All Forum Posts by: Randy Walters

Been a long time since I originally posted this, and the “interest only” payment even threw me for a loop haha. I’m sure I meant to pay towards principal of course. 

I want to ping the right people to get some information on the phone. I’d like to explore some variation of a cash out refi (get them a lump sum of cash) and locate a property manager to begin finding/screening/leasing tenants. Any suggestions on what to discuss or key things to look for in these people? 1. Accountant: Identify if the property has been depreciated and how much, what will tax burden look like 2. Property management company: What are key things to look for, how much do they charge, how thorough do they screen, how do they determine tenant rents? 3. Lender: Probably not needed until ready to move forward, what terms/rates can they offer Thanks again for the comments on this post. Everyone has been very informative!

Thanks for the input guys, this has been really helpful. I think even a conservative cash out refinance would be a good mix of all the options. Again, that’s assuming they find a great property manager that allows them to stay passive. I didn’t think of the 1031 options simply because I don’t think they intend to purchase rental properties (desire to stay passive/safe in retirement). Can you expand on what some of the most passive 1031 options are? Great advice!

Let me re-emphasize. The current goal seems to just be done with it and sell outright. I wanted to enlighten them that they do have other options, some more passive than others. Of the alternatives, I’m sure saving on the tax bill would be a big goal for them. 60+ years old.

Okay, I'm pretty new to BP and have commented on a few forms over the months.  I have some questions I wanted to ask the field for some advice on some strategies I've heard of.  In this scenario, I'll say I'm "asking for a friend" who is looking to move on immediately and retire.

Say for instance you have an older historic house that's paid off and you've been using this to operate your business out off.  The area likely will have interest from buyers has also had interest from the city to purchase in the past.  So when it finally comes time to retire (now) what are some of the options available?  House is on approx 1 acre, estimated around 1.5MM.

1. Sell 

- I think they are motivated to just be done with it and I respect that.  I feel they are in a rush to sell, but I don't know if they need to put an emphasis on speed if the property is paid off.  Am I wrong?  Are there going to be any significant tax triggers? Closing costs? May as well wait for an offer that is fair instead of settling for something below market.

2. Lease with or without a property manager 

- I like this option for them better than selling outright (you can only sell once). This option, however, may take some work or some research on finding the right property manager to find/manage tenants. Is there really more to this aside from properly vetting these companies? This may just be me as an outsider thinking this is ideal for them, but if they just want to be done with it, I can still respect them taking option 1

3.  Triple Net Lease

- This is a new concept to me that a friend of mine had suggested.  I just am unaware if this is common, or if these tenants are far more rare than typical leases, or if this is a guru "good idea" that sounds good in an article or podcast, but difficult to make happen.

4. Cash Out Refi

- I also only know of the general concepts of this.  If for instance, the property appraises for 1.5M, are you able to determine how much cash you pull out? I'm sure they could pull out some cash for retirement purposes and still be able to have some monthly cash flow from the tenants.

My advice to them was to ask their realtor plenty of questions. Consider consulting a tax professional, some property managers, and potentially some lenders.  Right now they just plan on talking with a realtor to put up for sale and I want to make sure that they know there are a lot more options than just selling.

Any help on these options would be great! I hope this is enough information to generate some discussion points.  If I need to add information please let me know.  If you were in retirement shoes where working was no longer an option, which sounds most desirable to you and why?  I do apologize if this is all over the place, but I appreciate your help!

Thanks for checking out this post!

Hello BP, I'm fairly new to the community.  I had some questions pertaining to owner/seller financing on your parents home.  All the other forums I found simply spoke to "why you shouldn't rent to your friends/family" so I felt the need to start a new topic.

My mother is living in a house that she owns free and clear, all of the kids have moved out, and she is looking to eventually downsize. Is it smart for us kids (either one or a group of us) to consider purchasing the house since it is paid off?  I remember listening to podcasts somewhere discussing the benefits of owner financing on both sides.  I have been researching buy and hold strategies and I think her home would be a good addition to my rental portfolio once she eventually vacates.  I tried to compile some of the benefits for each party, but I'm not sure what the downsides are when conducting this type of transaction with family.  Please feel free to weigh in on these, expand on them, or correct any of these if I'm missing any unforeseen consequences.

