What Should I Do Next?

Question

Hello,

My name is Sergio and I am a newbie when it comes to REI. I am 29 years old and have already started reading several books on the subject. My ultimate goal is for my wife and I to retire from our 9-5 jobs asap and become full time RE investors. To accomplish this, I would need at least a 10K monthly passive income stream. We don't make this much per month, but I would like the extra income to continue investing.

Now here is my question:

I have been trying to qualify for a mortgage for the past few years only to be rejected. First it was because of my credit score and now because of my DTI ratios. As far as my bills, I have a  car and a truck payment ($1,200 a month...stupid mistake), a $300 student loan payment, and seller finance land contracts on 3 properties.

Now, I understand that many people don't use accurate numbers when asking a question on a public forum, but I feel that doing so will help the BP community answer my question more precisely.

I "own" the following four properties that I have acquired in the last 3 years:

Property#1 (SFH): Original Mortgage: 92K @ 10% for 15 years currently rented @ $1,100 per month. Current Balance: 52K...probably worth about 110K

Property#2 (SFH): Original Mortgage: 96K @ 7.5% for 10 years currently rented @ $1,100 per month. Current Balance: 85K...probably worth about 110K

Property#3 (2 Detached SFHs on one lot): Paid Off ; Collect $1,650 in combined rent...probably worth about 120K

Property#4 (Primary Residence): Original Mortgage: 155K @ 4.375 for 28 years. I bought this property as "take over payments". Current Balance: Owe 137K to the bank and 15K to the owner. Probably worth about 175K.

I also have a 8K personal loan at a very high interest rate. $273 per month.

Now my question is, what should I do next? Should I use my personal income to pay all this loans quickly, for the exception of my primary residence, of course, since it has a low interest rate. Try to refinance the other two properties to lower the interest rate? How, if I don't qualify? Banks do not count my rental income and I end up with a very high DTI ratio. Or just keep buying high interest rate properties and hope for the best?

All tips and advise are welcome.

Thanks

Sergio Briones · Answer

I would like to give an update on where I stand:

Property#1 (SFH): Original Mortgage: 92K @ 10% for 15 years currently rented @ $1,100 per month. Current Balance: 52K...

I sold it in owner finance for 120K...10K down at 12% interest to pay off in 46 months. I get 3K per month from this house. -- My Current Payoff Balance: 40K and new buyer owes me 106K

Property#2 (SFH): Original Mortgage: 96K @ 7.5% for 10 years currently rented @ $1,100 per month. Current Balance: 85K...probably worth about 110K...

still in my possession. -- Current Payoff Balance: 75K. (this property has a negative cash flow of about $200 per month)

Property#3 (2 Detached SFHs on one lot): Paid Off ; Collect $1,650 in combined rent...probably worth about 120K --

Traded it in to purchase a convenience store...100K credit

Property#4 (Primary Residence): Original Mortgage: 155K @ 4.375 for 28 years. I bought this property as "take over payments". Current Balance: Owe 137K to the bank and 15K to the owner. Probably worth about 190K --

still in my possession. Current Pay off Balance: 133K

Property#5 (Convenience Store...Land & Existing Business): Original Mortgage: $268K @ 9% for 10 years currently being operated by my wife. Current Balance: 168K. Basically bought my wife a job, but after all expenses, she makes 60% more per week vs what she was making in her old job, plus there's always the possibility to increase sales and make more, and the third plus is the property is being paid down every month. We are gaining about 1K in equity per month thru principal pay down.

I also have a 8K personal loan at a very high interest rate. $273 per month. -- I now owe 10K :(

Update on the 2 auto loans: I still have them :(

Property #6 -- I bought a 30K single family 3bd 2bth house I am currently renovating with about 3K (Minor aesthetic repairs). This house will be rented for $850 per month, and I have no mortgage. I am going to get a taste of cash-flow for the first time. :)

So at the end of the day, I have a combined monthly cash flow of about $2,500, not counting the 2K a month I save from my day job. (total $4500 I can use to invest)

Now my question is:

1. Should I now concentrate on paying of my current debt to lower my DTI ratio and be able to use bank loans to buy more properties or refinance the ones I already have? I imagine that this will permit me to scale faster since I would be using the banks money.

2. Save money for another 30-50K property to rent out? I can probably buy one in a year.

3. Sell the non-performing "assets"? (Houses that are not cash flowing)

I apologize for the long post.

Thanks in advance.

Sergio Briones · Answer

This is some solid advise...it will be a huge sacrifice on our part. It surely gives me a lot to think about! I will start by putting one of the cars we have for sale on Craigslist. I can do a lot by eliminating that $480 monthly debt.

