Invest in existing loan or more leverage?

Question

I'd like to solicit the collective wisdom of BP for advice on deciding between two scenarios to invest a small windfall. I have an existing cashflowing duplex with great tenants, and I live w/in earshot of, w a note about 4%. About 550k equity, in a neighborhood that appreciates cyclically but quickly.

With this new capital, I'm wondering what would be more beneficial: zero the note on the duplex or invest in a basket of SFHs. Running the numbers it seems it works out the same. For instance:

Scenario 1: zero duplex note w/ 335k. Yearly pre-tax CoC is 43k. Saves 222k in interest!
Scenario 2: put 335k in turnkey 20 SFHs meeting the 1% rule. Yearly pre-tax CoC is 44k.

One thing that zeroing the note does is remove the mortgage deduction. But isn't that totally offset by not paying out 222k over the next 28 years and having it cashflow now?

The headache of building up those SFHs seems daunting and troublesome, compared to simply paying down a duplex. I'm corresponding w/ several turnkey providers and just not finding too many good deals..

Scenario 3 would be to wait for a downturn to buy into dips.

I'm open to advice on what kind of questions should I be asking myself about this opportunity?

Thanks in advance

Account Closed · Answer

@David Davidson The higher interest rates go the more you will wish you had the 4% mortgage.

Larry Fried · Answer

@David Davidson It really depends on what your goals are, and the time frame you have to get there. If you want to keep life simple, and the $43k/yr cash flow is plenty for you in the near term 2-5 years, and you really aren't into expanding your capital beyond that, I would say pay off the note. If you want to get a better return on your cash then paying off a 4% interest note (that is tax deductible), and are willing to be a little more active (mostly for networking and due diligence) then doing private lending (which can be roughly 6-24 months) as someone suggested, or like investing in the CF platform we discussed is likely to get you a much better return - at least 8% and upwards of 20%+. These of course do involve somewhat more risk, as any expansion of your REI would. Good turnkey deals are definitely harder to come by these days, and take more work in your upfront due diligence and even managing the managers to protect your investment. I have or am investing in all of these strategies, so the other possibility to think about is you can combine strategies.Keep in mind that we apparently have entered a period of rising interest rates, and that 4% rate will likely look really low in a rear view mirror not far down the road.Whatever you decide to do, you are in an excellent position. Take the time to act wisely for your own tolerance and circumstances.

James Wise · Answer

@David Davidson I would expand the portfolio. 4% is cheap money. Whenever you have access to cheap tax deductible money you should use it. I imagine you have some type of consumer debt that is a higher cost than 4% and is not tax deductible. Long story short If I were to pay down any debt that would be the very last debt I paid down.

Brent Coombs · Answer

@David Davidson, yes. That's $13.4k you'd be making ADDITIONALLY to what you're already making with that mortgage, if you instead invest it into something that only needs to net 8%/y!As I said: if you can't find 8% or better returns with $334k cash, you're not looking hard enough!Sorry, you'll have to sort out your own preference/team per market. Research'll be well worth it!

David Davidson · Answer

Thanks for all that feedback, good advice on there is no correct answer! @Larry Fried Thanks Larry. The CF platform you referred makes sense--for part of the picture. My goals are income replacement, something to generate a solid growth and return decoupled from the Wall Street casino, insulated from the vagaries of a cyclical business in which I'm gainfully employed, maybe liquidated in 15 years to a 1.5M. Not inconceivable. @James Wise No debt here. Cheap money resonates esp. now, considering we're entering four years where the economy will be governed by a hair-challenged twitter hair-trigger. I'm finding that linear markets like Kansas City have scant inventory on B props, Chicago's increasing tax problems are a mounting concern considering years of mismanagement of that city, Jacksonville turnkey I don't get warm fuzzies esp. some of the more reputable turnkey firms there, Ohio markets I'm also not seeing compelling economic evidence that won't be dislodged by a market pullback, Texas, Ariz, Seattle, Atlanta--all these markets are narrow unless you're an insider, and even though I'm relatively long-term (15-20 years), to invest at what seems like the top of an asset class seems imprudent given a 10-15% correction. I'm curious about other markets.@Brent Coombs In any given year, you said I'd be saving $4 per $100 owed. That's $13.4k saved per year on 334k, right? Love the idea of multis. What markets do you suggest? Wish I could jump in the deep end on actively pursing wholesale, because I see how this is the first rake of ROI. I'm open to partnering on deals, it's just turnkey made sense after my 70hr work week! Appreciate all the thought and consideration of your replies.Thank you.

Brent Coombs · Answer

In any given year, you'd only be saving $4 per $100 owed by paying it down now. If you can't invest to MAKE at least double that, then you're looking at the wrong investments/turnkeys.How about ACTIVELY trying to match turnkey companies at their own game? ie. Find the same sort of deals that THEY find for wholesale prices, but you get the extra ROI instead of selling them!How about investing in bargain MULTI/s? Saves you having to find so MANY deals!Paying off a 4% note seems like a terrible use for your $335k! My 2c. All the best...

Carlos Tavares · Answer

I would say it's not to try to increase your portfolio like Patsy Waldron mentioned above but I see your point in getting that maximum cash flow now saving all that interest payments. If you do then start saving that cash flow along with other capital (work) and I presume you'll have another in no time and if need be you can always draw from equity in future

Patsy Waldron · Answer

Personally I would go with expanding my portfolio, assuming there were good deals to be found. If you can't... Then do short-term things like private lending or note investing, so that if/when an opportunity to buy arises, you are ready.