First Step Plans/Questions

[Account Closed]

Hello,

  I'm a new BP member and I've been reading a lot of posts recently.  This site is amazing!!  My wife and I are interested in getting into real estate.  With that being said, I'd like to see if you all can give me some feedback on my starting plan and address some questions

Income:  We are blessed with well-paying jobs.  We are currently living on about 46% of our tax-home income (25% of which is our mortgage) and have used the additional 54% to pay off all of our consumer debt (student loans, car notes, etc...).  We just completed this in March and now have roughly 6 months of expenses saved.

Debt:  The only debt we have is our primary residence.  We hold a 306k mortgage on a home and 52 acres.  We currently have a 30 year fixed 4.25% note. We have owned this home for 2 years.  Our monthly payment including tax and insurance is $2036. 

• Should we pay this off 100% before buying our first rental?  We can have this paid off in about 4 years if so.  Maybe less if we take into consideration 2-3% pay increases over the next few years.  I hate to count on things that haven't occurred yet so, 4.5 years would be my target goal.
• If not, would you recommend increasing payments to pay it off in 15 years and start investing now?
• If not, what would you recommend we do with the additional $4000+/- of "extra" cash each month to get started?
• I'm a bit "scared" of debt.  I've read so much on leverage and people appear to look for that but, I don't know if I understand it well enough to embrace it?

Thanks for any feedback!!  I want to take action but, I want to take the RIGHT action.

[Brian Schmelzlen]

Being risk-adverse is a good thing, it makes you analyze a deal more carefully to ensure that it is a good one before you pull the trigger.

Yes, my recommendation would be to use your savings to make real estate (or other) investments rather than paying down your mortgage at an accelerated rate.  I don't think paying off your mortgage early is a bad thing at all; it will put you on very safe footing.  I just think it will stop you from ultimately making as much money as your could and eventually being on even safer financial footing.

In terms of increasing your cash reserves, I don't think that is a bad idea.  I think 6 months should be fine, but if you are more comfortable having 12 months of reserves that just makes your more secure.  You could also tap into those funds if you need reserves on any of your investments.

For down payments on your rentals, I think you should put down as little cash as you can.  That largely depends upon what the lender wants you to put down.  However, the caveat with that is that you should not leverage it to the point where it is too risky; you don't want to put yourself at risk of losing your rental.  You would have to run the numbers to see where that is.  Putting down less cash lets you scale up faster by being able to afford rental #2 sooner.

In terms of a 15 or 30 year loan; I think if the rental can support a 15 year loan I would do that.  It would have a lower interest rate than a 30 year loan, and given that you hate debt it seems like it would work better for you to pay it off faster.  Your cash flow on the deal would have to be pretty good to support a 15 year term, but if the property is paying for itself (even if you are not pulling money out) that is a pretty good result.

Of course, if you are interested more in immediate cash flow from your rentals then you should go with a 30 year loan.