Buy, Update, or pay off debt?

[Ben Clark]

Hello BP people,

my family and friends think I've lost my mind by being a real estate investor so I have to ask my questions here! I have a 4 unit currently. I've been looking for multi families under 80k that have a good amount of upside that I could work on to raise the value and rents. My question is what would be my best course of action. I currently have 20k to invest.

1. Buy a new multi unit. Looking for a good deal that cash flows as is but could be a great deal if fixed up a bit.

2. Fix up my current 4 unit and raise rents. The 4 unit I have is 1 2br and 3 1brs the 2br is pretty updated because I lived there for a few years. The other apartments are clean and well kept just dated and really plain Jane looking. If updated I could raise the rents by about 100 per month per 1 br. 

3. Pay off debt. I have a small car loan and personal loan both around 4k. 2 mortgages and student loans at about 28k most of which are in my father's name not mine. 

I know everyone will have a different opinion on what's the best option but I'm open to getting some input from people with more experience than me who are investors themselves! 

Thanks!

[Brenden Mitchum]

Hey @Ben Clark

The short answer here would be to just look at the numbers on each and see which returns the most on that $20k. However, I'm sure you have already done that so I'll try to be a bit more helpful. Let's look at each option individually.

1. Buy a new multi unit. In your market will $20k get you a decent small MF? If you're house hacking, I think this could be your best option. However, it is also the most difficult. It sounds like you might have a relatively high DTI? So I'd say as long as your market allows you to get in on a decent deal for $20k (especially if you house hack) and you're able to qualify, this will likely be your best bet.

2. Fix up current 4 unit and raise rents. Not a bad option if number 1 does not work out. 100x4x12=$4800 additional annual profit. It will take over 4 years for you to make back what you put in if you put the full $20k in. However, if this significantly increases the value of the property, that's where the real magic happens. You could potentially force enough appreciation into the property to refi and pull at least that $20k back out to put into option 1 or 3. If that's the case, this clearly becomes your best option. This will depend on your market so make sure you do a comp analysis beforehand or have your agent do it for you.

3. Payoff debt. This is clearly the easiest option but unless you have very high interest debt you can probably make a better return on your $20k through option 1 or 2. 

But just thoroughly run the numbers on each option. Clearly some will be more difficult/time consuming than others but if one presents a significantly better opportunity after running the numbers, that's the one I would go with. Luckily, you can't really go wrong here unless you buy a bad deal or rehab the property above what the market calls for. I'd say you have a good problem here with some excellent solutions. 

Please feel free to message me anytime if you have other questions or just want to chat!