Private Money to pay off Mortgage. Should I?

23 Replies

Hello BP,

Heres my situation and my question:

I bought a condo in Niceville Florida for 110k and I have a mortgage of about 80k. I am house hacking it so I have a roommate and make a great profit. However, I am leaving in April and will have to hire a PM and my income will be way less. Because of this, the house will pretty much break even after all expenses are accounted for. ($30 profit monthly)

I was thinking about getting people to invest in my house (Family, Close friends) up to 80k. The amount that they decide to put in will determine how much return they receive monthly based off the purchase price. 80k = $490, 40k = $245, 20k = $122 etc. 

By paying off the mortgage, I'll free up my debt to income ratio and also be free of paying the bank all that interest. Little by little I'll buy off the people that put money in as if I was paying a mortgage. 

I am not seeing any cons to this, it seems like a win-win for everyone. Is there anything I am missing?

Sounds like a good plan to be honest. I would make sure you have a solid lawyer vet out the contact. It’s a little complicated if someone wants to sell earlier than the group does.

@Timothy Casallas If it is not a good investment for you, why is it a good investment for your family.  I feel I'm missing something.

The only way I could see this working is if you could purchase money substantially less than what you are paying for your current mortgage. If the interest rate is about the same you will gain nothing.

1. Your DTI won't change....they won't report to credit bureaus but you'll be committing mtg fraud if you apply and don't disclose.

2.  You think these other individuals won't want interest also??

You only have $30K in equity in the house according to your figures ($80K loan less the $110K purchase price). I wouldn't let others invest more $25K a piece so that you still remain as the main shareholder of the property. Otherwise, you could risk your position and someone else could easily buy you out if so inclined. You'll definitely need to talk this idea over with a real estate attorney before mentioning it to anyone else. 

Also, I'm assuming that since your roommate will have the place to his/herself, then I would suggest they cover the cost of their own utilities and cable/internet in addition to full rent. That will help lower your holding costs significantly. First, compare what other similar rental units are asking and including in their rent. Ideally, you'll want to keep your holding costs limited to property taxes, mortgage & insurance. Typically taxes and insurance are included in the mortgage in some states.

"Own nothing, but control everything!", Warren Buffet. In other words, take advantage of financing where you can but never to the point where you lose control of your assets. As tenants pay down the mortgage every month, your asset grows in value and equity as does your position.

Hope this makes some sense.

You might want to work out the math on this one a little bit more before you make this kind of change.  Long term financing is typically going to give you a better rate than private money.  Seems like we're missing something here.  

@Timothy Casallas you would still owe $80K on your house. Just moving the debt from the bank to a private lender doesn't change anything. Unless you get a lower interest rate, which I doubt. If you are only making $30, I would sell the condo while the market is still good. You obviously over paid, probably retail price right off the MLS. Otherwise, it would cash flow better. I would bail out before the market corrects or you have a major repair event happen. Freeing up your debt to income, why? So you can borrow money on another $30 cash cow?

Originally posted by @Timothy Casallas :

Hello BP,

Heres my situation and my question:

I bought a condo in Niceville Florida for 110k and I have a mortgage of about 80k. I am house hacking it so I have a roommate and make a great profit. However, I am leaving in April and will have to hire a PM and my income will be way less. Because of this, the house will pretty much break even after all expenses are accounted for. ($30 profit monthly)

I was thinking about getting people to invest in my house (Family, Close friends) up to 80k. The amount that they decide to put in will determine how much return they receive monthly based off the purchase price. 80k = $490, 40k = $245, 20k = $122 etc. 

By paying off the mortgage, I'll free up my debt to income ratio and also be free of paying the bank all that interest. Little by little I'll buy off the people that put money in as if I was paying a mortgage. 

I am not seeing any cons to this, it seems like a win-win for everyone. Is there anything I am missing?

 I assume you have a rate around 4%, and you're only making $30/mo. Therefore, you're making $30/mo or $360/yr on your $30k cash in the deal, which is very low return on your cash. Since you have no extra cash flow to give, the best you could expect your private money people to make is 4% interest, or what you're already paying to the bank. I wouldn't see anybody wanting to give private money for that type of low return.

This one sounds like it does not have good rental potential and you'd be better off selling it.

Can you provide more specifics, such as rental rate, taxes, etc? 

Wow thanks to everyone for the responses. Def has given me a lot to think about. I guess my only follow on question would be to the people that say sell:

I get that the condo is making nothing but it is also losing nothing. As time goes and I pay off the mortgage and maybe raise rents, I'd hopefully see some more profits. If I sold the property today I'd lose about 10k of my initial investment from all the agent commissions and fees. Why not just stick with the property and leave it as is until time fixes it or an opportunity to sell and gain arises. In the meantime I can focus on a new project with a lot more experience than I had before.

Originally posted by @Timothy Casallas :

Wow thanks to everyone for the responses. Def has given me a lot to think about. I guess my only follow on question would be to the people that say sell:

I get that the condo is making nothing but it is also losing nothing. As time goes and I pay off the mortgage and maybe raise rents, I'd hopefully see some more profits. If I sold the property today I'd lose about 10k of my initial investment from all the agent commissions and fees. Why not just stick with the property and leave it as is until time fixes it or an opportunity to sell and gain arises. In the meantime I can focus on a new project with a lot more experience than I had before.

