Investment Allocation Question

8 Replies

So I have 3 rental properties in central Illinois. 1 has a mortgage on it. I'm selling one of those 3 tomorrow and can just use the proceeds to pay off the mortgage on the third and pay off the mortgage - leaving me with 2 houses with no debt and about $200k in equity.

Here's where my options get weird.

I'm moving to Colorado (where real estate prices are hefty - The place I'm likely to get will be coincidentally around $200k.) I also have the ability to get a VA loan for a low APR for NO money down (if I wanted to - although I would have about $50k to put as a down payment.)

Would you:

A - Sell the 2 rentals and buy a place in cash in Colorado and build back equity with the savings on not having a mortgage payment?

B - Take the loan on the place in Colorado and keep the 2 places - likely using a property management company to run them.

C - Other - Please explain.

Thanks for any feedback in advance!

I would personally keep the rental properties (assuming they were decent buys in the first place) and take the 0% down loan with 30 year mortgage at around 3-4% interest.  Keep the $50K in the bank for reserves.

What you should do really depends on whether you want to be a landlord/rental owner long term.  If you initially made the properties work by doing the management yourself and you don't really see a significant benefit to owning them, then things will not get better from halfway across the country having to rely on a PM to oversee things for you.

If you have to ask, then the answer is probably sell the rentals.  I personally wouldn't want to buy something with all cash right now when you can lock in a 3-4% interest rate for 30 years.

Medium logoMichael Seeker MBA, Renting502 | http://www.Renting502.com | Podcast Guest on Show #94

Opportunity cost The question is what is your return on equity? If you have 200K in equity. You have to ask yourself if I woke up tomorrow and found 200K under my mattress would I use it to by that property or is there a better use of the funds. Each day after you pay off those mortgages and you have that $200K in equity you are buying that asset again. Anyway, what's the rush? Is consider taking my cash and going to Colorado and seeing how things play out before I rush to repurchase an asset that I already own.
Originally posted by @Michael Seeker :

I would personally keep the rental properties (assuming they were decent buys in the first place) and take the 0% down loan with 30 year mortgage at around 3-4% interest.  Keep the $50K in the bank for reserves.

What you should do really depends on whether you want to be a landlord/rental owner long term.  If you initially made the properties work by doing the management yourself and you don't really see a significant benefit to owning them, then things will not get better from halfway across the country having to rely on a PM to oversee things for you.

If you have to ask, then the answer is probably sell the rentals.  I personally wouldn't want to buy something with all cash right now when you can lock in a 3-4% interest rate for 30 years.

 You make a lot of valid points. 

And I do feel a little burnt out from being a landlord. I'd definitely appreciate just being able to sell them.

If I sold them - would you still recommend I take the loan and reinvest?
If I were to just buy the house in Colorado - wouldn't it be the equivelant of making that same 3-4% - which seems a little better than what I can get right now in the market without taking big risks?

I'll jump on the train with Michael here and say use financing with the low out of pocket cash once you're out here. Take advantage of the rates while you can. 

Medium rhplogo jpgDan Mackin, Red Hawk Properties | [email protected] | 720‑971‑7139 | http://www.redhawkteam.com/ | CO Agent # FA.100056958

Also, is there a guide to calculating your return on investments?

I can get the basic principle of taking your annual rents and subtracting insurance, property taxes, expenses, etc. 

But do you then just consider the remainder as your return? Or do you consider things about how you file your taxes at the end of the year?

I guess my train of thought is that while you have to pay taxes on this income - you'd also have to pay taxes on any other annual returns you used the same capital for. So does the 4/15 taxes really make a big difference when it comes to calculating a return?

Sorry for my ignorance on this topic. :(

Also, any thoughts on keeping the mortgage on the 1 rental - keeping the rentals with a property management company - and using the sale proceeds from the 3rd rental towards a new place for myself in Colorado?

sell the properties - you mentioned being burned out on them, I don't know that a property management company will make it that much better for you. With out knowing the rents - you can still find some decent deals here for cash-flow, especially putting 25% or more down. 

Medium pinefinancialgrouplogoTravis Sperr, Pine Financial Group | [email protected] | 303‑835‑4445 | http://www.pinefinancialgroup.com

@Thor Camargo - Calculating your return is up to you. Some people like to use their post tax numbers, but that's not how different people can compare deals so most don't have that in their general deal analysis. There are lots of deductions that can be made so the numbers can vary widely. 

As it's been stated, if you're burned out on the rentals it may be best to unload them and think about going at your investing in a different way. Everyone has their opinions and mine is that the market here has at least a few years left of appreciation. To what level I can't say, but the demand isn't slowing even in the off season. If you're going to have a good amount of cash it may be worth looking into becoming a money partner in some short term deals such as flips. It still takes some good due diligence, but you don't have to deal with tenants... usually. 

Medium rhplogo jpgDan Mackin, Red Hawk Properties | [email protected] | 720‑971‑7139 | http://www.redhawkteam.com/ | CO Agent # FA.100056958

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