How to reinvest Home Sales Profits

Atlanta, Georgia
General Real Estate Investing
4yFollow

How to reinvest Home Sales Profits

Chad Dickinson
Member since 2022 · 3 posts · 2 votes

Hello,

Newbie here. I am divorcing and selling our home and splitting the profits of which should be about $250K per. I have chosen to rent for the next 12 months as I figure out where I want to live. Debt free and college is covered for both children.

I have another home that I own and rent my parents in a 55+ development. I carry a mortgage on that property of about $215K and basically rent it at a monthly loss of about $250 per month. The mortgage is a 7 year ARM and has about 5 more years before it could adjust. It is currently at 3.5% and my parents are in their early eighties.

I was debating if I should use the profits from the sale of my current home to just pay off the mortgage my rental property? I do right off the interest payments on this property of about $630 per month but if I paid it off, then I would be saving that amount roughly every month.

I was thinking, if/when I decide to buy a new home, if I needed money for the down payment, then I could get an equity line from my rental property. It was purchased for $280K and is appraising for about $350K now.

Should I pay off that mortgage or put the $250K in an IBond and leave it there for a year or so? I do have stocks but I wasn’t thinking that I should play the market but if the stock market keeps getting hammered, then I could see myself waiting to get some blue chips as the time to buy is when there is “blood in the streets”.

Any guidance or advice would be appreciated. Thank you, CD.

1Reply
53 views

Most Popular Reply

Steven Foster Wilson
Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
4y
Quote from @Chad Dickinson:

Hello,

Newbie here. I am divorcing and selling our home and splitting the profits of which should be about $250K per. I have chosen to rent for the next 12 months as I figure out where I want to live. Debt free and college is covered for both children.

I have another home that I own and rent my parents in a 55+ development. I carry a mortgage on that property of about $215K and basically rent it at a monthly loss of about $250 per month. The mortgage is a 7 year ARM and has about 5 more years before it could adjust. It is currently at 3.5% and my parents are in their early eighties.

I was debating if I should use the profits from the sale of my current home to just pay off the mortgage my rental property? I do right off the interest payments on this property of about $630 per month but if I paid it off, then I would be saving that amount roughly every month.

I was thinking, if/when I decide to buy a new home, if I needed money for the down payment, then I could get an equity line from my rental property. It was purchased for $280K and is appraising for about $350K now.

Should I pay off that mortgage or put the $250K in an IBond and leave it there for a year or so? I do have stocks but I wasn’t thinking that I should play the market but if the stock market keeps getting hammered, then I could see myself waiting to get some blue chips as the time to buy is when there is “blood in the streets”.

Any guidance or advice would be appreciated. Thank you, CD.

Why not raise the rent so you are not in a loss? What are other rents in the neighborhood? I agree with Joe in that if you pay off a investment it is costing you more as well as locking up cash that could be used to by another property that cash flows. I personally would use the money to buy another property. For myself the properties here in Columbus that I had bought have not only had a great cash flow but also appreciated tremendously. 
2Reply
See this reply in the discussion

8 Replies

Jump to latestLatest
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    Paying off mortgages on your own home saves you money by eliminating/reducing the interest charged to you. Paying off the mortgage on a rental costs you money. When you say you are saving money by eliminating the negative CF on the rental you're wrong. All you're doing is paying all of it upfront. Keep in mind that with a positive CF property, the tenant is making the mortgage payments...not you. When you use your money to pay down (or off) the debt, you are depriving your tenant of making those payments for you...and thus costing you more money. The cost to the REI of a positive CF property is restricted to only the money that comes out of their pockets in the form of cash. This could, but should never, include the negative CF the REI has to cover every month.

    0Reply
  • Steven Foster Wilson
    Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
    4y
    Quote from @Chad Dickinson:

    Hello,

    Newbie here. I am divorcing and selling our home and splitting the profits of which should be about $250K per. I have chosen to rent for the next 12 months as I figure out where I want to live. Debt free and college is covered for both children.

    I have another home that I own and rent my parents in a 55+ development. I carry a mortgage on that property of about $215K and basically rent it at a monthly loss of about $250 per month. The mortgage is a 7 year ARM and has about 5 more years before it could adjust. It is currently at 3.5% and my parents are in their early eighties.

    I was debating if I should use the profits from the sale of my current home to just pay off the mortgage my rental property? I do right off the interest payments on this property of about $630 per month but if I paid it off, then I would be saving that amount roughly every month.

    I was thinking, if/when I decide to buy a new home, if I needed money for the down payment, then I could get an equity line from my rental property. It was purchased for $280K and is appraising for about $350K now.

    Should I pay off that mortgage or put the $250K in an IBond and leave it there for a year or so? I do have stocks but I wasn’t thinking that I should play the market but if the stock market keeps getting hammered, then I could see myself waiting to get some blue chips as the time to buy is when there is “blood in the streets”.

    Any guidance or advice would be appreciated. Thank you, CD.

    Why not raise the rent so you are not in a loss? What are other rents in the neighborhood? I agree with Joe in that if you pay off a investment it is costing you more as well as locking up cash that could be used to by another property that cash flows. I personally would use the money to buy another property. For myself the properties here in Columbus that I had bought have not only had a great cash flow but also appreciated tremendously. 
    2Reply
  • Paul Camuto
    Real Estate Coach · Robbinsville, NJ · Member since 2017 · 185 posts · 99 votes
    4y

    I wouldn't pay off a loan at a fixed 3.5%. I bond's have restrictions and you will lose 3mths interest if pulled out less than 5 years. If you don't want to buy another investment property look into private non-traded reits like a Blackstone, Ares, Hines. Stay away from the market.

