Seeking honest feedback on my plans to prepare to start investing

[Adam Mangrum]

Hi everyone! I'm not sure which place would be best to post this so I'm posting this here and in the introduction section (this is my first post). I apologize for the length but I wanted to give a lot of background to hopefully make the advice given as relevant as possible.

Since joining the site and listening to about 50 BP podcast episodes, I've been formulating my plan to get started with RE investing. An idea recently occurred to me that I would really appreciate some feedback on.

I'd like to preface by saying that I feel like my wife and I have made some pretty stupid financial decisions and we are trying to fix those mistakes. That's the main reason for this post.

Our cash flow situation isn't nearly where it should be before we jump into investing. We bought a 4 br 2 ba home for $215k in 2015 a year after graduating college after conferring with a trusted local investor who I feel gave us some ill-placed advice. He suggested that buying a duplex instead of a SFR as our first home wouldn't make enough of a difference to matter and to go ahead and purchase the SFR as our residence and work on saving up for our first rental property. I sure wish I would have listened to Scott Trench's podcast episode and read his posts before we thought about buying a home!

The problem: our current situation leaves us with only $400 left after all expenses, I'm ashamed to admit. Our expenses include $1,150 in loan payments between student loans ($680 monthly), a personal loan with a 6k balance and a couple of credit cards with balances totaling about 8k. As I said, we weren't the best at money at all and have drastically reduced our spending after reading Mr. Money Mustache and other personal finance/early retirement blogs. 

We only bring in $70k gross currently between our two jobs and don't anticipate it changing anytime soon. I am doing a career change (finished a pre-med degree 2 years ago) into software development, and should be done with my second bachelor's in the field in December 2018. 

That's the backdrop to our situation. 

Before we bought the house, our monthly expenses were $835 less in fixed costs, and we've spent a few thousand dollars between a couple of DIY projects (painting the siding, replacing the main level's flooring) and the tools needed to do those projects. We are contemplating whether we should sell the house and go back to renting until we can buy a duplex. It makes a lot of sense to me to do that, but I wanted to get some genuine opinions from people here about it. 

Here are the pros and cons that I've come up with:

Pros:

1. Much more cash flow to be able to quickly pay off CC balances and the personal loan to free up another $350 in monthly cash flow. 

2. After paying off the bad debt in #1, much more cash flow to more quickly save for a down payment on a duplex.

3. Overall, getting started in REI much sooner than if we stayed in the home and waited for my new career to pay us well enough to save for the down payment on a second property.

4. Less stress on my wife, who hates her job and wants to stay home with our son and the future child(ren) that will come at some point, or at least only have to work part-time as a photographer (her dream job, and something she's really good at).

Cons:

1. Having to give up the space of a house and get rid of some belongings we have that wouldn't fit in an apartment lifestyle.

2. Having to explain to family and friends why we are taking a step "backwards," and having to admit that we made a mistake based on our new value system. (This one isn't a huge deal, we are humble enough to admit to the mistakes we have made.)

3. If we sell the home, we couldn't qualify for first-time home buyer loans for 3 years (not a big deal I suppose, since it will take the good part of 3 years to pay off bad debt and save up a nice down payment for a duplex)

4. Aaaand the more I think about it, the only cons are the hit to our pride and having less space to store things.

Anyone care to pitch on whether or not I'm thinking about this correctly? Does anyone disagree with the decision to sell our home? If you agree that we should sell the home, do you have any other good reasons that I haven't covered? 

Thanks to all in advance for any advice. 

Adam

[Allen Fletcher]

@Adam Mangrum

First I would like to congratulate you on the making the decision to streamline your financial portion of your life. Coming to the realization that even though your current lifestyle "works" it does not allow you to advance financially is a step not many are humble enough to take. Please remember that you must really do the math and talk with your wife before taking any advice that you are given.

With that said...

1) Do a bottom up build for your family budget. This seems boring and not very useful, but it is essential that you have a good budget and stick to it. You will be amazed at just how much more money you have when you track everything. Knowing where every penny of your money goes is the first step to making every penny go where you want it to.

2) You are a family of 3 at a minimum you need a two bedroom residence. Look into how much income would be liberated if you went to the smallest residence possible. If you are willing to sacrifice upfront it will help you get your feet under much faster.

3) Pay off the personal loan as fast as possible. Put every penny you can towards that personal loan. The faster you pay it off the faster you unlock all of the money going to service that debt for other uses.

4) Pay off the credit card debt.

5) Buy a multi-family property using an FHA loan. The FHA will let you buy and move into a multi-family property with as little as 3.5% down. This means you do not have to save near as long to jump into rental property investing and, depending on the type of multifamily property you purchase, you can treat your family to more space.

Sorry these suggestions are not glamorous, but they are the building blocks to a firm financial foundation.

Good luck,

Allen Fletcher