What to do with extra money?

Question

So my wife and I combined finances after getting married and are looking for ways to put our money to work. We each owned our houses before we got together. Right now we're able to set aside about $3,000/month. I struggle back and forth with the following options:

Payoff both vehicles in a little less than a year, which would give us an extra $850/month to invest. After that payoff our primary residence(about $90,000 owed right now) because it would not be taxed as income. After that, payoff the house she owned(about $69,000 owed). After that we would move to a nicer house and own two houses free and clear that are bringing in about $1,700/month.

Payoff both vehicles, which would then gives us about $3,850/month. Do not payoff her house which we're currently renting and have about $200/month cash flow and purchase a new $80,000-$100,000 rental house every five or so months, etc.

I look at it a couple of ways. Paying off the vehicles is like having an automatic $850/month coming in, minus the headaches and equity loss in a property. Owning one property that's bringing in $800/month cash flow is better than dealing with four that our bringing in $200/month.

It seems like a lot of people are all about more more more when it comes to rental property rather than less free and clear property and higher cash flow returns? To me dealing with four properties that are generating $3,200/month seems MUCH better than 16 generating $3,200. I do realize though 16 generating $12,800 in 30 years though is better long term though.

I'm I in the ball park here??

James Triano · Answer

This sounds exactly like the decision process my wife and I have gone through (and still go through).  We opted with paying off both vehicles first and foremost.  This was more of a decision that we don't want to have debt on depreciating assets and I just like having less payments to worry about.  We have done it and now both vehicles are free and clear and I love it.  I will never have a car payment again.

Our real estate strategy favors the slow and steady like you mentioned in paragraph two.  I completely agree that one property cash flowing $800 is better than dealing with 4 cash flowing $200 for a couple of reasons.  1) If something goes wrong in one house you're cash flowing $800 in, you can probably absorb a fairly major expense (furnace, water heater, roof leak, basement leak, etc.) after a few months of cash flow.  Certainly will be much more difficult covering a major expense (and a higher risk of it with having 4 places) with only $200 per month.  2)  Depending on what your full time job is, often time is a restriction on what you can do.  I know that right now, I can't manage 16 properties but I can (and do) manage 3.  The cash flow is higher on each property and I can sleep easier at night knowing that my phone can only ring with 3 different numbers vs. 16.

Eventually, I want to own 20+ units but I want that to be a smooth transition with a large margin of safety.  I'm okay with doing it over time and playing the long game.  I can't tell you what to do in your situation but I can say that our slow and less leveraged method is going well.

Sometimes the BUY BUY BUY is much more flashy and impressive than my slow and boring method.  But I'm okay with being boring.

Andrew Syrios · Answer

It all depends on your strategy. If you're getting built-in equity on each purchase, then even if the cash flow isn't as good with a loan, it makes sense to buy more for the equity and long term wealth potential. But at the same time, it's riskier and more hassle. It's all a trade off, but if you like the idea of free and clear properties more, than probably means that's the strategy you'd be most comfortable with and should pursue.

Matt Moldenhauer · Answer

All good responses. Thanks guys.

James, that's pretty much exactly where my head is. We're not really in this for the monthly profit at this point. With the replacement of the water heater and new flooring in the bathrooms, we lost money last year, BUT the mortgage was paid on time every month, building slight equity. We're more interested in the bigger profits and less work. Renting out two homes at first that are free and clear will put us in a very nice house in our area with not much more than we're used to paying, while at the same time continuing to invest and put that money back into the "business".

I know this is a little off topic, but as far as repairs go, how do you generally go about deciding what needs done. Our current rental house is about 48 years old. It's in pretty good condition, but we're going to paint all of the walls and replace light fixtures. The carpet in the living room is different from the bedrooms(which all match). The linoleum flooring in the kitchen/dining is god awful. The bathrooms are newly tiled, so are fine. I'm debating if we should try and stick it on the market as is or replace everything but the bathrooms with the Allure Trafficmaster flooring and be done with it? Doing all of this would pretty much eat up the years worth of profit, but would be done and possibly attract a "better" tenant? Any thoughts? I don't want to be a slumlord, but I don't want to go broke fixing up a place and only rely on the improvement deductions and depreciation come tax time.

Matt Gehrls · Answer

I agree with Andrew. You aren't wrong. It depends on what you want. Having fewer free and clear properties is definitely lower risk. If you don't want to build an empire and can live off the cash flow you are expecting why take the headache that more properties bring. You are much further along than I am, but I intend to do the same.

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