What if I don't want cash flow?

Question

I just listened to the August 1, 2018 podcast "7 paths to financial independence". Really great episode. They talked about the following method for those who don't want to be super active in real estate:

Buy one house a year, ensure rent covers all expenses at a minimum
Have each house on a 15 or 20 year note
Once you hit year 16 or 21 (whatever you amortize the loan for), start doing cash out refinances

This method only requires one house (more would work too) a year, and would greatly supplement or even provide a retirement.

I have been wanting to build a portfolio of single families and small multis that cash flow ~$100 a door after expenses. I've always thought building equity would be great; pay them off and enjoy more cash flow, do a cash out refi and buy more, cash out refi and loan the money, do a 1031 exchange into a more passive portfolio, etc. I hadn't really ever thought about just doing the cash out refi to have cash and not pay any taxes.

This got me wondering, what about putting small multi families on as fast of a note as possible? Ensure you can pay taxes, insurance, property management, save for vacancy, save for repairs and cap ex, but then put everything else into the principal and interest payments. This way you pay the property off as soon as possible, allowing you to do a cash out refi asap.

Assuming you are ok with no cash flow for awhile, would this provide any tax benefit? Avoiding rental income to take advantage of refinance income?

Salvatore Lentini · Answer

@Joe Villeneuve love your line:"the mattresses of the property..." Great way to put it

Joe Villeneuve · Answer

Let me get this straight, you want to take money you have now (at no cost to you), spend it (putting into the house as equity), then take it back with cost (refi)? Like @Kyle J. said..."why"?There are a number of reasons why you wouldn't have a house that didn't have positive cash flow. All, based on basic math. Here is a more practical reason: Paying off your property is the job of your tenant...not you. When you are taking your money and paying it on the mortgage, that is a cost to you. When the tenant does it, it costs you nothing. and all costs (out of pocket) you spend must be recovered "before" you can make a profit. When you "buy" your own equity, that doesn't get you anywhere. All you're doing is transferring your cash from your bank account to one of the mattresses of the property...and rendering that cash dead.You are NOT saving interest charges, since you were never paying the interest in the first place (remember the tenant?). Let the tenant pay off the house for you. They do such a great job of it...as long as you have positive cash flow.

Daniel Dietz · Answer

I think I may have read/understood this a little different than some of you. I am thinking of doing something similar with an upcoming duplex I am in the works of purchasing right now. Currently my two partners and I generally use as long of amortization as possible, which varies from 20 years for non-recourse and 25-30 for standard loans. We do NOT pay off early on those as we either take the cash flow or use retained earning in our Retirement Fund owned properties to buy more of the same. We do that with 25 units right now. On the upcoming duplex I am thinking/planning on doing it a bit different,and similar to what the original poster is saying, for a few reasons. This one I am going to 'own solo', on the others that are co-owned we all three 'vote' on when to refi, reinvest, etc.... My plan is this will be my 'start retirement' property :-) I am going to do my standard 25 year amortization loan in case I run into any unexpected things along the way, but use the projected cash flow on this property to apply all of that to paying down the mortgage early. I should have it paid off in 13-15 years.... right when I am going to want to retire. Yes I will be letting the renters, NOT my own cash, pay off 5% money early, but will be buying 'peace of mind' at retirement time. When the property is paid off in 15 years, I will have the choice of 1) Enjoy the 'bumped up' cash flow of about $1200 per month 2) Do a 'refinance' or 'cash out' of say 180K on a now 240K property and let the renters ALSO pay that off for me or 3) Sell the property outright for 240K. The choice would depend what I need at the time. Do I want to rent a retirement home somewhere and put the $1200 towards that? Or do I want to take the 'cash out' and buy a home somewhere, or maybe a nice motorhome to tour the country in? :-) The original investment in EITHER of these scenarios would STILL be generating equity growth at the same time of roughly 6K per year. Lots of ways to look at it!Dan Dietz

Kyle J. · Answer

Why would you want to hurry up and pay the property off only to pay to borrow the money back?

Steve Vaughan · Answer

'Avoid rental income to take advantage of refinance income.' Uh, nope. You are still getting rental income. Whether you take a vacation or pay down the loan, how you use that income matters not.'Refinance income' isn't income. It's just borrowed money. Overall, I like your plan. If you already have a good w2 or business to eat and live on, it's a great long-term play, especially for part-timers. Can you imagine 1 house a year over 15 years? How that would affect the wealth and family tree of average Jack and Jill homeowner! Except for the refinance again right away after you pay it off part. Worry about that when you get there. I have yet to run out and slap a new til death, I mean mortgage, on any of mine. Cheers!