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Financially it's almost always better to leverage but less so in higher interest rate environments when there are good investment alternatives, and not everything in life is or should be done for purely financial reasons. 

I'm sure Dan M. knows better and can correct me, if I'm wrong about this.

If it was older when you moved in in that works even better for you.Whether or not they were even justified in replacing it is another issue.

My question is whether it makes sense to keep the capital in the deal banking on it performing better long term and the retention of 5 percent of the deal after the waterfall as a long term asset, or if it makes sense to take the capital back and put it into my own deals (my partners and I are currently working on buying a hotel and I could use the capital to get myself equity and to help us close the deal).

It's better for you to sell the home vacant.

I often refer out loans, particularly to community banks, if their deal would be better. 

Better Systems.

So let's assume that the lender does provide that 30 day notice - it's better for the lender for them to NOT foreclose on the property. 

Feel better Ray.