Woodland Hills, CA · Member since 2017 · 39 posts · 23 votes
Hello Everyone at Bigger Pockets!
I currently own 5 properties in Houston TX all residential rentals. I have a mortgage on only one of them. The home with a mortgage I am currently selling after sale I will have rough 300k take home the same amount I need to pay off my current non investment home I live in.
Would it make more sense to pay of my home? Or purchase two rentals at 150k each in Houston to rent them out for $1500 each which is 36k gross 20-24k net.
I would love hour suggestions and input. I know no on in my circle that buys and holds time to change that. V
Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
9y
I'm not a fan of paying off your primary residence mortgage unless you feel like you are going to live there for decades, or you have some financial hardship where you want to reduce your overhead. If I had $300K, I'd buy 8 $150K rentals w/ 20% down, then I'd start snowballing all ten of your rental properties mortgages (one at a time of course), until they're all paid off. Then you can decide if you want to snowball your personal residence. After you snowball the first couple of properties, you'd be surprised how quickly you can get your portfolio paid off. Quality problem to have, my friend!
Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
9y
I'm not a fan of paying off your primary residence mortgage unless you feel like you are going to live there for decades, or you have some financial hardship where you want to reduce your overhead. If I had $300K, I'd buy 8 $150K rentals w/ 20% down, then I'd start snowballing all ten of your rental properties mortgages (one at a time of course), until they're all paid off. Then you can decide if you want to snowball your personal residence. After you snowball the first couple of properties, you'd be surprised how quickly you can get your portfolio paid off. Quality problem to have, my friend!
Acquire the new income properties and use that income to fund your next acquisitions. Eventually, you will reach the point where your income will make the house payment less of an issue.
Equity looks good on a balance sheet, but produces no income. So, your Balance Sheet will look better than your P&L (cash flow).
Real Estate Agent · Houston, TX · Member since 2015 · 93 posts · 46 votes
9y
Either way good job. Usually it does make more sense to have that payment unless you don't plan on moving. We don't really know enough to make an informed decision though.
Woodland Hills, CA · Member since 2017 · 39 posts · 23 votes
9y
@Sharon Tzib Im afraid of the snowball that is assuming everything goes well and not accounting for repairs and tennats not paying with a mortgage on hand cannot imagine that with more props. When they are cahsed out its a bit limited how many homes you can get but for me at least I find it head ache free. But I will be contacting you soon to discuss I see you are a very active realtor on HAR.
@David Dachtera This is what I am now leaning towards just keep buying until I am dead :) I like having the homes paid off I wont scale fast but wont half to worry about keeping up with association demands you know how that goes.
I am not a fan of investors paying of rental mortgages. You take useable cash and buried it in a property to receive a 3-4% return (equilivant of prevailing interest rates) while losing out on a additional opportunity value of 6-7%.
Reality is that equity ultimately turns every income property into negative cash flow due to the lost opportunity value of cash. Investors would be wiser to pull out the equity and place into a income fund if they do not want to own additional properties.
Very sad to see cash dead and wasted. Condolences .
If you want worry free parking cash in real estate is defiantly not the way to go. When the market turns you will lose it all. It would be safer under your mattress.
It's aggressive, using more leverage/debt, but the risk/reward is attractive to many investors, me included. I think you're attracted to having no mortgage so that you can afford the unexpected surprise (vacancy or major capital repairs; for example a new roof required). These can be managed by keeping a "reserve" for such items.
If Alexander1 has 2 homes paid off with $300k invested, you have maximum cash flow in the short run.
If Alexander2 has 8 homes with 8 mortgages, 8 tenants are paying them off for you over the next 30 years, you'll end up with $1.2 million (not $300k) in properties. And, what if your market experiences a little appreciation.....that percentage applies to $1.2Million of property, vs $300k (of course, admittedly, if properties depreciate in the future, that applies to 4x bigger basis)
Woodland Hills, CA · Member since 2017 · 39 posts · 23 votes
9y
@Steve K. With 8 houses how much would be ok to net at the end of the year? My thought process in 30 years the paid off homes would generate you $1,080,000 - Property tax, insurance and insurance and if you want to sell then you get your 300 k back + Appreciation at that time.
But I will look into what you are saying That is why I'm here to enrich my investing techniques.
@Thomas S. Just curious Thomas how many properties do you own and are any paid off? You got me regretting now paying the properties off cash will look into snowballing 8 properties. I am currently looking to invest in Houston. At least I can sell current props now with a profit or refinance them pull cash out and could always buy more so the money is not dead yet.
Also guys so If I get 8 properties lets say at $150,000 Mortgage w 20% Down lets say with insurance and property taxes comes to $1100 Monthly you charge lets be realistic and say $1400 Monthly rent Multiply by (8) end of the year net profit is $28,880 minus repairs and any other items at props. the paid of home is netting me 12,000 end of year times 2 netting 24k minus expenses only with two tenants.
