Pay off mortgage or keep cash for next property?

Question

Hi all,

I flipped two houses (out of my 401K) and paid off my debt and i'm currently renting my only residence. I moved to a new city and i'm looking to dive into the Grand Rapids Mi market. I have about 10K cash and pre approved for $150K. My strategy was always to keep flipping until I had enough cash to buy a rental but I know the window for cheap houses won't be here forever. What is a good strategy to use? Get a house to live in (and fix up) and hammer my one mortgage (with it currently rented)? Or finance a house then keep looking? For example, buy two houses at $75K each? Looking forward to your responses!

Carson M. · Answer

I would be hesitant about thinking Michigan's housing market will be depressed for a while, therefore many rental opportunities.  I look at 4 cities in Metro Detroit.  I have been looking for a year and a half.  I have seen 3/1 brick ranches in B areas start at 50-70k to 75-100K, and currently 100-150k.  In some c+-b- areas I have seen prices go from 25-40K to 50-60K to now 70-100K.  My money has tied up and I have, what I believe, been seeing my opportunity to buy a decent home in a decent area completely go away.

Brant Richardson · Answer

I doubt Michigan will be seeing a rapid increase in prices soon.  If you have rehab skills their will always be deals in markets with older properties.  Grand Rapids looks like a great niche for rentals, there is so many schools to provide student tenants and steady jobs for residents.

What to do with your money is a personal question.  I want to grow a large portfolio of properties.  If you are like me then the answer is to use your cash for new acquisitions not to pay off old ones.  I like Kevin R's idea of using FHA loans to stretch your 10k as far as possible.

Kevin Romines · Answer

One school of thought for someone looking to buy and hold is to buy a 2-4 unit property as owner occupied. Live in one unit and rent out the other 3. You must owner occupy the property for 1 year, but you could feasibly rinse and repeat once a year.

You can get an FHA mortgage for 3 1/2% down for the purchase. You can even take out an FHA 203K loan for the purchase and rehab of the units, thereby increasingg the value and rental income and still only pay 3.5% down payment.

Where else can you get such a great financing deal on what essentially is an investment property? I would really consider refinancing them as non-owner occupied after any rehab is done, primarily to get rid of the mortgage insurance. I know several buyers that have done this to build a great investment portfolio all at owner occupied rates and down payments.

Get used to moving :)

Carson M. · Answer

Rob K.

Has this changed your investment strategy at all? I have started to look from B+ areas to B-, in order to chase the 50-70K deals, but I am starting to realize I may not see these deals any more.  I don't want to keep chasing these properties in sacrifice of location.

Ryan Arth · Answer

@Charles Morgan  when I was younger I covered 5 for about 5 months out of pocket. We subsequently purchased one for cash to help cover the high leverage on the mortgaged properties. It balanced well.

Now I shoot for borrowing while money is available and keeping the rest of the cash from the lower downpayment in reserves. It gives me the greatest flexibility.

To Drew's question, what you should do depends on what your long term plan is. Are you looking for personal residence stability and then reducing your mortgage debt on your investment? Are you looking to keep going? If so, you have to figure on trying to make the most moves possible with the cash that you have to keep rolling.

Rob K. · Answer

Not really. I used to buy in C areas for under 10K, but have been buying in B areas for last few years.

Rob K. · Answer

Home prices in Michigan have been going up like a gas pump for the last 1-2 years.

I'm seeing the same thing. Houses in nice areas have doubled in price just in the last year.

Brant Richardson · Answer

By all means get in when you see a great deal.  But don't just jump on anything for fear that you will miss out because the market is going to skyrocket.  Interest rates are great now and could change for the worse as well.

Ramon Jenkins · Answer

Congrats

" keep cash for next properties "

Just my two cents

Charles Morgan · Answer

I do have three mortgages. I can just barely pay all three from my day J.O.B. if I lose all three renters at once. So far I have only had two empty at one time. I want to get at least two more to bring in the cashflow to cover the possibility.  The more properties that you have cashflowing the better your chances of surviving bad times. Note* they need to be cashflowing!

Pay off mortgage or keep cash for next property?

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