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Pay off car, or save for second investment property?

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FinanciallyConfused
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Pay off car, or save for second investment property?  Reply with quote  

I've heard and read differing advice, but never from anyone who has known my financial situation. Here is my current situation, as well as my goals:

32 year old male making 80k plus 13k annually in rent. I own a duplex (owner occupy), and have a goal to buy another investment property or single family ASAP.

Debts:
238k mortgage at 4% fixed FHA loan with PMI (equity level currently around 20%)
18.4k car loan at 2.9%

Assets:
71k in 401k (putting away 15% of income)
34k in cash
house worth approx 300k
car worth approx 20k

My goal/plan has been to save cash as quickly as I can, so I can refinance my existing home as an investment property, which would enable me to purchase either a single family or second duplex with as little as 3.5% down (via FHA). I plan to refinance once my mortgage is down to about 220k, and I have 40kish left in cash as a down payment for property #2. My car payment is currently $400 per month, and will be paid off in 48 months. Now I'm hearing I should just pay off my car now, and then work towards saving for that second property. My initial goal was to refinance 12 months from now, and begin house shopping in about 15-20 months from now. I figure if I pay off my car now, I would have to delay my refinance/2nd house plans by about 12-15 months to re-save that 18.4k in cash.

Thoughts?
Post Wed May 24, 2017 2:50 pm
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oldguy
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quote:
Now I'm hearing I should just pay off my car now, and then work towards saving for that second property.


I'm retired, wealthy. I have a huge SP500 Taxable Account. And I have a $35k car loan, also at 2.9%, for 5 years. When I bought the car (a 2017) I had two options -

1. Sell $38k of my SP500, pay cash for the car and use $3k to pay the capital gains tax on the profit.
2. Finance 100% of the car including tax/lic for 5 yrs - and leave my $38k in my SP500 account (Rule of 72, it typically doubles every 7 years) with a goal of doubling to $76k shortly after the 5 years pay-off.

I chose #2. Disclosure - I've done this for over 35 years. (And that's part of the reason the SP500 is 'huge'. Also, every time one of my rental houses builds up some equity I refi and add that cash to the SP500 account. (Back in the 1970's I applied the cash-outs to more houses - after I had 4 houses I started using the refi cash as seed money for the SP500 account.

So - in my world, I would never prepay 2.9% fixed rate money. Nor would I ever prepay a 4% fixed rate mortgage. Instead, retain the use of that capital and put it to work elsewhere. (BTW, US mortgages are one of the cheapest sources of capital in the World - very few nations will allow a 30 year fixed rate loan, most are 10 yr variable rates.)

As a long time landlord, I share an important rule - "never rent to a co-worker, an acquaintance, a friend, and never ever to a relative, you need an arms length formal agreement with a STRANGER." This rule also applies to choosing a realtor, a builder, a lawyer, car repair, yada - lots of bad feelings and shoddy work come from having 'good ol' uncle louie' help you.
And I never live within sight (~ half mile) of a rental, they don't want you to watch their every move, and conversely. With a duplex, I would rent out both sides and live elsewhere.

The $12k /yr that is going into a 401k is where your far-future will be. Your $32k plus $12k/y invested at 11%/yr will be $3,100,000 at age 62. (Actually more cuz the $12k will grow over the years). The power of compounding is always a surprise![/quote]
Post Wed May 24, 2017 3:42 pm
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littleroc02us
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I'm in the same boat right now as you, as I've always been debt adversed, but recently had to buy a used pickup truck for my side businesses, pulling trailers, etc... I put down 11k and loaned 15k @ 2.9%. I hated doing this, but I didn't want to pull money from my investments to pay for it.
As for a second duplex property, I'm dealing with the same problem as to saving up enough money for 25% DP on the next one. My current duplex I owe 127k and according to the comps my realtor pulled of recent sales of duplexes came out to anywhere between 230k and 288k. I'm in the midst of doing a cash out refi on the property at 70% LTV, but we ran into a snag yesterday when the appraiser came back with low ball comps. So I'm working with the mortgage lender and filling out a counter to his appraisers, because we found 3 properties in the neighborhood that for some reason he decided not to use as direct comparables. For some reason he chose fixer upper duplexes that were stolen at a cheap price for the neigborhood. So we'll see what happens. Should this happen, then I'm back to grind working and saving extra money for the DP. So I feel your pain.
If I were you I'd get to working extra jobs and saving cash. Will an FHA 3.5 DP give you any cash flow?

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Thu May 25, 2017 6:37 pm
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FinanciallyConfused
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Thanks for the replies

So assuming you have the 70 LTV ration on your current duplex, are you saying you're attempting to leverage your existing equity in that duplex to finance the 25% down payment on your second one? I'm not very familiar with "cash out refinancing" you were referring to. Could you explain it to my like I'm a 5 year old?

I would not necessarily have cash flow on a second duplex purchase using the 3.5% FHA loan. My plan would be to owner occupy that new duplex, with the neighbors rent helping to cover the mortgage. I would have positive cash flow on my current duplex once both sides are rented and it's refinanced as an investment property. Very Happy
Post Thu May 25, 2017 7:45 pm
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littleroc02us
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There are two options for getting cash out of your investment or primary property.

1. Home Equity Loan - The bank basically allows you to use your property as a piggy bank, but at a larger interest rate of 7 to 8%.

2. Cash out refi - The math goes like this. appraised value * .70 (LTV) - mortgage balance/closing costs (2k usually). So basically it's a refinance with a low interest rate and they throw the cash out refinance amount back onto the loan. So if you had a 270k appraised home and owed 125k, then you take 270k * .70 = $189,000. Then you subtract mortgage balance/closing costs. 189k - (125k + 2k) = $62,000.

As for an FHA loan, I don't think it's a bad idea if you're owner occupying. I would have gone about it that way, but since I'm married with kids, my wife put the kubash on that. After two years, you could refinance into a conventional loan, fixed rate and rent both sides. Owner occupying work best if the units need work, so that you can produce sweat equity over time, which would allow you to cash out refinance that equity for the purpose of another duplex.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Thu May 25, 2017 8:40 pm
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oldguy
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quote:
I'm not very familiar with "cash out refinancing" you were referring to. Could you explain it to my like I'm a 5 year old?


You would go to your lender and ask for a new 30 yr fixed rate loan, say $290,000. The lender lends you $290,000 minus the $238k pay-off, minus fees. So you get about $50,000 cash (cash-out).

Then you would use the $52k to make a down-payment on a new house. Or maybe two houses if you use some of your $34k.

quote:
to save cash as quickly as I can, so I can refinance my existing home as an investment property,


Think of your $80k income stream as a constant fungible flow, it neither 'saves faster' or slower, the task is to correctly direct the stream toward its highest and best use. Eg, if you direct it to prepay a car loan then that money is spent, gone. But if you direct that income to a leveraged $200k house w/ $10k equity - and the house appreciates by 5% ($10k), your $10k equity doubles to $20k equity (a 100% return). That's how you build Net Worth.

As for getting a positive cash flow - I often leveraged a house into a negative cash flow - so I feed income into the house until the rent catches the loan payment. That is usually a better investment (builds NW faster) than taking low loans to get a higher cash flow. Ask yourself - what will you do with the higher cash flow? Keep it in a 1% savings account? Bad idea.
Post Thu May 25, 2017 9:54 pm
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