Investor · Phoenix, AZ · Member since 2015 · 105 posts · 26 votes
Hello Everyone, Let me give you the setup real quick. Over the past 5 years I have purchased 4 multifamily properties. I bought them all a little distressed and fixed them up and have mortgages on all 4. They are all cash flowing. I was looking to purchase another 4 plex property and keep going with reinvesting but I feel the market is a little higher than what I want to pay right now and the deals don't seem to be coming as often. I thought I might switch to paying off the properties I have (at least until the market improves some.) So these are my options:
1. I could save the extra cash from my rentals and invest it in something else until the market improves and then buy another property. Another property would be more cash flow but also more debt and I eventually will need to pay these mortgages off anyways.
2. I own a house and I was considering paying down my personal property mortgage before paying off the rentals. I owe more on my personal property than the rentals but this property is not cash flowing and is just a liability.
3. Instead of my home, I could start paying down the lowest mortgage balance on one of my rentals and then when paid off, use that extra cash to pay off the second, then third, etc.
Whether I pay off one of my rentals or my house, the extra cash would go towards paying off the other properties. Any thoughts on these choices? I know there are more options but I didn't want to list them all. What do you think? Smart to pay off a rental first or my house? Investing in something else might be the smartest move but I need to start cutting into some of this debt I feel. Any advice is appreciated.
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
9y
Hello and welcome to this website! You have to keep some of your money in a reserve account to at least last 6 months. With the rest, if there is any, be creative with your financing options whether your expenses are thinking about is wholesaling, or Fix and Flip, or another short term investment that get you were you ultimately interested in. Another investment could be in a turnkey home with an experienced company to give you a positive cash flow on that.
I am 60 years old now, and unfortunately, I had a brain annuerism and a stroke at age 54. It was 2 days before my schedule to have preventive surgery to prevent my brain annuerism. In some way I feel lucky about my life since then. Unfortunately, I am still recovering eventhough I originally thought that I would be healthy enough to go back to work in about 6 months. I still cannot walk and my wife and I fight a bunch and she is getting tired of what she has to do for me. Luckily she is a computer programmer and makes a decent salary and is only expected to come to the office for a 1/2 day and do the rest from home.
I was lucky that I collapsed in the evening and my wife was there and called an ambulance and I was in the hospital for 30 days and I do not remember any of that. Until then I was in the construction business since I was 17 including those college years. I also got a real estate broker license after I graduated from college (In1980) and kept that active until I had my medical problem. My Docter had been telling me for about 30 years that I was in good condition and my Chiropractor told me to get a head MRI and that is when they found my potential brain annuerism problem.
I think that wholesaling, if you are capable, is a decent place to learn about real estate. But it does need a communication ability that might be hard to do unless you can talk well with strangers. I do believe that money in a bank will not get you a return to speak about but it is insured. I never have practed real estate full time and only have made one investment deal for myself. I am typically opinionated on real estate actions.
Just do what matches your goals or do what helps you feel better. I would pretty much put up yard signs on your properties and see if you get any offers from people that are not investors. There is not a charge for putting up "for sale" signs. You can reject all offers that are lower than what you want and hope you can take advantage of this market. Try to pay down your property loans with any remains positive cash flow funds and hold off investing until the current cycle turns it into a buyer's market.
You do not know how long the seller's market to change or if prices will come back down. Just make your consideration on what the current market tells you what to do. Having excessive positive cash flows and putting some of that into your pocket is considered to be good debt. Timing your options are pretty good depending on how you look at them.
I would say that if your loan pay down on your house you will lose interest you can take off your tax returns which you might need or can afford. Phoenix should do well in the future so I would recommend making any changes beyond where your properties are still cash flowing in a positive way and not putting your properties up for sale unless you get an offer out that Is more like retail and not dicounted like a wholesale price, the amount you look for when buying.
You might aught to look at your MF expenses and income in some kind of report with people you trust and understand your goals and possibly reduce your expenses and increase your income that you could help. Any pluses could go towards the debt pay down loans on your property assuming you do not have any restrictions on prepayment.
This market has changed since I started to get into it about 20 months ago but I have learned much about it. There are more people in it now and their competition has changed some of my thinking. The main reason that I got into it was the hope it would be more flexible with my time. My older brother offered to help me and be my partner and seems pretty smart to me and has been in construction management for about 20 years.
Los Angeles, CA · Member since 2015 · 4 posts · 2 votes
9y
Not an expert here but maybe you should explore paying off the debt with the highest interest rate first. Even though you get to write that off, money saved from the interest could be a great return.
Specialist · Indianapolis, IN · Member since 2014 · 670 posts · 352 votes
9y
Corey G. I don't believe there is one correct answer to your scenario and most likely will come down to your personal preference and risk tolerance. Food for thought, whatever interest rate your paying down is essentially what your making on that money. So if your paying off 5% loans your making 5% on that money. What if you could invest and make 10% or more? Simple thought, but another way to look at your scenario.
