is it worth mortgaging my primary residence.

Knoxville, TN · Member since 2013 · 29 posts · 2 votes

Quick and to the point!

I purchased my home last june with cash, a foreclosure for 54k its worth about 180k. I have one rental property with a mortgage that breaks even and only about 6k equity, I have a guest house on my property that I will be renting in the next six months once i finish the much needed repairs. I'm hungry for another rental property. Is it worth mortgaging my primary residence to get cash to purchase more properties? I really like not owing anything on my home but Im ready to find another property.

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Joel OwensBusiness Member

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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

13y

My answer would be debt service is cheap right now. Equity sitting in a property is dead equity losing value year after year due to inflation and not performing.

If you can most of that equity to work for much higher than borrowing costs plus get cash flow and tax write off then it's a no brainer to me.

Some people do not like carrying debt at all but to me there is good debt and bad debt. Not all debt is created equal.

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
My answer would be debt service is cheap right now. Equity sitting in a property is dead equity losing value year after year due to inflation and not performing.

If you can most of that equity to work for much higher than borrowing costs plus get cash flow and tax write off then it's a no brainer to me.

Some people do not like carrying debt at all but to me there is good debt and bad debt. Not all debt is created equal.
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William Chrisman
OP
Knoxville, TN · Member since 2013 · 29 posts · 2 votes
13y
Joel Owens Thanks! If it were a rental I wouldn't hesitate to take the equity out but with it being a primary residence it makes me a little nervous. One other thought I've had is to mortgage my current home then rent it out and the guest house take lets say 150k (using a conservative number) and try to find at least two more foreclosures, live in one rehab the other. Wash rinse repeat!
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Callum K.
Rental Property Investor · Tulsa, OK · Member since 2012 · 291 posts · 102 votes
13y
Quick answer: Yes.

Agree with Joel Owens. Rates have bottomed out and you might as well borrow while you can still get solid rates
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William Chrisman
OP
Knoxville, TN · Member since 2013 · 29 posts · 2 votes
13y
One quick note: when looking into taking cash out i've been told since I have had the property for less than a year I would have to use the purchase purchase price and not the appraised value. So i will at least hold off until june when I hit the one year mark.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
I'll give a contrary opinion. A house you live in is an expensive doo-dad, like a car or boat. Most folks would advocate you buy doo-dads with cash, not mortgages. I'm not sure why a house deserves one treatment while a car deserves another. I know the argument is that a house appreciates (tell that to folks who ought in 2005) and a car doesn't. But, in my opinion, owning your place to live free and clear is a good goal. I do realize I'm in the minority with that opinion.
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William Chrisman
OP
Knoxville, TN · Member since 2013 · 29 posts · 2 votes
13y
Jon Holdman although you may be the minority my feelings keep leaning towards owning it free and clear. I guess the underlying question would be.....do i want to stay here long term if so then keep it debt free, if I decide this is a temporary place then maybe i'll try the mortgage, rent current property idea----that I put in a previous post.
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Nate Tanner
Real Estate Investor · Member since 2013 · 19 posts · 4 votes
13y
Are you willing to lose your house (not just the investment property) if the investment goes sour?
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Emily Dixon
Virtual Assistant · Anaheim, CA · Member since 2013 · 167 posts · 44 votes
13y
One thing at a time. Get that guest house done sooner then 6 months to help you with possible new mortgage. Then make a decision. But right now your focus needs to be getting the guest house done so you can start collecting that rent. This gives you time to think about whether you want more debt.
2 Reply
Gary Clark
Chicago, IL · Member since 2013 · 82 posts · 7 votes
13y
I have been contemplating a similar scenario. The advice I was given was to not risk it until I have more experience
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George Paiva
Investor · Milford, CT · Member since 2012 · 592 posts · 285 votes
13y
I just finished paying off my primary. I would not risk losing the roof over my head but that is just me. As for pulling equity from one investment to purchase another? I have no hesitation on that because I invest for cash flow. If it all goes well c'est la vie just start over but at least you still have a bought and paid for house.
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Ben Hughes
Investor · Cypress, TX · Member since 2013 · 403 posts · 59 votes
13y
I would for sure refi and take out as much as I could to buy other properties but that is just me. To me it is all good debt so why not do it. The bigger question here is why do you have a rental property and your just breaking even? In saying that, I wouldn't refi just to buy a rental where you make no cash flow.
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Mark Ferguson
Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes
13y
My strategy is to borrow as much money as I can at cheap long term rates and buy as many rentals as possible. I figure my ROI is over 20% on my rentals not considering apreciation or tax benefits and I can borrow money on my cars and houses at less than 4%. It is a no brainer to me when I look at the math.

