What is the next step?

Question

I currently am in my mid-twenties and own a 3Br Condo in Northern Virginia and rent out one of the bedrooms for 800 and the mortgage is $1,500.  What should I do with my discretionary cash flow?

1. Set up a solo 401k?

2. Pay down principal?

3. Save for second property?

Account Closed · Answer

I would save the 20% as well . That loan is such a great rate you mind as well put the cash aside for your next deal.

Account Closed · Answer

Save for your next property for sure .  If you plan on growing you Business you are going to need 20-25% cash down to acquire more deals .  Also you are going to need some cash in reserves.  Paying down the principle is not a bad idea however unless you are paying it off you are getting rid of money that could be used to purchase a new property that will bring you more cash . If you put that money into a savings account instead when you choose to act you could purchase a new property or put it all towards equity at that point.  Cash saved up just creates more options .

Good luck !

Michael Boyer · Answer

Agree that the Roth IRA is a nice idea (wish I put in more when I was young and qualified on income, eligibility phases out if you make too much)....

And you are clearly a budding landlord, already renting out a room and on BP, so saving for the second rental property down payment sounds like an idea. If your condo pencils out well, it might be a rental (as one unit) someday and you could try an owner occupy multi-unit (2-4 unit).

Best of luck.

Justin Windham · Answer

@Shane Gaboury

Sounds like you're off to a great start! Welcome to BP.

Shane Gaboury · Answer

Thanks everyone so much for such quick and informative feedback. BP is the real deal! The goal will be to put a tiny away for retirement income and the rest fully into the savings account. That way I am fully prepared when the next opportunity arises!

Jerry Ellis · Answer

It seems like cash to make deals happen is one of the biggest obstacles folks face. I know it's mine. Your retirement is also very important so I'd suggest that you save somewhere around 10% of your income for that. Diversification is not a bad thing.

Lots of choices are available after that in terms of what to do short term.

Jerry

Kevin Hunter · Answer

@Shane Gaboury, my two cents.  I would save that rental income, rent the third bedroom if you can, and save that $800 per month as well.  Take the $1600 per month and in 12 months you will have $19,200.  Then you go find another property to owner occupy and use an FHA loan with 3.5% down to buy it.  That will allow you to buy up to $163,200.  I know that is not alot in northern Virginia, so if you need to, do it for two years, save the $38,400 and you can then buy a property for $326,400.

Use the other part of the income you mentioned to increase those numbers to one that satisfies your investment strategy.  Good luck.

Ryan S. · Answer

@Shane Gaboury  Additional money toward the principal in your property will have no impact on whether that investment will appreciate or not. The market (supply/demand) is what will drive appreciation.  Also, you probably will never pay off that note, so why pay it down?  What would you be making progress toward other than a smaller loan balance?  So, in my opinion, paying down principal should be avoided as you would just be locking up more money that you could be using in another investment.  The only reason I could see paying more to principal is if you didn't have 20% down and you were trying to get to a point where they would remove PMI from your payment, thereby improving your monthly cash flows.  Congrats on your first house-hack!

Naveen Kumar · Answer

Or, you can pay down principal on the primary property, refinance to lower your monthly payments, and take a HELOC on the equity you have built in the condo to buy your next property.

Russell Brazil · Answer

Save up for a 2nd property. Solo 401k is for earned self employment income. Your rental income is passive and won't qualify.

If you are income eligible for a Roth Ira you might want to consider that as well.

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