Pay off my house or invest in another property?

Question

I am 25 years old and I recently closed a deal on my first house, last Monday actually! Exciting for me. I got the house for $31800 with a 10% down payment so I still owe $28620 with an interest rate of 4.42% (that can be adjusted in 5 years), and a monthly payment of $179.90. The house is in Arkansas City, Kansas, a town of about 12,000, and home to a very successful community college. There are also several rural towns within about twenty miles so there is a decent amount of economic traffic from those towns. One piece of important information, my fiance attends the community college in Arkansas City and her and I are living in the house. We will live there until July 2018, at which time she will transfer from the community college to a bigger four year school. I would like to use the house as a rental property at that time. I believe I can get $550/month for the house in rent. The taxes and insurance combined on the house are currently around $100.

I make an income of about $52,000 as an educator so I am pretty flexible on where I work as far as what city. With the extra income from my full-time job, and if my calculations are correct (which they are) I could have the house paid off at exactly the time we move out in July 2018. So in other words, over the next 22 months or so I will have about $26,000 in extra income. My question is, should my goal be to put that 26K towards the house that I am living in and have it paid off OR should I use that money to obtain another deal or two in that 22 months time OR do a combination of the two?

First time poster, any suggestions or solutions would be awesome!

Chris T. · Answer

@Chris Dawson is absolutely correct.

@Eric Hansen However, a big part is how do your fiance feel about real estate investing? You guys are starting a life together, so her feedback and support is important.

If she is on board, leverage your $26K, you should be able to use that as down payment for 2 or 3 houses, and you're on well on your way to building your assets. Or use cash to buy / rehab / rent and cash out.

Key thing is to be able to recycle your money over and over again using BRRRR strategies.

Chris Dawson · Answer

@Eric Hansen this is a pretty easy question to answer. Your paying 4.42% to have access to $28,620 dollars. Why would you pay that loan off completely and start over when you can leverage leftover money you save each month and purchase more real estate? Anything over a 5% return (roughly, I realize more math is involved here) on your new investment would net you positive investment income. If you can't find an investment deal in your town where you can't make at least a 5% return, then you need to STOP investing in that town! Based on your numbers for your primary home, you should be able to easily make well over a 10% return when factoring in all costs.

To me, this is a no brainer!!

Joshua D. · Answer

@Eric Hansen

Dude you got a great income and a tinny mortgage payment!  Whatever you do you are off to a freaking good start.

One thing I would encourage you to look at is the overall values of the property.  Is that house you bought worth 60k now?  Did you get it at a good discount and then do a value add?

This (to me) is where the money is in the buy and hold strategy. You need to add value on the front end.  To be honest the cash-flow don't look that exciting on the numbers that you throw out there. But if you had 20k in equity after 6 months, that is the equivalent of decades of cash flow on a house like this.

If you are adding value like this, in your situation, I would recommend buying 4-5 more of them that cash-flow like this or better.  you will end up with total mortgage of $1200 a month which you could easaly cover with your income at an absolutely worse case situation. Best case you will end up with $1000 a month in cash-flow and 100k added to your net worth.   This is super low risk in my opinion.

Eric Hansen · Answer

Chris T. you bring up a good point throwing my fiance's thoughts into the mix. However, she is just as on board as I am. She wants to invest in real estate as much if not more than I do. So luckily, we are a go!

I also thought I could use that money to acquire at least 2 more properties over the next couple years. That way when we move to the next location we will have cash flow from 3 properties total and could really get the ball rolling hopefully. Thanks again for your advice.

Eric Hansen · Answer

@Joshua D. I actually really like your strategy. I am going to start looking for similar deals to the one I have where I can add value on the front end then cash flow essentially risk free after that. Thanks for the advice.

Eric Hansen · Answer

@Chris Dawson Thank you for your response. This helped me out tremendously.

I don't know that I want to continue to invest in my current town since we will only be here temporarily but I do know that I want to continue to invest and buy properties. I have actually always wanted to live and work in the Kansas City area because I have a lot of friends that live there and are from there. Maybe you could help me get my feet wet into the Kansas City real estate market at some point.

Eric Hansen · Answer

@Chris Dawson Thank you for your response. This helped me out tremendously.

I don't know that I want to continue to invest in my current town since we will only be here temporarily but I do know that I want to continue to invest and buy properties. I have actually always wanted to live and work in the Kansas City area because I have a lot of friends that live there and are from there. Maybe you could help me get my feet wet into the Kansas City real estate market at some point.

Pay off my house or invest in another property?

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