Should I buy more properties or starting saving my cash?

Question

Im a single parent and investor with 4 rental properties. Three have been paid off in the last few years and the last payment on the 4th home will be February 2017. House #1 appraises at $94,000 with $1,000 rent, #2 $76,000/$900 rent, #3 $66,000/$1,000 rent and #4 $80,000 rent $900 (Im currently living in it temporarily til next summer while I rebuild my paid off primary residence $143,000 that had a fire).  I also was injured a couple of years ago in a car accident and have had a few minor surgeries with possibly more extensive ones to come. Id planned on working until 60 at my state government job but I can retire in 3 years at 55 (36 years) with a full pension of about $1,700.  Im currently on an intermittent work schedule because of flareups and may need to retire between 55-57.

My rents next year will total $3,800 monthly but after taxes, insurance, repairs etc it will cash flow  about half off that. My expenses will be about $2,000 monthly conservatively or $2,500 if I travel as Ive planned. Decent 3 bedroom rentals can be purchased in my town for about $35,000 to $40,000 then I usually do minor rehab for $5,000 to $10,000 more to get better rents.

My question is whether I should hustle to buy another rental or two with future cash in the next couple of years? Put down 20% and finance 2-3 more in retirement? Possibly down size and sell my 4 bedroom 2 bath primary residence (since I only have one 17 year old still at home) to finance them? I dont want to be house rich and cash poor in retirement either. I was of work for almost a year and depleted most of my 401K down to about $50,000. To cut down future costs Ive also replaced windows and roofs on all houses and installed 3 new furnaces with two more furnaces that may need replacing eventually. Ive lost sleep on many nights about a plan. Any suggestions on future rental purchases?

Robert Leonard · Answer

I think you've done extremely well @Priscilla Davenport!  If you establish a line of credit that will be very low cost and won't cost you any interest until you use it, you will be ready to make a quick acquisition of another property or two.  I think if you are an opportunistic buyer, you will only buy when you have a great opportunity to buy a great deal.  Having the LOC in place will allow you to do that.  With roughly 300k of equity, you should be able to establish a LOC for 75-80% of that and that would put at least $225k "at the ready" for you to buy.

If you are keeping things simple and self managing, keep buying the type of quality middle income type properties you have in the past.  Managing those are very different from lower income properties.

About the paid-off 140k primary residence - that's one that is a matter of risk tolerance.  Someone who has proven that they know how to manage their finances well enough to pay off almost 5 properties and still have some retirement savings after going through financial hardships, is a disciplined investor.  There's a significant opportunity cost that comes with what people call the "peace of mind" of having a paid off primary residence.  When you reject the super cheap money that you can borrow on your primary residence you miss some opportunities to buy those additional properties that can create the income you are looking for.  Not everyone can handle their money well and manage investments the way you've proven that you can.  That's why this idea may be good for you where it wouldn't be for less disciplined or experienced investors.

Priscilla Davenport · Answer

@Robert Leonard Thanks for the compliment. I have seen too many good people in my family and also friends work all their lives with little to show for it financially. Many have made bad financial decisions or lived for today. I made up my mind in my 30's to pass on instant gratification, instead embracing delayed gratification. I also didnt give in to lifestyle inflation. I decided to buy houses on 15 year mortgages as a way to catch up before retirement. I worked 2 jobs for 7 days a week for two years to come up with each house down payment while my friends partied, bought expensive cars and vacationed. Some of those say people say how I am "lucky." I tell them that luck has nothing to do with it; sacrifice and hard work  combined with Gods grace does. I tried to get a few in on the rental house band wagon but no one listened besides my Mom. She and I bought a few houses but sold just before the bust for profit because of her health. She kept one paid rental so she can have "play money" now that she and my Dad are retired.

I will find out more about about LOC's at both my bank and credit union. I have always played it safe but could handle a little risk I believe.  I will weigh the virtues of peace of mind vs lost opportunity costs to increase my income. Thanks for the great advice.

Michael Lee · Answer

Hello and welcome to BP!  You ought to do both.  Save until you have a decent amount saved then buy more property.  You never know what will happen in the future.  I am 59 years old and previously in great condition according to the doctor and I had a brain aneurism and a stroke when I was 54.  I was and still am married by a woman that has been taking care of me even though it has been over 5 years ago and she has been saving for about 25 years and we live in a house with the mortgeage paid off.

Take your time and do whatever you think you can do.  Spend your time with your family and tell your parents, if they are still alive, that you really appreciate them and love them.  Just talk to them regularly and each time tell them how much you appreciate them.  The same goes with your children, just let them know how much you appreciate them and what they have accomplished.  I have only one daughter that is getting to start her third year at The University of Arkansas and I miss seeing her around now because I spent so much time with her growing up.  You can not get the past back so tell them how you feel and look forward to there future.

That is enough of that just do what you like and do not cut any corners to make something look better than it actually does.  I am in Texas and I wish you the best of luck!

Priscilla Davenport · Answer

@David Krulac Wow! I want to be like you when I grow up! I pretty much winged this real estate stuff. No one I knew thought it was a good idea. I would have loved to have you and others as mentors a dozen or so years ago. Im sure I wouldnt have made as many mistakes and have more rentals to show for it. I am definitely going to look into buying a few more rentals, possibly even with leveraging. Biggerpockets is a great site. Thanks again

Priscilla Davenport · Answer

@Michael Lee Great advice. There is no reason I cant both save and buy. Im sorry to hear about your health and hope that the quality of your life improves. Both of my parents have had major health scares. My Mom especially has been my biggest supporter, advisor and cheerleader. At 52 I am literally the only person I know who still has both parents. I know that I am blessed beyond measure. I talk to Mom daily and we try to vacation together at least every couple of years. We even used our mutual timeshare to take the whole extended family to Disney a couple of Xmas's ago. My real estate aspirations are to leave a real estate trust and not medical/funeral bills to my child. Take care and thanks for the reminder of whats important.

David Krulac · Answer

@Priscilla Davenport

Congrats you have done well in acquiring 4 properties and paying them off.  You could stop at 4 if you wanted.  I didn't.  I bought and sold over 900 properties, and bought the first 11 essentially 100% financed.

Today interest rates are at historic low levels about 3.5% fixed for 30 years.  For myself, everybody is different, I'd borrow as much as possible to take advantage of the low interest rates, while they are still available.  Here, I could get 80% loan to value (LTV) investor mortgages up to 10 at residential rates, then unlimited number of portfolio mortgages after that.  Borrowing now is getting, while the getting is good.  It won't always be like this.

Priscilla Davenport · Answer

Thanks for the response. Yes I have a good tax person and will take that into account. I vaguely remember an article on BRRRR and will look it up. I also looked up home sales and like the rest of the country there is low inventory and prices are up again. My price range is now 40-50 grand which is still relatively low.

Chris Latham · Answer

The first thing I would suggest is to search for "BRRRR" on Bigger Pockets.  You have relatively inexpensive houses and a good cash flow.  You have plenty of equity to use for another house.  Think about the prospect of having $450 cash flow from two houses rather than $900 from one house.  In that case you would be building equity on two houses and profit from two houses when you sell rather than just one.  Yes, its' risky to have an additional house payment but you are spreading the risk by having more properties.  If one of your houses is vacant now, you would have a 25% vacancy.  If you buy just one more house and the same things happens then you will have a 20% vacancy.

Secondly, don't underestimate the value of depreciation.  If you have a good tax person then you can save thousands of dollars on your taxes each year with multiple properties.  Add that calculation into your monthly cash flow.

Should I buy more properties or starting saving my cash?

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