All Forum Posts by: Michael Pempin

Paying 11K in points is extreme. Depending on the current value you can get around the same rate and pay off some additional debt which will lower your total outgoing payments. It sounds like your home is worth roughly 450K so at 60% LTV you'll be able to get a loan for approximately 270K. Get a 30-year fixed and pay the 15 yr. payment if you really want to go that route.

You have options which is great.

I hope this helps and have a good one.

@John D. I completely understand where you are coming from. I also agree with a lot of what you said here. My only objection is the idea that we are trading one issue for another issue.

To be clear, I am not advocating for business as usual. I am advocating for landlord rights to defend their property from abusive tenants. At the moment landlords have ZERO rights' to our own property while still maintaining all the risk. Why does the buck stop with me? How about I tell the bank "Welp, my tenant refuses to pay rent, so you pay it"... No chance. And forbearance is a joke. In 3 months I have a balloon payment. Unlikely tenants will have caught up to cover this.

I 100% want to support my tenants with a valid hardship. I do not want to pay a free ride for tenants who think this is a "chance in a lifetime" to get free rent. Something has to give!

@Michael Pempin

I don't know even the general nature of your transaction so I can't comment anymore on your estimates.

As for your question about why leverage on when your property may go down and why buy more now... I'm just trying to give you options.  Honestly, my opinion is real estate values also has its cycles, holding something while its down its part of investing.  Also, you seem to be in a circular "logic trap" to which I'm not going to be able to resolve for you, especially not over a written blog.

If you think property values are going to go down and you want to get out of you property now so you don't have to wait for the values to go up is your own business decision.  if you decide to divest yourself of that property, pay the taxes, and sit on the cash, presumably making not even 1% interest in the bank, waiting for the market to go down before investing it is also your decision.  If you want to increase your leverage on your current property even though it will go down and pay some deductible interest able to be offset by your cashflow instead of taxes, that too is your business decision.

It sounds like you are trying to time the housing market.  That's your business call, and I'm not trying to get you to do something do you don't want to do.

Let me also comment on your comment about paying more in interest with restarting the amortization table.  While you might be paying more absolute amount of interest with a new loan, but you are still paying an interest rate on the outstanding loan amount.  So, is your concern the absolute amount of interest you are paying or the rate?  Honestly, I think the latter portion of a standard portion of a fixed rate loan period is a kind of crappy point to be in for a leverage point of view since your credit service ability is tied up now.  You have actually lost some of your leverage "power" and all the benefits that come with it (of course there are downsides, but the point of leveraging is use its advantages).

Best of luck however you proceed.

@Michael Pempin you made reference to the fact that you have paid for 12 years on a 30 years mortgage. Apparently I worded my response badly. I was trying to say that moving that equity to another property wasn't the same as starting over. And you could look at a 20 year note... Where is real estate headed? Ah... there is the big mystery question. I think you need to look at a lot more than just the purchase cost. What is the "opportunity lost" cost if you sit out the market for 5 years? What is the cash on cash return if you buy something now? Are you making an acceptable return on the cash invested? Are you paying off principal each month? Are you looking at properties that are in the middle ground as far as rents / costs? I wouldn't invest in high end condos right now - but I would look at a solid 4 plex in a B neighborhood. I tell my investor clients to make the best decisions they can with the information they have today. 

@Michael Pempin

For starters, I honestly don't understand your intent so my apologies if my two cents is a little off.  First, if you are concerned about your perceived overexposure in real estate, why are you planning to invest in more real estate in the next 10 years?  Since you say illiquidity isn't your concern, but its the exposure, then sell it and invest your money someplace else.

Can you clarify another comment of yours:  "...if home values drop drastically, tapping into equity won't be an option and net worth would essentially vanish."  Why do you say that?  If you cash out refi "before home values drop," you'll have the equity in hand already.  Sure, you might have a tough time selling if you become underwater, but I wouldn't refi that much nor would a lender let you.

As to what to do with the refi funds, I believe you already said it in your original post:  "If I sell now, the plan would be to use the 160k to purchase 5 or so properties and a discount once the inevitable foreclosures start rolling in."  So, cash out refi and get say $140k in cash and leverage that for maybe 4 properties...

To try to answer your next question about capital gains tax, I would calculate your capital gains tax 'the way its supposed to calculated.'  Determine your current cost basis from your purchase price plus appropriate capital expenses less depreciation.  Depreciation recapture is 25% (or I think 15% if your tax bracket ends up being less than 25%).  Then, tax the rest at your current/projected tax bracket.

You are saying your net cash after closing is around $200.  It sounds like you are being very conservative.  $50k-$75k of seller closing costs seems way too high.

@Michael Pempin are you sure your goal is to acquire properties over the next 10 years? It seems like you are avoiding some of the obvious solutions. Can you 1031 and come up with more units that provide even more cashflow (and avoid that tax hit)? Can you refinance (which will result in higher payments) and purchase something that makes up the lost cashflow plus some? (BTW: you wouldn't be losing that 12 principal buydown - you would simply be allocating the funds differently). 

 Thank you for your response Teri.  yes the goal is to obtain more properties but not at todays prices.  Does anyone think the markets will remain at current levels or higher the next 12 months?  seems almost impossible ....do you think that with the inevitable upcoming forclosures after all of the forbearances become due, investors might be able to get properties at 20, 30% discount from todays values?   Possibly even higher if this virus situation lasts longer?  

So reinvesting today just leverages more money at what i believe are peak values (for next 5 years or so).  So if cashing out today at a relative peak, and being armed with cash for when more options are available, would it not put us in a better spot then leveraging more now or doing a like exchange for more property that will most likely decline in value in near future?  

Maybe I'm missing something or do not many people feel the market is due for a near term major decline? 

what is best way to avoid losing in a near term decline and still have cash to make moves during that while your properties are declining in value? 

"With not losing the principal buy down"im not sure what u mean?  if i start over at the beginning of an amortization schedule with a new purchase would i not be paying more interest than equity relative to being 12-13 years into a loan? 

@Michael Pempin

I like cash out refis as well. What’s your current interest rate? How do your rents compare to the market rate? Refis typically increase your mortgage payment, unless your old rate is ridiculous. Have rents boomed with home values?

Your capital gains taxes calc seems low. How did you calculate them? What is your current baseline?