Advice needed on payiing down debt!

[jbings4]

I will try to make this as short as possible.
Income: 132k with rental income
We have 3 big debts:
1. Current home: 149K
2. Rental home : 100k
3. Student loans: 78K
Currently, we usually have around $3000 monthly to pay toward debt.
We own both of our vehicles and make no payments on them.
We rent our 1st rental house for $1000/month and the mortgage payment totals $722….so we have a positive cash flow of $278 monthly.
We have been really aggressive at paying down our SL’s and have been able to reduce the principle balance from 107k to 78k in 7-8 months.
We would like to buy a new house at some point and here is where my question comes into play. My thought was to take the next year to pay down our high interest home loan at 7% and get the balance to around 100k. We would then refi this home which would turn our monthly payment to around $700. My plan is to refi and then turn our primary residence into a rental property as well. This would leave us with 2 rental properties turning a positive monthly cash flow of around $600/month between both properties. My main point for doing this is this:
1. We would not have to sell our primary residence in a down market and increase our monthly cash flow immediately.
2. Once the market picks back up we would be able to sell one or both of our properties and gain a sizable amount of cash.
3. This would also allow us to move into our new home without the contingency of selling our primary residence.
4. We would also be able to get into a house in this down market with a decent interest rate.
I have been so focused on killing our student loan debt which ranges from 4.5% to 1.5% as we have paid off the high interest rate loans which were at 6.8%. With these low interest rates I am starting to think that it would be better to pay extra on the primary residence at 7% interest until I am able to refi it.
I’ve been thinking of continuing to pay the minimums on my student loans which is around $750 monthly and start throwing all our extra cash at the primary residence loan (this is also our highest interest rate by far). If my plan goes accordingly, we should be able to pay down our primary residence to around 100k which would allow us to refinance and turn it into a rental property.
My thought was that after the refi, we would move in with my parents for a year and really start to make some progress on saving for down payment on our new house. Living with the folks for a year would give us an opportunity to save cash and gain more income by renting out our house. In order to show income on the rental property, in the view of mortgage brokers, I must show 12 months of income and moving in with the folks would allow me to do this.
We both live very frugally and willing to do without the frills of life if it puts us in a better position down the road.
Does this sound like a financial plan that will work?

[riverwed070707]

With that much debt and that much extra per month to put toward it, I'd suck it up in the house your in for a while and pay of the mortgage in the first rental before I considered taking out a third mortgage or living with my parents.

Also, why not refi the house now? Seems silly to me to keep paying 7% interest while you're trying to pay it down -- you're just putting more toward interest that could be going toward principal.

[Petunia 100]

I think your plan of accumulating rentals with positive cash flow is a very sound one. You are already a landlord, so you know what you are getting into.

How do your parents feel about you moving in with them?

I'm going to guess that:

1. The reason you don't want to sell your first rental in a down market is because you intend it to be a long-term investment.

2. You aren't doing a refi right now because you are not at 80% LTV.

[dczech09]

You asked for advice... so please bear with me.

You are not in the rental business. There... I said it. You are not in the rental business, so why on earth are you being a landlord? I understand it is a way to get extra cash flow. But what will you do if you get a bad tenant who does not pay? What about emergencies? Maintenance?

I love the idea of trying to make money in real estate, but only if you are in the business of doing so. I am assuming this is just a little side thing you have going on? And guess what? You're in debt. I do not care if things are positive right now, cuz you are a great candidate for a world of hurt if things go south.

So, I would sell off the rental. You had over $100k in student loans before and you decided to take on two mortgages?! Thats absolutely crazy! Sell the rental and work on paying down the loans. You chopped off $30K in not even a year, so you're obviously living frugally and can knock these things down.

Once your loans are gone, focus on the mortgage. You SHOULD refi in the near future if possible cuz 7% is pretty high for this environment.

Also, do you have an emergency fund? Are you saving for retirement? You should be doing those things if you aren't already.

Trust me friend, with a primary home mortgage and that much student loan debt, the last thing you need is a rental property with a mortgage. You ESPECIALLY do not need another rental property with a mortgage.

For your own good, I am telling you that your plan is horrible.

[jbings4]

Reply

We are in the rental business! We have been doing in for 5 years now. Our rental house and the house we are turning into a rental were both built in 2006. Due to this, I don’t see any major repairs coming up in the near future. Just in case something does happen, we have emergency funds built up to handle any repairs.
With our rentals we are:
1. Building equity in the home while the tenant pays for it
2. Enjoying the tax benefits
3. Bringing home around $700 month
I don’t see how any of these things are negative in any way.
My parents have been living with us for over 8 months while their new house is being built and my wife and I have really enjoyed the time with them. We have a great relationship with them.
I do some serious screening on my potential tenants and have been fortunate to have the same tenant for over 4 years.
After this year of paying down our primary residence, we will be in a position to refi. We can’t refi now because we don’t own 20% equity in the property. Even in this down market, we will have about 90k in equity in these properties.
We are both teachers and contribute monthly to our retirement plans.
Another option is to rent out both properties and when the market turns around we could liquidate and have a pretty nice payday!
My thought on the rental houses is to supplement our retirement (which will pay monthly until we die) with the rental homes. At the time of retirement we would also be in a position to either hold onto the properties and enjoy the rent with no mortgage to pay or sell them and make some serious cash.
My wife is itching to sell our house and get into a new one. I am too, but I am not quite where she is at. This plan would allow us to own two rental homes which turn a positive cash flow and be able to easily afford our new mortgage. If I had it my way, we would sit tight in our house for longer and continue to hammer away at mortgage principle and student loan debt.
I know many of you are all about getting out of debt as quickly as possible and I am too. But when I have an opportunity to own rental homes and enjoy the benefits that come with them, it is hard for me to turn down all these benefits when they are giving us cash right now.
We live in a renters market. When I was initially renting my home, I had over 20 potential renters that looked at the property and 80% wanted to rent it. I am not worried about not being able to rent it out as this point. If for some reason we run into a situation where we don’t have a tenant, we have enough extra monthly income to cover the costs. If the market does pick back up, many people will not be able to afford mortgages and will be in a position where they must rent a house and not buy. Either scenario, I have found it quite easy to rent out my properties to good tenants who pay on time.
We owe 100k on the rental and it was just appraised at 135K. We owe 148k on our current residence and it was appraised for 149K. By taking this year to pay down our current residence to around 100K, we would now have about 90K in equity. I am sorry, I just don’t see how this is a bad thing.
I do appreciate all your perspectives and don’t want you to feel as though I am defending myself against your posts. I appreciate all perspectives and truly seeing how you feel. Thanks for the honesty and continue this conversation please. Thanks.

