Real Estate Lender · New York City, NY · Member since 2011 · 54 posts · 30 votes
Hi all. Here is my current situation
Property 1: A recently purchased SFH in Raleigh. I put 20% down and have a 4.62% mortgage on the other 80%. The property cash flows $200/month. I have $4,000 in reserves for vacancies/repairs/assessments.
Property 2: I am planning on using my HELOC from my home to purchase a 2nd property. The current rate is 2.75%. My goal is to use the HELOC for 2 years and then do a cash-out-refinance.
If I go this route, then my 2nd property will cash-flow $550/month ($6,600/year) if the prime rate stays the same.
So, here is my question: What should I do with this excess cash-flow? My initial plan was to use the extra $6,600/year to pay down the 4.62% mortgage on my 1st property. But, now I am questioning if that is a smart move. Why should I pay off a mortgage that is at historical lows? At 4.62% that is extremely cheap money for an investment property. Would I be better off using that excess money for a down payment on a 3rd property?
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
14y
Originally posted by David Ackerman:
What should I do with this excess cash-flow?
Very simple - send it to me!!! :mrgreen:
Seriously, in the current climate, I am more inclined to leverage my cash than pay off debt. Yes, I am doing both, but I'm placing far less capital towards debt, which should get paid off just fine if and when inflation rears its ugly head, and allocating the majority towards financing at these super-low rates.
Investor · Farmington, UT · Member since 2011 · 314 posts · 179 votes
14y
Dave, love your question. I've had the same one for a number of years. IMO you are ultimately better off having more control/liquidity with the money. Paying down the mortgage doesn't give you liquidity. Paying down the first does make you a guaranteed return of the interest rate that you are currently paying, but like you said they are at all time lows. I would rather have access to the money to fund my flips, HML's, or use for down payment. Once you pay the money down on a long term mortgage you won't see that money again for a long time.
Access to quick money when you need it is WAY more valuable IMO.
Investor · raleigh, NC · Member since 2010 · 45 posts · 18 votes
14y
I would think it depends on your strategy, whether you want to expand in the RE business or not. In any case, I would avoid paying down the mortgage when you already have a very low interest rate right now. For my situation, I would use it for a third mortgage.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
14y
Originally posted by David Ackerman:
What should I do with this excess cash-flow?
Very simple - send it to me!!! :mrgreen:
Seriously, in the current climate, I am more inclined to leverage my cash than pay off debt. Yes, I am doing both, but I'm placing far less capital towards debt, which should get paid off just fine if and when inflation rears its ugly head, and allocating the majority towards financing at these super-low rates.
Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
14y
Originally posted by Mitch Kronowit:
Originally posted by David Ackerman:
What should I do with this excess cash-flow?
Very simple - send it to me!!! :mrgreen:
Seriously, in the current climate, I am more inclined to leverage my cash than pay off debt. Yes, I am doing both, but I'm placing far less capital towards debt, which should get paid off just fine if and when inflation rears its ugly head, and allocating the majority towards financing at these super-low rates.
I agree with Mitch... A mixed strategy is best unless you do not want to expand your portfolio. Excess cash sitting on your balance sheet is losing money in this environment.
Real Estate Investor · StL, MO · Member since 2008 · 294 posts · 152 votes
14y
What about using the cash flow to pay down the HELOC. Yes it seems silly to pay down a 2.75% loan but, as a line of credit, you still have access to borrow that money again in the future and in the mean time, you pay some what less interest. You could think of it as a savings account paying you 2.75% to keep your money there until the next purchase. It would also reduce your % of credit being utilized which may help you get the third loan.
Real Estate Investor · Chicago, IL · Member since 2008 · 122 posts · 46 votes
14y
Another question to consider: is the $4000 you have in reserves all of your extra "emergency fund" cash for your portfolio? If so, I'd build up my reserves to at least $10,000. After that, I agree that a mixed strategy of mortgage payoff and capital savings is preferred.