Pros for buyers (kids): keeping the home within the family, determine own financing terms, gives mom flexibility to downsize when she feels ready, no loan costs, keeps real estate agents away that are pushing her to sell before she's ready to earn a commission.  I also live out of state, so this could be a tax write-off for future travel when I fly back to check on the family/house.

Pros for the seller (mom): fast closing, more tax savings upon sale, gives her plenty of time to find next property on her own timeline, monthly passive income from the transaction could fund rent/living expenses at her next property.

Some scenarios I hope I won't have to deal with for many decades to come:

What happens if me, as the buyer, dies?  I've heard some buyers take out a life insurance policy up to the amount of the purchase price so if anything were to happen to the buyer, the seller (mom) would be the beneficiary of the policy ie: the full amount of the house.

What happens if mom passes away?  Who then is owed the monthly payments from the purchase?  Surely it isn't just wiped clean. Would I then make payments to her beneficiaries (which may be the surviving siblings)?

I hope this isn't too all over the place but I just wanted to get some thoughts out to the community on owner/seller financing on your parents owned home.

Thanks for reading, look forward to your input!

Thanks, @Brent Coombs

I see your point about the equity requirement.

I had some time to consider things and thought up other ways to pay quicker. Obviously, if you have some expendable income, you can throw it at your mortgage early. But if you wanted to mirror this strategy without the use of a HELOC, you could simply dump those payments into a separate checking/savings account designated for "Payment towards mortgage" bucket. Boils down to paying $100/month vs. paying $600/6months or $1,200/year in larger chunks. This could give you a little safety net if something were to arise where you needed money, you could tap into those funds designated for mortgage acceleration.

Obviously, you could be more/less aggressive/conservative with the residual income you set aside based on your goals and cashflow ie $500/month or $5,000 every 10th month.

As for opportunity costs and putting that money into other cashflowing assets, it is still better to pay down debt in your main home rather than having the funds sitting in an account not working for you correct? I would rather pay down the mortgage, which in turn allows for larger HELOC use if desired, which can then be used if a screaming deal presented itself. Yes, a free and clear property still needs to be maintained, taxes, HOA etc. But having that peace of mind is powerful, and you can always leverage that money in the future if needed.

I just had a thought that came to mind that would use similar principles without obtaining a HELOC, but a separate bank account instead. I agree per my amortization calculator that paying $2400 each year mark is slightly better than a $200 payment every month.

Here's my question about the need for a HELOC; let me throw a few numbers at this post for comment. Let's say for example I track all my income and expenses each month and want to start accelerating my mortgage payments. Lets also say that I average a monthly net income of $2,000. This excess money would work well if you follow the strategy mentioned above.

In lieu of the HELOC though, If I were to conservatively set aside half of that excess into a separate bank account, I would eventually build up $12,000 ($1,000/month x 12). At this point, I would make an interest only payment of 12,000 against my mortgage - rinse and repeat. This is similar to the HELOC by taking large chunks out at a time, but not putting all your residual income after expenses into early payments. Of course if I wanted to change that $1,000 to be more/less conservative/aggressive, I'd simply change the amount I put away (not to exceed my cashflow).

I feel this method would give you more control, less to qualify for, and you would be gaining minimal interest vs paying the simple interest on the HELOC. Also, if any deal were to come along that gave you a better opportunity cost/cashflow, you could put that money towards that?

Thoughts?  Thank you!

I've listened to a few podcasts that talk about this strategy in depth. It seems like a good strategy to follow specifically for my situation. I purchased a house a year ago using a VA loan which didn't require the typical 20% down. I think this would be a good way to build my equity up and get ahead of the interest payments faster. I don't see it mentioned above, but I think part of the reason people are using the HELOC as opposed to simply paying interest only payments is the fact that once you make a payment to your mortgage, that money is out of your control. If you load up your HELOC and life drops something unexpected, you always have the ability to use the money building in your HELOC for that unexpected expense instead of towards the next mortgage lump sum.

I hear the argument that you could be better served using that extra money to invest into new cashflowing properties.  In my situation, I feel it would be a better investment to build some equity in my primary residence first, especially if current numbers and income holds, I'm expected to cut the payoff time from 30 years, to somewhere between 8-12 years.

Some run-on sentences but this was my first BP post!  Please let me know if you have any feedback