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Ana Bejar
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Just want opinions how to invest my money

Ana Bejar
Posted Jan 28 2024, 20:25

I have 7 rental properties. Interest rates range from 4.12% to 6.5%. Net cash flow is currently $50k/yr but pre tax. I haven’t paid taxes since I bought them due to deductions such as depreciation and interest payments. I owe about $950k left. They are located in California and Nevada. How would some of you do this?

Scenario 1: Pay off all mortgages and my net pre tax cash flow is about $120k/yr. I have no more headaches, there is an umbrella policy for the properties, and I can buy more properties with the cash flow without anymore personal money. Example, I can buy a property that is $500k and pay it off in less than 5yrs and snowball more or leverage 5 other properties elsewhere and snowball. I can pay down faster if I included personal income but at this point I don’t need to.

Scenario 2: Pay off properties with the 6.5% mortgage and 4.25% mortgage. Why? The money needed for these properties would regularly require a greater than 8% return in other investments to receive the same cash flow if paid off. I would be getting about $90k/yr. The other rentals I have, I don’t need to pay off because other investments can currently generate the same amount of cashflow.

Scenario 3: Leave as is, put money in other investments, and buy more property when deals come along. Problem is that I have to use my personal income plus rentals and that would probably take a few years longer to acquire properties in the desired areas. I am almost 55 and still have kids waiting to go to college so saving will be a little more difficult. I am also less aggressive at acquiring properties since covid, I like to work less and hang out with the family more.

I have a plan, but I would like others to chime in on their thoughts. Maybe there will be new ideas I haven’t thought about.

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Ana Bejar
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Ana Bejar
Replied Jan 28 2024, 20:33

Sorry, it's some simple math.  Just want ideas.  I also realized once the properties are paid off, I probably would end up paying taxes.  I would need to keep buying property to lessen the burden, but that is why I am asking for opinions

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Basit Siddiqi
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Basit Siddiqi
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Replied Jan 30 2024, 12:47

Scenario 1 = It looks like you have $950,000 cash to pay off the mortgage balance off.
You are getting $70,000 additional cash-flow
$70,000 / $950,000 = 7.3% which is not bad considering this is just cash-flow and you likely get an additional 4% appreciation bringing your total return to around 11%

The thing to consider is that you would then lose the mortgage interest deduction.
Without that deduction, it may put you into taxable income territory.

You may want to consider seller financing some of the properties and see if you can get 8% to 10% interest.
it would guarantee you a return and still get you nice interest over a period of time.

As I get older, I want my investments to be more 'simpler'

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Leslie Pappas
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Leslie Pappas
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Replied Mar 11 2024, 13:05

@Ana Bejar

It appears you have a substantial portfolio, well done. Another angle you could consider is to diversify into different asset classes to reduce your risk, potentially continue your low tax burden and earn cashflow passively through 1031 exchanging into Delaware Statuary Trusts (DSTs). Hope this helps. 

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Jake Andronico#3 Out of State Investing Contributor
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Jake Andronico#3 Out of State Investing Contributor
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Replied Mar 11 2024, 14:36

@Ana Bejar

Congrats!! If I was in your shoes, I'd pay them off or simplify the portfolio to the "best" ones and hit my cash flow goals. 

Paid off properties tend to cash flow extremely well ;) 

But, everyone's goals are different. Whatever you decide, you're in an amazing spot!!

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Gwen Stavros
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Gwen Stavros
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Replied Mar 13 2024, 10:28

I like Scenario 3. BUT...you mention that you would have to use personal income and rentals to buy more more property. You can use a DCSR loan alternatively, or as I love to do; buy homes using seller financing. The opportunities are out there. I'm finding some great sellers in Orange County who like that option to help with their capital gains liability...you just need an agent who knows how to present that type of offer.  You also mention that if you payoff the rentals, you'd have to start paying taxes. Whether you pay off the properties or keep them, don't forget that you can do a cost segregation study and use bonus deprecation to off set taxes. You can also do this with each new property you purchase. I'm happy to provide more info if you need help. Good luck and circle back to let us know what you decide.

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Bonnie Griffin Kaake
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Bonnie Griffin Kaake
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Replied Mar 13 2024, 16:57

@Ana Bejar  Have you leveraged cost segregation yet on all your properties? This could give you the cash-flow you need now. With those lower interest rates, you may not want to sell those properties but a 1031 exchange into a larger investment could give you more leverage. You didn't mention whether you are a real estate professional or not. Also, have you grouped your properties, active or passive, to be able to use losses on one against gains on another?

Another option you may not have considered is to work with a developer and build a multi-family property in a desirable area, leverage ECO construction benefits available ($5 to $15 per sq. ft.) and cost segregation and bring in a management company to manage the property once it is ready for occupancy. Hands off, more time for family, and, if you hold it with the intention to pass the property to your heirs, you never have to pay any of the tax benefits back. Your heirs inherit the property at its new market value and they can leverage whatever tax benefits are available at that time.

I am here if you have additional questions. Don't pay more in taxes than you need to, especially when there are options that you and your CPA/tax professional may not have considered. 

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Robert Sorrels
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Robert Sorrels
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Replied Mar 15 2024, 01:20

Option 2. 

Don’t have to read much. Very well explained 

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Ana Bejar
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Ana Bejar
Replied May 19 2024, 20:10

Hi all!

Thank you for all the responses!.   Im still trying to figure out what would best for my investments.  At the current moment, I am following option 3, I have placed the money in different investments, cd's, annuities, mm, etc.  They are collecting interest, a little less than if properties were paid off, but feel secure about the cash and if I do need to pay off the properties, I can.  At the same time, I am still creating cash flow to invest in more properties.