Author Topic: Healthy position to add a 2nd rental property?  (Read 1486 times)

kevj1085

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Healthy position to add a 2nd rental property?
« on: November 11, 2019, 07:06:30 AM »
Wife and I are 34, 2 kids age 3 and 6. We have 1 paid off rental property we bought for 132k back in 2011 that is now worth 250k. Our primary residence is valued at 350k, we bought it 5 years ago for 275k and have 75k left to pay it off. Currently between her part time job and my full time, along with the rental, we bring in about $5500/mo. Our monthly expenses are around $3700-4200 (we don't really live mustachian, just minimal for a family of 4). So, we save about $1300-1500/mo. I was wondering if in the next 3 years when we pay our primary off, since we will have an extra $2700/mo. Coming in, we could easily get another rental property and pay it off pretty fast. Our net worth is currently $550k and with another property at $320k that could quickly boost us up to 900k or more by age 40.

Papa bear

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Re: Healthy position to add a 2nd rental property?
« Reply #1 on: November 11, 2019, 07:18:32 AM »
You’d be fine to buy another place.

BUT

One of investment real estates greatest advantages is your ability to leverage it with government subsidized loans.  If you are just going to pay cash, or keep paying off mortgages super early, you’re most likely better off just dumping your money into equity index funds. 

This has been argued ad nauseam on the forums.  The pay/don’t pay your mortgage. The real estate vs index funds. 

Financially, you don’t pay off your mortgage early. Leveraged, reinvested, and self managed real estate >= equity index funds > cash purchased / early pay off real estate.

So. If you’re really going to go down the path to more professional real estate, which is what your asking, then start treating it like a business. Use other people’s money. And money being fungible, your cheapest source of funds is from your primary residence.  Start borrowing. 


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NonprofitER

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Re: Healthy position to add a 2nd rental property?
« Reply #2 on: November 11, 2019, 07:53:57 AM »
I'm in the "leverage for rentals" camp, but this depends on your personal risk tolerance.

What about refinancing the rental you already have, pulling out equity and using that as a down-payment to purchase a second cashflowing rental?
That's what I would do.

kevj1085

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Re: Healthy position to add a 2nd rental property?
« Reply #3 on: November 11, 2019, 08:11:38 AM »
Well I just don't want to get into a position where for whatever reason I can't afford the 2 places at once. I'm a primary grade teacher and my wife is part time so on our own we don't bring in a ton, but with the buffer of a paid off property it brings in more of that security. I'm sure I probably could right now, but it's a bit more risk than I want.

Papa bear

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Re: Healthy position to add a 2nd rental property?
« Reply #4 on: November 11, 2019, 10:04:46 AM »
Real estate is inherently risky. To combat that risk, you need a cash cushion, for vacancies, repairs, or to jump on the next deal.

My suggestion to you is to build up your equity portfolio at this time until you feel more comfortable with leverage.




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clarkfan1979

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Re: Healthy position to add a 2nd rental property?
« Reply #5 on: November 13, 2019, 12:16:17 PM »
You’d be fine to buy another place.

BUT

One of investment real estates greatest advantages is your ability to leverage it with government subsidized loans.  If you are just going to pay cash, or keep paying off mortgages super early, you’re most likely better off just dumping your money into equity index funds. 

This has been argued ad nauseam on the forums.  The pay/don’t pay your mortgage. The real estate vs index funds. 

Financially, you don’t pay off your mortgage early. Leveraged, reinvested, and self managed real estate >= equity index funds > cash purchased / early pay off real estate.

So. If you’re really going to go down the path to more professional real estate, which is what your asking, then start treating it like a business. Use other people’s money. And money being fungible, your cheapest source of funds is from your primary residence.  Start borrowing. 


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This advice from Papa Bear makes alot of sense. If you are not going to use leverage, you are better off in the stock market. I think to mitigate risk tolerance for using leverage, make sure you have a comfortable cash cushion.

My wife and I are in a similar position, but we are about 5 years older. I teach community college and make 52K/year. My wife is working part-time in a seasonal job and makes about $1,000/month. We have a 2 year old son. We do not pay for child care.

Our W-2 take home after taxes, pension and health insurance is $3,200 + $800 = $4,000/month. Our rental income is $1,500/month after vacancy and repairs. Our expenses are $4,500/month. We spend about $500/month of the real estate income and save $1,000/month.   

We have 3 rentals and a primary home. One of the rentals is a duplex.

Our total mortgage obligation is 1,136,810. The value of the real estate is 1,715,000. We have 34% equity (578K) and 66% leverage at the moment. Our monthly mortgage payments are $6,835/month, including our primary ($1,275). Our total rent generated is $8,500/month.

These numbers are big considering we only make about 60K/year at our day jobs. However, we currently have 65K in cash as an emergency fund. If shit hit the fan, I could easily get a 2nd job or my wife could get a full-time job. If things got really bad we could also rent out our basement on airbnb or as a long-term rental. We would need to create a separate entrance, which would cost about 2-3K.

My step-dad makes 150K at his day job and owns 90% of a 39-unit apartment complex. Each unit rents for around $1,100. He has a mortgage. You can probably estimate the numbers. They are huge. 

 




 

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