What Should I Prioritize?

Question

Hi all. My husband and I are newbies, and we need some help prioritizing goals according to where we’re at in our REI journey. We want to buy and hold.

Quick version:

-We currently have one property in Denver we rent out.

-We recently moved to the Nashville area. We’re renting an apartment ourselves - didn’t want to buy when we knew absolutely nothing about the cities or market out here. Our contract is up in September.

-We have some credit card debt from the move.

-We want to buy as soon as we can to reap the rewards of investing, cash flow and equity buildup.

So… what should we tackle first?

My initial thought is we need to get our credit card debt paid off ASAP.

If so, should we then first buy a place for ourselves, followed by a rental? Or do we buy a rental first, potentially renew our apartment contract for a few more months, and then buy our own place?

I hate the idea of renewing when we could have our own home for the same, if not less, cost/month.

If we bought for ourselves first, we could do low money down if we live there for a year, then move on and rent it out, correct? And hypothetically, could we do that multiple times until we are getting enough cash flow each month to make more substantial down-payments?

Also, should we set up a corporation to deal with our real estate immediately, or is that something we should wait on until we have a larger portfolio?

So many questions. I’m a planner, if you can’t tell. I know a lot of this may be personal preference, but I’d appreciate any and all advice! Thanks in advance for your input!

Andrew Postell · Answer

@Lynelle Livesay I'm going to make some assumptions here.  I'll make the assumption that you are your husband have good lives and good jobs.  So that means you don't want anything to ever upset that path.  With that in mind the very first thing any investor should do is have 3-6 months of bills saved up in the bank.  Minimum.  That way, when something unexpected happens (and it will occur) - tires going flat, someone getting sick, whatever (and it will happen), that your good live and good job stays on track.  Saving 3-6 months of bills is #1.

#2 - if either of your companies has a matching 401(k) then make sure you are contributing the maximum amount that is maxed.  If your company matches 25% and your 401(k) has 0% return...you still made 25%!   Take advantage of this if you have the available to you.

I also think that if you solve #1 above then your credit card debt will magically disappear. Most experts agree that people have credit card debt because they don't have enough in savings.  If you had the cash you would have used it over the credit card, right?

Also, keep in mind that home ownership is more expensive than renting.  If your rent was $1000 per month and your mortgage is $1000 per month...the house that came with that mortgage needs the grass mowed, or if the ceiling fan breaks you pay for it, etc.  If you rent, then most of the costs of owning fall on the property management company.  Renting temporarily is not a bad option to keep your expenses low.

Investing in real estate is a full time job for some people. But for a lot of us it diversifies our investment portfolio and our regular full time job is how we make our daily money.  Treat your normal finances right and you will then have the ability to buy investment properties easily.  Hope this helps!

Matt M. · Answer

Talk to a LOCAL lender and make sure you can qualify on another home purchase. x2 on having 6 months of reserves saved up.

Chris Low · Answer

When just starting out, it's easy to get overwhelmed by all the choices and decisions. If you listen to the BP podcasts you'll hear a common theme when Brandon asks 'What separates successful investors from those who give up, fail or never get started?" Most people answer something along the lines of 'you just have to get started.' Don't get sucked into analysis paralysis. It really is paralyzing. You really can't go wrong with any of the moves you've talked about as they're all important, with some possible caveats. You didn't discuss the size of your credit card debt so I'm going to assume it's not huge. Yes, getting out of credit card debt is a good choice, but if you're looking for a conventional loan, it's not imperative to have zero debt. What is important is your debt-income ratio and your credit scores. So, yes, pay it down if it's really huge. Relatively low debt isn't going to stop you from getting a loan. It sounds like you also need to figure out your living situation. Why not house hack? Look for a duplex, trip-plex or quad to buy and let your tenant(s) make your payment while you get a place to live for a year or two while you decide if you really want to stay in that town and, if so, where. This gives you the benefit of simultaneously buying yourself a place to live AND a rental property. Live in it for a year or two then refi it to get your equity out and roll it into a new property. You could also trade up via a 1031 exchange.

Personally, I wouldn't set up the corporation yet. It's just an unnecessary barrier to taking action at this point. You can always do it later and put your assets into your corporation at that time. I would do it when you have a couple of properties, but not when you're just starting out but, of course, the costs/benefits do vary by state. Still, it's not necessary at this stage of the game IMO.

Good luck!

Tyler Stephens · Answer

Paying off your credit card debt will have the most obvious positive effect on your bottom line. If you have $5000 debt at 15%, paying it off will have the same net effect on your bottom line as finding a $5k investment at 15% (which, if guaranteed, would be an excellent investment for anyone.)

On the other hand, you can pay your monthly minimums temporarily and get your next house sooner, get more investment income and equity coming in, and THEN pay off your cards with that extra income. If you look at all the ways rentals earn you money (appreciation, cash flow, tax benefits, and amortization) and compare that with what your credit card debt is costing you, you'll be able to see which is the better route strictly from a numbers standpoint.

Then there's the intangible things to consider, like the fact that getting your next property can be very exciting. I'm also considering these options in a vacuum. Take a close look at your personal situation.

I'm thinking this out in my head as I type and now I'm also considering the ability to leverage properties. It will be easier to use equity in your properties to grow your portfolio down the road. (as opposed to using credit card debt for a down payment.) If you do decide to buy, the FHA loan program for owner-occupants is a very powerful tool. Just depends on if living there for a year will be a problem.

Leland Barrow · Answer

If you have credit card debt then I am assuming you have no money for a down payment. It is hard to buy an investment property with low or no money. There are a variety of options for low down payments if you are buying a residence. If it was me in your shoes I would house hack a multi-family with a low down payment loan. I would do as many of those as you can until it is no longer a viable option.

Also you do not need a corporation.! I think you need to spend about 3 months reading through the educational content on BP.

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