Pay off my house before I buy a rental?

Question

Hello everyone. I bought my first home about 10 months ago and I am 33. The loan was for 125k which I owe about 118k. I have no debt other than this house. My girlfriend pays the utilities and I pay the mortgage that is just over 1k per month. I have paid extra every month on the mortgage but after fixing up a bunch of things and getting settled in I can afford to pay 2k a month towards the mortgage, I could pay more than the 2k but that is a number that is easily obtainable. I make about 75k per year and I will have about 20k saved up in the couple months. So here is the question that I just can't decide on. Should I stop paying extra on my mortgage and save the money to buy a rental house or should I focus on paying off the mortgage on my house?

Jeff S. · Answer

Mike,Congrats on the house and no debt other than the mortgage. You are winning in today's climate. Many here love to leverage debt to bring in income and have their renters make their mortgage payment for them. Personally, I agree with doing that, but only if you have your 1st house in order. By "in order", have 3-6 months of savings should the unexpected happen. Next figure out how much you feel comfortable spending on an investment property. Have at least 20% to put down and look for something that you and your girlfriend can paint, fix up and tidy (sweat equity) before renting. The 1st is investment property is sometimes the hardest as you learn what your doing, but will prepare you for your next. 4-5 paid for houses can make you a millionaire if you save wisely with your regular job income. Best of luck to you.

Mark S. · Answer

Mike Mike , check out Keith Weinhold’s recent podcast on “Why Home Equity Is A Terrible Investment.” I’ve never heard anyone explain it better than him. Get Rich Education (GRE). I think it was 3-4 episodes ago. His podcast literally changed my life.

Mike Mike · Answer

Mark S. · Answer

@Mike Mike, I think 4% interest is a bit low on an investment property loan right now. I closed about a month ago on a 30-year fixed at 4.875% (excellent credit, 20% down, etc). What makes you think you can get the property for $20K less than list price? Great if you can, just wondering why. $2,500 closing costs seems a tad low, but probably not too far off. What will you do for $5K in rehab costs to make it worth $100K? I think you’re on the right track, just a few things to consider.

Mike Mike · Answer

This is the first analysis I have done. They listed the property @89k. Thoughts?

Mark S. · Answer

@Mike Mike, don't get stuck in Analysis Paralysis for too long. I made this mistake. I literally just posted about it here: https://www.biggerpockets.com/forums/12/topics/519...Check it out when you have a few minutes. I hope it's helpful.

Mike Mike · Answer

Thanks for the responses. I have listed to a hundred or more bp pod casts as well as many others. Rich Dad poor Dad was mind alternating book for me. I know a hand full of investors in my area and one of which has been a huge mentor to me. I have been learning as much as I can to try to avoid mistakes. I am working on a goal to have 30k in cash by summer and spend 20k on my first rental in 2018. My biggest problem has been not setting a goal in stone and not wanting to take a risk but I am going to do this. My mentor tells me I’m to worried about the small things and to just save more cash and make a deal. He is 100% right.

Steve S. · Answer

Borrowing money right now is so damn cheap they're practically giving money away at the bank it seems. I'm definitely in the pro-leverage camp. There's no day like today to get started in REI. Hope for the best but be prepared for the worst. Can you handle the unit being vacant for 3-6 months? Can you handle 2-4% point increase on your loans? If the answer to those questions are yes.. you should start giving it a serious look.

Navid A. · Answer

@Mike Mike, I agree with @Jeff S. about making sure your financials are in order before investing in another home. It sounds like your debt to income ratio is where it needs to be and that you're able to bring in significantly more than what you have to pay out for bills...that's a beautiful thing! I highly recommend you save up for an emergency fund, or as I call it, the Armageddon Fund. People have different beliefs of how large this should be, I personally recommend saving up for at least 3-6 months of expenses and never touching it unless you absolutely need to. That being said, with $20k you can definitely get financing for a rental home. But keep in mind, your goal is to buy a rental property as low as you can so you can enter it with built in equity after you fix it up a bit, hence the "sweat equity" as mentioned by Jeff above. The issue with traditional financing is that the bank will hardly issue a note on a house that needs a lot of work or fails inspection. This is where cash comes in. With cash, you can buy houses without an inspection or a bank's approval and fix them up yourself. With that being said, this is where I'll recommend the BRRRR strategy. Look it up on BP when you get the chance. There are so many awesome strategies and there is no one right answer to anything, that's what makes it fun and unique to each investor!