Snow balling VS 15 year notes on rentals
Real Estate Agent · South Ogden, UT · Member since 2016 · 15 posts · 13 votes
Snow balling VS 15 year notes on rentals
Most Popular Reply
Rental Property Investor · Miami, FL · Member since 2017 · 2k+ posts · 911 votes
8yPaden.
I think the best option would be to take the cash flow that you have now and use that cash flow to buy more properties until you have 10 loans. Then once you have 10 then you can start to pay off the property that has the lowest balance with the cash flow from all 10 properties. Pay that property off, which will then open up another loan line for you to use and finance another property.
68 Replies
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @JD Martin:
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Splitrock:
@Paden Anderson lots of great minds have already commented on this but I will give my thoughts.
First of all, it sounds like your strategy is to accelerate pay down of 30 year loans and at the same time purchase new properties with 30 year loans. That doesn't make a lot of sense. You are just paying down one debt and taking on another debt. The new debt is very likely at a higher interest rate. Every time you write a new loan, there are one time expenses (loan fees and appraisal).
You could save all your cash and purchase future properties with cash. That avoids writing new loans and keeps your low interest loans you already have. The disadvantage of this is that it will take you longer to acquire properties in the beginning. Leverage is a shortcut to acquisition and speeds your wealthy accumulation.
Third option is what I would do. Save all your cash for down payments and acquire new properties with 30 year loans. If you feel this is risky, just keep healthy cash reserve for a rainy day. I would acquire enough properties to meet your financial independence goals, then work towards paying off the loans.
All these strategies work, but I have learned is your biggest advantage in real estate is time. The sooner you can acquire the better. The reason is because of the inflationary nature of money. Over time, money loses value. That means a dollar today is worth less than a dollar ten years ago. Here is why that is good. The dollars you use today to pay back a loan from 10 years ago are worth less. At the same time, rents have increased due to the dollar value decreasing. So rents and cash flow go up over time and you are paying the bank back with dollars that are worth less. At the same time, you are able to claim the interest as a business expense, so it reduces your taxable income.
to me being in the building trenchs any increase in rent is just sucked up in higher cost to maintain the asset over time.. and what you pay to put a roof on your home when needed 15 years ago now its that much more.
so cap ex even though your saving for it.. the actual cost of it goes up as well.. Heck my lumber packages this year have gone up 30% in 9 months .. I was paying 18k for a lumber package on one home just paid for another of the same design and it was 25k ish..
so in 10 years when rentals need cap ex.. if your saving for cap ex at todays cost its going to be much more in 10 years.. this is why I think people really underestimate the on going cost of owning fixed assets.. as opposed to those being the bank they let the borrower worry about all that.. and note buyers are only in the asset at 50 to 65% of Todays values.. the owner is in it at 100% better equity protection.. so that's something to think about for those sitting on the side lines.
This is a fair point but at the same time that money set aside for future capex, if smart, is being invested somewhere at better returns than the rate of inflation. Not just sitting in a bucket being degraded. Maybe you can't guard against everything, but done properly your capex reserves - which, for me, is just all the extra money put aside since I live on way less than I bring in - is invested in index funds, or maybe other real estate, or something else, that is outstripping those inflation numbers. Some things cost a lot more but other things end up virtually flat.
problem is average investor is not like you they spend their money when they have extra LOL
LOL. Well in that case I hope they have a good time!
Skyline Properties - New York, NY · Member since 2018 · 15 posts · 23 votes8yI create a reserve with the cash flow from properties. Once I hit the reserve target for the property I use those funds to escalate the purchase of my next property. My goal is to generate as much income as possible through property not be debt free.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
I had a bloated reserve and opportunity fund in a savings acct earning zip way too long. In Dec I moved it to Vanguard. Even the mmkt acct almost earns inflation. Move it to the s-t govt bond fund (now that those yields are up) and you can safely get inflation easily, safely, with liquidity. Other large co's like Schwab or Fidelity have the same thing I bet. A safe option for idle funds or you can easily buy MFs or stocks if you want to, of course.
