Selling half of portfolio to paydown mortgages?

[Edward C.]

Hi all, Was hoping to get perspectives / hear stories on how others approached the possibility of selling RE assets and using the proceeds to paydown debt on other properties. Here is what I see as potential +’s and -‘s: + increase cash flow by removing mortgages (so more passive income) + opportunity to sell underperforming assets - less assets under management (so less potential equity appreciation) - taxable gains (will not redeploy into RE as my sense is we are near the top of the market) - 30 year fixed mortgages in place at low 4-handle rates (based on simple bond math, the value of my liability is shrinking on a relative basis as rates rise) Other facts relevant to my situation: * RE is but just one asset in my portfolio (and I’m fine with that); cash flow and appreciation are great, but I’m looking at the asset class as more of a long term hedge against inflation * not looking to leave my day job and / or replace W-2 income entirely with passive income * don’t need the cash flows from RE; again, I see the asset as a levered inflation-hedging play

[Thomas S.]

You will not increase cash flow by paying down a mortgage. What you are actually doing is buying cash flow at a very high cost. With mortgage rates at 4% and the opportunity value of cash a realistic 10% you are losing 6% annually on your cash not increasing cash flow. Realistically would you have considered investing in real estate when you started out for a 4% return. Buying cash flow and increasing cash flow are entirely different. One is investing, the other is not.

Selling losers is a good plan however parking surplus cash in real estate is a bad plan. Take the money and diversify your investment farther. Investing in a moderate risk income fund should be able to achieve a 10% return on average over time. You should also pull dead equity out of your remaining properties to increase ROI and reinvest it as well.

With the possibility of a correction in real estate values on the horizon you do not want to leave dead equity at risk in real estate. Real estate is the last place you want to park excess cash if you believe we are at the top of the cycle. As long as you have positive cash flow there is very little risk with leverage.