In my opinion the method that gives you maximum choice in the future, when you're unsure what to do now, is to save the cash into an earmarked account. After X months you can decide to pay down a mortgage or add this fund (or part of it) to your down payment on a new property, then repeat. This choice costs you the minimal amount of interest you'd save had you used the funds to pay towards mortgage instead. Cash might be king but choice is heir to the thrown.
Anytime one has multiple debts and they really want to pay them off, I recommend paying off the smallest balance first. Each time you pay a debt move to the next lowest balance but put all your newly freed up CF towards that debt. This method goes by multiple names including "the debt snowball", it works better than the highest interest rate first strategy because it changes your thinking and keeps you motivated as it's happening. You see the debts going away and it's exciting. Yes, you pay more interest this way, but the amount is negligible if you Excel it out, or slightly more interest is acceptable I guess considering it succeeds more often with more people becoming debt free.
Investor · Phoenix, AZ · Member since 2015 · 105 posts · 26 votes
9y
Thanks for the advice and sorry about the slow response. I think Tyler may be right and I should save that money and keep it invested. That way I keep my maximum options open. I currently have it in an account making 1% interest. Any better returns you would recommend for short term investments besides the stock market that would allow quick access to cash should the need arise?
Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
9y
Hello and welcome to this website! You have to keep some of your money in a reserve account to at least last 6 months. With the rest, if there is any, be creative with your financing options whether your expenses are thinking about is wholesaling, or Fix and Flip, or another short term investment that get you were you ultimately interested in. Another investment could be in a turnkey home with an experienced company to give you a positive cash flow on that.
I am 60 years old now, and unfortunately, I had a brain annuerism and a stroke at age 54. It was 2 days before my schedule to have preventive surgery to prevent my brain annuerism. In some way I feel lucky about my life since then. Unfortunately, I am still recovering eventhough I originally thought that I would be healthy enough to go back to work in about 6 months. I still cannot walk and my wife and I fight a bunch and she is getting tired of what she has to do for me. Luckily she is a computer programmer and makes a decent salary and is only expected to come to the office for a 1/2 day and do the rest from home.
I was lucky that I collapsed in the evening and my wife was there and called an ambulance and I was in the hospital for 30 days and I do not remember any of that. Until then I was in the construction business since I was 17 including those college years. I also got a real estate broker license after I graduated from college (In1980) and kept that active until I had my medical problem. My Docter had been telling me for about 30 years that I was in good condition and my Chiropractor told me to get a head MRI and that is when they found my potential brain annuerism problem.
I think that wholesaling, if you are capable, is a decent place to learn about real estate. But it does need a communication ability that might be hard to do unless you can talk well with strangers. I do believe that money in a bank will not get you a return to speak about but it is insured. I never have practed real estate full time and only have made one investment deal for myself. I am typically opinionated on real estate actions.
Just do what matches your goals or do what helps you feel better. I would pretty much put up yard signs on your properties and see if you get any offers from people that are not investors. There is not a charge for putting up "for sale" signs. You can reject all offers that are lower than what you want and hope you can take advantage of this market. Try to pay down your property loans with any remains positive cash flow funds and hold off investing until the current cycle turns it into a buyer's market.
You do not know how long the seller's market to change or if prices will come back down. Just make your consideration on what the current market tells you what to do. Having excessive positive cash flows and putting some of that into your pocket is considered to be good debt. Timing your options are pretty good depending on how you look at them.
I would say that if your loan pay down on your house you will lose interest you can take off your tax returns which you might need or can afford. Phoenix should do well in the future so I would recommend making any changes beyond where your properties are still cash flowing in a positive way and not putting your properties up for sale unless you get an offer out that Is more like retail and not dicounted like a wholesale price, the amount you look for when buying.
You might aught to look at your MF expenses and income in some kind of report with people you trust and understand your goals and possibly reduce your expenses and increase your income that you could help. Any pluses could go towards the debt pay down loans on your property assuming you do not have any restrictions on prepayment.
This market has changed since I started to get into it about 20 months ago but I have learned much about it. There are more people in it now and their competition has changed some of my thinking. The main reason that I got into it was the hope it would be more flexible with my time. My older brother offered to help me and be my partner and seems pretty smart to me and has been in construction management for about 20 years.
Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
9y
@Corey G. I'll echo what @Tyler Mullen and @Jeff Wallenius have said; there is no one right answer. A hybrid approach may be the best. Save the CF for a set period of time or until your choice become more clear. In six months no better investment option present themselves, than pay down a portion of your highest interest rate debt and lock in that return. Determine how much to save based on the market at that time. Then wait another six months and repeat.
I dislike the snowball method for the simple reason that it is a sub optimal choice. It has been shown to work better than the highest interest rate method for people who have a large amount of consumer debt. However, you don't have consumer debt, who have asset backed debt. You didn't make the choice to borrower from your future self in order to have gratification now. You are an investor who is making sacrifices now for their future benefit; you can see the rational of paying off your highest interest rate loan and don't need a behavioral psychology trick to keep you on track.
The difference in paying down an 8% loan vice a 7% loan on a $250,000 balance is $208 a month, which could cover most of the CapEx for one of your units.