Also I am using a realtor to find me the tenants being I live in California and invest in Houston I own a flooring business in Houston so my guys do all the repairs and misc. Items in house.
Thanks for all the feedback guys I am a sponge socking it all up!
Wilmington, DE · Member since 2015 · 121 posts · 36 votes
9y
The math side of this question is pretty straight forward. If you are strictly looking for return on your investment you simply need to compare your projected ROI for your investment with your mortgage interest rate. I'd venture to guess (hopefully) that rental returns would crush your mortgage.
The question can get a little more difficult when you take into consideration your personal situation/goals. For example are you getting ready to retire? Do you need to supplement active income with more passive income? Keep in mind that just because many people want a big portfolio doesn't mean everyone wants or needs one.
I would suggest coming up with your goals and making a decision based on what needs to be done to achieve those goals.
Woodland Hills, CA · Member since 2017 · 39 posts · 23 votes
9y
@Jeff Sheraton Current home Mortgage is $1500 owe 290k On it.
So I would net 2k Monthly so not exactly crushing it but there it is. I am thirty years old not looking to retire now but want to retire at 40 for sure. You are right though everyone's wants are across the board.
Real Estate Investor · Nashville TN · Member since 2009 · 287 posts · 171 votes
9y
buy more rentals. your equity in your house is just 'sitting there not earning a return. I think you should deploy it and get a return on it. rentals or otherwise
I have 30 properties and I pull out max equity when ever I can. Some are 100% financed. Equity is created principal pay down some through appreciation.
I stopped buying additional properties and have redirected the cash into investment funds that have generated between 7 and 15% returns over the past 10 years. Far better returns than simply saving on the mortgage rates by having equity in a property.
Wilmington, DE · Member since 2015 · 121 posts · 36 votes
9y
I'd suggest thinking about what retirement means to you and what it will take financially to get there. If the number of units you have now is all you need maybe it makes sense to pay off the house. The other school of thought might be to buy rentals that cashflow more than your mortgage. After all who really cares about a mortgage if your not the one paying it?
For a long time I wanted to be mortgage free. I could have hustled to pay it off (maybe a few flips, sell a couple rentals, whatever). Instead I moved into another house and rented my first. The rent from house one covers nearly all of the costs for both houses. To me it made much more sense to put my money into another asset. The benefit being that I build more equity each month, the downside being that I have to manage the rental. To each his own.
...shows how he used $150,000 down payment to acquire 9 houses in 2.5 years. He now has about $500,000 equity in $1.3 million of real estate, and has $200,000 cash in hand back to do more deals. The 9 houses cash flow $5700 per month net, after expenses. Compare that to buying a single house for $150,000 and having debt-free rental income on just the one house (or in your case, wanting two for $300,000)
Woodland Hills, CA · Member since 2017 · 39 posts · 23 votes
9y
@Clifford Kearns Creating this post really helped me consider many things but ultimately I will be buying more props might give buying 8 houses a shot with 20% down to see results personally.
Rental Property Investor · Yorba Linda, CA · Member since 2017 · 140 posts · 58 votes
9y
First off, a massive congratulations Alexander Parada on all of your successes so far, awesome!
I would definitely have to agree with the buying more properties option.. not necessarily spend all 300k on properties but possibly 200-250k and keep a bit in reserve for any problems that may arise along the way. With that being said, I am unsure of your current cash reserve so it's hard to comment. But for sure buy more properties!
Congrats mate!
Rental Property Investor · Yorba Linda, CA · Member since 2017 · 140 posts · 58 votes
9y
Alexander Parada I see you are also in SoCal.. I would love to connect and hear more about how you got started..
Maybe we could get together for a coffee one day.. let's connect!
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
9y
I am out of the majority on this one. I cannot wat to pay-off my home. Had I not been so aggressive in paying down my mortgage I would not have been able to pull equity out to buy investment properties. So I am now on a 10 year mortgage at 3%. Worst case scenario- I go broke and the house can be liquidated to pay for my kids college.
But, again, I haven't lost sight of why I got into the game... specifically to pay off my mortgage and put my kids through school. My wife and I have 401ks and pensions...so that also doesn't impede us.
I get no tax benefit from my homes mortgage... I want that sucker paid off yesterday! Congrats to you 🙂
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
9y
I re-thought my original answer in the context of selling off the asset. I would put the money into a multi-family or apt. building. Here in NJ I can't for the life of me make the kind of cabbage off a single family to justify purchasing one, or dozens. I can clear a hell of a lot more with a multi and deal with much less of a headache.
Purchasing another multi-family would be my go (for me). It would shave at least 2 years off my home mortgage. Not to mention the benefit of not paying any taxes on the sale.