Anyone else paying down mortgages rather than buying now?
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Member since 2016 · 13k+ posts · 12k+ votes
8yPaying down a mortgage on a income property is a terrible idea as a investor. If you have cash or equity it should be moved to a different investment vehicle not simply allowed to wallow in a property where it is essentially being sent to die. That is hoarding not investing and a embarrassing use of money.
Every 100K in a property will suck $866/month directly off the top of your income based on a conservative opportunity value of 10%.
Take the money and invest in a income fund or REIT if you want to hold, do not burry it in a property where it will essentially kill your cash flow and turn the investment into a liability.
Simply because you are on hold does not mean your money should stop earning it's keep.
79 Replies
- 8yNed J.Pro MemberInvestor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
Its all about risk......yes paying off your primary is a poor CoC return at 4%, but the risk is ZERO, and if you take the cash you were paying the bank and use it to fund more deals, you are still moving in the right direction. And for me at least, you can't put a "return" on the feeling that I own my own home straight up. Once I paid it off, I took out a HELOC, so the $$ isn't completely locked up for me to use if I want to..... if things crash, the banks may freeze it, but in the mean time I'm stockpiling cash so I may not even need it.
For me it came down to the fact that in CA, the deals are very sparse, hard to find and tons of competition....so I got tired of seeing my cash just sit there earning 0.05% in a savings account. I was able to pay off my house and still have enough cash that if something did come up, I could use cash and some HELOC to buy it. So I didn't make myself "broke" by paying off my house....still got lots of other investments in stocks/mutual funds/IRA/401k etc etc...and I have 3 rentals .....so paying off my house is just part of my low risk aspect of my investments.....but far from the best investment return for that portion of my investments....
I have zero plan to pay off my rental mortgages any quicker than necessary....my philosophy for my primary vs rentals is different.
I have investments that have higher risk and potential higher rewards....and some that are conservative with much lower risk that don't return as well....its a balance.
- Rental Property Investor · Campbell, CA · Member since 2017 · 419 posts · 499 votes8y
Financially it doesn't make sense. Emotionally, do what makes you and your family sleep best at night.
I personally don't see the point... My rentals cover all the expenses and then some so i'm not in a hurry... I save the extra $ and when you have enough for the next property add to the portfolio. Let the power of compounding kick in.
- Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Owens:
In the last downturn HELOC's also were drying up along with lower lending LTV's.
Banks go into (meltdown mode) where they want to keep loans performing at all reasonable costs and shrink ratios to borrowers in what they see as a very risky current lending environment.
If you have ever heard the saying a banker has an umbrella for you on a sunny day but when it starts raining they run like hell! lol
Helocs got froze and called during the last down turn.. read the fine print.. these are not fixed 30 year loans. they are an extension of credit at the unilateral discretion of the lender.. basing your investment future on HELOC"S is quite risky.. when they call them you usually don't know until 60 to 90 days later when you get a letter in the mail or go to access it and it wont let you.
we have a whole crop of new investors who never lived or invested during those times and simply don't know what they don't know and neglected to read the fine print in their loan docs ( which is common I never do either).. but as a HML in those days I bailed out many a folks who had projects half way through and their helocs got froze .. so I learned this in real time in real situations.
Very interesting point indeed....
- Investor · Eagle, CO · Member since 2013 · 94 posts · 24 votes8y
I bought an REO duplex in 2013 for $405k, now owe $320k. Present value is about $625k. Lived in the small side for initial owner-occupied financing. Saved up, bought an up/down duplex in 2016 w owner-occupied financing, live upstairs, rent out the first duplex. 3 rental units gross $5250.
The first duplex now has $300k+ equity. 26 years remaining on the loan w a great rate.
What is the best way to protect that equity from liability without killing cash flow?
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
Personally, I can't see worrying about someone suing you and getting your equity. I have 4 mil total in coverages. I would have to do something pretty egregious to have a judgment against me for more money than that, and I guarantee that the insurance company, who would be on the hook for the first 4 million, is going to mount a vigorous defense on my behalf.
Most people look to equity protection as a way of shielding it against debt collection. You have a far greater chance of defaulting on your debt than you do losing your property in a lawsuit.
Skyline Properties - Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes8y
@David K. I would have to agree with @JD Martin
Paying off a property pretty much results in the same return as a blue chip dividend stock. The only difference is the stock requires no effort. However, if you don't like stocks then maybe a couple of paid off properties would help you ride out any storms.
For example: If you have 3 leveraged properties that all equal 1/months vacancy of $1,000/m and 2 paid off properties that cash flow $1,000/m.
Paying stuff off is peace of mind and being at the point where you no longer want to grow the portfolio.
I am in my growth stage and right now things are tough. There isn't much of anything worth buying. The returns are simply not there anymore. A few years ago it seemed buying a house was getting you to third base, now it's either to first or halfway.
Properties in my area that are good BRRRRs used to be $70-$80k. Now the same properties are going for $105k and rent hasn't kept up with the price increase.
