40K/yr to invest: Pay down home OR buy more

11 Replies

Hey there! 

TL;DR:

I'm 29, have 40K to invest per year, but don't think I should "buy high." I'm not confident I'll get great deals on houses in this market. Should I just pay down my own mortgage for now, use my house as a savings account, and leverage it to buy rental homes when the economy dips? Or should I just get started buying houses? 

More detail:
I have a salary of $70K that I live on. Two months ago I bought our first house ($250k, Austin, TX, via FHA). I'm new to being employed, having run my own business (graffiti art, colorcartel.com) since I graduated from college 4 years ago. But even employed, I've been able to continue making money with my murals at the same rate. So I've decided to live on my salary, and dedicate $40k/yr of my art income to investing. If I just pay down my own mortgage, would it be easy to leverage this to a buy a house or two when we have our next recession? Or should I just suck it up and try to find good deals now?


Thanks!
Andrew

@Andrew Horner predicting economic swings is way above my pay grade and near impossible in my opinion.

I know people in Austin that are still buying cashflowing rentals, despite what everyone's mailman says is possible. Areas surrounding Austin still have stock available and there are plenty of opportunities. I'd say the likelihood that the metro area continues to grow south and you see some appreciation is pretty high, but still buy for cashflow!

My question to you is, how long are you willing to sit on the sideline waiting for deals to be readily available? Who's to say when the next downturn will be. Could be this year, next year, 10 years. Who knows. And who's to say that real estate deals will be easier to find. In theory they should be, but again, who knows. One thing I can say for sure, by paying down your mortgage, you're paying back the cheapest leverage available to you, and you're tying up that liquidity and making it illiquid. I am fairly confident you should not have any problem finding an investment vehicle that will return more than you are paying in interest on your mortgage.

Originally posted by @Kris Wong :

My question to you is, how long are you willing to sit on the sideline waiting for deals to be readily available? Who's to say when the next downturn will be. Could be this year, next year, 10 years. Who knows. And who's to say that real estate deals will be easier to find. In theory they should be, but again, who knows. One thing I can say for sure, by paying down your mortgage, you're paying back the cheapest leverage available to you, and you're tying up that liquidity and making it illiquid. I am fairly confident you should not have any problem finding an investment vehicle that will return more than you are paying in interest on your mortgage.

Good point. Even if I wait for a recession, Austin may hold up as people leave the coasts. With FHA, I have mortgage insurance and a 4.5% rate. A solid property should make up for that.

@Andrew Horner in general predicting the market is a bad idea. Most people don’t realize you need to be right twice. Once at when to get out and the next at when to get back in. Compared to people who just let it ride then need to be right once.

So that aside it is possible to predict some economic factors. People I’ve talked to say the next recession is forecasted to be mid 2020. So take that what you will. They help manage billions of dollars so it’s really their job to know this sort of thing.

So personally this may make me more conservative or slow buying slightly but that’s really about it.

The consensus is that waiting isn't the wise way to go.
But is paying down my house still a good idea? Sorry if that's a rookie question. A friend of mine who has several rentals told me he and his wife pay down their houses and then leverage those houses to buy new ones. If I did that, I'd be both paying down (thereby saving on interest and MI) and using that money toward new properties at the same time. 

The right thing to do is what fits in with your goal. 

If your goal is to own rental property free and clear, then your focus should be on paying down those notes. Buy a couple of them and use the cash flow from both to pay off one note. Rinse and repeat.

If your goal is to own a lot of properties that are cash flowing, then focus on how to best leverage what you have without putting yourself at too much of a risk and buy, buy, buy. What is too much risk? See above...it is what fits in with your risk tolerance. 

The pattern here is that every person has their own idea of right. Use your education/knowledge to help decide.

Define your goal and your path to get there becomes less cluttered with shiny objects that can distract you.

@Andrew Horner there isn't a wrong way to do it. If you want to build a portfolio as quickly as possible you need to use leverage.

If you want to build a portfolio that's as safe as possible pay down mortgages. Your return will drop with this strategy.

Assess what risk you are comfortable with and go from there!

What if we have a deep downturn and you can’t get a bank to give you a Heloc? Don’t wait for a downturn that may not come for a long time or presents its own challenges. Invest wisely now.

Originally posted by @Jon Horton :

The right thing to do is what fits in with your goal. 

If your goal is to own rental property free and clear, then your focus should be on paying down those notes. Buy a couple of them and use the cash flow from both to pay off one note. Rinse and repeat.

If your goal is to own a lot of properties that are cash flowing, then focus on how to best leverage what you have without putting yourself at too much of a risk and buy, buy, buy. What is too much risk? See above...it is what fits in with your risk tolerance. 

The pattern here is that every person has their own idea of right. Use your education/knowledge to help decide.

Define your goal and your path to get there becomes less cluttered with shiny objects that can distract you.

I've got a high tolerance for risk, but I've also put a lot of risk into my business. I enjoy my work as an artist, and I'm not looking to stop. I'm looking to add stable, passive income, so I can continue to take other risks without worrying about "destroying" my family's future if/when one of my business investments doesn't pan out. If having a lot of cash flowing properties can be done passively, I'd love the cash flow. Is that reasonable? If not, I'm willing to sacrifice short term cashflow for more of my time back. 

Does that help?

First of all, congrats on living well below your means and searching for passive income as a way to fund your artistic passions. You've got some pretty awesome lifestyle design at work! 

@Jon Horton put it very wisely above. It sounds from your post like you have concerns about being at the top of the market, and you're also looking for real estate to be the safe secure passive income that funds your lifestyle. So if you think you need to keep that money close right now to sleep at night, do that.

On the flip side though, nobody can time the market and although we've had quite the bull run Austin has a great profile-- strong in migration, low unemployment, and a booming tech sector. If you can find a property here that cash flows from the start your risk is mitigated-- there's a lot of people foregoing that cash flow because the factors I mentioned above have people so confident in Austin that they're willing to withstand negative cash flow for an appreciation play. Given what you're looking for real estate to provide as an investment vehicle I would avoid that path. Good luck!

Originally posted by @Kathryn Morrison :

First of all, congrats on living well below your means and searching for passive income as a way to fund your artistic passions. You've got some pretty awesome lifestyle design at work! 

@Jon Horton put it very wisely above. It sounds from your post like you have concerns about being at the top of the market, and you're also looking for real estate to be the safe secure passive income that funds your lifestyle. So if you think you need to keep that money close right now to sleep at night, do that.

On the flip side though, nobody can time the market and although we've had quite the bull run Austin has a great profile-- strong in migration, low unemployment, and a booming tech sector. If you can find a property here that cash flows from the start your risk is mitigated-- there's a lot of people foregoing that cash flow because the factors I mentioned above have people so confident in Austin that they're willing to withstand negative cash flow for an appreciation play. Given what you're looking for real estate to provide as an investment vehicle I would avoid that path. Good luck!

Thank you! Yes, I think you are right. Looking at Austin’s history, we fare well in recessions. And I’d probably gain more equity by the time a recession happened then I’d lose. 

Since making this post, my wife and I have set a goal to own 5 houses by the time I’m 35 (I’m 29). We bought this first home (fha) a few months ago in Buda. We’ll be set by the end of next year to buy a second one via USDA. (My understanding is I need enough money for 6 months of both mortgages in savings— which is about $30k— and closing costs/down payment.)

It sounds like trying to buy a second property and stay in this one would be a cash heavy method requiring 20% down, so the plan is to rent this out and buy another. If I cash flow on this one, it won’t be much.

So we’ll try to get something with cash flow next. Does that all sound about right?