Getting rid of all the houses that are anchoring me back does not sound like a bad idea. I can probably get about 65K equity back if I sell my two rentals, and can then remortgage the paid off property like you mentioned. I would have close to 150K to begin investing.

Sergio Briones · Answer

Yes, I am losing money on both houses each month. The rental income only covers the principal and interest. I am left with repairs, vacancies, taxes, and insurance.

What kind of bank would do a portfolio loan? I don't have terrible credit...probably mid 600's.

Kevin Siedlecki · Answer

@Sergio Briones.

Account Closed sums it up nicely. If you are losing money every month on these, they are not good investments.

My first option would be to find a bank that will give you a loan on the whole portfolio. You should be able to get lower interest rates and longer amortizations than you currently have, and your credit score shouldn't matter as much as the performance of the assets. That will hopefully get you to cash-positive on all the properties.

If you can't find a bank to do that for you, then you probably want to sell off these non-performing assets and use the cash to get yourself into some better deals!

Sergio Briones · Answer

One step closer:

Yesterday, I decided to use the money I received from selling my small business to pay off my 8K personal loan, and also listed my car for sale on craigslist. Hopefully it will sell quickly. I will use the $273 per month I was paying on that loan and put it towards the 15K I owe the owner of my primary residence. (He agreed to receive his 18K equity in 18 equal payments.) I want to get out of that 1K monthly payment ASAP to start snowballing my way through the mortgages! In the meantime, I will try my best to get them refinanced to lower the interest rate.

Brian Pleshek · Answer

Yes, that is a Dave Ramsey book.

Yes you can refinance a rental property.  If you have just purchased it, the bank may require it to "season" a bit.  How long is up to the lender, but a year of ownership is usually enough.  Also, a rental property is more "risky" for a lender, so expect a bit extra on the rate.

Good Luck,

Brian

Sergio Briones · Answer

I think everyone agrees that I should get rid of the two giants (auto payments).  I will start with selling my hatchback, and will replace it with a good used 2K-3K truck. (Pick-up trucks come in handy with rentals.) Would you sell it as a "take-over payments" type of deal and still leave it in your name? Risky, I know! I'm probably going to have a harder time finding someone who can put it in their name.

I have read Rich Dad in the past and loved it. I wouldn't mind getting a second bite out of it. I will order the Total Money MakeOver. Is this from Dave Ramses? I think I've heard of it before.

Can I refinance a mortgage on a rental property? The good thing is that I only owe 52K and it is probably worth around 110K. I just sold a small business I had and acquired 10K. I will probably use it to eliminate the 8K loan. Almost 27 percent interest is ridiculous any way you see it!

Yes, I think that my best bet will be to work on my current properties/loans before acquiring more mortgages. I need to build my empire on a solid foundation.

I will be more careful with my credit score. I know its easier said than done, but if I don't try my best, I will never get it there.

Thanks for taking your time Brian.

Sergio Briones · Answer

I couldn't agree more Jana. I am sure that deleting the $1,200 monthly car payment will mean at least 100K more in buying power for a future cash flowing mortgage.

Brian Pleshek · Answer

I would sell your two vehicles and replace them with 2 vehicles that are worth about 1-2k each.  I have a truck and two cars that are probably worth less than 12k all together.  They "look" nice, but they're just old.  I also have 2 paid off houses.  Choose your lifestyle carefully.  Might want to read, Rich Dad, Poor Dad or the Total Money MakeOver.  The first to make sure you understand the differences between assets and liabilities that look like assets.  The second to get yourself out of debt.

Next, I would look into refinancing your 10% loan.  While doing that, I'd work my butt off trying to retire that 8K personal loan.  It's a small balance, so get rid of it.

As for the income off the properties, banks will count it as income if you can show it over multiple years(each bank is different).  You may need to shop a different bank.

I would put new properties on hold for a short period of time to take care of these few things and get a more secure footing.  Then go ahead and go for another one.

Also, be very diligent about paying your bills from now on.  You say that you have a mid-600 credit score.  On my properties, I only rent to people who have credit scores north of 630.  You'll find the cost to borrow a lot cheaper when that number goes into the mid to high 700s.

Good luck,

Brian

Jana Cain · Answer

I second the advice to dump the cars for cheaper (read: paid for) vehicles. Particularly if DTI is what you're trying to improve. Cheap cars don't have to be a permanent lifestyle choice, but it is wise to clean up your consumer debt mess first, which will give you a clearer picture of what you can contribute to future investments.