Am I worried about losing my house and cars if things go bad? No, I have enough passive income coming in from my rentals to take care of my basic expenses even if I lost all of my other income sources. I am also confident I can make money in Real Estate no matter what the market does.

In order to reach my rather lofty goals, I have to take risks.
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John W.
Real Estate Investor · TX · Member since 2012 · 59 posts · 15 votes
13y
William, my 2 cents is this.

dont put the cart before the horse, but do your best to be reasonable about what you expect the near future to hold. from the limited info i know have gathered from you.
you are starting out and need some more cash to fuel some deals. you are conservative in your expectations and realistice. you paid cash for your 1st house so you know how to save.
i dont know your age, but that has to play a factor.
rates are very low and taking advantage of the cheap money would be huge.
what i think i would do, is cash out leaving something like 30% equity and make sure you are very comfortable with what the payment on your primary will be. (and yes, it is my understanidng that you need to wait 12 months to refi at a new appraised value). also, if you think you will rent your primary out down the road, that would be nice to have a low interest on the house.
as long as you are conservative in your expectations and confortable with your new payment, i think it would likely be a good move.
1 Reply
Scott W.
Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
13y
people borrow vs their homes all the time in order to start a business...why is a rental business different?

Plenty of people still lost their homes with them being paid off. I f you can't pay your property taxes, the govt can still take it away.

the bottom line is if you can borrow for 5% interest & make 20+% then of course you'd want to do that. but, as stated below, with risk comes reward.
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Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
13y
From a purely financial perspective your cheapest money comes from your home. If you set a limit on how much you borrow against it then IMO it would be fine.

The risk comes from not having enough cash to pay your mortgage during economic downturns.

The question would also hinge on whether you plan on living in this home forever or will it become an investment property.

Another thing to consider is that good cheap financing can also make a property more desirable.

Have known successful investors each with opposite styles on debt who both became rich.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
A year or two back, I recall reading a story in the Denver Post about an "unfortunate couple". They were losing the house they had lived in for 30 years. The article was written with the twist "this poor couple has lived in this house for 30 years and instead of having the mortgage paid off, they're losing it to foreclosure". But you read a little further and they had refi'ed and heloced all the equity out of it, over and over again. Some of that had gone to toys and vacations. But some had gone to "failed business ventures". When you mortgage your house, you are, for all intents and purposes, selling the house to the lender and renting. You're renting the money instead of your living space, but you're paying to live there either way.

At some point, you're probably going to want to retire. If you're young and buy a residence now and pay that mortgage for 30 years (or whatever) then you will end up with the cheapest possible living arrangement when the mortgage is paid off. If you're mortgaged the property repeatedly, like many advocate, then the income to pay that mortgage has to come from somewhere. If you're using that money to buy rentals that produce income to pay the mortgage that was used to buy the rentals, then you really have to take a hard look at the math. Interest is real money out the door. The point of all investment strategies is not to own stuff. Its to have money in your pocket. Compare the combination of a bunch of rentals and a mortgaged residence to a few rentals and a free and clear residence and see which is actually generating more money in your pocket.

2 Reply
Keith Barton
Real Estate Attorney · Cleveland, OH · Member since 2011 · 140 posts · 89 votes
13y
Assuming the plan works out (i.e., whatever investment property you acquire doesn't tank...) mortgaging your primary residence is a great way to go:

1) you get the mortgage interest deduction on your taxes;
2) interest rates are low enough that you presumably will get an ROI high enough to pay the interest on your mortgage and still be ahead;
3) you are using someone else's money (differing opinions on this but one potential bright side is - would you rather be out 100k of your own cash or would you rather lose 100k of someone else's cash and then lose your home?;
4) Having more investment properties (under the right circumstances) may lower your tax bill even further if you are able to carry over more loss from your Schedule E to your 1040.

Of course, only you can weigh the pros-cons to determine which makes most sense for you....
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Scott W.
Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
13y
where else are you going to get an above 10% ROI? Certainly not the stock market.