    2Reply
  • Chad Dickinson
    OP
    Member since 2022 · 3 posts · 2 votes
    4y
    Quote from @Steven Foster Wilson:
    Quote from @Chad Dickinson:

    Hello,

    Newbie here. I am divorcing and selling our home and splitting the profits of which should be about $250K per. I have chosen to rent for the next 12 months as I figure out where I want to live. Debt free and college is covered for both children.

    I have another home that I own and rent my parents in a 55+ development. I carry a mortgage on that property of about $215K and basically rent it at a monthly loss of about $250 per month. The mortgage is a 7 year ARM and has about 5 more years before it could adjust. It is currently at 3.5% and my parents are in their early eighties.

    I was debating if I should use the profits from the sale of my current home to just pay off the mortgage my rental property? I do right off the interest payments on this property of about $630 per month but if I paid it off, then I would be saving that amount roughly every month.

    I was thinking, if/when I decide to buy a new home, if I needed money for the down payment, then I could get an equity line from my rental property. It was purchased for $280K and is appraising for about $350K now.

    Should I pay off that mortgage or put the $250K in an IBond and leave it there for a year or so? I do have stocks but I wasn’t thinking that I should play the market but if the stock market keeps getting hammered, then I could see myself waiting to get some blue chips as the time to buy is when there is “blood in the streets”.

    Any guidance or advice would be appreciated. Thank you, CD.

    Why not raise the rent so you are not in a loss? What are other rents in the neighborhood? I agree with Joe in that if you pay off a investment it is costing you more as well as locking up cash that could be used to by another property that cash flows. I personally would use the money to buy another property. For myself the properties here in Columbus that I had bought have not only had a great cash flow but also appreciated tremendously. 
    Thanks for the reply.  The reason why I am renting the unit at a loss is because I rent it to my parents and they are on a fixed income and cannot pay an increase.  They pay me just enough to cover the mortgage and basic utilities.  I pay the property taxes, repairs, and appliance purchases out of my own pocket.  My main hope is that when I sell it sometime in the future, the profits (if there is some) will recover my expenses/losses of today.  

    If I was renting the unit at a profit, then I would no doubt keep the mortgage and treat it as a true real estate investment.  

    1Reply
  • Chad Dickinson
    OP
    Member since 2022 · 3 posts · 2 votes
    4y

    Thanks Dan.  My plan is to rent for 12 months and then reassess the market and potentially decide where I want to purchase a home/town home.  I think the market is a bit overpriced in North Atlanta area so waiting could be good.  I want to get the money into something in the meantime.  After that time, in theory, I would add a little money to the $250K (and the interest it earned) and use that to buy a place and not have a mortgage at the new purchase for myself.

    I know this is a real estate forum but I am not sure I want to get in the real estate rental business as it takes all I can to deal with the current rental situation I have...ha!   Thanks again for the insights.

    0Reply
  • Kevin PolitePro Member
    Investor · Decatur Atlanta, GA · Member since 2011 · 612 posts · 232 votes
    4y

    @Joe Villeneuve you bring up a good point and one I'm debating with myself. I could pay most of my loans off on my rentals and don't need the proceeds and this would increase my rental income which I'll be partially living off of in 3-5 years. I have enough rentals and don't want anymore. 

    Is there any point when you say you're getting to being a man of a certain age that you "retire" your debt (pun intended) or do you just stay leveraged? 

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Quote from @Kevin Polite:

    @Joe Villeneuve you bring up a good point and one I'm debating with myself. I could pay most of my loans off on my rentals and don't need the proceeds and this would increase my rental income which I'll be partially living off of in 3-5 years. I have enough rentals and don't want anymore. 

    Is there any point when you say you're getting to being a man of a certain age that you "retire" your debt (pun intended) or do you just stay leveraged? 

    Yes, there is madness to my method, and a specific reason for doing what I do.  In other words, I have a plan...that works.
    Paying off rentals, using your own money (that includes cash flow) is just adding to the cost...not saving you money.
    The cost to an investor is only the cash that comes out of their pocket.  The rest (positive CF) is paid by the tenant (don't help them).  The cash flow's main reason for being (in the beginning) is to pay you back for what you paid for the property (down payment).  After that, it's main reason for being (in the beginning) is to add cash for future investing and buying paying you while you wait for the property's original equity (your DP) to double from appreciation (only).  Once that takes place, the property has reached its maximum profit and value...and it's time to sell, take the equity, now twice what it was at the start, and move it into the next deal.  This describes the beginning of the plan.
    As equity grows it's losing value.  If you can buy a property for 20% down, and you have 40% equity in a property, you lost (and will continue to lose) money as the actual value of that equity goes down.
    Example:  A property worth $100k when you buy it, at 20% DP, cost you $20k.  That means the value of your equity is worth 5 times what it says it is ($20k) since the property is worth 5 times the DP (your initial equity).  When the property value goes up to $120k, the equity increased at the same rate and is now $40k, but that equity is only worth 3 times its face value in property value.  Sell that property, take out the equity, and move it to another deal once again at 20% DP, and that equity is now worth 5 times its face value again = $200k...not, just $140k.  Also, with two properties instead of one, both the same price as the original property, your CF should double as well.
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free