Plus, after doing my taxes it turned out a traditional IRA contribution would be 60% free for me. Playing what-if with turbotax is awesome! Anyway, I established and funded it in minutes because I had an existing acct with a mf co.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
Originally posted by @Steve Vaughan:
I had a bloated reserve and opportunity fund in a savings acct earning zip way too long. In Dec I moved it to Vanguard. Even the mmkt acct almost earns inflation. Move it to the s-t govt bond fund (now that those yields are up) and you can safely get inflation easily, safely, with liquidity. Other large co's like Schwab or Fidelity have the same thing I bet. A safe option for idle funds or you can easily buy MFs or stocks if you want to, of course.
Plus, after doing my taxes it turned out a traditional IRA contribution would be 60% free for me. Playing what-if with turbotax is awesome! Anyway, I established and funded it in minutes because I had an existing acct with a mf co.
I'm the same way. I get lazy and I'm a little bit of an Ebenezer Scrooge miser, counting my gold coins and chuckling, which makes me leave money hanging around in pathetic interest accounts way too long. Oh well.
Skyline Properties - WOODBURY, MN · Member since 2018 · 22 posts · 5 votes8y
Hey Paden- I might have a more untraditional view, but I think its worth having a discussion on. Equity in a property does not earn anything. In my opinion, paying off a mortgage is the same as filling a coffee can full of cash and burying it in the backyard. The rental property will appreciate (or depreciate) regardless of your equity position. Most people believe they are "Safer" by having their house/rental property paid for, but is that really true? I actually believe you are more at risk when a house is paid for because there is only two ways to ever touch that money again, and both ways require a bank. If you were ever to want to touch that equity you would either need to a) refinance (which requires a bank) or b) sell the property. Most of the time when you sell a property the new owner will be dependent on a bank for financing. I would think you'd be in a much better position not paying off those mortgages, and leveraging the cash flow to provide the next down payment on your next rental. Here's another reason. Lets say you pay off these mortgages and 10 years from now you find an amazing 6 plex and you need to come up with $150k for a down payment. I supposed you could refinance the rental that is paid for, but what if interest rates in 10 years are at 12%? Would you really want to refi at that point and pay 12% interest. People with cash on hand ALWAYS get the best deals, so having liquid money (in my opinion) is always the best way to go. Hope that helps.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Tim Zajicek:
Hey Paden- I might have a more untraditional view, but I think its worth having a discussion on. Equity in a property does not earn anything. In my opinion, paying off a mortgage is the same as filling a coffee can full of cash and burying it in the backyard. The rental property will appreciate (or depreciate) regardless of your equity position. Most people believe they are "Safer" by having their house/rental property paid for, but is that really true? I actually believe you are more at risk when a house is paid for because there is only two ways to ever touch that money again, and both ways require a bank. If you were ever to want to touch that equity you would either need to a) refinance (which requires a bank) or b) sell the property. Most of the time when you sell a property the new owner will be dependent on a bank for financing. I would think you'd be in a much better position not paying off those mortgages, and leveraging the cash flow to provide the next down payment on your next rental. Here's another reason. Lets say you pay off these mortgages and 10 years from now you find an amazing 6 plex and you need to come up with $150k for a down payment. I supposed you could refinance the rental that is paid for, but what if interest rates in 10 years are at 12%? Would you really want to refi at that point and pay 12% interest. People with cash on hand ALWAYS get the best deals, so having liquid money (in my opinion) is always the best way to go. Hope that helps.
interest rates go to 12% we are in trouble :)
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
Originally posted by @Tim Zajicek:
Hey Paden- I might have a more untraditional view, but I think its worth having a discussion on. Equity in a property does not earn anything. In my opinion, paying off a mortgage is the same as filling a coffee can full of cash and burying it in the backyard. The rental property will appreciate (or depreciate) regardless of your equity position. Most people believe they are "Safer" by having their house/rental property paid for, but is that really true? I actually believe you are more at risk when a house is paid for because there is only two ways to ever touch that money again, and both ways require a bank. If you were ever to want to touch that equity you would either need to a) refinance (which requires a bank) or b) sell the property. Most of the time when you sell a property the new owner will be dependent on a bank for financing. I would think you'd be in a much better position not paying off those mortgages, and leveraging the cash flow to provide the next down payment on your next rental. Here's another reason. Lets say you pay off these mortgages and 10 years from now you find an amazing 6 plex and you need to come up with $150k for a down payment. I supposed you could refinance the rental that is paid for, but what if interest rates in 10 years are at 12%? Would you really want to refi at that point and pay 12% interest. People with cash on hand ALWAYS get the best deals, so having liquid money (in my opinion) is always the best way to go. Hope that helps.
