I'm a new investor, finally pursuing a lifelong dream. I purchased my first investment property earlier this year, for $50,000. I put 20% down, so the loan was for $40,000.
My husband and I are about to sell our primary residence and move, and we'll make a pretty sizable profit from the sale of our house. I want to use some of the money to help grow my business. I've considered two options: pay off the loan on my investment property, therefore increasing my monthly income; or put the money toward a down payment on one or two other properties. I can see pros and cons either way. I want to balance the amount of debt I carry without being "over-leveraged," and not throwing away too much of my own money.
I'm curious to hear what approach other investors think is most favorable. Thanks!
@Amber Rhea : Only you can truly answer a portion of this... what is "over-leveraged" to you? At what point can you no longer sleep? Do you have other sources of income? Obviously, you don't need to answer these questions out loud...
If you want to build your portfolio, then it does not make sense to pay off the loan on your existing property unless you can get the money back out for another property at a lower rate. I am not necessarily saying you have to use all of your gains from the primary residence for a new property. Perhaps, keep a portion in the bank for a "rainy day" and invest the rest. The rainy day could even be put in an index fund (or something of the like) so it is still working for you.
New, loans are cheap right now.
Thanks for the feedback! It sounds like acquiring more properties is the way to go. I think a big part of this has been getting past my old mindset of "all debt is always bad." I definitely want to build my portfolio!
@Amber Rhea - Hey there Amber. I would somewhat disagree with the other posts. Absolutely it should come down to your comfort level but... and a big but.... having mortgages out are a good thing. It lowers your tax burden, you can allocate assets across other investments and diversify and as @Matt K. is right, historically 8.0% is about what you can expect on a mortgage so getting 5.5-6.0% is historically cheap money. Now the more leveraged you are the lower your monthly cash flow will be but the higher your ROI will be. That is the relationship. I would recommend that if you do invest in single family homes in the future, try to purchase them at or above $80K-$90K and make sure they will rent for $900+. You want to be in B class or above neighborhoods unless you have an absolutely steller prop mgmt company that can handle the tenants of C class. Cheers
FYI, the $50,000 property is definitely in a B class neighborhood -- this is in Augusta Ga. which has very low prices! It is also my hometown, and I am investing there as a way of giving back, even though I no longer live there.