Pay Down Debt, Buy Cashflowing Assets, or Fund My Business?

Question

Hey folks,

I'm at a bit of a crossroads regarding what to do to move forward with REI.  I currently house-hack a SF home but do not own any other properties.  It has about 250k in equity (worth $400k, 150k note at a great rate of 3.25% 30y-fixed), but my DTI is high that I can't access the equity.  I have a few sources of income that net me about $10,000 a month.  Here's what I can do to move forward, and I honestly don't know the best route to take.

1) Pay down my personal debt to free up the equity in my home.  This will take me about 6-8 months to pay down the $75k (ish) I owe.  This will let me qualify for the equity and/or my second VA loan if I wish to access it to house-hack again (my goal is to purchase a 2-4 plex).

2) My second option is to keep funding my cash flow strategies.  Without getting into the details, I have the capacity to create an extra $200-$500 a month for every $10,000 I put toward these assets (a mix of promissory notes or crypto passive).  The returns are excellent, but there are risks to both.  They haven't failed me in the past three years, but there is no depreciation and minimal diversification.  I basically have all my eggs in two baskets.

3) Fund my business to purchase my first investment property via a DSCR loan.  My final option would be to fund my LLC so my LLC can buy its first property without any credit check or connection to me personally.  Basically, I save up 20%-25% of the purchase price of a cash-flowing property (+ 6 months of rent reserves), and buy my first multi-family with my business.  I could save up for this option in another 2-3 months easily if I purchase in the right area.

Anyway, I'm someone with a great problem. I just don't know how to move forward.  I'd love some counsel, BP.  What do you think?

Jason D. · Answer

Personal loans are anywhere from 7% to 10%.  I do not plan on paying down the mortgage.

Eliott Elias · Answer

Keep the debt, buy cash flowing assets

Erik Browning · Answer

@Jason D. I agree with @Theresa Harris, pay down the debt excluding the mortgage, especially since it will only take 8 months. While you are in your earning years, eliminating the consumer debts will only benefit you long term and unlocks your ability to access more financial products to buy homes.

Also, and more importantly, please make sure you are recording your rental income from the existing house hack on Schedule E of your taxes. This give your more versatility on the next multifamily purchase using your VA loan - specifically 2 years of Schedule E rental income. If you didn't record the house hack rental income on 2020 and 2021's taxes, I advise you amend your taxes to reflect that.

Taylor Dasch · Answer

What is the interest rate on the debt? I would put the interest rate on the debt vs the expected cash on cash return from buying cash flowing properties, I am not knowledgeable on bitcoin or promissory notes but if your making 200/month or 2400/yr for 10k that is a pretty decent return depending on the risks. I am fairly certain that RE is less risky than bitcoin though so I would weigh that in as well.

Can you say with confidence that your cash flowing assets will give you a 24% return minimum? If so, then I would probably keep doing that until I can create a game plan for what I am going to do.

If you want to diversify, you can use dollar cost averaging and put money into each of your strategies, it will take longer but you will be more diversified and have less risk.

I invest in RE because I can understand how it creates wealth so I honestly do not diversify at all. I heard someone say (maybe Warren Buffet?) to only invest in something that you are an expert in. While I'm not an expert or even close, I do understand RE and am confident in the returns that I will get.

Theresa Harris · Answer

What other debt do you have and what are the interest rates?  If you are netting $10K a month, I'd focus on paying down your other debt (not the mortgage).  You need to balance risk with returns and make sure you don't have all your eggs in one basket.