Author Topic: Buy a Rental before primary paid off?  (Read 3437 times)

Stachebound

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Buy a Rental before primary paid off?
« on: June 15, 2013, 08:52:27 AM »
What are the mustachian views on buying rental property before paying off your principal residence?

Just curious...

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28466
  • Age: -999
  • Location: Seattle, WA
Re: Buy a Rental before primary paid off?
« Reply #1 on: June 15, 2013, 10:02:04 AM »
It all depends on your goals, risk tolerance, etc.

What is your investment plan?

Math-wise, assuming you're buying something that cash flows, it's much better to buy it before paying off your primary.  Some prefer security over risk, however slight.

Some worry about inflation, others deflation.

It really depends on you.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Shandi76

  • 5 O'Clock Shadow
  • *
  • Posts: 90
  • Location: Sweden
Re: Buy a Rental before primary paid off?
« Reply #2 on: June 15, 2013, 10:25:39 AM »
What I've done with my past two places is buy a place, pay off a chunk of it, then move elsewhere, buy another property and keep my old place as a rental. The numbers on both places worked.

I know a couple who bought 8 rentals and they are doing really well out of it as they cash-flow nicely and he is a carpenter so they can maintain them easily, but I personally wouldn't like that level of risk (I think they had 500K+ of mortgage debt). But as long as the numbers make sense, and you could service the mortgages easily if you had a long void period, or to fix up the rental if a tenant trashed it, then it makes sense.

Have you looked into the availability of financing the purchase(s)? I'm actually itching to buy another property as there are some good deals (as far as the UK goes) I am seeing, but I'm limited by the fact that without a permanent full-time job banks are hesitant to lend so the only ones on offer require a 40% deposit, which limits my buying power.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5227
Re: Buy a Rental before primary paid off?
« Reply #3 on: June 15, 2013, 10:34:17 AM »
It's cheaper to have the leverage on your primary residence.  I have always had a mortgage on my house, and I bought properties whenever I could and the numbers made sense.  I levered up in 2009 and bought 4 properties for cash over the next two years.  I refinanced the debt on my house in December to 3.125 percent.  The cash flow from those four properties easily services both the original and the added debt on my house, as well as providing a bit of additional cash flow.

I like the idea of buying a primary every year or two at owner-occupied rates and then renting it out and moving into the next one.  This allows you to accumulate a stable of rentals over time at favorable interest rates. 

Stachebound

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Re: Buy a Rental before primary paid off?
« Reply #4 on: June 16, 2013, 01:05:28 AM »
Great question! Well, we are investing 15% into 401ks now and are looking to the next step...I like real estate and might be able to find a reasonably priced property. Our goal would be to pay it off after our primary. I really like the thought of something tangible that will cash flow in our later years and we can build equity.

We have 6 yrs until our first enters college, so we have that on the horizon too.

Stachebound

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Re: Buy a Rental before primary paid off?
« Reply #5 on: June 16, 2013, 12:03:57 PM »
Also to note, we are still working and We are new to the site and MMM ideas - so not sure yet how many years we will need/want to work.

totoro

  • Handlebar Stache
  • *****
  • Posts: 2154
Re: Buy a Rental before primary paid off?
« Reply #6 on: June 16, 2013, 12:20:06 PM »
"I like the idea of buying a primary every year or two at owner-occupied rates and then renting it out and moving into the next one.  This allows you to accumulate a stable of rentals over time at favorable interest rates."

This is how we have done it too.  I've never purchased a rental property that was not a primary residence first. 

I have no desire to pay them off in cash - nor could I right now.  I use the mortgage interest tax deduction against rent and invest cash elsewhere.  The rental income pays down the mortgage.

I think a lot depends on the rules in your country for borrowing and taxation.  This strategy works well in Canada for the right property over the longer term.