Rental Property Investor · Fort Lauderdale, FL · Member since 2019 · 11 posts · 1 vote
I have one paid off property and one that I owe 20000 on I want to pay the 20k off and then have two paid off property and then what would be my best strategy after that?
Really depends on what you want to do. You could refi and go out there and buy more properties, but then you'll have to pay those ones back down if that's your goal. You could get a HELOC and use that to buy other properties. The advantage there is you only have to pay for the money you use with a line of credit. The other main option would be (if you're renting) stack up the cash flow to go reinvest. Really depends on if you're looking to expand with leverage or if you're looking for cash flow with a little more peace of mind in having some properties fully paid off. There are other strategies as well, selling, seller finance if you want to become the bank. Just make sure you know what your goals are and align your next move accordingly.
@Lorenzo Swinton what are your long term plans? If you are looking for security and cash flow with little debt. Will these two properties conclude what you want in your portfolio? Look at the big picture first and go backwards to the beginning. For many people, having only 2 properties, even when paid off isnt the ideal portfolio.
@Lorenzo Swinton have you looked into the BRRRR strategy yet? Great way to leverage and expand quickly. In your case as well, you could use the strategy with a HELOC or a cash out refi. From what I understand, a lot of banks don't really do HELOCs on investment properties. You'll have to do some shopping around to find a bank that does do it. If you can't find one, then cash out refi is the way to go.
Look into a lender that will allow you to use the paid for properties to cross collateralize your new investment property selections. This will allow you to minimally encumber the paid for properties and should allow you to consider good cash flowing investments. Utilize the cash flow to quickly pay the amount owed on the paid for properties. Insist upon a release clause for the collateral.
@Lorenzo Swinton definitely look at some opportunities to leverage to recycle equity you can amortize this or look at a HELOC depending on how much/how fast you want to grow making interest only payments can help you recycle your cash flow also. But depending on how much you get when you leverage those properties it should help you scale and keep buying. Again all about your goals like others said about how fast you want to scale and how leveraged you want to be
@Lorenzo Swinton you could also consider selling them both and using the proceeds to scale up to a larger multi-family property using a 1031 exchange... or like others have said, find a lender that will do a cash out refi and use the proceeds to scale up. I am working with a lender now that does cash out refi’s for investment properties. Are you looking to add to your portfolio in South Florida?
The biggest pro is that it will give you equity in the deal to allow you to conserve cash at closing. There is no particular advantage if you have plenty of cash on hand. If not then utilizing cross collateralization could allow for you to have a single loan. The property that is purchased can then be stabilized as a rental. Once a group of properties is stabilized then portfolio financing may make sense.
@Tracy Tippett I hear you but I wish I could get a better understanding of what you are saying but I definitely want to use the leverage to add to my portfolio!
There are some great lenders that will take the equity you have in the properties in lieu of a big cash down payment. As an example if one of your properties is paid off and has an appraised value of $200,000.00, you could probably pledge as much as 65% of the value towards the purchase of additional property. If you are trying to buy another property for, let's say 400,000.00. The lender could take a lien position on your owned property for 100,000.00 creating a 25% equity down payment on the new property. When the new property is stabilized and cash flow is established you can then focus on buying down the equity position. It is important to negotiate a release clause into the financing. I hope this description will be helpful
Lorenzo, you are in an ideal situation! I do not do the "normal" as some people think. Here is my 2 cents worth: DO NOT REFI! DO NOT SELL! Get the 2nd one paid off and combine the 2 of them for a LOC (you can add more paid off properties and increase the loc amount as time goes on). The difference between a Heloc and Loc is Heloc involves your personal home and LOC (line of credit) is the loc you use and will most likely be a commercial line and gets renewed yearly. That loc becomes a gold mine for you. That is exactly what I do. Here are more details: I have HELOC as my back up money - yes the home is paid off which maximized the amount my Heloc is worth – it is my emergency fund and we get to live with no house payment, that feel good and opens many doors. With the commercial loc, they (the BANK) wants to see it continually go up and down. So, then you have the first 2 properties as collateral for the loc and you are a cash buyer. Having your 2 paid off properties as collateral has no effect on how you operate unless you do not pay ,,,, and I'm betting you did not get one paid off and the on its way by not paying. With leverage there is always some form of risk, be it a lot or a little So on initial buy of rental unit number 3 you will use leverage in the form of LOC. Then you have a 3rd free and clear property to help pay back the loc. Side point, you no longer need and emergency fund of $50K - $100K because that will become active money returning a lot more than the .1% you get by keeping it in a savings account. I call this