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Reader e-mail on Acquisition vs Paydown

March 29, 2014

I had a reader drop me an e-mail with the question below. I thought it was a good topic for a blog post. If you have any questions, drop me a note at: landlordinvestor@gmail.com

I was writing to thank you for the high quality blog you write. I have learned a tremendous amount from you and am grateful you decided to share your knowledge with the world.

I am a young landlord (24 – have been a landlord for two almost three years now) and have made plenty of mistakes and been extremely lucky that they have not bitten me harder than they already have. Your blog is also opening up my thought process for avoiding future mistakes.

I was wondering if you would go into your acquisition against pay down strategy a little more in a future post? I currently have one property purchased for 147k in 2011 that I still owe between 69 and 89k on depending on how you count it (I’m in the army and USAA offers a “career starter loan” of 35k at 0.5% interest due in 5 years. My mortgage was for 111.2k at 3.75% interest due over 30 years. I’ve got 69k left on the mortgage and about 15k left on the 35k loan). I’m currently stationed in **** due to leave in 1 year and was trying to figure out if I should use my non-retirement savings of roughly 50k to essentially pay off the mortgage or finance a new house to rent. Obviously since you don’t know my exact situation you can’t answer that readily but maybe some pro/con discussion as well as your strategy would really help me out as have other parts of your blog.

Thank you again very much!

Respectfully,

X

 

X,

Thanks for the e-mail and reading my blog. Sorry it has taken me so long to respond. Keep commenting – it keeps me motivated. Congrats on starting to landlord at 24. I did not start until my 30’s, but sure wished I had started that young. So to your question…

Acquisition vs paydown is always a hot topic. I am going to give you my philosophy on this and I assure you it is not in-line with many Real Estate gurus and many of the RE books. They think you should leverage like crazy, take out as many mortgages as you can, always keep buying, then 1031 Exchange into multi-unit apartments, etc, etc.. Hell, I am not doing that.. I don’t need to be Donald Trump. I am fine being a ‘weekend warrior’ landlord. Keep in mind that my wife and I hold full-time Mega corp jobs and we self manage so our time is limited. Our main purpose with rentals is to build enough wealth and income that we don’t need our corporate jobs any longer. The key for us is to build that stream of income – And I feel the best way to build that quickly is to get the properties paid off ASAP.

Now with the above said. We do use leverage. It looks like you have done what I might have done. You used the .5% 35k loan for a down payment on a rental. Nice. Then you signed up for a 3.75% mortgage. Beautiful. It is very difficult for me to recommend paying off a 3.75% mortgage early. After the deduction this is close to sub 3%. Almost free leverage. Now that Val and I have been at it for a while we have several rentals paid off. This allowed us to open lines of credit against these properties. When we find the right deal, we pull from our line and pay cash. Our lines are currently at around 5% and variable. Not great, but not bad and we pay the lines off quick (2-3 years) so it does not really matter anyhow.

You then asked, “Should I use 50k in non-retirement savings to pay off/down the mortgage or finance a new house to rent?”   Hmmm.. tough to answer without knowing more about you. You sound comfortable being a landlord and you have good equity in the home so if it cash flows ok today, I would keep the mortgage especially at that rate. 50k is a decent sum of cash and will give you some options with RE investing. I will say that my wife and I both graduating from college and attaining full-time corporate jobs has been hugely beneficial to building our portfolio. With your service in the Army and various stations – I am not sure if you have had this opportunity. My first thought is you should think about using your funds for college. If you know real estate is for you, then a real estate or finance degree will allow you to do both.

If you have had the chance to get your degree, then I would consider using the funds for a down payment and rehab expenses on a fixer and live in it when you get back to the States. Fix it up, Rent it out, Rinse and repeat. Take your time and wait for good deals.
I hope this helps..

Best of luck to you.
Chuck

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