Q: I have recently purchased 3 rental properties and these properties have a positive cash flow of $800 per month.
Am I better off taking the $800 and paying down the mortgages of these 3 properties or should I use the extra money to help buy more properties? My goal was to eventually buy more properties, but what would I be better off doing financially?
I understand there are a lot of variables in answering this question, but any insights or thoughts would be appreciated.
A: Congratulations on making some smart moves. It’s difficult to purchase investment properties and immediately have positive cash flow.
Before you start investing the cash in another property, make sure you have enough in reserves in case you lose a tenant, or a repair has to be made. Once you’re secure that way, you should feel free to take another step.
In your case, although I don’t know all the details, I think you’ll probably be better served by investing the extra cash each month in another property — particularly if you can get one with positive cash flow as well.
I think it’s a great idea to prepay the mortgage of the property in which you live. However, when it comes to investment property, every dollar that goes into fixing up the property or paying the interest on the mortgage is written off against the income the property brings in.
Although it might be a good idea to pick up one or two more properties, you should then settle into the job of being a landlord. Five rental properties is a lot to handle, particularly when it comes to finding tenants and keeping up with the maintenance these properties require.
Once you’ve spent a year or two managing these properties, you can start to think about acquiring more.
Talk to your accountant or tax preparer about how all of these investment properties will affect your income tax return. Together, you and your tax preparer should be able to come up with a few strategies that could make a significant difference in how much tax you pay down the line.
If you’re serious about being a real estate investor, as you seem to be, pick up a copy of each of these books: Every Landlord’s Legal Guide, by Marcia Stewart, Ralph Warner and Janet Portman (Nolo Press, $44.99) and Vern Hoven’s The Real Estate Investor’s Tax Guide, 4th Ed. (Dearborn, $32.20).
Sept. 17, 2004.