Wentzville, MO · Member since 2016 · 40 posts · 5 votes
I'm inheriting enough cash to pay off my existing mortgage of a little over $180,000 and still have a little under $15,000 leftover. While the idea of having a paid-off mortgage seems awesome, I feel as though with the right strategy I can use that cash to make more money flipping real estate, which I ultimately want to do. I'm brand new to the game and don't know what my best starting point is given my situation.
Split it up. Allocate $50,000 to start up your flipping business. Pre-pay your mortgage with $50,000, so each payment you make is now farther down the amortization schedule.
Put the remaining 95,000 in a separate account a revisit the decision in a year. If you have failed spectacularly, you probably only lost 50,000. If you have done awesome flipping, you can add capital to it. If you get sick or injured, you have 95,000 to make your life easier.
Jonathan Studdard I think most on here are going to advocate for investing in real estate without paying down the mortgage and I'm strongly of that opinion.
I'm going to assume that the reason for wanting to pay down the mortgage is so that you can live free of monthly expenses. Remember that you'll still have taxes which in some places can be a very significant component of your monthly housing bill. So paying off the mortgage and you'll still have an expense.
If on the other hand you take that money and invest in cash flowing real estate you could achieve enough cash flow to cover ALL of your expenses on both the rentals and your personal residence. Then you have the benefit of equity build up and appreciation potential which I like to view and a nice little savings account that doesn't need any regular contributions.
The power of real estate is in leverage and letting other people pay off your debts (rent). You can learn a lot of different strategies on this site. Poke around for a bit and come back to ask questions on the specifics.
In your opinion, what is the best type of real estate investing for a beginner with cash, -building a rental portfolio or going after properties to flip?
it really depends on your goals. I like both and could help diversify your investments. The goal of flipping usually is to build up a good chunk of cash to use for passive investing. It's also a popular strategy because the returns are higher. Of course the risks are too. It's much more hands on. Rentals can be passive especially with a good priority manager.
Do you have any experience in construction? Or in real estate? If not, I wouldn't mess with flipping until you have some experience. You will get eaten alive by subs and others in the business as they will sense your inexperience. I've seen it a lot of times before. Before you know it, your money is gone and you have some crappy, half finished house you will have to unload to somebody. Get educated, don't rush into anything until you thoroughly understand it. Its your money. Same with buying rentals, be careful and take your time. Remember the tortoise always wins the race.
Pay off your mortgage. If it was an inheritance then honor the people that you got it from. If you are new at real estate, you can go further faster without worrying about your mortgage on your house. Use the 15k to start flipping. Borrow against the property you are buying so if something goes wrong your property is protected.
After you perfect investing in real estate whether buy and hold or flipping you can use your property as a debt weapon.
If I pay off my mortgage, then I would still have to pay taxes and utilities on my home every month as Derek Carroll mentioned. I don't see how I could start flipping with $15,000. I would have no money for any emergencies or renovations. If I borrow against the property I am buying, how does that protect the property if something goes wrong? When you say I can use my property as a debt weapon, which property are you referring to?
If I pay off my mortgage, then I would still have to pay taxes and utilities on my home every month as Derek Carroll mentioned. I don't see how I could start flipping with $15,000. I would have no money for any emergencies or renovations. If I borrow against the property I am buying, how does that protect the property if something goes wrong? When you say I can use my property as a debt weapon, which property are you referring to?
You will still have to pay taxes and utilities. No matter what you do or where you live. But I'm assuming that it would cut your monthly expenses in half with a paid off mortgage. If you can't see how you can start flipping with 15k then you may not be ready to start flipping. As far as borrowing against the property and something going wrong, would you rather lose that property to foreclosure or your own? When I said you could use your primary as a debt weapon, I meant after you get seasoned on flipping, get great at analyzing a flip and knowing all of the risks, then you could borrow against your primary home.
I'm giving you a more cautious approach. I hate to see people lose their home because they tried to go to big, to fast, and fail.
I wish you the best of luck in your investing choices.
Keep in mind if you pay off your Mortgage you lose the interest write off.
Before doing anything you should thoroughly educate yourself. It might make sense to take the money put it in a 3 month CD so you can't access it while you determine what path you take. Don't run into making this decision, walk (very slowly). I can't stress that enough. After working in financial services for 15 years I've seen time and time again people coming into large sums of money only to lose it due to poorly informed decisions. Good luck!
@Greg Gallucci, He can only take the mortgage interest deduction (on his personal residence) if he itemizes and it's greater than the 12,600 standard, right?
If I pay off my mortgage, then I would still have to pay taxes and utilities on my home every month as Derek Carroll mentioned. I don't see how I could start flipping with $15,000. I would have no money for any emergencies or renovations. If I borrow against the property I am buying, how does that protect the property if something goes wrong? When you say I can use my property as a debt weapon, which property are you referring to?
We started with $6,000 cash and a HELOC on our largely paid off primary residence. Granted, we are still only on our second flip, but the first was profitable and the second is shaping up to be much better yet, so we will be sitting on a whole lot more that $6,000 cash to work with!
Keep in mind if you pay off your Mortgage you lose the interest write off.
