I turn 40 soon and want to go into real estate full time....sooner than later. The good news is I have a nice paying job....the bad news is that it is a JOB. I plan to start the process of becoming a Realtor and then plan on getting brokerage license with the thought being to manage rentals for others in the Tulsa area in addition to working with investors as needed.
I have 3 active rentals and am negotiating for 3 duplexes in a row near two of my rentals as well as another duplex that is going through short sale. I self manage the rentals and work full time as does my wife. I understand the value of leverage but am considering hanging it up for several years after I close on the 3 duplexes and possibly the short sale if that ever goes through. We have two young boys and she is in grad school...another reason I want to get one big (to me) acquisition done and call it quits for a bit.
Assuming I end up getting the 3 duplexes and go from 3 units to 9, is it dumb to consider just crashing debt with rental income and occasional capital contributions from our W2 income? Or should I continue to look for long term fixed rate instruments to fully leverage these properties and just pocket the cash flow?
The whole point of paying them off as much as possible as soon as possible is 1) help eliminate liability risk in the event the market changes, rent rolls decrease, W2 income disappears etc and 2) Be in a position where I can fully leverage them again in 4 - 7 years when I am ready to acquire another 4 - 10 duplexes, small apartment building etc and ditch the W2 for good.
For those that deal with rentals and used them as a way to ditch your 9-5, how did you do it? Any regrets....lessons learned etc? It is best to just do long term leverage and pocket the cash?
I go back and forth between 30 year fixed mortgages that I could finance these with vs the typical 5 year balloon, 20 year amm institutional loans. Again....long term, I want more. Just not certain on the smartest way to get there.
@Chris Simmons Congrats on having a good start. Your missing some vital details, but assuming you have them leveraged as much as you can now, then I would say do not pay your mortgages down, especially if your intent would be to just refi them in a few years to buy more rentals.
Why not take the same money that you'd be using to pay them down and buy more rentals now? Besides, there are closing costs every time your finance. Why pay them twice?
The 3 rentals I have are all 3/1/1 between 900 and 1050 sq ft. Two are rented at $750 and 1 is at $825/month.
#1 has a $45,000 heloc on it that serves as operating account. All excess rental revenue currently goes to pay this down and I advance it as needed to pay for repairs, acquisitions, improvements, taxes, insurance etc. Currently I am not using any personal funds for real estate.
#2 I recently did a cash out refi on and pulled out $52,000 at 4.75% for 30 years. 6 months ago I thought this was smart move....you seem to be saying the same.
#3 I bought with loan from father in law...owe him $45,000.....should appraise for $75,000. Was thinking about doing cash out refi just like number two when seasoning is complete and paying him back....he doesn't want that as he gets nothing on his money in the bank. I could extend his loan out and focus on paying others.
I have already confirmed that I can finance these duplexes with my mortgage guy and get 30 year fixed rates on them at 75% ltv. Assuming I had the cash to do that, would that be your recommendation and just pocket the cash for future acquisitions?
Hey @Chris Simmons - if your goal is to purchase additional properties in the future (you mentioned ~7 years) then I think you'd be better off getting 30 year fixed loans on your current properties if possible and saving as much of the cash flow as you can for future acquisitions. There are 2 good reasons for this...the first is the cost of refinancing. If you pay down all that debt and then need to tap back into it, you'll have to pay a good amount of money to refinance and cash back out. The second is the interest rate environment...I'm no economist, but I don't think we'll see today's rates available in 7 years. So why pay off a 3-4% interest rate mortgage quickly so that you can do a cashout refi in 7 years into a higher rate loan?
Conventional 30 year mortgages are great! If you can get them, then go for that. Once you have too many or if you start having trouble qualifying (DTI/down payment/etc.) then commercial loans are a good alternative. Ideally you'd be able to tap out those 30 year mortgages now and lock in as much debt at as low of an interest rate as possible.
Good luck with the duplexes you're working on!
My whole thought process is to get a big chunk of income producing real estate with lots of equity and then going back to an institutional lender and saying hi. I want that 45 unit apartment complex for $1.2MM.....here is my collateral...in addition to what i want to buy. Is it better have several properties with little usable equity but $150,000 in the bank?
Again, my goal is to be well positioned to jump ship from my W-2 in about 5 years....not save $7,000 in closing costs from a refi. Also...at what point do people find it worth while to get out of the solo game and decide it is actually a good thing to get a partner, or seek investment capital from accredited investors...whatever that entails....vs the traditional going to the bank and asking permission each time?
OK....well two people have said get the long term, fixed rate and I have read the same throughout most of the forum. Guess that is the road I will go down.
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