Cash flow or not, and buy vs rent out

2 Replies

Hey all,

Question 1:

Looking for some help with this. I'm not a super savvy business guy. I've been looking into getting into real estate investing for a while, and I think I found my first purchase. I plan to work for about 13-15 more years before I would like to retire.

Single family home, on a street full of other houses that look the exact same/floorplan/layout. $238,000, $5000 to closing. I would put down 15%, and on a 30 year fixed cash flow around $350-400/month, or I could do a 15 year fixed and lose $150/month. The way I see these kinds of rentals is that $400 is peanuts, the real money is when they are paid down/off, and you're cashflow skyrockets. I'm debating the 30 vs 15. I like the idea of the 15 because I do not need the $400/month cash flow, and I would see greater income quicker if the house is paid off quicker. With a 30 year, I'm getting money from the cash flow, equity pay down, and appreciation. With the 15, I'm losing money monthly, but getting to the equity pay down quicker, and will also have appreciation.

What would you do?

Question 2:

My primary home is 3 bed, 2.5 bath, movie theater, pool, outdoor kitchen, fully remodeled with "the best", in upscale neighborhood. I bought it for $410,000, and I've put around $100,000 into it, and it recently appraised for around $518,000. I have the house on a biweekly 15 year loan, which should be paid off in 13 years, with a current balance of around $350,000. The house feels cramped, has a galley kitchen, and upstairs makes me feel claustrophobic (I'm not being dramatic.) I love the place, but it's not my forever home. I've found a home I like, that I am *considering* purchasing. I think I can get it for $705,000. I plan to work for 13-15 more years, so I was thinking of doing another 15 year loan on the house. But I don't know if that's the best idea.

My question is should I sell or rent out my existing house? I worry because it's so beautiful, that someone will **** it up, but I have to think of it as just a rental, and not be emotional about it. My thought is that I could do a 30-year loan on the 700,000 house, and then when it's time to retire in 13-15 years, I could just sell my current primary residence, which would be paid off by then, and then that would be enough to pay off the remainder of my new house's mortgage. So basically I would keep my payments low by doing a 30 year loan on the new house, and then keep my other house rented out, mortgage being paid by someone else, then sell it in 13-15 years, and use that money to pay off the balance of my new house mortgage.

There are several issues. My current primary residency has a lot to maintain. Weekly pool cleanings/chemicals (a company does it for me), landscaping, HOA, and the fact that it's on a 15 year mortgage so the payments are around $1600/every two weeks. I highly doubt I could rent it out for enough to cover all of those expenses. I would think more like $2400-$2500 / month, which would put me in the hole about $1000/month by renting the house out. In 13 years that would be $156,000 down the hole, but it would mean that the mortgage is paid off, with a house that would have a value of at least $520,000, assuming it just stopped appreciating, which it wont because its in the nice neighborhood that is extremely strong.

The other idea is to just sell the house, take the $145,000 profit, and put that towards the new house, put new house on a 15 year loan, and suck it up.

What would you do?

Q1, put it on a 30 year note so that you have the ability to cashflow, and any cashflow you don't need put towards the paying down the principal. Ensure that there is no prepayment penalty on the note. This way, if you all of a sudden do need the cashflow, you can access it without the risk of defaulting on your mortgage. 30 yr. notes give you the most flexibility.