What should we do one year later?

Question

My wife and I started out paying double mortgage payments in our current primary after she finished college in 2016.  We were maybe 2.5 years away from being debt free.  Then, we refinanced, pulled out cash, and used the refi money and some of our own to pay cash for an investment property in Glendale, AZ (we also live in Glendale, AZ).  We have some options a year from now that we have been debating.

1. Use the cash flow from this property and our dual W2 income to save up 25 percent down on the next property.  Once purchased the cash flow after expenses on both rentals would come close to covering our refi mortgage (not that we would use it for that but worst case).

2. Refi the rental and pull out $100K for another rental property.

3. Refi the rental and pull out the max cash.  Put $100K for another rental and the rest to pay down the principle on the primary.  She still wants to be debt free on the primary in the next 5 years.

We are buy and hold people for single family homes, but eventually would love to buy a shorr term vacation rental in San Diego.  I understand some people put aside part of the rental money for maintenance, but is it also okay to just have a $10K slush fund per house that you replenish as needed?

I'm comfortable with any of the options.  I know people would buy 3 more rentals after pulling out max cash from a paid off rental property but we are new to the game and that option is too big of a leap for us.

I have been lurking on these forums for a while and hope to connect with other folks in the area.  Biggerpockets has already helped me connect with Brock Embree from Trelora who also invests in the valley so it has been invaluable so far.

Steve Vaughan · Answer

First, congrats on being so responsible and successful so far!

Personally I'm ok with a lot of equity and like my properties individually to have little debt or max debt depending on whether it's a vanilla house / plex or unique or commercial asset.

All that to say, if I'm expanding, I'll use one vanilla residential asset to leverage that growth.   So I would get max leverage from a free and clear house.  The cost and hassles are the same whether you get a little ($100k) or max LTV.

The other thing we do when we can is qualify individually.   My wife will get one loan, I'll get the next.  Cleaner and you don't run into caps so fast.  You (or she) may have to quitclaim to the other to do this, but a community property agreement should protect if you're not in a community property state.  Check with a legal pro.

Lastly, if there isn't a loan on the house, it's not a refi.  To save pain when talking to lenders, state you seek an equity loan.  Glad to have you!

Jerry W. · Answer

@Howard Jow, what @Steve Vaughan is suggesting is that if you use your personal names you can low interest 30 year loans with fixed rates.  When you are a corporate entity you can often only get 20 year loans and 5 year adjustable rate mortgages.  The idea is to lock in the low rates.  Using an LLC does help on your potential liability, but you usually pay a lot more interest and have higher mortgage payments.

I second getting getting a lot of money out now to buy the next one.  I like being conservative, but when you are starting out growth is hard to come by.  It will be easier to make the mortgage payments out of your own pockets if something horribly unforseen happens.  When you start getting a lot more units you may have to be more careful at least I was.  I knew I could make 2 extra payments b y scrimping.  Now the rental income is 4 times my monthly salary, so I use a lot less leverage and work to keep cash flow high.  It is all about lifestyle.  If having your primary home paid off makes you sleep better at night then definitely pay it off.  What is acceptable risk for some is not acceptable to others.  You have to tailor your investing to your own personality.  Best of luck.

Howard Jow · Answer

UPDATE:

We have been so busy with life I haven't had time to login to BiggerPockets.  After our trusted GC went through the home inspector report and visited the home with the inspector, we found enough problems that we ended up walking away from the deal (they had a backup offer for the same price, but not all cash like us).  After that, we ended up paying off our primary mortgage.  Now we are saving up cash to buy our first rental (either single family with 20% down or multi-family with 25% down).  Keller Williams is offering free classes in my area to become a realtor.  I have been taking the online classes as I have always been interested in real estate.  I am not looking to switch careers at the moment (maybe a pivot when I retire), but I feel the knowledge will benefit us when we are buying homes in the future.  We won't be saving on commissions until I get more experience since I'll need a mentor to help me when we're ready to buy again (co-agent).  But I feel the experience will be worth it and hopefully someday I can represent our family's interests by myself.

Mark Frattini · Answer

@Howard Jow

As Dan previously mentioned there is a lot of red tape surrounding STRs in San Diego. The laws are continuing to evolve and change. A way around that would be to do either a medium term rental (30+ days) or LTR.

I wouldn't do option three. Pulling out cash from one property to payoff another doesn't make sense. You should already have a really low rate on your primary. The rate to REFI on an investment property is going to be higher.

Make sure you are applying all the little secret tips on paying off a mortgage early.

Mark Frattini · Answer

@Howard Jow

Disclaimer (not legal advice): I have quitclaim deed my rentals into an LLC and never had an issue with the lender calling the note due. If you need to REFI in the future you will need to place them back into your name.

Dan H. · Answer

San Diego area is not very STR friendly.  The city of San Diego has passed an STR quota that in effect means few or no new STRs.  Other most desirable STR cities in the county have or have started to pass anti STR regulations.

If you do STR in San Diego county, be sure you have a backup plan if the STR gets banned.

Good luck

Howard Jow · Answer

A colleague of my wife suggested we can also quit claim the title to an LLC after closing.  But I will check with our loan company if this is discouraged for future loans against this asset.

Howard Jow · Answer

On the first rental home, we have a LLC we each own 50 percent filed as a single (not partnership).  I think you're saying the next home would be an LLC just controlled by one of us?  Aren't the caps against our income together or is it against us individually?  Just wondering how many times we can put down 25 percent for a rental home before we hit a wall.

What should we do one year later?

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