new to RE ... how to best use cash?

Question

Hello BiggerPocketers.

I am new to this RE and am very excited to be in a community with so many experts. This is probably a basic question, but I feel as though no question is too dumb to ask.

If we have recently sold a piece of property, should we take that money and pay off our other primary residence mortgage in full? or, should we take that money and use it to venture and buy another property and leave the primary mortgage untouched?

for our example here, let's use the following figures:

sold a piece of property for $400k.

Should we take that money and pay off our primary mortgage to be debt free (not including property taxes, etc)?

or should we take that money, find two pieces of rental properties at $400k each and put a 50% down on both so that we can rent them out assuming all figures work out and we are getting some passive income?

or just take the money and pay off a 400k rental property in full?

I am learning drastically from this forum and hope you would pls share your knowledge with us so that we can pay it forward with others in the future.

thanks!

Brian Pawl · Answer

I think this all depends on your personal financials, your goals for investing in RE, and property specific cash flows with the potential investment properties. If you pay off your primary mortgage, what is your cash flow going to be every month by not having to pay down that mortgage? What are you going to do with that influx of cash every month? Are you going to use it to further invest in real estate, or to cover other living expenses? Can you use that increased income as a safety net to cover your loan on an investment property that you rent out when that rental goes vacant?

If you purchased two other rental properties, and assuming you operate them efficiently and have some type of positive cash flow, what happens when those rental properties go vacant, or a bad tenant destroys your property, can you cover your mortgage plus two other properties' debt service?

Basically, this all boils down to your appetite for risk and leverage, and your personal financials. Not sure anyone can give you a 100% recommendation on what to do without knowing the actual numbers.

Tim Lee · Answer

thanks Tray and Brian. I'll def look into more details.

Tray Rogers · Answer

Sounds like you've got a GOOD problem on your hands! You may get several completely different answers to your question but here's my take on it:

Paying off your current mortgage may seem to be the best decision, but you want to think about the leverage that you can create with 400K. Two factors play a major role in what you should do with those funds. The home prices in the market in which you want to invest, and your "bankability" or in other words your ability to obtain credit from a bank.

Have you analyzed any potential deals?

Since it's your first investment, it may be wise to look at a single family home or a small multifamily properties unless you can find a good mentor/partner to help you get through the complexities of dealing with larger properties.

If you haven't already, I recommend checking out @Brandon Turner's post about BRRRR Investing. Sounds like that strategy will be just what you are searching for. If you have never heard of the BRRRR strategy, scan the Bigger Pockets podcasts for an episode dedicated to it.

Hopefully the information you find will help you reach a decision!

new to RE ... how to best use cash?

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