Before doing anything you should thoroughly educate yourself. It might make sense to take the money put it in a 3 month CD so you can't access it while you determine what path you take. Don't run into making this decision, walk (very slowly). I can't stress that enough. After working in financial services for 15 years I've seen time and time again people coming into large sums of money only to lose it due to poorly informed decisions. Good luck!
So if he pays 10k in interest for the year, he could get a $2500 tax break? No thanks, I'll Pay the $2500 and put $7500 back in my pockets!
it really depends on your goals. I like both and could help diversify your investments. The goal of flipping usually is to build up a good chunk of cash to use for passive investing. It's also a popular strategy because the returns are higher. Of course the risks are too. It's much more hands on. Rentals can be passive especially with a good priority manager.
Also highly dependent upon your skills. A contractor is good at estimating costs + labor; how about you? It can be learned of course, but the school of hard knocks eats that inheritance voraciously. You can hire it all out - - at an extra cost.
I'm conservative(read chicken) with my inheritance and went for something that was within my skills - - Buy&Hold units and became a landlord. My MFU became a cash-cow and I feel vindicated in being chicken.
Greg Gallucci
I don't think it's good advice to tell someone to keep a mortgage for the tax write off. If you look at it mathematically which people on this forum would agree with, then why I pay the bank $10,000 in interest to get back $2500 in a refund saying you are in the 25% tax bracket? Makes no sense.
Split it up. Allocate $50,000 to start up your flipping business. Pre-pay your mortgage with $50,000, so each payment you make is now farther down the amortization schedule.
Put the remaining 95,000 in a separate account a revisit the decision in a year. If you have failed spectacularly, you probably only lost 50,000. If you have done awesome flipping, you can add capital to it. If you get sick or injured, you have 95,000 to make your life easier.
Greg Gallucci
I don't think it's good advice to tell someone to keep a mortgage for the tax write off. If you look at it mathematically which people on this forum would agree with, then why I pay the bank $10,000 in interest to get back $2500 in a refund saying you are in the 25% tax bracket? Makes no sense.
No one is suggesting borrowing money for a tax deduction. That is merely a bonus for using leveraged money.
Pay off the mortgage. You can make more than enough money if you invest the $15,000 wisely. Take what you used to pay monthly in a mortgage payment and save it. If you cant turn 15k into 50k then you wouldn't have been able to turn 180k into 400k. If you cant turn the 50k into a 100k then you wouldn't have been able to turn the 180k into 360k. If you cant turn the 100k into 200k then still wouldn't have been able to turn the 180k into 360k. If you are able to go from 15k to 200k then you didn't need all that money anyways and now you have 200k and a paid off house. Just my 2 cents.
@Marcus Johnson No where in my response did I suggest not to paying down his mortgage to keep the write off. He should keep that in mind when making his decision. I think it is totally irresponsible to provide people advice when knowing so little about ones situation other that what they post on a forum. The best you can do is provide them with facts that help them come to an educated conclusion.
Sorry, I was just going by your statement of "Keep in mind if you pay off your Mortgage you lose the interest write off", which I and another poster took as you should keep a mortgage so that you can write off the interest, which mathematically is foolish. Now we can talk about the benefits of leverage and that's a different topic.
The question is would you rather have $195,000 cash to invest and a monthly payment of $860 or $15,000 cash to invest plus an incremental amount of $860 dribbled to you monthly? As someone that is on the other side of 30 year mortgages I can assure a paid off property only increases DEAD equity. That dead equity will never be able to increase your cash flow more than $860 a month for the NEXT 30 years vs the mortgage. Think how little value $860 will have in 10, 20, 30 years.
Also go to your mortgage company and ask how much they will discount the mortgage if you pay it off. Wait for laughter! Then ask them how much they will charge you to get a $180,000 mortgage. Prepare for the $$$ signs.
There are a few strategies you can use to avoid having to choose either/or.
1) Pay off the mortgage and save the monthly payment. Then take out a heloc on the property and use that money for home flipping. HELOC's on a primary residence are incredibly cheap right now. The money you will save on private lender fees will be big. You can avoid keeping only 15k for flipping this way.
2) Pay off the mortgage, take out a HELOC, and use that money on a new rental, not a flip. The key is to buy a rental below market rate (like you would the flip anyway), then rehab it and pull out a traditional mortgage afterwards. Use the money from the traditional mortgage to pay off your HELOC. Now you have a cash flowing rental paid for by your inheritance money AND you have your primary mortgage paid off too. Repeat this process to buy more and more rentals. Brandon Turner refers to this as the BRRR method. Many of us use this strategy.
3. Don't pay off your mortgage and instead use the cash for flipping. Use the money you make from your flips as the down payment for additional rental properties that cash flow. If you do it right, you can keep the money for flipping and use the profit to buy you rental properties.
As you can see, there are tons of ways to use this money to keep the ball rolling. Don't think in an either/or mindset. Look for ways to use that money for both!
@Account Closed and @Derek Carroll have it right in my opinion , here is a blog that i just wrote the other day which shows the difference between paying off the mortgage or keeping it. comments on it welcome, that's how we learn ). but it is also what you feel comfortable doing with the money you inherited.