What would you do?

Question

My primary residence is free and clear and with an appraised value of 290k.

Rental property A has an appraised value of 150k and has two liens.
1.  33k balance on first mortgage at 5% fixed with 6 years remaining ($475 a month)
2.  83k balance on variable HELOC currently at 3.24% with 6 years remaining ($1300 a month)

Gross rent: $2070 a month.

Rental property B has an appraised value of 225k and has one lien.
1. 180k balance on the only mortgage at 4.8% with 27 years remaining ($950 a month)

Gross rent: $1200 a month. (potential rent of $1900 per month)

Would you pay off the first investment property in 5-6 years and then focus on the second?  ...or...

Refi primary residence and pull 217k out at 3.25 for 15 years (or 30?), pay off property A and 80k on property B and then apply extra rental income to property B until it is paid off?

Thanks.

Account Closed · Answer

By the way, there is a YouTube video (tutorial 7) of my Power Debt Plan spreadsheet that shows the advanced concept of pulling out some cash with a HELOC and using that as a down payment on positive cash flow rental property. The positive cash flow services the HELOC and improves the paydown of the other debt account. That's an example of using "good" debt with proper leverage. You can find it on my UltimateBargains YouTube account.

Account Closed · Answer

My spreadsheet says the Property A 2nd will pay off first, then roll that payment into the Property A 1st (total pmt is $1,775) to pay off in another 3 months (total time is about 74 months) for free-and-clear Property A. Then roll the $1,775 payment for Property A into Property B (total payment is now $2,725) to pay off in another 67 months). Total time to free-and-clear for both properties is about 140 payments (just over 11 years). Your total interest savings is $84,662.

I am reluctant to recommend pulling cash out of your residence to pay off the other properties, because that is just shifting debt from one account to another account. I very much prefer the suggestions to pull out cash to invest in other income properties with a cash-on-cash return (CCR) that is much higher than the cost of that money. Then use the excess cash flow to apply to the paydown of the other properties.

Examples from my spreadsheet:
1. Add $100 per month reduces the time to 134 payments, saving $89,273.
2. Add $500 per month reduces the time to 113 payments, saving $103,213.

Two cents worth. Your mileage may vary.

Benjamin Johnston · Answer

Yes, I can do a cash-out refi on my primary residence.

Dory Peters · Answer

I like Patrick's suggestion, but I'd approach the deal slightly differently.  I'd tap 50% to 60% of the equity ($145K to $174K) in the free and clear property.  I'd use that cash to obtain an unsecured business LOC (for at least $2M).  I'd use that $2+M to acquire a portfolio of distressed properties (that I could get for at most 50% of the ARV).  I'd flip all of the properties in that portfolio, and use the proceeds to pay off the LOC and all of the other loans.  Plus, I'd still have a nice chunk of cash remaining--most of which I'd reinvest.

Then I'd rinse and repeat only having more cash and equity to work with.

George P. · Answer

Can you do cash-out refi (with fixed rate) on your primary property?

Steve Babiak · Answer

From a tax deduction standpoint, I believe that mortgage interest on a taxpayer's residence phases out after a certain income level is reached.  Whereas on investment property, the mortgage interest is always deductible AFAIK.

Benjamin Johnston · Answer

I guess my biggest concern is the HELOC being variable.  I don't know how much I should be concerned about that considering the Fed is pledging low rates through the middle of 2013.  Thanks for the input.

Patrick Snyder · Answer

Sounds like you are in a good situation.  if it were me, I would use some equity from your primary residence to buy another property, which would generate a decent cash-flow, which you could use to pay off the other loans quicker.  Since property A will be paid off in 6 years, and the rents more than cover, I would keep accumulating.  With property B, raise the rents ASAP to help you out, too.