All Forum Posts by: George Pauley

Chuckle, I read somewhere that self-discipline is just empathy with your future self.

A bird in the hand is worth two in the bush. You have the cash in your hand right now. If you give it to the mortgage company, you may not be able to get a bank to loan you money against the property in the future. For example, if the economy tanks we may very well see deflation, particularly property value. We don't know what's going to happen, but it is entirely possible we have another 2008 style scenario where property values are cut in half. You won't be able to get that cash back out from a HELOC if that happens.

Of course there are other considerations.  But if you are at all concerned about the current situation, you might want to hold on to the cash.

I'm in agreement.  My tenants are an important part of my overall investment.  Evicting, even if possible in my localities, is not a great idea.  Everyone is suffering and I'm not likely to find another tenant in trying times. 

Fortunately I have a goodly buffer and can probably hold out with no rents for several months.  But I don't intend to preemptively offer rent breaks.  For all know my tenants are still working or have goodly buffers of their own.  

I will most certainly work with my tenants if they are struggling.  Maybe half rent, or deferred rent.  Also possibly offering extended leases with no rent increases for tenants who work with me.

Ultimately, my tenants and I are in a partnership.  If I get no rents, eventually I will lose the very homes they are living in to the mortgage company.  So they will need to pay what they can lest their residence gets repossessed out from underneath them.

Hopefully everyone continues to work and pay rents.  If not, my challenge will be to convince them that we're all in this together.

My wife and I often joke that our (apparent) investment strategy is to make less expensive mistakes with each new investment.  I closed on my first rental in January of 2008, a 4000 square foot behemoth McMansion that was almost unrentable.  Today I have 15 properties, all cash flowing.  But there were le$$on$ along the way.  My story is very non-unique here in these forums.

Yes you (inadvertently) picked a challenging time to get into the business.  Just like my 2008 entry.  But every investment has its own unique challenges.  But there IS a way to make it work.

I like to use my "5 year rule".  When confronted with a difficult decision I like to ask myself "If I take action X, what will that look like 5 years from now?"  So ask yourself, if dump your new investments (probably at a loss) how will feel about that in 5 years?  Missed opportunity?  If you find a way to make it work and hold on to the property, how will you feel in 5 years?  Happy that you have a cash-flowing investment in your portfolio?

Mortgage deferal just feels like we're passing the buck. Presumably there are investors (possibly retired people living on fixed incomes) that are in need of their own ROI on the notes they are holding?

Paying off loans always sets off alarm bells in my head.  :)

My first question would be what is your ROI on each of these properties? I'm guessing that they are considerably higher than the interest rates on the loans. Arbitraging high ROI vs low capital rates is a fundamental concept in real estate investing. Paying off loans always works counter to this concept as it decreases ROI. (Because you are increasing your investment size.)

Another concept is that of Return-On-Equity (ROE).  ROE is like ROI except that we divide by equity in the property versus initial investment.  As you pay down mortgages, the ROE will also decline because you are increasing equity.  When the ROE becomes less than your ROI on some other investment, then its time to get the equity out of the property and into that other investment.  Put another way, you have equity that is not working efficiently for you.  Paying off early just accelerates this process.

Finally, there is opportunity cost.  Assuming you have the cash to pay down some of these loans:  If you pay down these loans you will no longer have the cash.  Now, further assume the economy downturns and buying opportunities start making themselves available.  You won't have cash, and the loan company won't give you that money back when you most want/need it.  I would not advocate holding on to massive amounts of cash waiting for a down turn.  But I'm guessing you can find plenty of short-term investments that pay higher rates than the mortgages you would pay off.  (Hard money lending comes to mind.)  Heck, at the rates you list, you can likely find dividend funds that have higher returns.

Of course, life isn't always about maximizing ROI.  Peace of mind, risk tolerance, etc are factors too.  Only you can make these (non-mathy) decisions.  But hopefully I've given you a thing or two to think about?

I agree, those closing costs seem high.  

I usually approach these types of problems like this.  Calculate the total cash return on both options.  Now you have 2 numbers that you can compare to each other.  Most likely, using the existing properties as collateral will have the highest return.  But there is risk associated with putting your existing properties up as collateral.  You could lose them.  But you will know exactly how much MORE profit you can expect.  Which will put you in a better position to evaluate whether the risk is worth the reward.

 A couple of thoughts.  I would think that a successful investment will change your family's mind.  If you can show them the P/L after the first year, actual numbers not projections, that would go a long way towards alleviating any fears they may have.

I've been investing for 12 years now and neither of my kids have been interested.  But recently, my oldest daughter, who is now 30, after doing a little math, commented that when I pass the benefits of my investments will more likely help her children (my grandchildren) than her.  Suddenly she's more interested (funny how motherhood and maturity can change you?).  We are discussing hiring her as a book-keeper as a way of introducing her to the business.  Takeaway point:  Don't make the mistake of believing that the way things currently are, are the way they'll always be.

Finally:  Recognize that this is your dream, not necessarily theirs.  It's OK that they don't want to be real estate investors.  Support them in their dreams as you would have them support you in theirs.

Realize you are going to make mistakes.  But you'll get through them and learn and get better with each mistake.  Don't let the fear of the mistakes (which usually cost $$$) keep you from getting started.

@Kevin Holden sounds like you are thinking about doing exactly the right thing.  Good Luck!