Any benefit to paying off my first place?

Question

I suspect this may be a self-answerable question...   :oops:

I currently live in a small but nice townhouse.  I want to buy something else, but I'm wondering if there would be any benefit to paying off this place before doing so.  Based on what every outlook I've read seems to indicate, things will continue to decline or at least stay low for some time, and I think that there is time enough for me to pay off the place and then save up more.

I'm expecting to hear that it's best to keep cash on-hand and ready for use when a great buy comes along, so no, I shouldn't tie it all up in the first place.

But what about financing?  With lenders being freaked about who they give money to now, will I be able to get a loan while carrying the first place?

Account Closed · Answer

Mike,

You may want to pay down the debt and then go to a bank and get a home equity line of credit lined up. I use Wachovia and they will do a LOC up to 90% of value and the rate is adjustable and based off prime. The benefits to this are:
1. you only pay interest when you withdrawl the money
2. cash is easily available in case a great deal pops up (you can make draws on a LOC by simply going into the bank and getting a cashiers check)
3. you dont have to lock in a rate

Stephen Leblanc · Answer

or buy 10 homes with a 10,000 down payment on each.  It is more work due to the fact that your cashflow is coming from more units, but you will get better cashflow.

Derek Decoste · Answer

million dollar property, not a house neccesarily, so this could be anything from a quadplex to a small apartment complex depending on where you live and what kind of shape its in

Tom Noonan · Answer

Lets say you own one house (flat out, no mortgage) for 100k that rents for 1500/month, and expenses are 45% of gross rental income, 5% vacancy...  Your cash flow per year will be $9,405.00

Lets say you sell that 100k house, and use that 100k as a down payment for a $1,000,000 (10x as much) property that rents for $15,000 per month (10x as much), same 45% expenses and 5% vacancy, and you take out a mortgage at 7% for 900k, your cash flow will be $21,522.24 per year.

Also, if the price of housing goes up 5% in the area, your 100k property will now be worth 105k - a $5,000 increase, however your $1m property will appreaciate $50,000.

Mike Seluk · Answer

More n00bZ questions...  :goofy:

Why would I want to take money OUT?  I never understood that.  If you do that, you've got cash in your pocket, but you 'own' less of the property, no?  And won't it be harder to cash flow, since you now owe more on it?  Your payment SHOULD go up, right?  If you sell, won't you have to sell it for a good bit more than you bought it for so you don't loose your butt?

I figure if I OWN the place, I don't pay interest anymore.  I rent it out, and that money is MINE (well...expenses, too...lol).  If it goes down in value, who cares?  I'll wait; it would still be making me money if I keep it occupied, right?  And if it goes up, bonus, and I can sell whenever I want and put waaay more in my pocket.

"I've seen more people fail because of liquor and leverage - leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing." 
- Warren Buffett

Yeah, like that guy said...   :D

Dick Green · Answer

The goal isn't for you to pay it off but to have someone else pay it off.

What are you planning to do with the current home?  Rent or Sell?  If renting then...will the townhome hold the rents of a refinanced mortgage amount? If so...pull your cash out and rent.  Let some else make your mortgage payments.  But remember, you're probably gonna have to put some of those same dollars back into the property for repairs.  Also if you decide to rent....make sure you have a home warranty on the property to offset some of those repairs.
 
If selling, I would focus on current profit and not what prices used to be.  In this market, how long will the prices take to get back to past levels.  Are you prepared to sit on the property for that length of time?

Stan M · Answer

If we could always find a right time, we all would be rich in no time

Mike Seluk · Answer

30 yr. fixed at 6%.

They're dropping in price right now, to be honest.

Looking back, I should have sold when they were high.  I had just bought the place, and not 2 years later, the prices around me almost doubled!!  I had no idea how abnormal this was since it was the first time I had ever been in the game, so to speak.

Dick Green · Answer

Debt free is always a good alternative.

How cheap or expensive is the money that's sitting in your townhouse?  If it's 30 or 15 years fixed at a extremely low rate, I wouldn't touch it. I'd look for something with cash on the table to put the new deal together.

What's the rate of appreciation in the townhouse.  Is that a good place to to have money sitting?

As far as loans....there's still good products available.  Depends on what you're wanting to do.