Yep. Just leave your family/friends out of it, as you're better off with current interest rate! My 2c. 

The downside to keeping the house is you are losing what your money could be doing for you in a better investment. There is the risk that a downturn in the market, major repair (mentioned above), vacancy.... could push you deeper in the red. You lived rent free, turned some cash flow and learned from the experience. Try finding a buyer! Talk to your renter, neighbors, anyone who will stand still! Put up a FSBO sign, post notices in local establishments. If you could sell it w/o real estate commissions i bet you can get out without losing anything at all. You have till April to find a buyer, so get busy!

@Timothy Casallas can you share your numbers with us? Estimated retail value today. Rent value for the entire unit. HOA and any other utilities or expenses you pay? Monthly payment, interest rate and loan term.

I know lots of people are giving advice but without knowing your numbers, they are shooting in the dark.

@Joe Splitrock Sure!

Bought the property in July 2017 for 110k. It is still worth about the same today. I might be able to sell it for 112k tops as per my real estate agent.

Rent goes for about $1,100 per unit.

HOAs are $280/month

Monthly payment including mortgage, insurance and taxes are about $635.

Interest Rate is 5.25%

Loan Term is 30 years.

@Timothy Casallas , you wrote "In the meantime I can focus on a new project with a lot more experience than I had before". Hmmm. I hope that includes shopping around for a better (owner-occupier) interest rate next time, too? [ie. 5.25% is just adequate, as an investor rate!]

@Timothy Casallas I would not use hard money to pay off this loan. I would probably keep the property, even though it may be around break even on the surface. Keep in mind that although you may not have monthly cash flow, you are paying down debt and gaining equity. There are also tax benefits of depreciation and interest, which you may be able to use as a write off against your primary income. If I did decide to sell the property, I would consider trying to sell it to a tenant to avoid realtor fees. No reason to take a $10K loss here.

As others commented, the 5.25% is pretty high for owner occupied. I am not sure if refinancing is an option right now, but could be an option down the road to help with cash flow.

A couple things to consider: you make your money when you buy, so on your next purchase be more selective on your purchase...

and--you can FSBO and not engage an agent and try and sell on your own. Nothing wrong with trying that route IF you want it gone.

Don't hold it for debt reduction...that is WAY to slow to see a return. If you cannot get quite a bit more rent than anticipated at this point, it isn't going to make any money. 

@Timothy Casallas your numbers are all screwed up. $1100 rent minus $280 HOA and $635 mortgage payment leaves $185 of cash flow. If you sold the condo for exactly what you paid, ($110K) the commission to your agent would be $6,600, not $10K. Even if you lose money by selling, you paid for an education. I bought a condo as a rental once too, it made money, but I won't do it again.

@Timothy Casallas Hey Tim, what about a different approach🤔

Rent the room you're staying when you move and continue to make your nice profit. Vet the second roommate, and take a chance of not deploying a PM, at least for the first few months and see how things go. You may be pleasantly surprised. 

Oh, as for the whole paying the mortgage thing, I won't bother as it'll too much hassle for everybody involved. 

Syndicating money from family and close friends isn't a walk in the park. Mitigate your risk by simply letting the bank continue to carry the asset for you

Hope this helps. Goodluck. Thanks! - Ola  

Originally posted by @Anthony Dooley :

@Timothy Casallas your numbers are all screwed up. $1100 rent minus $280 HOA and $635 mortgage payment leaves $185 of cash flow. If you sold the condo for exactly what you paid, ($110K) the commission to your agent would be $6,600, not $10K. Even if you lose money by selling, you paid for an education. I bought a condo as a rental once too, it made money, but I won't do it again.

You forgot PM, CapEx, maintenance, and vacancy. Those add up as well.

@John Thedford that is why I advised him to sell. He overpaid.

@Ola Dantis That is a very interesting idea and something I will def think about doing!

@Anthony Dooley and 

@John Thedford you guys are right. I forgot to mention the PM 10% and then all the money I put aside for the repairs. That's why my cashflow is non existent. Most def overpaid but I won't make the same mistake twice.

@Joe Splitrock Thanks for the advice. What would you say is a good owner occupied interest rate?

My personal residence is 3.6% 7 year ARM. I'm currently getting 4.75% on my investment properties. 5 is way high. I'd refinance it. I am unsure how you got stuck with that high of a rate unless your credit is bad.

@Timothy Casallas the actual rate is going to vary daily. Currently a 30 year fixed is around 4.2% and 5/1 ARM is around 3.8%. Some people may have lower rates, but keep in mind rates have been increasing, so even though I have 30 year mortgages under 4%, you are not going to get that rate today. Rates are on the rise, so I would recommend a long term fixed rate. The problem with an ARM is that the rate can increase at the end of the 5 or 7 year period. The FED has been increasing rates, so expect to pay higher rates in the future. Historically a 30 year fixed mortgage has been 7% or higher, so there is a good chance we could see a return to that in the future.

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