Paid off rental, what now?

Question

Hello,

First of all thanks for the taking the time to read my question.

Here it is:

I have a rental unit (2b2b) in Hayward (CA) worth ~$250K which got paid off due to an HELOC repayment on my primary house when I sold it.

What would you do?  Just leave it that way and enjoy the yearly net profit (~$11K)?  Get an HELOC just in case (if I need money at some point / lawsuit liability) and/or for investment?  Any other idea?

For context: I have a primary house with a  $600K mortgage (ouch! :( ), another rental unit with a $160K mortgage and this paid off rental.

Thank you in advance

Jerome Kaidor · Answer

Liability to hold?  Not at all.  Hayward properties are seeing appreciation similar to the rest of the Bay Area.  The OP is  enjoying this appreciation and almost  $1K of cash flow a month AND he is also getting the depreciation on the value of the building, based on what he paid for it.  Assuming that he paid say $150K, he would get about $318/month of depreciation.  That means that about a third of that cash flow is TAX FREE.

If he sells it, he will have to recapture all the depreciation he already took, and pay tax on the "profit".

The profit might put him in a different tax bracket, and he will be shocked at the tax bite.

Let's look at mutual funds - I was checking out conservative dividend-paying funds a few months ago.  It seemed that good ones were paying maybe 2%.   Let's say the OP sells his house for $250K, pays the broker commission & various fees, winds up with $230K... which he then has to pay taxes on, knocking THAT down to (wild-assed-guess) $180K.  He sticks that in the 2% mutual fund and starts bringing home a whopping $300/month.  Taxable.

So I personally would strenuously recommend against selling the property, unless the OP plans to do a 1031 exchange into something bigger.  The problem with THAT is that Bay Area properties are currently priced at levels that guarantee zero cash flow.  Or even negative cash flow, ick.

He could stick a mortgage on it, to have a lump sum ready for when/if the bubble pops.  The trouble with THAT is timing.  There is a 3% per year "tax" on cash.  It's called "inflation".  Since the bank does not pay any interest, inflation comes right out of the buying power of the cash.  Not only that, he will be paying real interest on the mortgage.  Assuming a 4% loan, his real cost of holding that cash is something like 7% a year, ouch!

A HELOC might be a better idea.  The trouble with that is that the kind of upheavals that lead to cheap properties might also cause the bank to renege on the credit line.

Alexander Felice · Answer

Retiring is easy, do something challenging ;)

in all honesty, real estate isn't too hard, with the assets you have you don't really need to take huge risks or make it a full time effort to really add a significant increase to your retirement funds.

look at it this way, that money is sitting there doing nothing, like an employee sitting on the job. put it to work!

Sandeep S. · Answer

@Richard Durant

You should base your decision on whether you want to grow your RE portfolio or maintain what you have (or reduce).  If you want to grow - it would be best to get a mortgage on the paid off rental and then re-invest that in one or two more properties.  Where to buy is a whole different topic (although I'd say Hayward is one of the very few good choices in bay area for cash flow).

I have been buying (mostly condos) exclusively in Hayward for last several years and growing my portfolio - one at a time.  I'd love to connect with you and chat about experience in Hayward :)

Brandon Sturgill · Answer

@Richard Durant I work with a couple out-of-state investors...not too challenging with a good team. My personal preference is multifamily properties...shoot me a PM if you want to chat more off-line...or if you want to get an idea of what Midwest markets can offer.

Cheers

Brandon Sturgill · Answer

@Richard Durant it depends on the value of the properties (outside of the mortgage balance)...and your investing plan...do you want more properties?...what are your long-term goals?

Having properties paid off is awesome...

Thomas S. · Answer

Based on the amount of equity you have in your rentals if you are not interested in pulling out the equity to invest in additional income properties you could generate more income by selling both and parking your cash in a mutual fund.

Based on the opportunity value of cash your rental properties presently both have negative cash flow. After deducting return generated by the dead cash/equity the properties themselves generate nothing. Truth be told they are a liability to hold.

Catherine A. · Answer

Hello Richard,

If you still have a job and want to retire, you could refi that house that you just paid off and buy more income producing property. Interest rates are still low so it's a good time to be using leverage and putting the equity you have in that property to work for you. If you don't want to invest in your market, look elsewhere where ROI is better and spend some time vetting an experienced property manager.

Good luck and congrats on paying off your house. :)

Catherine

Richard Durant · Answer

Thanks for your reply @Brandon Sturgill and @Alexander Felice!

Primary house:  $600k mortgage for ~$900K+ value1st rental: $160k mortgage for ~$350k+ value

I guess my long term plan is to retire asap, life is so short...  I don't think I want to invest in more real estate in this area as I am afraid a earthquake would wipes out my eggs basket.

Another mortgage seems like a lot, I think I am reaching my limit... but definitely something to think about.

Alexander Felice · Answer

what's your plan?

how about take out 200k as a mortgage and put it as 20% down on a multifamily.

Paid off rental, what now?

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