mortgage. If you were to get a new one in the current environment (assuming we're talking 30yr conventional fixed rate), you would be paying 7%. Instead of paying off your current mortgage, you could save that money as equity in your next home. Put it this way:
You have a 100k home w/ 20k of equity and 80k from the bank @ 6%. You are planning on paying off your current mortgage and then getting a 2nd house. Your new balance sheet might look like:
2 * 100k homes w/ 120k equity and 80k from the bank @ 7%. Why not instead keep the below market mortgage and get a balance sheet like:
2 * 100k homes w/ 120k euqity and 80k from the bank @ 6%?
Besides the obvious fact that you have a cheaper liability, you'll also save on the friction costs that come with getting a new loan (broker fees, etc...). I know that it feels nice to " Delever" but there are two ways to do that: You can pay off liabilities or you can build equity. I recommend that you build equity. You can always use that cash to pay off the mortgage if there's some legitimate credit related reason. Another plus: you keep the cash in case you have an unforeseen change in circumstances.