Thoughts/Advice - Paying off debt vs. Saving for Investment Property

[Longhorn Al 440]

I'm 35 years old and work for the Feds. I've been with them 11.5 years.  It's an ok job, but I want higher earnings, and have always wanted to own rental properties since I was a kid.

Should I work on paying down my non-mortgage, non-student loan debt over the next 3 years?  Or should I save up for a 20% down payment on my first small rental house somewhere outside Austin?  I'm talking about something like a $60-80,000 house in a smaller town.

I'm looking for part time work to speed up either process.  My regular job is Mon-Thur 5pm-3:30am.  I have 3-day weekends, but I get pretty busy in the Fall with football on Fridays/Saturdays.  I'm hoping to find something Mon-Fri during the day so it won't interfere with my regular job, and still get some sleep.  It's tough.

I already rent out 2 of the rooms in my home.  In January, one of those rooms should be free because I'm pushing one guy out.  I guess an option would be to move everyone out and rent the house 100%, and try to get a small cash flow.  But I have to live somewhere.  I'd hate to throw money at renting my own place, but I don't have 20% to put down on a nice house closer to Austin.

I owe ~$130k on my house.   I have some equity, maybe $12k, but I'm paying PMI currently because I bought this house with less than 5% down 4 years ago.  Similar houses in my neighborhood are listing for $175-185,000 currently.
 

 

 

 

 

[luke duke 6447]

You’re paying PMI on your primary residence and you want to buy a rental house before eliminating the PMI?

[Longhorn Al 440]

40 minutes ago, luke duke said:

You’re paying PMI on your primary residence and you want to buy a rental house before eliminating the PMI?

Do you think getting a new appraisal is a good idea to try and get the PMI removed first?

 

PMI is about $45/month.

Edited July 16, 2018 by Longhorn Al

[T’Boo Ted Marshall 2779]

If you’re confident the appraisal will get you to 80% LTV then yes.

[Longhorn Al 440]

1 hour ago, T’Boo Ted Marshall said:

If you’re confident the appraisal will get you to 80% LTV then yes.

Ha. I'm not certain of anything. That's why I created this thread. I'm being pulled in a lot of directions.

[Celery Man 21076]

I have no practical experience based advice and am very risk averse, but having consumer debt that would take you three years to pay down, and instead of doing that adding an additional mortgage/insurance/property tax to your cash flow sounds scary to me.  I mean, obviously you would want to rent it out and have it create positive cash flow, but how long could you keep it all afloat if you had a deadbeat tenant or whatever potential hiccup.  Sounds like the investment property thing is a dream you should follow, but be careful buddy.

[Assman 1830]

I'm no real estate mogul, but a $60-$80K house seems like the type that would either need a lot of work, or might have tenants that wouldn't take care of the place.  I think this sounds like a bad idea if you have other debt that you could be paying down.

[Longhorn Al 440]

Paying down debt first is the way I was leaning, but I had read other places the advice of jumping into investment sooner than later, and having the cash flow pay off your debt.  I just wasn't sure how to go about it.

Edited July 16, 2018 by Longhorn Al

[T’Boo Ted Marshall 2779]

Ha. I'm not certain of anything. That's why I created this thread. I'm being pulled in a lot of directions.

Correct me if I’m wrong, but looks like you paid $142k for the house? If so, you would need it to be over $178k to get the PMI off.
Call the mortgage company and ask about your options.

[TwiceHorn 31994]

I have to believe that debt service is a better investment than diverting the money to another investment, especially if that debt is other than your mortgage.  Interest rates are going to go up sooner rather than later and if any of the debt is not fixed-rate, that's gonna start to hurt.

 

I think people have been able to "borrow to earn" because of the unprecedentedly low interest rates, so it's easy to have your investments return more than the cost of money.  I am relatively certain that interest rates are going to go up, making that a dicier proposition.

 

I am extremely debt-averse, however.  So, yeah, what Celery said.

Edited July 16, 2018 by TwiceHorn

[Washpark 176]

Pay off debt excluding mortgage and apply to jobs that are higher paying.

[52-80 19374]

it wouldnt be very american if you dont get into debt.

 

so why do you hate america?

[Nice Guy Eddie 13710]

Good on you to rent out some rooms to earn extra.  I imagine that works well since you work nights.  Probably don't see the roommates too much.    Maybe you should grab that weekend job for the next year (forgo 1 season of football) to jump ahead even further.

