First Rental Property went great. Double down or Buy another?

Question

I Live in North Jersey, where home prices are high to say the least. It's hard to find a deal without being out bid by all cash offers and investors in prime areas. In 2017 I managed to get my first home near Montclair with a vision of renovating it and renting it out( got lucky, I was the only one who showed up in a snow storm during a best offer situation and the sellers wife was due in the next month!). fast forward to 2018, I've rented the property, got lucky and got an awesome tenant who just extend the lease for 2 more years.

Property Breakdown:
Purchase: 270k
Value today: 330K
Debt on Property: 240K
Mortgage: $2,000 (taxes & insurance included)
Rent: $2,500
Landlord expenses: $45/m - water.

I moved back with my parents and save a good amount a year. My parents are very supportive and told me as long as I'm moving "forward" they don't mind at all (they are retired).

I'm preparing to get another property but I'm not sure if I should save my money and pay off the first property or invest in another. If I double down, I can pay off the property in 3 to 4 years and increase that profit margin to almost $1400 a month.

However, I understand that if I take my savings and seed other properties, in the long run, I'll have a larger net worth.

I love cash flow, but would I be making a objective mistake paying off the first home instead of investing in another? Even though the entry price NJ is much higher. Even dilapidated houses in the right neighborhoods for renters still start off at 320K in my area. If I were to buy another one, it would be 30K+, + Closing Cost 15K + Renovations (10K+) and sit on it for a year because I wouldn't be able to rent it out as a home owner unless I bought it as an investor etc (higher down payment etc.)

I've done a lot of research and lurk the web all the time, I see people on youtube who emphasize more doors, more doors! But they live in Cleveland or somewhere where a house cost 100K and I envy them. In NJ it's a lot tougher to collect doors unless you are willing to go into some tough areas which I am not, I spent some time in my youth there and it's just not for me at this point.

if you have some advice, I'd appreciate it!

Jonathan Greene · Answer

Would you be looking to house hack the next one and get out of your parent's house? That may be a better second option from a downpayment point of view. Also, where is the property? Your deal metrics suggest maybe Orange, East Orange, or Belleville. All still rapidly appreciating, but some with lower ceilings than others. You are spot on with the 320k in-price so it depends what you want to get out of the next one. You should NOT be thinking more doors is better over how it impacts you. More doors also equal more problems, more things that can fall apart. Before you ever move on to a second property you should always make sure your first one is running at peak.

Gabe C. · Answer

Congrats on the first property! The answer to your question depends largely on your goals and debt tolerance. From a wealth building standpoint, it makes no sense to pay off your house. Buying another one allows you to use leverage again, magnifying your buying power. Paying off a house for increased cash flow only makes sense if you’re at the point where you want to wind down (ie retirement). As long as you have tenants, you’re not really worried about that debt, and having all that equity makes you a target anyway. Some just can’t stand having debt, which is valid too, but then building wealth is going to take much longer. Sounds like you put about 30k down? Saving another 30k for a new house is gonna be much faster than paying off that $240k. You will increase velocity with each property.

Joshua S. · Answer

Don't pay off the existing rental. When you have a mortgage on your primary residence it makes more sense to pay it down faster, in my opinion, because your mortgage is one of your largest expenses and really affects your cash flow. But on rentals the leverage actually works in your favor. When you purchase rentals you can almost think about it like the lender is your partner / investor. They put up 80% and you put up 20%, but you have to manage the whole thing. Once things are settled and you have saved up enough you can buy another one and so on. If you're in a hurry to pay back their investment, you're not able to buy other rentals and that should be your focus.I know what you mean about doors, because I live in the same area and it's tough around here, but be patient. I think there is a financial disaster around the corner and things will get cheaper in the coming years. I think you're in a perfect position to buy duplexes and live on one side for a year and then move back home and rent out the other side, so that's what I would look for if I were you.

Sebastien Jean-Baptiste · Answer

Thank you guys for taking the time to reply! I took great value in the comment about becoming a target, Gabe. "Would you be looking to house hack the next one and get out of your parent's house?"- Yes, that's the plan. My parents house would kind of be my base of operations (moving in/out as needed). For all future purchases until I can compete with the big boys cash wise. The property is in Bloomfield, near Montclair. I'd love to get my hands on a two-family in that area, that would be worth it to me 100%, I'd have to see how spring 2021 shapes out in order to see if I can compete.