All Forum Posts by: Wade G.

The main reason I lean away from paying off a rental is asset protection. If a rental is paid off and one day you get a phone call from a tenant saying they had a slip and fall and hurt their back it will make you stop and think. Even if you have hired contractors to do the work, house is in a LLC, and an umbrella policy in place I bet it will make you nervous thinking all that equity could be up for grabs if an attorney can prove negligence. I have had a similar incident happen with a tree trimming contractor but it didn't go anywhere. I guess it would be rare for that to happen but it made me stop and think about it.

@Vijaianand Thirunageswaram

What you describe in B class neighborhoods is what I have experienced.  I had a property in a C neighborhood but didn't like it much.  Appreciation was low, got a phone call early one morning because someone kicked the door in and robbed the house.  I tend to like the B neighborhoods, much better appreciation, working class families, not as good cashflow.  Taxes have been a killer the last few years.  In hind sight though I wish I would have just hired a PM and kept the C class house.  Oh well, mistake number 5,000 in my investing years.

@Chris Hopper

I agree about appreciation.  Without appreciation I don't think I would be buying and holding houses at all.

@James Polk

I agree about MF being designed for cashflow.  

Sure are a lot of good answers here. When I first started buying properties I was around 34 and had nothing to lose. Now at 49 I feel the need to not be as risky with what little I have gained. I think that is the appeal of paying off the mortgage. The personal residence is a very safe place to put money and thereby reduce monthly expenses. Problem is I also recognize the opportunity cost of having almost 300k in equity just sitting there effectively earning a meager 3% or so, which is just inflation. Honestly though responsible leverage does not scare me as long as I have a very large pool of liquid reserve funds available. I would not want to have a lot of equity in a rental for asset protection purposes. Even If the property was in an LLC I would not like having a large sum of equity at risk from an unforeseen lawsuit. I have been considering this for two years..."analysis paralysis" in action.

My average CF on a 3/2/2 SFH in southeast Harris County worth about 160k - 190k, at 75% LTV, is about $300 month. That $300 month is after PITI only, actual CF after repairs, maintenance, PITI, and vacancies is about $100 month. So for me that's about $100 a month per house that I could spend on personal living expenses if I wanted to. I have been a member of LU off and on for many years but I have never experienced the $500 - $700 per month of spendable CF that they proclaim on a newly purchased properties at 75% LTV. I ask because I am refinancing a couple of my properties and I'm trying to figure out where to invest the proceeds. Buying more houses with $100 month CF does not excite me too much. Buying properties with $500 - $700 month real actual CF would excite me. So I'm asking other Houston area investors what your typical CF is?

Overcoming the mindset of paying down mortgages is a dilemma for me. Considering the low interest rates I am going to refinance a couple of my SFH rentals and my primary residence. It makes financial sense to me to refi and use the proceeds to buy more and better assets. On the other hand its hard for me accept reduced cashflow and new 30 year terms. I understand all the reasons to use leverage and pull equity out. I have no desire to pay off any RE other than maybe my primary residence and even that goes against financial sense. Has anyone else had this struggle?

I know this question has been asked over and over again but there are always new members with different viewpoints. To make this as brief as possible I have four SF rentals. Two are only around 65-70% LTV but the other two are around 40-45% LTV. They all cashflow and even after the refi each would CF $200 month. Currently total CF on all four properties is about $1,200 month. The way I am seeing it is from these four properties there is only about $400 left over from CF that I could spend or save towards other investments. The rest of the CF (about $800 month) is reserved for future repairs and vacancies. If I refi the $400 month would go away due to the higher mortgage principal but I could pay off my primary house and thereby free up $700 month (I know taxes and insurance are still due). So I go from $400 to $700 month extra to save for other investments, or add to an IRA, or spend, etc. I could also open a HELOC on the primary and when an opportunity arises I will be in position to buy it. Hopefully then be able to refi the new purchase and pay off most of the HELOC. I realize paying off the primary mortgage at 3.75% is a terrible use of money and that is a disadvantage. Also though, the ROE in the rentals is getting worse and the equity is at risk from an asset protection standpoint due to any possible lawsuits. In Texas, equity in our primary home is protected from lawsuits but the rentals are at risk. It should also be noted that if I did this I would still retain about 20k in a reserve fund for the rentals. I'm a firm believer in reserve funds.

Well obviously there are many different opinions and strategies and they can all work.  Guess that is a nice thing about RE, you can conduct your business however you want as long as its profitable and meets your expectations.

@Jeff Brower that is the other side of it. After 10 years could refi, then use the tax free funds to pay for CAPEX and purchase another property with equity.

@Joe Villeneuve that is what I have been thinking. CAPEX is hitting now with these 10 year holds. Seems like selling within the first five years makes sense if a large chunk of equity is captured on the new purchase. Otherwise the long term holds seem like more of an appreciation play.

I have tried to figure this out but I get lost in the details.  I have a couple of houses that I have had for over 10 years and a couple for only a few.  I'm trying to figure out if its worth keeping them that long or if its better to sell them a after a couple of years of holding them as rentals and redeploying the capital.  A few details for this scenario:

- houses are bought with equity gains in the beginning

- all repairs (new AC, roof, paint, flooring, etc.,) is replaced at acquisition so house is in great condition

- no intent of ever paying off the house

- appreciation being normal at 3% for this scenario

- cashflow being $400 month, figuring $200 of the $400 for future repairs and vacancy

- sell and pay capital gains tax rather than 1031

So in my scenario I figure most everything has a 10 year life span...AC, faucets, dishwasher, water heater, will need all fresh paint inside and out, etc.  Basically in 10 years the house has to be rehabbed again and 10k -15k spent.  

Selling in a couple of years the house should still be in good condition, should get to keep more of the net cashflow since you only have one set of tenants and avoiding the future big expenses, and you get to redeploy the capital and capture more equity but pay more closing costs and probably some repair costs on new property.

Waiting 10 years you get more appreciation, more mortgage paydown, but more cashflow has to be saved for rehab.  Could probably refi the house and use that money for rehab to buy another property and capture some equity.

I realize there are many variables to this and I hope it makes sense.  I cant keep my thoughts straight when trying to figure it out.  Maybe its a wash when everything is considered.  In my thinking with normal appreciation, good tenants that dont destroy, it may be better to sell the properties after a couple of years and use that money to by another property but only if there is a huge equity gain.  If not buying for huge equity gains maybe just holding the property 10 plus years is the way to go.