To Sell or Not Investment Properties?

Question

I wish to have advice on following from members on this forum. I currently own 5 properties as below

Current residence: Bought for $637K, downpayment made-126K, current mortgage balance - 500K

Investment Property1: Bought for 175K, downpayment made - 65K, current mortgage balance - 105K, net rental cash per month after PITI+HOA fee payment = $445

Investment Property2: Bought for 209K, downpayment made - 72K, current mortgage balance - 124K, net rental cash per month after PITI+HOA fee payment = $436

Investment Property3: Bought for 217K, downpayment made - 70K, current mortgage balance - 0, net rental cash per month after PITI+HOA fee payment = $1137

Investment Property4: Bought for 455K, downpayment made - 90K, current mortgage balance - 253K, net rental cash per month after PITI+HOA fee payment = $287

I also have investments in ETFs worth around 250K. They have yielded around 6.5% per year net gain so far.

I was thinking of selling investment 1 and 2. This requires me to pay off mortgage worth 105K+124K = 229K.

If I sell ETFs worth 229K and pay off these 2 properties, I expect to add extra cash flow of $1143 per month (on top of net cash mentioned for each property above).

My question is, does it make sense to go this route? Or should I not payoff mortgages and keep investing in ETFs? What option would be better investment decision and why? I also max out my 401K for me and my wife each year. Together we have around 500K worth 401K invested in target date based mutual funds.

Thanks

JD Martin · Answer

Exactly. No way I would pay off 3.5% mortgages. You can almost throw a dart and earn 5%. As for reducing your DTI, you would be better increasing the income side of things at those kinds of rates.

John Warren · Answer

@Anand Sankhe I normally use a simple rule of thumb for this type of decision. If you can recoup over 10 years in cash flow and then re-invest the money, then I think it makes a lot of sense. I am actually considering selling a solid performing property now in my Illinois portfolio so that I can re-deploy the equity. I think using a "return on equity" calculation every year is a good way to measure whether or not to continue holding a property.

I am not a fan of the ETF's as it sounds like you are potentially an accredited investor. Why not be a passive partner in a syndicated deal where you can get 7-8% preferred return and then share in the upside as well?

JD Martin · Answer

Unless your mortgage rates are obscene I would just do the same thing you're doing now, with the exception of (financially speaking) downsizing out of your current home since it costs a bunch of money and makes you none.

Larry Turowski · Answer

@Anand Sankhe Your return on cash invested will be much higher if you keep the mortgages.  It looks like from Property 3 that your return for a property with no mortgage is 12 x 1137 / 217,000 = 6.3%.  And I'm guessing that is gross, since you haven't including mainetance, capex, and vacancy.

So it seems you'd do better leaving your investment in the ETFs.

Alex Shaughnessy · Answer

I would keep the properties and use the etf funds in another syndicated deal

Andy S. · Answer

@Larry T. @JD Martin @John Warren for valuable insights. My current mortgage interest on properties is as follows;

Investment Property1: 3.25% (30 year fixed)

Investment Property2: 3.25% (30 year fixed)

Investment Property3: 3.75% (30 year fixed)

Investment Property4: 3.875% (5/1 ARM. Interest rates due for revision in 3.5 years )

Larry, yes I did not include maintenance, capex and vacancy in my 1137/month cash flow calculation for Property3

My ETFs are made up of stocks, after 10 year bull run, I imagine stocks will go down by 60-70% in next 1-3 year span. Housing market, especially in Central New Jersey has not seen such a downturn historically. Maybe 10-20% correction.

Assuming 70% correction on ETFs, $250K available there will be reduced to 100K. I was wondering, why not in that case use some of the 250K cash and pay off property 1 and 2?

JD, what do you mean by "do the same thing you are doing now". Do you advise not to pay off mortgages for property 1 and 2?

John, For property1, if I pay off mortgage now, the 10 year cash flow comes out to be $117K. After deducting maintenance, capex and vacancies for 10 years, it will go down to $100K. If I do not pay off mortgage now, in 10 years the same cash flow will be around $50K. Hope I understood your recommendation accurately? Would you please share with me ROI calculator for real estate investors? Also would you please elaborate on the syndacated deal you mentioned? What kind of investments are these and how to go about looking for the same?

To All, By paying off 2 mortgages worth around $220K, wouldn't I be increasing my home equity and also helping to reduce my debt to income ratio i.e. a factor very critical for getting future mortgages for future rental investments?

To Sell or Not Investment Properties?

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