Selling half of portfolio to paydown mortgages?

Buying & Selling Real Estate
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Selling half of portfolio to paydown mortgages?

Edward C.
Investor · Palisades Park, NJ · Member since 2017 · 46 posts · 14 votes
Hi all, Was hoping to get perspectives / hear stories on how others approached the possibility of selling RE assets and using the proceeds to paydown debt on other properties. Here is what I see as potential +’s and -‘s: + increase cash flow by removing mortgages (so more passive income) + opportunity to sell underperforming assets - less assets under management (so less potential equity appreciation) - taxable gains (will not redeploy into RE as my sense is we are near the top of the market) - 30 year fixed mortgages in place at low 4-handle rates (based on simple bond math, the value of my liability is shrinking on a relative basis as rates rise) Other facts relevant to my situation: * RE is but just one asset in my portfolio (and I’m fine with that); cash flow and appreciation are great, but I’m looking at the asset class as more of a long term hedge against inflation * not looking to leave my day job and / or replace W-2 income entirely with passive income * don’t need the cash flows from RE; again, I see the asset as a levered inflation-hedging play
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y

You will not increase cash flow by paying down a mortgage. What you are actually doing is buying cash flow at a very high cost. With mortgage rates at 4% and the opportunity value of cash a realistic 10% you are losing 6% annually on your cash not increasing cash flow. Realistically would you have considered investing in real estate when you started out for a 4% return. Buying cash flow and increasing cash flow are entirely different. One is investing, the other is not.

Selling losers is a good plan however parking surplus cash in real estate is a bad plan. Take the money and diversify your investment farther. Investing in a moderate risk income fund should be able to achieve a 10% return on average over time. You should also pull dead equity out of your remaining properties to increase ROI and reinvest it as well.

With the possibility of a correction in real estate values on the horizon you do not want to leave dead equity at risk in real estate. Real estate is the last place you want to park excess cash if you believe we are at the top of the cycle. As long as you have positive cash flow there is very little risk with leverage.

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  • Edward C.
    OP
    Investor · Palisades Park, NJ · Member since 2017 · 46 posts · 14 votes
    8y
    Hi all, Was hoping to get perspectives / hear stories on how others approached the possibility of selling RE assets and using the proceeds to paydown debt on other properties. Here is what I see as potential +’s and -‘s: + increase cash flow by removing mortgages (so more passive income) + opportunity to sell underperforming assets - less assets under management (so less potential equity appreciation) - taxable gains (will not redeploy into RE as my sense is we are near the top of the market) - 30 year fixed mortgages in place at low 4-handle rates (based on simple bond math, the value of my liability is shrinking on a relative basis as rates rise) Other facts relevant to my situation: * RE is but just one asset in my portfolio (and I’m fine with that); cash flow and appreciation are great, but I’m looking at the asset class as more of a long term hedge against inflation * not looking to leave my day job and / or replace W-2 income entirely with passive income * don’t need the cash flows from RE; again, I see the asset as a levered inflation-hedging play
    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    You will not increase cash flow by paying down a mortgage. What you are actually doing is buying cash flow at a very high cost. With mortgage rates at 4% and the opportunity value of cash a realistic 10% you are losing 6% annually on your cash not increasing cash flow. Realistically would you have considered investing in real estate when you started out for a 4% return. Buying cash flow and increasing cash flow are entirely different. One is investing, the other is not.

    Selling losers is a good plan however parking surplus cash in real estate is a bad plan. Take the money and diversify your investment farther. Investing in a moderate risk income fund should be able to achieve a 10% return on average over time. You should also pull dead equity out of your remaining properties to increase ROI and reinvest it as well.

    With the possibility of a correction in real estate values on the horizon you do not want to leave dead equity at risk in real estate. Real estate is the last place you want to park excess cash if you believe we are at the top of the cycle. As long as you have positive cash flow there is very little risk with leverage.

    2Reply
  • Jeremy Beaumier
    Ottawa ON · Member since 2018 · 8 posts · 4 votes
    8y

    Could you not pay sell off the low performers, pay off some of the mortgages, then use the equity from the paid off properties to finance new investments and still keep a higher cashflow?

