Investment Direction & Decisions
Hi,
I have existing rental property and would like to invest $15-$20K/year to purchase addtional properties. I would also like to retire in 13 years and use my rental property as passive income so I can enjoy my "golden years". I don't know if I should:
1. Put down a minimum down payment and buy as many properties as I can, financed over 30 years, provided I can get at least $100/unit positive cash flow now.
2. Put down a large down payment, apply all income to paying down the debt and own the property free and clear in 10 years.
Thanks in advance for the advice,
CB
How about a combination of the two.
Buy as many properties as you can afford and conveniently manage using fixed rate financing for 30 years. As long as the properties generate a positive cash flow, and you have adequate cash reserves for unplanned repair events, then consider using your excess cash flow to pay down your mortgage loan balance.
Pick the property with the lowest loan balance. Pay extra each month against the loan balance. When that property is free and clear, you have more cash flow to apply to the next loan with the lowest balance.
On a 30 year mortgage, paying one extra mortgage payment per year takes about 7 years off the loan term. Paying two extra mortgage payments per year reduces the 30-year loan term to about 19 years.
As long as your rents are covering your expenses, let your tenants buy your properties for you. You may not have all your properties free and clear at the end of 13 years, but you may have enough passive income to "retire".
Only contribute your own cash to this plan if1. you do not have another higher yielding investment opportunity, and,
2. you have an adequate cash reserve to take care of any personal emergency that would require quick access to cash.[ Edited by DaveT on Date 11/14/2003 ]
You are likely to get differing opinions on this one. If you are investing in an area where there is appreciation (I believe KC experienced about 13% in the last year) the numbers indicate that you will be better of with more properties. Look at it this way: If you buy twice as many properties as you want free and clear when you retire, when the properties double in value, sell half of them and pay off the ones you keep!
There is a very good example in one of the Rich Dad, Poor Dad books where a 20 year plan is presented starting with about $10-20K. All properties are bought with 10% down. Buy one property and hold for 5 years. Refi the property and buy another. At the end of 10 years refi both and buy a third...and so on. At the end of 20 years, net worth was over $6M.
The appreciation rate throughout was 5%.
Do some spreadsheet calculations to convince yourself. Also I have an article that I submitted spreadsheet planning. Hopefully, it will be published.
Regards,
Ed
I also saw that 20-year investment scenario on the web. Three underlying assumptions are that the property will always breakeven cash flow, AND, that the non-owner occupied refinancing can be done at 90% LTV, AND that the mortgage interest rate will always be 7%.
None of these assumptions may prove to be correct, and consequently the scenario may not be sustainable if the investor is unable to deal with negative cash flows. A better assumption would be to refinance at the LTV where the debt service ratio is 1.0, or breakeven cash flow.
Of course, the final net worth result will most likely be a lot less than $6MM+, but the scenario is still sustainable on an initial investment of $20K.