[Xtreme Thunder]

A 6 year old house isn't new enough? ...unless size of the home is the concern and not the idea of it not being "new" any more.

[dczech09]

Ok, my mistake. You are "in the rental business." But that still does not negate the fact that having two rental homes (much less one), with so much debt is a very risky position to be in. Personally, I would not put myself in that situation.

Like I said before, it is cool that you are looking for ways to make money with real estate. If you have been doing good with one rental property, then stick with that one rental. But adding a second, plus a new home with a mortgage in the future, on top of student loans?

You're saddling yourself with a huge amount of debt.

[LMA]

I will try to make this as short as possible.

You failed... just kidding...

We would like to buy a new house at some point and here is where my question comes into play.

Do you think you will be able to qualify for a loan on this 3rd house you want with your debt to income ratio?

Aside from that if you do make it into the next house; what would you do if it so happens that both of your tenants leave at the same time? Can you carry all 3 payments?

I agree with others that your debt load is too much and your cash flow in the rentals is not that great.

[jbings4]

Reply

Already met with the bank and got approved for much more than we actually want to borrow. The reason we looking for a new house is not because this house is too old. The house we are in is a starter home and we have a growing family....not enough bedrooms for all the little ones. I do appreciate all you advice and will consider it before I make the decision to make my current residence a rental property. You all may be right that we should focus on paying down debt and not getting ourselves in more.

[riverwed070707]

Already met with the bank and got approved for much more than we actually want to borrow. The reason we looking for a new house is not because this house is too old. The house we are in is a starter home and we have a growing family....not enough bedrooms for all the little ones. I do appreciate all you advice and will consider it before I make the decision to make my current residence a rental property. You all may be right that we should focus on paying down debt and not getting ourselves in more.

I always cringe when I hear this. You don't have to have a bedroom for every kid and a guest room. Far too often we 'outgrew our house' simply means you *want* a bigger one. That's fine, if you can afford it, but it doesnt mean you need one. Same applies for families with two kids who think they have to have an suv or van.

Not directing this at the op, just a general rant.

[jpg7n16]

I guess I'll be the first one who's not terribly opposed to your plan. In some cultures, multi-generational dwellings are common. And although I personally wouldn't do it, it seems like your situation is different. From the original post, it seemed as if you would HAVE to move in with your parents to make your plan happen. I'd be opposed to that. This seems more like your family wants to live together. That's different.

To accomplish your goal of a second rental, I would 100% focus on paying the primary 7% loan down. Even after the tax advantage you're likely paying more than the SL's.


Now for my caution: your portfolio is likely getting out of balance, and you will be subject to higher real estate exposure. Especially if down the line your family moves to a separate dwelling. As you've likely experienced, real estate values can fall, and a good chunk of your net worth will be subject to that risk.

I'm curious as to your other investments. Do you max your 401k? Roth IRA? Does your wife do the same? You have the extra income to do so (or close to it), and that would balance out the reliance on solely real estate. Plus add to your liquid assets in retirement.

In your situation, I would likely take the employer match for each of you, then pay down the home to refi, then refi and start maxing your retirement investments before paying extra on your loans.

[NetSkyBlue]

We rent our 1st rental house for $1000/month and the mortgage payment totals $722….so we have a positive cash flow of $278 monthly.

This scares me. I've been looking into getting into the rental business someday, myself, and it doesn't look like you're figuring in all the costs here.

What about property taxes, landlord insurance? I've also read that you really should form a LLC to protect your personal assets if a tenant should sue. This is doubly important to think about if you're considering adding a second rental. This costs annual maintenance to keep it renewed. Not to mention the cost of repairs, even minor upkeep, or any utility expenses.

[jbings4]

Reply

The only upkeep expenses I pay on the rental property are lawn fertilization at $250 year and an annual HOA fee of $60.
The mortgage payment of $722 includes taxes and insurance. I have met with an insurance consultant and bought a 1 million dollar umbrella policy to cover me with the rental in case of legal action.
Due to the house being somewhat new, I haven't run into any high cost repairs. If a tree needs to be cut down or the house power washed, I do all those things when need be.
So after considering the expenses I discussed above, my actual monthly bring home from this property would be closer to $230 or so. At the same time I am getting the tax benefits, building equity in the house and enjoying investing.

[Petunia 100]

I guess I'll be the first one who's not terribly opposed to your plan. In some cultures, multi-generational dwellings are common. And although I personally wouldn't do it, it seems like your situation is different. From the original post, it seemed as if you would HAVE to move in with your parents to make your plan happen. I'd be opposed to that. This seems more like your family wants to live together. That's different.

It's too late for you to be the first, but you are welcome to be the second.

[jpg7n16]

It's too late for you to be the first, but you are welcome to be the second.

Haha true! Turns out I was stealing your ideas oops!