the good form of being broke with 95% of my money working. I have 2 accounts at the bank that I have the loc at, one checking and one is the loc. I park 3 times the money I need to pay the monthly interest payment on the and have it on auto pay. Any time I have extra cash I pay down the principal. Should I have an oops and need emergency cash I get it out of my loc orb Heloc- seldom happens. My banker works with an e-mail when I request money and he puts the money in my checking account (released so I can spend it that day) and the LOC becomes active. Its rate is variable with the market so the amount I keep for my "peace of mind" auto pay varies. so the loc become my parking lot for debt (secured leverage) that I'm paying down. The more units I own the more cash gets paid monthly when I get my monthly distribution at the end of the month from my rentals. Another side note; this is not my set-aside money that is for property taxes, insurance etc. - known coming expanses. I could use the set aside money to pay down on the loc (grow faster) but I do not for other reasons. I believe paying off my properties is the best form of risk mitigation there is anywhere. Catastrophic losses are covered under my insurance. I have never understood the refi idea because it is not flexible and must always be paid monthly and may reflect on your credit. Nor do I understand the sell and buy back in. You are buying back n the same market. That is a taxable event that can be better handled with 1031's - but keep in mind with a 1030 your cost basis is lower (cost basis comes from the sold property plus any increase it the cost of the acquired property, so if depreciation is key to you (depreciation should not be your key, just a benefit to you until you sell and then you have recapture tax on it or go the 1031 route), maybe not a good thing. I'm not a good writer so I hope this makes sense. They say that you can't avoid death and taxes ....... balderdash, you can avoid taxes by using the 1031 and then dying. the property is grossed up to market value to the person who inherits it. If they sell it at that value, no taxes.
Congratulations on getting to this point!
Lorenzo, you are in an ideal situation! I do not do the "normal" as some people think. Here is my 2 cents worth: DO NOT REFI! DO NOT SELL! Get the 2nd one paid off and combine the 2 of them for a LOC (you can add more paid off properties and increase the loc amount as time goes on). The difference between a Heloc and Loc is Heloc involves your personal home and LOC (line of credit) is the loc you use and will most likely be a commercial line and gets renewed yearly. That loc becomes a gold mine for you. That is exactly what I do. Here are more details: I have HELOC as my back up money - yes the home is paid off which maximized the amount my Heloc is worth – it is my emergency fund and we get to live with no house payment, that feel good and opens many doors. With the commercial loc, they (the BANK) wants to see it continually go up and down. So, then you have the first 2 properties as collateral for the loc and you are a cash buyer. Having your 2 paid off properties as collateral has no effect on how you operate unless you do not pay ,,,, and I'm betting you did not get one paid off and the on its way by not paying. With leverage there is always some form of risk, be it a lot or a little So on initial buy of rental unit number 3 you will use leverage in the form of LOC. Then you have a 3rd free and clear property to help pay back the loc. Side point, you no longer need and emergency fund of $50K - $100K because that will become active money returning a lot more than the .1% you get by keeping it in a savings account. I call this the good form of being broke with 95% of my money working. I have 2 accounts at the bank that I have the loc at, one checking and one is the loc. I park 3 times the money I need to pay the monthly interest payment on the and have it on auto pay. Any time I have extra cash I pay down the principal. Should I have an oops and need emergency cash I get it out of my loc orb Heloc- seldom happens. My banker works with an e-mail when I request money and he puts the money in my checking account (released so I can spend it that day) and the LOC becomes active. Its rate is variable with the market so the amount I keep for my "peace of mind" auto pay varies. so the loc become my parking lot for debt (secured leverage) that I'm paying down. The more units I own the more cash gets paid monthly when I get my monthly distribution at the end of the month from my rentals. Another side note; this is not my set-aside money that is for property taxes, insurance etc. - known coming expanses. I could use the set aside money to pay down on the loc (grow faster) but I do not for other reasons. I believe paying off my properties is the best form of risk mitigation there is anywhere. Catastrophic losses are covered under my insurance. I have never understood the refi idea because it is not flexible and must always be paid monthly and may reflect on your credit. Nor do I understand the sell and buy back in. You are buying back n the same market. That is a taxable event that can be better handled with 1031's - but keep in mind with a 1030 your cost basis is lower (cost basis comes from the sold property plus any increase it the cost of the acquired property, so if depreciation is key to you (depreciation should not be your key, just a benefit to you until you sell and then you have recapture tax on it or go the 1031 route), maybe not a good thing. I'm not a good writer so I hope this makes sense. They say that you can't avoid death and taxes ....... balderdash, you can avoid taxes by using the 1031 and then dying. the property is grossed up to market value to the person who inherits it. If they sell it at that value, no taxes.