How to accomplish an REI/life goal?

Question

Hi everyone! I'm SUPER new to the world of real estate investing and am looking to get some input on how to tackle an REI/life goal. Forgive me if this question is too basic! I'll provide some background:

Goal - Live mortgage free. Right now, the main reason I want to invest in real estate is because my version of financial freedom is not having to pay my own mortgage. I love my career and don't want to leave it, but I do want to get to a place where my fixed expenses are super, super low, so that if I want to strike out on my own and start a business, travel the world, etc. I can. To that end, I'm looking to get enough cash flow from real estate investing to cover my own personal housing costs.

Current status - I own and occupy a one-bedroom condo in a very pricey part of the country (DC metro area). I doubt I'd have any trouble getting a renter if I chose to leave. I currently owe $180K on the place and it's worth about $200K. I love the place and the neighborhood, but if I want to grow my family in the next couple of years, this place is going to be too small.

Here's the question - Should I work on paying off my current place so that it becomes pure cash flow in ~10 years, or should I save up to purchase a duplex in a cheaper part of the country that I can live in half of and house hack?

If we look at potential rental income in today's dollars, I could get about $1500 per month in rent for the condo. After taxes, insurance, and condo fee, that would net me $1100 per month if the mortgage was paid off (I'm not factoring in property management because the place is super small and unlikely to need much management, but let me know if this is foolish). If I moved to a cheaper part of the country and bought a modest townhouse or single family home, that would cover most of the mortgage. And I'd only have to deal with one renter, who's not my neighbor (unlike if I was in a duplex).

Another major upside is that I'd be debt-free on that property, which is something I really value. The major downside is that paying off $180K is going to take a while, much longer than saving up a down payment on another property and getting the ball rolling on my mortgage-free lifestyle sooner.

So, which do you think is a better move? I should note that whichever route I take, I'm not planning on selling the condo. I plan to keep it for cash flow during retirement no matter what.

Let me know what you think! And remember, I'm SUPER new, so any advice you have would be great. Thanks, guys!

Lindsay K. · Answer

Thanks so much! That's a good point about using other peoples' money - although I'm generally kind of nervous about taking on debt, I think it makes sense to use leverage in this case.

Question on your cash flow point, and this is more a general question I have about REI and can't seem to get my head around: If I don't have a cash flow need at the moment because I have a job, why is cash flow so important to the calculation? In my case, if I keep paying my mortgage off according to its terms, it'll be paid when I'm 58 (whether I'm paying or someone else is, as a renter). At that point, any rent I get will be cash flow (after I pay taxes, condo fee, etc.). But at that time, I'll have a cash flow need, i.e., funding retirement. Since I plan to keep working until then, isn't breaking even on my condo good enough for right now, so that I can use it for income later?

Joe Splitrock · Answer

@Lindsay K. the biggest advantage of real estate is leverage which means using other peoples money (the bank) to purchase property. I would not recommend a pay-down on your current mortgage. Save up any extra money to buy another property. The decision on whether to keep your current property as a rental property should be based on cash flow given the current financing. Lets say for example your mortgage is $1200 and that includes taxes/insurance. Then add association, vacancy expense, management and and repairs. My guess is that at $1500 rent, it will not cash flow very well. The property should cash flow with the mortgage and expenses or it is not a good investment, not a good ROI (return on investment). It probably makes more sense for you to sell the property and invest in a duplex sooner.