In terms of the real estate market falling apart, it doesn't have much further down to go.
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Michael B.
Apopka, FL · Member since 2012 · 207 posts · 120 votes
13y
Let me give you another point of view on this:

If you borrow for real estate your home is at risk. It doesn't matter if the mortgage is on your home or not. All of your assets, including your home, are standing behind your promise to pay back the mortgage. That's why banks demand a personal guarantee when you borrow. Banks can and do chase after other assets when they've been stiffed on a mortgage. Even in non-recourse states banks can usually come after extra assets to get pay back a bad rental mortgage.

And I know that in most states they can't actually come after your primary residence, but they can come after wages, profits, and hit you with large notes that you have to pay. That can force people to sell the house to make ends meet.

So, yeah, borrowing puts your house at risk, no matter what you borrow against.

So my thought is that it doesn't really matter what asset is named on the mortgage if in the end all your assets are standing good for it. HELOC rates tend to be among the lowest. That would be my choice. Just make sure you acknowledge the debt and treat it carefully.

One more opinion for what it's worth: Consumer debt has no place for an investor. If you have student/car/credit card/medical/other debt clear it up first. Then look at borrowing to buy another house. You'll have much more flexibility that way.
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Scott W.
Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
13y
no one's really been able to answer the question: how do business owners get their initial capital? 401k? homes? savings? all of the above? yes, yes, & yes.

there's always a risk when you start a business.
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Larry K.
Investor and Architect · Ramsey, NJ · Member since 2010 · 305 posts · 84 votes
13y
A way to do it and minimize risk is to have the rental property "cover" your obligations.

First being the payments. The rental covers the loan payments and puts money in your pocket every month, not the other way around.

Second being the debt. You can sell the rental property and cover what you owe on the home loan.
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Scott SewellPro Member
Investor · Anchorage AK and Hampton, VA · Member since 2012 · 140 posts · 82 votes
13y
You've gotten a lot of good advise here William. What a resource this website is (thanks Josh)!
I'm not as experienced as many you have already been advised by but, IMO the decision comes down to three factors: your tolerance for risk, the term, or amount of time you have to invest (or recover from bad investments), and your acumen as an investor.
So... If borrowing money causes you to lose sleep at night, 4% is way to much to pay... If you're 20 years old and starting out, you're in a completely different position than if you're 60 and looking at retirement soon... and finally, it takes time, education, and effort to learn how to make money, and none of the above to loose/blow it.
I think Emily's approach has a lot of merit.
All that being said, what you are contemplating is VERY close to how my wife and I got started 8 years ago. (2005 by the way, John) We now have enough equity to pay off our debt if we chose, plus enough passive income to make a substantial difference in our lives.
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James H.
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
13y
In your situation, I would borrow against the primary given a few conditions:

1) the new payment could be easily made using income from my day job without any dependence on the future rental.

2) it was borrowed as a cash out refi with a low locked in rate (would even go with a 15 year to further reduce the rate)- not a heloc.

3) I would only borrow about a third against it, or less depending on critieria number one.

Then, I would use that cash to get a discounted rehab to hold project. Any future borrowing would be against my rental(s) and not my primary and only if the cash flow was at least 200/month after applying a 50% rule and assuming major systems (roof, electric, HVAC, plumbing) all have at least 5+ years left in them.
1 Reply
Matt Stoker
Property Manager · Lehi, UT · Member since 2013 · 45 posts · 2 votes
13y
Scott, how old are you? My wife and I started by buying a place that we knew would turn into a rental. Then, we bought another, and another, etc....You need to sacrifice in the beginning. Making small sales and putting the profit into another larger deal. That is my philosophy. I believe that home equity is a great source of capital. My parents invested with some others into some storage unit properties years ago. I went with them to visit one of the partners in the deal. We pulled up to his 25,000 sq. ft. house!!!!! He bought the property in distress from the bank. It was framed and had a roof. He purchased it and finished the home for about 2mm, and then got a loan for 5mm on it once finished and started his storage unit empire!! Great story, huh?!
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Scott W.
Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
13y
the reason i started buying was because i was stuck with a rental I inherited overnight that doesn't cash flow.

I reasoned, "I'm digging in my pocket every month, assuming huge risk, & stuck with this stupid thing forever."

So I bought one for cheap & it now cash flows my other 2 properties.

And now, I'm going to get my reserves back up. I may buy another one in a year if the prices are still depressed.

Where else am I gonna get a 40% cash-on-cash return?
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