I get your view on this, Tim. You are not 'untraditional' at all here on BP using leverage all the time always for everything. Quite the contrary.
Only commenting because in your argument for the 6 plex 10 years from now, he has no money if he pays off his mortgage. I have a bunch of paid off rentals (that were higher rate and higher risk than conventional resi loans) and I can assure you he will have money. Without debt service that's one thing we have coming out our ears. The hard part is re-deploying when deals are hard to source and too much effort to bother with.
So, when that 6plex hits the market in 10 years, he will be the one with cash in hand, buying at a discount, with no banks, no 45 day delay, no borrowing fees, appraisal fees, lenders insurance and no PITA of qualifying. Oh- since it would've been a commercial loan- no calls, adjustable rates, balloons, short terms and no reporting your financials to them, either.
- WOODBURY, MN · Member since 2018 · 22 posts · 5 votes8y
Hey Steve- I think we are in agreement, I just didn't do a great job of explaining my position. I agree that he is way better off keeping his money outside of the mortgage so when that 6 plex becomes available in 10 years he has the liquid cash to take advantage of the opportunity as opposed to having to refi one of his other properties to access some cash.
Like most in this discussion, I side with leverage. I'm in the growth stage and I need leverage until I'm at the end of the Fannie Mae 5-10 rule (I'll keep going if they lift the rule or push it further). A dollar now is worth a lot more to me than a dollar later. In this realm of business, time is your friend, your money will not grow or compound easily without it, that's why I refused the discount points offer to lower my interest rate when I did my cash out re-fi. You can calculate it and tell me "but you could've saved 5x that amount in interest.." all the cash saved is at the end of my 30 year term..but I need it now.
Great topic!
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @JD Martin:
Originally posted by @Jay Hinrichs:
Originally posted by @JD Martin:
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Splitrock:
@Paden Anderson lots of great minds have already commented on this but I will give my thoughts.
First of all, it sounds like your strategy is to accelerate pay down of 30 year loans and at the same time purchase new properties with 30 year loans. That doesn't make a lot of sense. You are just paying down one debt and taking on another debt. The new debt is very likely at a higher interest rate. Every time you write a new loan, there are one time expenses (loan fees and appraisal).
You could save all your cash and purchase future properties with cash. That avoids writing new loans and keeps your low interest loans you already have. The disadvantage of this is that it will take you longer to acquire properties in the beginning. Leverage is a shortcut to acquisition and speeds your wealthy accumulation.
Third option is what I would do. Save all your cash for down payments and acquire new properties with 30 year loans. If you feel this is risky, just keep healthy cash reserve for a rainy day. I would acquire enough properties to meet your financial independence goals, then work towards paying off the loans.
All these strategies work, but I have learned is your biggest advantage in real estate is time. The sooner you can acquire the better. The reason is because of the inflationary nature of money. Over time, money loses value. That means a dollar today is worth less than a dollar ten years ago. Here is why that is good. The dollars you use today to pay back a loan from 10 years ago are worth less. At the same time, rents have increased due to the dollar value decreasing. So rents and cash flow go up over time and you are paying the bank back with dollars that are worth less. At the same time, you are able to claim the interest as a business expense, so it reduces your taxable income.
to me being in the building trenchs any increase in rent is just sucked up in higher cost to maintain the asset over time.. and what you pay to put a roof on your home when needed 15 years ago now its that much more.
so cap ex even though your saving for it.. the actual cost of it goes up as well.. Heck my lumber packages this year have gone up 30% in 9 months .. I was paying 18k for a lumber package on one home just paid for another of the same design and it was 25k ish..
so in 10 years when rentals need cap ex.. if your saving for cap ex at todays cost its going to be much more in 10 years.. this is why I think people really underestimate the on going cost of owning fixed assets.. as opposed to those being the bank they let the borrower worry about all that.. and note buyers are only in the asset at 50 to 65% of Todays values.. the owner is in it at 100% better equity protection.. so that's something to think about for those sitting on the side lines.
