New investor, please help

5 Replies

I've inherited a duplex worth approximately 195k, I owe 89k on it. I have rehabbed the duplex a couple of months ago and both units are now rented. Total rent is $1850/month. Cash flow of about $820/month. Older home built in 1890. 

I do not have a home of myself (I rent) and would like to buy a home (thinking of another duplex , living in one side). I will be able to save approximately 85k by November 2020. This would allow me to put 20% down and leave me with a decent emergency fund. 

Question: Should I use that 85k that I can save to purchase another duplex, which I would live in or should I use that money to completely pay off the rental duplex I inherited? 

Thanks!

@Dominick Marschall

Hey Dominick and welcome to the BP community. To me, you sound like you are set up to do very well in real estate investing. The fact that you can save that much money in such a short time shows me that you will do just fine with either option. I will just list a few pros and cons of each that I can see.

Paying it off: Pro- it is hard to have a property foreclosed on when it is paid off. You get to keep all the money and potentially roll it into the next property and after you rinse and repeat this process for a few properties you will have enough cashflow to buy units with just that income and almost no risk.

Con- you will not be using the most powerful real estate asset which is leverage. Using other peoples money (the bank in this case) can radically increase your return on investment. You will have to continue to rent and maybe you want a place of your own.

Get another duplex Pro- You are using the power of leverage. You are getting three units to pay for your place to leave and maybe you get to live mortgage free so to speak. You manage more tenants and learn that side of the business.

Con- You carry more leverage and if the markets change and you can be in a tough spot if you are over leveraged(I know you said you would have an emergency fund so that is good).

I am sure there are many more but you get the idea. Good luck and keep it up either way!

@Derek Diamond Thanks for the response! If you were in my situation what would you do? 

Also, I didn't see any mention of tax benefits. Do you think I should consider this in the equation? 

I also recently became debt free, so the thought of having a mortgage on the rental and another mortgage on a house of my own scares me a little. However, I am very eager to stop renting. 

Originally posted by @Dominick Marschall :

I've inherited a duplex worth approximately 195k, I owe 89k on it. I have rehabbed the duplex a couple of months ago and both units are now rented. Total rent is $1850/month. Cash flow of about $820/month. Older home built in 1890. 

I do not have a home of myself (I rent) and would like to buy a home (thinking of another duplex , living in one side). I will be able to save approximately 85k by November 2020. This would allow me to put 20% down and leave me with a decent emergency fund. 

Question: Should I use that 85k that I can save to purchase another duplex, which I would live in or should I use that money to completely pay off the rental duplex I inherited? 

Thanks!

 Much of this depends on your tolerance for risk. You aren't overly leveraged (I don't think) on your current duplex to where even if you have some vacancies, you'll still be fine.  As long as the maintenance isn't significant on something that old.

Derek has already given you a good way to analyze it. The answer, for you, depends on your goals and tolerance for risk and leverage. 

I'd buy the second duplex if it were me, but it's not.

@Dominick Marschall

Hey Dominick - To answer your question I think you need to ask yourself what your long term goals are. Have you set goals for yourself and created a long term investing plan? Is real estate investing part of that plan and if so how active of an investor do you want to be? Are you happy working a W-2 and okay retiring at a "normal" age or do you want to retire early? I'm big on risk management - know what your risks are before making a decision and set up your plan with them in mind. What can you do to minimize those risk and how much risk are you just willing to accept? 

The route with less risk and less upside in your case is to pay down your current duplex. You'll see increased cash flow once the mortgage is payed off and be sitting on a nice chunk of money if anything ever goes south. 

You can assume more risk with higher upside and save for a new duplex. You'll be using leverage to obtain a better ROI. You may even be able to refi your current duplex to pull some money out and buy before Nov 2020. You may also want to look into a FHA loan w/ only 3.5% down since you'll be living in one side of the duplex.

As with any strategy, make sure to do your homework and plenty of research before diving in. Good luck!