Should I keep, sell, refinance, or make extra payments?

Question

Hello everyone,

I will try and be brief.I am in the East Houston, TX area.  I am 4 years into a fixed  30 year mortgage. I have a 5.875% APR with $107,500.00 left to pay. Original loan amount was 115k.  Appraisal should be somewhere between 200k - 250k. Monthly Gross from rents is $3200.00 Net is $2000.00. i have a 4 plex, one mobile home I own, and one mobile home that I just rent a spot to on this property. I talked to a mortgage broker today and waiting to get an answer on rather or not Fannie Mae will do a refi since there is mobile homes on the property. The one trailer I own is free and clear no liens. The lien is just on the 4-plex. I asked about being able to use the equity should I want to later to purchase other property and it seems we would be in the same boat. If i do get approved for the refi I would be going to a fixed 15 year at 4.25% APR. I would cut 11years and around 80k off the interest. Would this be a good thing to do? Or Should I think about selling this place and do a 1032 and move on? Or my other option is to pay down the interest on this loan via extra payments towards the principal.  I do not know if this information is needed or helpful, but  i have about 15k in reserve or a emergency fund for the property. I do not have a lot of maintenance issues, just some improvements I would like to do. i have owned this property since 2001. This is the year it was built also. Let me know what other information is needed or any good advice.  I feel like I am not getting anywhere so that I can expand. It seems more like a hobby that I would like to be my full time job instead. Just can not figure out what I am doing wrong.

Thanks in advance for any and all your thoughts, ideas, and soulutions.

Lawrence Cox III

Terry Giancaterino · Answer

@Micheal Ran:  I just noticed something you wrote above and you said,

"My personal thoughts...

The market is really high right now(not a time to buy unless you find a gem)."

What exactly do you mean by that? I know the inventory is a bit slim for houses right now but people, I find, are still thinking about 2008 and not increasing their prices (some people) thinking they probably cant sell it unless it's low. (I've actually run into that --twice) so I feel as though the market is great right now for buying and selling.  Your thoughts?

Michael Ran · Answer

You should have no taxes. Depreciation should still be in your favor. Add return of capital investment(all cash you put into purchase) and the capital improvements(rehab & major maintenance improvements,New ACs,etc) and it should be a big chunk of cash.(double check that with a real estate accountant.)

When you buy a new property, the depreciation needs to try and cover the income of both properties.(aka accelerated depreciation. The mobile home properties can also depreciate) I know one investor that buys properties for depreciation! When he reaches the point that you can't buy enough depreciation to cover the income that is when you do the 1032(thought it was a 1031). That idea scares me but it is an interesting model! Then he sells everything(or atleast the fully depreciated ones) and buys more or build new.

On a different note, I have been self employed since 2009. It has been great working from home! However, don't discount your employment benefits!(401k, insurance, vacation days, stable cash flow, possible stock matching, etc) If you have a family and kids, don't be in too much of a hurry to quit your job! I have seen a lot of people quit their job and forget about all the benefits their jobs gave them. This should be a hobby till the REI is suffering from your time spent on the job AND the RE income more then covers all the extras you need to equal your current situation(plus enough profit to keep growing). I feel  like I have to add in the warning to every investor. A lot of people went belly up in 2007!

Lawrence Cox III · Answer

Thanks for the advice  Michael Ran. I have been reading your feed back over and over. I like the way you think. I guess for myself I started out wrong have gone through some struggles and now would like to move forward a little quicker. I do not want to get in over my head in alot of debt. I have been bankingy money in hopes of making another purchase. The problem there is keeping it where I can easily liqudate it when the time is right and not give it all to uncle Sam. I would like to fire my boss and be a full time investor.  Looking at the math with my current situation, I would like to think that this could be done in a couple of years or less. I guess that's my biggest goal.

Thanks again

Lawrence Cox III

Michael Ran · Answer

My personal thoughts...

The market is really high right now(not a time to buy unless you find a gem).

Remember REI is a slow game! REI is a game that grows exponentially overtime. Cash flow is king in REI. The longer the loan term and lower the payment. The lower the expenses are the better the cashflow.

Will refi 15yr and 4.25%, lower your current payments? Have you thought about pulling out equity? If so, is it enough to buy a second 4 plex?

What is your goal?

Slow and safe - pay it off or sell;

200-250k equity and 2500 a month cash flow(when paid off) sounds like a great start. With 2500 a month, that's a new rental house a year. Would be better in current market unless you already have a plan for the cash.

Fast and riskier- refi (take equity out);  buy another 4 plex in the area.

People follow one of those 2 plans in buy and hold. The people who got hurt in the crash of 08' were the fast growth people. However they over leveraged themselves.

Michael Ran · Answer

I would only refi if it lowers you monthly payments or pull equity out (which is what I do)and buy another.

Selling is not how I look at REI so I'm the wrong person for that call. I only sell when maintenance is too high or it needs full rehab(personal business model). However, if you do sell what's the plan? Do you already have properties you want to buy? You may end up not finding a better deal than what you have now!

I am currently banking my money. I see a lot of people over paying for properties and I'm waiting till they have to sell. Muni's are selling right now but no one has noticed. Sales have fallen 6.8% but everyday there are more people talking about REI.

I'm a buy and hold, type of guy. Once you own it, why trade it in for over priced properties? When refi will let you keep it and you get only a little less than if you would sell. Then you build up your equity again and refi both! Buy 2 more the second time. Rinse repeat buy 4 more or pay one or 2 off. I try to keep a percentage paid off(the highest cashflows) so I always have a fall back and can keep paying notes if market goes down.

I know there are many who will disagree with my model but that's what I do and how I think. Would love to see other people's ideas on you problem!

Good Luck either way!