This is a fair point but at the same time that money set aside for future capex, if smart, is being invested somewhere at better returns than the rate of inflation. Not just sitting in a bucket being degraded. Maybe you can't guard against everything, but done properly your capex reserves - which, for me, is just all the extra money put aside since I live on way less than I bring in - is invested in index funds, or maybe other real estate, or something else, that is outstripping those inflation numbers. Some things cost a lot more but other things end up virtually flat.
problem is average investor is not like you they spend their money when they have extra LOL
LOL. Well in that case I hope they have a good time!
well pre 08 if the average buy and hold investor would have saved and kept adequate reserves I would not have ended up foreclosing on over 200 landlords and owning their cash flow cows.. LOL.
and you would not have had the massive foreclosures and I get it in those days reserves what are those everything is rosy.. and boy I just made it through by the skin of my teeth myself but I went through Millions in reserves and equity to protect my good name and credit standing.. it was brutal.. so yes I am totally debt adverse.
I am more like my grandpa who lived through the depression and never had a penny of debt most of his life ..
either way.. what ever floats your boat right ???
- Real Estate Agent · South Ogden, UT · Member since 2016 · 15 posts · 13 votes8y
Great thread guys! Thank you for all your comments. Its very helpful. I agree cash is king but man it does feel good to be in a position where you don't owe anybody a penny and have large amounts of cash flow coming in every month. If a property sits vacant for a month or two, who cares. Our financial goals definitely come in seasons.
After this thread my goals are to keep the properties at a 30 year am and save my cash, conservatively purchasing other multi family deals that meet my parameters until my loan lines are maxed (in this market this could take years). Then I will work on the buy down phase while adding properties here and there. Once you have 10-20 properties paid off with cash it doesn't take long to purchase more. Patience is key.
- Real Estate Agent · South Ogden, UT · Member since 2016 · 15 posts · 13 votes8y
Another strategy that has been on my mind that I want to run by you guys is... I have friends killing it in Crypto and stocks and other asset classes... Ive thought it would be sweet to set up a few properties where those cash flows go directly in other asset to sit there for long term. I can only imagine if the average person used rentals to fund their other investments they could get the best of both worlds when they retire and be pretty well diversified. (disclaimer- this money these rentals give would have to be looked at as long term buy and holds and higher risk as its not my specialty and I cant even time the real estate market let alone a stock market or crypto/blockchain). ;)
- Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes8y
@Paden Anderson I'd say continue to keep your capital dynamic and not just sitting dormant in the two assets. Continue to scale up to your monthly cash flow goal, which could be, say, an amount that is more than income from working. Then, at this point, you can start your paying down the mortgages strategically.
Hope this helps. Goodluck. Thanks! - Ola
- Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes8y
I treat both equity and debt as something that needs to be paid off. I want my equity returned first before I enjoy the profits off of the rent. This can take years. This is an important accounting distinction and metric for my portfolio.
I think @Jeff V. said it perfectly. It depends where you are in your investing cycle. For me, I'm just starting out, so I want 30 year notes, and don't want to pay any more than the minimum required to continue saving up for additional down payments.
Also, interest rates are still about as low as we can reasonably expect to see for the next few years. If you are going to acquire more properties in the next few years, the interest rates on those notes will probably higher. If you want to pay off a note quicker, you should pay off those higher interest rate notes than the ones you have now.
I believe that investors view real estate with tunnel vision. They see it as their be all and end all. This is very short sighted thinking. It should be only one part of your overall investment strategy not your primary. All your eggs in one basket is fiscally poor thinking. All your cash in brick and mortar is fiscally poor thinking.
I am 65, my properties are leveraged and every one has positive cash flow. The cash I could have used to save 5% mortgage payments is invested elsewhere and over the past 10 years has returned between 8% and 17% interest. I am not an idiot and do not see saving 5% on a mortgage as smart investing.
In difficult times my real estate portfolio will support itself and if not I have saved my cash reserve outside of real estate to call upon in times of need. In the mean time I am generating twice the returns a paid off property could ever generate.
Investors need to stop viewing their real estate as a stand alone investment, step back and take in the over all picture. If you view it as the whole pie by paying off mortgages you are not seeing the entire financial picture and definatly not using your investments to the greatest advantage.
As I often say when you are so wealthy that you have no further use for money park it is real estate. If you want to generate more income it is always wiser to invest than to hoard.
I agree @Thomas S., as sacrilegious as it might be to say here on BP, I don't think real estate should be anyone's only investment. I wouldn't want all of my money in RE, just as I wouldn't want it all in any other single class of asset.
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