As far as paying down consumer debt, I would look at it from 2 directions.  First, if it's high interest, you have get rid of it ASAP.   You're basically working for the banks when you pay high interest.  Low interest isn't great but at least it's low.  Second, you have to consider how consumer debt affects your chances to get other loans to buy rental properties. 

You also need to ensure that you  have a nest egg to cover problems with the rental property.  I'm sure there is a good rule of thumb out there.  1 year of expenses or rental income, or something like that.  

I don't know if 60-80K is a good entry point in whatever small town you're looking to buy, but I've always heard that you its better to own and rent out five 80K homes over two 200K homes. You have larger rentee pool and you spread the risk in case one tenant turns out to be a deadbeat.   And who care if you yourself would live in the 80K home.   Many rich people rent out dumps that earn them tons of money in the long run.

[Hugh G. Rection 156]

I wouldn't own a rental house that was leveraged.  Some idiot tenant decides not to pay and it takes 3 months to evict him plus another month or two to fix it back if/because he tore shit up, and you have to make those payments out pocket when you're paying the mortgage for the place you live in.  Especially for the shit homes you're talking about.  If I wanted rental income I'd buy REIT shares.

[luke duke 6447]

I wouldn't own a rental house that was leveraged.

You’re missing the point of owning a rental house.

[Hugh G. Rection 156]

I wouldn't say I'm missing it, Bob.

Edited July 16, 2018 by Hugh G. Rection

[CooterBrown 18273]

  I mean, obviously you would want to rent it out and have it create positive cash flow, but how long could you keep it all afloat if you had a deadbeat tenant or whatever potential hiccup.  Sounds like the investment property thing is a dream you should follow, but be careful buddy.

My grandparents owned 14 rental houses in my small hometown. My casual observation is that renters in small towns usually can’t afford rent. If they could, they would be home owners due to cheap real estate.

There were many times when I helped clean out houses where the renters disappeared in the middle of the night or were evicted after months of not paying.

[Nice Guy Eddie 13710]

12 minutes ago, CooterBrown said:

 

My grandparents owned 14 rental houses in my small hometown. My casual observation is that renters in small towns usually can’t afford rent. If they could, they would be home owners due to cheap real estate.

There were many times when I helped clean out houses where the renters disappeared in the middle of the night or were evicted after months of not paying.

 

I think that's why you just don't buy into a market without understanding the ratio of market rent to house prices.

[CooterBrown 18273]

2 hours ago, Nice Guy Eddie said:

I think that's why you just don't buy into a market without understanding the ratio of market rent to house prices.

Yep. Luckily it was just a hobby for my granddad. He loved doing carpentry and would buy houses just to remodel. Renting was an afterthought. The market was so shitty, there was one that came with the house next door for free. When he died, my grandma found out about two houses she didn't know they owned. They were so cheap, he never bothered to tell her he'd bought them.  

 

[Longhorn Al 440]

In the town I've looked at, $100,000 is probably middle of the road.  The $80k houses I've seen don't look like absolute dumps.  A little fixing, but not too bad.  It's not like an $80k house in Austin.

Thanks for the discussion. Gives me a lot to think about.

I'm going to go ahead and concentrate on my non-mortgage debt, and call my lender to see if I can get PMI removed.  I need to study more about how to decide where to buy rentals. Any websites with lessons on that?

[dingleberryswitzer 2724]

On 7/16/2018 at 6:00 PM, Longhorn Al said:

It's not like an $80k house in Austin.

Thanks for the discussion. 

Isn't a 80k house in Austin just a card board box on a 20x20 ft plot of land? 

[TwiceHorn 31994]

Here's another perspective on it.  Going purely by cost of money (debt is costing/has lower interest than ROI) only works if your investment is highly liquid.  That is, should your income stream dry up (job loss, disability), can you liquidate the investment to service the debt, because failure to service debt has immediate consequences, e.g. foreclosure, acceleration, penalties, legal fees, credit hit etc.  And, in addition to just being bad things that you really don't want, just a little of that shit can eat up the spread between your cost of money and your ROI.

 

If the investment is not liquid, as in the case of real estate, then there's probably more to it than just what's the interest rate vs. what's my ROI.  This is, again, a risk-averse perspective, but it's taking into account something other than investment risk.

Edited July 20, 2018 by TwiceHorn

[UTPhil2006 3910]

1 hour ago, dingleberryswitzer said:

Isn't a 80k house in Austin just a card board box on a 20x20 ft plot of land? 

Where are you getting 80k land?