Rental Property Investor · DE (delaware) · Member since 2020 · 9 posts · 5 votes
I’m a new investor with 1 property under my belt. It is a 1b1b condo I took out a loan for and purchased November of 2019. The loan came to 65,000$. I lived there for a short while and rented it out in February of 2020. In March of 2020 I put 10,000$ towards the principle bringing my loan down to 55,000$.
My initial goal was the Dave Ramsey approach. Pay down ASAP and than mortage a second property. However after doing some reading I’m curious on some other ways of going about it and wanted opinions of other more experienced investors.
One thing I can’t do which I know is a popular and good option for immediate cash flow is take out a 2nd mortage. I’m only 21 and I want to take it slow. I have 17k in my savings right now and here’s what I am considering ....
1-Continue to pay down my condo and have the loan paid off and than take a loan out for a second rental.
2-Save my money and let my principle and interest be the only payment on my condo that I make. Purchase 2nd property in cash and rent that out.
Now it's important to note my 1b1b is rented at 1,000$ a month with the mortage and HOA coming to 690$ a month. My Interest rate for this loan is 3.9%.
@Emily Lauren boulden - given that you're borrowing at 3.9%, it makes no sense to pay the place off quickly. You have $17k in the bank right now (which is great considering you're 21 and own one place)....imagine if you had $27k in the bank. As @Joe Villeneuve stated above, the tenant is paying it off. If you want to pay it off faster, put $200 each month into an account for that condo (repairs, vacancy, etc) and add $110 to the principle every month. Meanwhile, you'd be looking for your next property. $27k will present more options than $17k. You might consider a small house for your next purchase and house hack it. After a year or so when things are going well and you've been saving up because your roomies are paying the mortgage, you go to the third home. Make sense?
Once you start using your own cash towards an existing property, all you are doing is adding to the cost. If you have positive CF, it means your tenant is making the mortgage payments for you. P & I. They are paying the interest, and they are buying down your principle...as in buying your equity. This means they are providing you with free equity. Once you start substituting for your tenant, you are going backwards.
@Emily Lauren boulden - given that you're borrowing at 3.9%, it makes no sense to pay the place off quickly. You have $17k in the bank right now (which is great considering you're 21 and own one place)....imagine if you had $27k in the bank. As @Joe Villeneuve stated above, the tenant is paying it off. If you want to pay it off faster, put $200 each month into an account for that condo (repairs, vacancy, etc) and add $110 to the principle every month. Meanwhile, you'd be looking for your next property. $27k will present more options than $17k. You might consider a small house for your next purchase and house hack it. After a year or so when things are going well and you've been saving up because your roomies are paying the mortgage, you go to the third home. Make sense?
As for cashing out your equity, you may be hard pressed to do that in the current market condition (ie pandemic). You don’t mention the purchase price, but just know that a bank will want to maintain 25% or more equity in the property. So if you paid $100,000 for the property, they will only lend you the amount of free equity you have in the property past the 70-75k range... so if you owed $65,000, the most they would loan would be $5-10k... less closing costs.
Right now many banks aren’t even writing cash out loans at all... so don’t be surprised if you find out a refi won’t work very well.
Also, be careful about homestead exemptions... you lose that when you move out and you are obligated to tell your taxing authority if that is the case... otherwise when they figure it out (by your current address not matching the condo address) they will back bill you for whatever tax advantage you received.
You will always make the most money by leveraging (financing) your properties. Take your free cash and generate a second income stream (ie another property). This has the side benefit of you having another appreciation stream too so that you are benefiting from the pay down of both loans, and hopefully market appreciation as well! In just 2-3 years we have seen about 20% market appreciation... that’s a huge part of the game you will want to keep in mind.
Dave Ramsey is a smart man, much smarter than I, but I think everyone would agree that he is ultra conservative, especially when it comes to real estate investing. If it helps you sleep at night to pay of the first condo than go for it, but you'll make a lot more money in the long run by using leverage. You'll just have to decide what you are comfortable with. My two cents would be to go after your second property as soon as the $17k grows to a 20% downpayment somewhere that will also have a positive cashflow after sufficient reserves. This would still be a very conservative approach assuming you don't overpay.
Hey @Emily Lauren boulden, congrats on a great start! I agree with @Randall Wagenleitner that Dave Ramsey is regarded as a super conservative investor. Not that there's anything wrong with that, but it leaves little space to leverage debt. I also grew up on Dave Ramsey so to speak, and while I do agree with his principles on debt for "stuff", I don't necessarily agree with it in terms of real estate investing. That being said, I'm not going off the deep end either, I prefer to put a minimum 20 to 25% on any property I buy, and keep a large cash reserve on the side. As you begin to invest more you will find what you're comfortable with and go that route.
Use Dave Ramsey as a rule of thumb, but not as a Holy Grail when it comes to real estate investing. Keep in mind that he is speaking to millions of people, many of which just don't have the financial aptitude that most people have here on BP
I tried to listen to him as well man and like you said way to conservative don’t buy income properties unless you buy all cash? Whole point in my opinion is to buy to rent so tenants pay it off for you no?
I tried to listen to him as well man and like you said way to conservative don’t buy income properties unless you buy all cash? Whole point in my opinion is to buy to rent so tenants pay it off for you no?
Yep, listen to him to get out of consumer debt, but if you don't have millions of dollars in cash rolling in from books, endorsements, etc...like he does, you'll need to listen to other voices on real estate investing.