BP Experts-Help me figure out pros/cons of getting from 1 to 2

[Joe M.]

Hey Experts. 

Im looking for opinions on how to view a friend's position, pros/cons and ways to think of their next step. Due to his first rental being his old primary, there is quite a bit of equity in it. It would be about the same amount to either pay off the loan on it (3.85%) or put a 20% down payment on another rental. For big picture, he is not looking to grow a huge portfolio, so slow, steady, and conservative are fine by him. I am not sure of tax implications if paid off, and I also assume he can open a HELOC to either get a down payment, or even pay for next rental in full.

So if you were in his shoes, would you pay off the mortgage OR use that money to buy rental property #2?  How would you be looking at this?

[Mark H. Porter]

Did he live in the first rental for 2 years out of the last 5?  It makes a huge difference in the answer.

[Joe M.]

Originally posted by @Mark H. Porter:

Did he live in the first rental for 2 years out of the last 5?  It makes a huge difference in the answer.

yeah hes been out a few years now...I know he wants to keep it long term 

[Mark H. Porter]

I would never pay off a mortgage, always use other people’s money at these rates.  I would refinance, take the money and buy something, then use the 20% that he was going to put down and buy a third property.

[Joe M.]

Originally posted by @Mark H. Porter:

I would never pay off a mortgage, always use other people’s money at these rates.  I would refinance, take the money and buy something, then use the 20% that he was going to put down and buy a third property.

 Thanks. Appreicate the reply

Any other opinions?

[Joe M.]

Should I have titled it "Help, I have no money, can I get into RE?"

[Charlie Munson]

I am pretty conservative when it comes to debt, but I tend to agree right now with the above poster.  At 3% or less in investment loans, pretty hard to not use borrowed capital.  The risk would be a prolonged, serious down turn in which case the house owned outright only contains the risk of not meeting property tax, whereas if you take a loan, buy a second, you are on the hook for taxes and mortgage on both.  I guess I'll date myself here, but I started with a cadre of guys investing in '07.  I'm sure they are all back in the game now, but for 4 years or so, I was the only one playing and made a good turn on no brainers in the recession.  They used to goad me about being so debt adverse, but a couple years later I was making hard money loans for 12%....  worked out for me.  

That said, if you want to grow and fundamentals are in place, take on  debt.  If it's slow but sure to the finish there is a good argument for the debt pay down.  

Run both cash flows, not having the note on property #1 will obviously help cash flow a little.  

I'm not sure how the 2 year homestead helps if you are not selling.

[Joe M.]

Appreciate the post. Thank you

Originally posted by @Charlie Munson:

I am pretty conservative when it comes to debt, but I tend to agree right now with the above poster.  At 3% or less in investment loans, pretty hard to not use borrowed capital.  The risk would be a prolonged, serious down turn in which case the house owned outright only contains the risk of not meeting property tax, whereas if you take a loan, buy a second, you are on the hook for taxes and mortgage on both.  I guess I'll date myself here, but I started with a cadre of guys investing in '07.  I'm sure they are all back in the game now, but for 4 years or so, I was the only one playing and made a good turn on no brainers in the recession.  They used to goad me about being so debt adverse, but a couple years later I was making hard money loans for 12%....  worked out for me.  

That said, if you want to grow and fundamentals are in place, take on  debt.  If it's slow but sure to the finish there is a good argument for the debt pay down.  

Run both cash flows, not having the note on property #1 will obviously help cash flow a little.  

I'm not sure how the 2 year homestead helps if you are not selling.