What would be the next move...

Question

Hey Gang,

I have asked for advice to a lot different people (realtor, financial advisor, property manager, other investors in the area) about what I should do for my next move as I have read about a few different strategies on how others invest or continue to invest.

So a little background for me I have house hacked everything that I have. I started on Ohio State's campus and bought a duplex, which cashflows $800/month. I then got transferred to Dayton, OH and the Columbus property has worked out so well I bought a 4 unit/1 BR apartment building (I lived in one unit fixed it up and then rented that out and moved/fixed up another unit, until it was time for the next adventure). This cash flows $1000/month. I then bought another duplex, which I fixed up and paid off just this past year and that cash flows $1320/month. After living next to my tenants for 6 years I decided that I wasnted some privacy and purchased a SFH that needed some work close to University of Dayton's campus, with the thought that I will outgrow that property and I will move and put it up for rent.

The problem that I am currently running into and unsure what I should do next is the dreaded Debt to Income ratio. I work a good job and bring home 70K before taxes, I have the properties, which cashflow a total of $3120 and I own another business that puts on running events, which brings in an additional 22K per year. The goal is financial freedom and no longer having to work my 9 to 5 job.

With all of that above I am having problems figuring out my next move: Is it best to pay off one of the mortgages like the 4 Unit? But then I have read why would you do that when you should just be letting the tenants pay off that mortgage. So do I save to buy another property with a large deposit? My fear is that I have to get rid of some of this debt in order to get my next loan, which by my calculations if I put a decent chunk in most months shouldn't take a long time, but I would prefer to do things properly, rather than having someone ask why did you do that and be uncertain.

Thank you for taking the time to read and potentially respond, looking forward to hearing some of your own thoughts.

David M. · Answer

@William Przybyla

Part of the allure of real estate investment is that there are so many complexities and different ways to do it.  As such, you ask 10 investors and you will get 20 opinions....

Of course, if you pay the mortgage over time is more cost effective and efficient...  you should use the power of leverage... but if you are “flush” with cash why bother with paying for other people’s money... oh but we’re you planning on using that cash for something else...

These are all strategies depending on your particular situation.  It sounds like your deals are going well.  Seems odd you are running into a dti problem — have you checked with your lender on how much they will lend you??  Find out first if you have a problem

Meanwhile, think about what approach works for you and what is financially effective and efficient for you.  When you say you can pay down a large chunk in short time. Is “large” 25%? 50%?  75%?  It’s silly to mostly pay it off since you will have lots of equity in the property but be stuck with the large payment which is exactly what you don’t want.  Meanwhile, I don’t think it’s efficient to take out a loan and pay it off in a few years if you don’t have to.  It defeats the purpose of paying for a loan and basically getting rid of it.

As rates came down the years and my equity grew, I did a ‘consolidation refi.’  For example, three properties with three mortgages became two properties fully mortgages and one property free and clear.  Why should I pay for three loans when I only needed two?? See what I mean...

Sorry I can’t give you a more definitive approach.  Understandably I don’t have all your financial info and my point is there are so many “advantages” in REI that you can find the silver lining in any approach.  So figure out your overall goal and determine what means do you have at your disposal.  Then, craft your strategy to take advantage of which benefits work for you, then go for it.

Hope this helps.  Good luck.

Marc Winter · Answer

@William Przybyla, congratulations, you're off to a great start!

At your current stage, you have some experience as to what to do and how to do it to make some cash-flow happen.  The next step is becoming more creative, not focusing on your DTI ratio.

Example:  you are concentrating/focusing on bank financing.  You are paying too much attention to their requirements.  What would happen if you looked beyond the box they want to put you in to qualify for their money?

Just a couple of ideas:  find the deal, get the seller to finance it, or get a partner, do a 'subject-to' deal, build up a private money investment network.

There are so many more avenues to acquiring real estate besides conventional financing, I'd recommend you put some of that positive cash flow into more education or meditation to free your mind to birth another way of doing deals.

Namaste.

Gordon Starr · Answer

You are willing and able to fix up your own properties. You are operating in dayton ohio and getting low cost and high cash flow properties. you know what you want. Hit the gas pedal, not the brakes!

Robert Ellis · Answer

Excellent advice! Like he said there are seemingly endless ways to go with real estate.

Eric James · Answer

The returns on RE purchased with cash are very low. You won't get to financial freedom that way. The way you avoid the DTI limitation is by making sure all RE you purchase bring have total expenses that are less than 75% of rents. When you do that, RE that you purchase actually decreases your DTI ratio.

Calvin Anderson · Answer

Hey William,

First of all, it was fascinating to read about your story, it gives me even more motivation to achieve liftoff. Always good to hear from another Dayton investor! I'd be interested to hear more about your story and the details another time.

Anyways, going back to what you were saying. It sounds like you identified your ultimate goal of achieving financial freedom, now it comes down to how you're going to get there. Based on my own research and view on this subject, the idea of financial freedom is a hugely personal issue, and only you can figure out how to get there. This goes back to book, The One Thing, and the idea of the domino effect (not sure if you read it or not), but I'd recommend checking it out when you get a chance. Basically, there should be a lot of mini goals (dominoes) along the way for you to knock over which eventually leads to knocking over that ultimate goal. https://www.the1thing.com/blog/the-one-thing/use-the-domino-effect-to-crush-your-biggest-goal/My personal vote is paying down your mortgages to build more equity in your homes as well as acquiring even more cash flow per month down the road, which may be in line on your financial freedom path of eventually having to work less because the cash flow will replace your W2 income.

I hope my perspective helps, and I would be interested to see what other people say. As @David M. said above, you're going to get lots of opinions on this subject!

Remington Lyman · Answer

I agree with you. There are a bunch of different strategies to use here. I am in a similar situation. I am also constantly changing my strategy. I recently just started purchasing with cash and commercial loans because my debt to income is not good enough to get owner-occupants (newly self-employed.

William - It sounds like you are doing it correctly though!

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