    (I'm new, so maybe I'm missing something)

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  • Edward C.
    OP
    Investor · Palisades Park, NJ · Member since 2017 · 46 posts · 14 votes
    8y
    Thanks Thomas.  I get the math, but remember this is trapped equity that can't be pulled out because the LTV is ~75% currently (following cash out refis mid last year).  By selling the properties, I'd be able to take out the trapped equity (25% equity value) and then (to your point) redeploy it elsewhere.  Since I'm not inclined to purchase more real estate at this stage in the cycle, I'd rather pay down debt or potentially invest the funds elsewhere to earn a higher return.  I'm kind of at the stage with the size of my investment portfolio, where I'd be comfortable paying off entire mortgages and just collecting cash.

    Am trying to understand if others had followed a similar path and what their rationales were for doing so.  If there is anytime to pursue such a strategy, I think it's now (with the exception of the financial caveats that I mentioned above).


    Originally posted by @Thomas S.:

    You will not increase cash flow by paying down a mortgage. What you are actually doing is buying cash flow at a very high cost. With mortgage rates at 4% and the opportunity value of cash a realistic 10% you are losing 6% annually on your cash not increasing cash flow. Realistically would you have considered investing in real estate when you started out for a 4% return. Buying cash flow and increasing cash flow are entirely different. One is investing, the other is not.

    Selling losers is a good plan however parking surplus cash in real estate is a bad plan. Take the money and diversify your investment farther. Investing in a moderate risk income fund should be able to achieve a 10% return on average over time. You should also pull dead equity out of your remaining properties to increase ROI and reinvest it as well.

    With the possibility of a correction in real estate values on the horizon you do not want to leave dead equity at risk in real estate. Real estate is the last place you want to park excess cash if you believe we are at the top of the cycle. As long as you have positive cash flow there is very little risk with leverage.

    0Reply
  • Edward C.
    OP
    Investor · Palisades Park, NJ · Member since 2017 · 46 posts · 14 votes
    8y
    Yep, that's what I'm looking to do (but not re-invest into real estate).

    Originally posted by @Jeremy Beaumier:

    Could you not pay sell off the low performers, pay off some of the mortgages, then use the equity from the paid off properties to finance new investments and still keep a higher cashflow?

    (I'm new, so maybe I'm missing something)

    0Reply
  • Paul Choi
    Rental Property Investor · San Ramon, CA · Member since 2017 · 350 posts · 611 votes
    8y

    deleveraging is fine but like @Thomas S.said, your cash on cash ROI will be hit. you could be ok with that and sleep better at night. Nothing wrong with taking money off the table as long as you have a longer term strategy in place. When the market corrects, credit will be tighter so you could use those funds to buy properties later. But make sure you understand that lenders will be tighter with their money, meaning higher LTV requirements, higher interest rates, etc so understand those numbers and put them in your long term calculations.

    maybe 1031 into other vehicles so that you don't get hit with taxes?

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Edward C. With rates like that unless we have another epic crash/recession like we did 10 years ago, you’ll never get those rates again anytime soon. Most people see rates (for investment loans, 30 year fixed) being 6 percent by end of this year and likely near 7 percent by end of next year. Meaning if you pay off your current mortgages you’ll be stuck if you ever want to refinance. So my suggestion would be to take cash flow you earn now, as is and use that to pay down the lowest balance mortgage. This will take longer then selling but over time you will keep all your assets while deleveraging.
    1Reply
  • Edward C.
    OP
    Investor · Palisades Park, NJ · Member since 2017 · 46 posts · 14 votes
    8y

    @Caleb Heimsoth - super helpful.  thanks.

    1Reply
  • Edward C.
    OP
    Investor · Palisades Park, NJ · Member since 2017 · 46 posts · 14 votes
    8y

    @Paul Choi - yep, i get that math.  the additional 400-500bps in an alternative investment is nice, but not the primary consideration.  have always viewed RE primarily an inflation hedge. 

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