Young Landlord Seeking Advice

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Young Landlord Seeking Advice

Juvawn Parker
Member since 2019 路 20 posts 路 16 votes

I am 27 years old. I currently have 3 properties. 2 of the properties are long term rentals (1 SFH, 1 Duplex), and the other property is a primary residence.

I have a high paying career and I have managed to keep my expenses down. The only loans I have are my real estate properties, no other debts are owed (no car loans, credit card loans, student debt loans, etc). With my career and relatively low expenses, I am able to put away an extra 40k a year. That means by the end of 2023 I will have 40k put away assuming nothing goes awry. 

The background information is needed to determine what I should do. In my position what would you, a seasoned investor with experience, do? Would you pay off a rental property you currently own (my SFH rental can be paid off with a sum of 40k), and place it inside of an LLC? Doing so could help reduce debt and also start a company to help liabilities? Once SFH is paid could even take a heloc and pay off another investment property (SFH is worth about 110k).

Would you buy more rental properties? Would increase my debt and liabilities since every property would be in my name, but could be a chance to get greater appreciation in the future? Time in the game is essential afterall.

Would you focus on paying off your primary residence? At my savings rate I could probably pay off my primary in about 7-10 years. Once that's paid off my debt would greatly be reduced, and my living expenses would be drastically reduced since the living expenses are my biggest expenses.

Would you do a combo of all three? I prefer buying and holding. Maybe an occasional cosmetic brrrr if the opportunity arises. I also prefer to heavily focus on my career as of now since I believe I can increase my income even more as time goes on and I gain more certifications.

ANY AND ALL ADVICE WELCOME. THANKS!!!!

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Greg ScottPro Member
Rental Property Investor 路 SE Michigan 路 Member since 2014 路 4k+ posts 路 6k+ votes
3y

I would never pay off my personal residence or a rent property.  The cash you use to pay down the mortgage only gives you a rate of return equal to the interest rate, so what, 6%.   If I can borrow money at 6% and have it earn 10, 15, 20, 50%, I will do it all day long.

Related to that, it does not seem you are aware that on rental properties a portion of the income from the rent property is added to your income.  When done correctly, your debt-to-income ratio and your ability to qualify for a mortgage improve with each rent property.

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  • Greg ScottPro Member
    Rental Property Investor 路 SE Michigan 路 Member since 2014 路 4k+ posts 路 6k+ votes
    3y

    I would never pay off my personal residence or a rent property.  The cash you use to pay down the mortgage only gives you a rate of return equal to the interest rate, so what, 6%.   If I can borrow money at 6% and have it earn 10, 15, 20, 50%, I will do it all day long.

    Related to that, it does not seem you are aware that on rental properties a portion of the income from the rent property is added to your income.  When done correctly, your debt-to-income ratio and your ability to qualify for a mortgage improve with each rent property.

    1Reply
  • Daniel Molina
    Member since 2020 路 117 posts 路 56 votes
    3y

    I second what Greg said about not paying off a primary or rental property if that money can be used to create a higher return on your money. In your situation it depends what your goals are with investing. If you are looking to keep buying rentals are you looking for long term holding or instant cash flow?

    0Reply
  • Willie Herring
    Investor 路 Fayetteville, NC 路 Member since 2017 路 3 posts 路 4 votes
    3y

    First, let me start off by saying, "great job." With that being said, being debt free and owing real estate is the path that I chose to take. I suggest paying off your primary resident first than working on your rentals. This is a forum with all kinds of real estate investors so this opinion is coming from a all "Cash" investor. Just imagine owing all off your properties free and clear with your amazing W-2 income!!

    1Reply
  • Nathan Harden
    Real Estate Agent 路 Puyallup, WA 路 Member since 2022 路 551 posts 路 379 votes
    3y

    I personally would continue to use the debt of all of the properties debt to your advantage. I am assuming that all of these properties will appraise for more than you bought them...? If that's the case, take the equity out of the properties and do it all again.

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker 路 Cody, WY 路 Member since 2010 路 28k+ posts 路 41k+ votes
    3y
    Quote from @Juvawn Parker:

    Congratulations! Being debt-free puts you ahead of most Americans. Owning cash-flowing rentals puts you even farther along, and you are only 23!

    As the others have said, you do not want to pay off your rentals or your primary home. There are benefits to carrying that debt, and it increases your rate of return. I recommend you  read a few books on real estate investing to learn the power of leverage. I like the Unofficial Guide to Real Estate Investing (it may not be in print, so look for a used copy). Here's a very basic explanation to get your juices flowing:

    Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.

    Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.

    Buy four houses with $50,000 down on each. Mortgage payment is $1,000 on each house, so you're essentially earning $500 per house or $2,000 a month. After five years you'll have earned $120,000 in rent income and gained $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it.

    The DIY Landlord Book4.7244 Reviews
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  • Eliott Elias
    Investor 路 Austin, TX 路 Member since 2021 路 9k+ posts 路 5k+ votes
    3y

    Be as aggressive as possible while you're young and take advantage of your job/youth to grow. If your goal is to have real estate retire you 3 properties isn't going to cut it. 

    0Reply
  • Steve Vaughan
    Rental Property Investor 路 East Wenatchee, WA 路 Member since 2014 路 10k+ posts 路 16k+ votes
    3y
    Quote from @Juvawn Parker:

    I am 27 years old. I currently have 3 properties. 2 of the properties are long term rentals (1 SFH, 1 Duplex), and the other property is a primary residence.

    I have a high paying career and I have managed to keep my expenses down. The only loans I have are my real estate properties, no other debts are owed (no car loans, credit card loans, student debt loans, etc). With my career and relatively low expenses, I am able to put away an extra 40k a year. That means by the end of 2023 I will have 40k put away assuming nothing goes awry. 

    The background information is needed to determine what I should do. In my position what would you, a seasoned investor with experience, do? Would you pay off a rental property you currently own (my SFH rental can be paid off with a sum of 40k), and place it inside of an LLC? Doing so could help reduce debt and also start a company to help liabilities? Once SFH is paid could even take a heloc and pay off another investment property (SFH is worth about 110k).

    Would you buy more rental properties? Would increase my debt and liabilities since every property would be in my name, but could be a chance to get greater appreciation in the future? Time in the game is essential afterall.

    Would you focus on paying off your primary residence? At my savings rate I could probably pay off my primary in about 7-10 years. Once that's paid off my debt would greatly be reduced, and my living expenses would be drastically reduced since the living expenses are my biggest expenses.

    Would you do a combo of all three? I prefer buying and holding. Maybe an occasional cosmetic brrrr if the opportunity arises. I also prefer to heavily focus on my career as of now since I believe I can increase my income even more as time goes on and I gain more certifications.

    ANY AND ALL ADVICE WELCOME. THANKS!!!!

     I've paid off a dozen mortgages,  with reason.   Riskier adjustable, callable, balloons looming, commercial,  seller-financed or fixed over 6%. 

    It also matters if there or aren't available opportunities of low risk and hassle with a better return than the loan rate. 

    You're doing awesome 馃憤

    0Reply
  • Juvawn Parker
    OP
    Member since 2019 路 20 posts 路 16 votes
    3y
    Thanks for all of the feedback!
    0Reply
  • Leo R.
    Investor 路 Member since 2021 路 591 posts 路 695 votes
    3y

    @Juvawn Parker first off, congrats--it sounds like you're killing it (ESPECIALLY for someone your age)!

    I can't necessarily tell you what you should do, but I'll tell you what I did (and it worked out pretty well):

    Buy, and move in to, an A or B grade SF or small multi fam using a conventional 30 yr mortgage every year. Only buy properties you know will have sufficient cashflow as rentals. If you need to (or if you just want to maximize your returns), house hack it in year 1 to offset expenses. Then, rent it in year 2 when you move to the next property. Rinse & repeat until you hit the limit of 10 mortgages.

    It's arguably the simplest way to acquire more properties with the best debt terms available.

    Since you already have 3 properties, you presumably already have a lot of the necessary experience to execute this strategy (e.g.; market & property analysis experience, due diligence experience, property management experience, etc.).

    And, since you also have good W2 income, if you want to mix in some other strategies (e.g.; and occasional BRRR, etc.), you can probably do that...though, I suggest that the aforementioned strategy should be your bread and butter (since it's lower risk and less work than ARV-dependent and more complicated strategies like BRRR'ing).

    As for whether to pay off the debts on your existing properties...this depends on factors like: what are your current debt terms? What could you do with the cash if you don't pay off the properties right now? How do the properties cashflow now, and how would they cashflow if you paid them off?  Would paying them off result in the type of cashflow needed to help you achieve your goals?  ...and, what ARE your goals?     ...answering these types of questions will help you zero in on what move fits you best...

    As others have mentioned, if you have good debt terms locked in (most investors who bought properties in the last 5+ years have EXCELLENT debt terms locked in), then it often doesn't make much sense to pay off the property (especially if it's already cashflowing). Why would I rush to pay off my properties that have debt locked in at 3.25%?  Especially when we have inflation that's WAY higher than most real estate debt, it rarely makes sense to pay off the debt....my debt is at about 3.25%, but inflation is over 8% --this means I'm literally repaying the debt with money that is worth less now than it was when I borrowed it. It's like borrowing gold from a bank, and then repaying them with gravel! (well, maybe not THAT extreme, but it is repaying a debt with something that is less valuable than what was originally borrowed --one of the few times investors have an advantage over the bank!)

    Good luck out there!

    0Reply
  • Drew SygitBusiness Member
    Property Manager 路 Royal Oak, MI 路 Member since 2012 路 13k+ posts 路 9k+ votes
    3y

    What are your goals and how much risk can you stomach?

    It will take longer for you to build wealth & cashflow by paying cash for rentals.

    Faster growth, but more risk, by leveraging loans to buy more units.

    [email protected]248-209-6824
    Logical Property Management4.9464 Reviews
    WebsiteView Page
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