Perhaps just stash the cash and only buy opportunity when it presents itself.
Is anyone out there finding properties worth while anymore.....???
- Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes8y
Originally posted by @JD Martin:
Personally, I can't see worrying about someone suing you and getting your equity. I have 4 mil total in coverages. I would have to do something pretty egregious to have a judgment against me for more money than that, and I guarantee that the insurance company, who would be on the hook for the first 4 million, is going to mount a vigorous defense on my behalf.
Most people look to equity protection as a way of shielding it against debt collection. You have a far greater chance of defaulting on your debt than you do losing your property in a lawsuit.
Good points.
- Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes8y
Originally posted by @Ned J.:
Its all about risk......yes paying off your primary is a poor CoC return at 4%, but the risk is ZERO, and if you take the cash you were paying the bank and use it to fund more deals, you are still moving in the right direction. And for me at least, you can't put a "return" on the feeling that I own my own home straight up. Once I paid it off, I took out a HELOC, so the $$ isn't completely locked up for me to use if I want to..... if things crash, the banks may freeze it, but in the mean time I'm stockpiling cash so I may not even need it.
For me it came down to the fact that in CA, the deals are very sparse, hard to find and tons of competition....so I got tired of seeing my cash just sit there earning 0.05% in a savings account. I was able to pay off my house and still have enough cash that if something did come up, I could use cash and some HELOC to buy it. So I didn't make myself "broke" by paying off my house....still got lots of other investments in stocks/mutual funds/IRA/401k etc etc...and I have 3 rentals .....so paying off my house is just part of my low risk aspect of my investments.....but far from the best investment return for that portion of my investments....
I have zero plan to pay off my rental mortgages any quicker than necessary....my philosophy for my primary vs rentals is different.
I have investments that have higher risk and potential higher rewards....and some that are conservative with much lower risk that don't return as well....its a balance.
I will say it felt great to pay cash for my first house 7 years ago. I finally felt secure. Even with a low wage job I would have been able to live a middle class life thanks to not having a huge housing expense over my head. That said, the house grew old and needed work, the location was not that great, and eventually I sold it after converting it into a rental.
Though I have the money to pay off another residence I intend to move back into, I don't, largely because the mortgage is so low, that after tax benefits I'd be coming out abour $200 a month ahead paying it off, vs. pulling in $1,000 a month by investing the money into a REIT.
Yes, the thought does come to mind from time to time to reduce risk and just have the paid off house, but alas, there are risks with that as well, lawsuits, natural disasters that your insurance doesn't cover, etc.
- 8yNed J.Pro MemberInvestor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
I think the "don't pay off your house since it makes you a target for lawsuits" is an urban myth and complete BS. There are other viable reason to argue but this one is BS. If you have that fear then having adequate insurance is an easy solution and a better option anyway.
- Rental Property Investor · Philadelphia, PA · Member since 2016 · 82 posts · 22 votes8y
If you really wanted to show a piece of real estate as heavily leveraged could you just write a note between the RE and another entity you control for 100%+ of the value. Never pay on it but it's first position?
- Real Estate Agent · Milwaukee, WI · Member since 2017 · 3 posts · 2 votes8y
Originally posted by @Robert Herrera:
Scott Titus If you pay off your house, you are a HUGE TARGET for a LAW SUIT. If you have debt on your property, attorneys don't want to go after a house with not much left over after paying realtors and the mortgage off. If it's free and clear, look out, you are the #1 guy they LOVE to sue. If they win, $$$$ loss is huge.
How does owning a property free and clear make you a target for a lawsuit?
- Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes8y
@Brandon Bennett If you have a free and clear property, and lets say your kid gets in an accident. Lets say they hit someone on the HIGHWAY and its a bad accident. Your insurance covers medical expencses, etc. Then their lawyer does an Asset Search on YOU. Turns out you have a house with TONS of equity in it. There are no liens, so no one else to split the money with. Lets say its worth $250,000 free and clear. The lawyer decides to take a civil case against you, as you are loaded with cash that they want. You lose in court, the judge orders your house sold, and the proceeds awarded to the Lawyer and their client. You just lost $250,000.
On the other hand, if there is debt, lets say you owe 80%, then you only have $50,000 equity. If the lawyer wants to fight in court over $50K small payout, they know they will not recieve anywhere near $50K. First the house is sold, to pay off the $200K in debt. Then They would have to pay Real Estate Agents 6% for the sale. Thats $15K off the $50K. So now they are at $35K. They only get a percentage of the $35K so the deal is looking less and less desirable. Also there is a chance they could lose, and spend a lot of time trying to gain a few thousand dollars. Attorney is going to say it's not worth it, and decline to pursue you. You just saved $50K.
If you own a free and clear house of $250K, and took out a mortgage of $200K, you would have $200K in your bank account TAX FREE. You don't pay taxes on Debt. Now you can invest those moneys in Other properties. You could put 20% down on a $1M property. This would greatly increase your cashflow monthly, and you would make the Appreciation on the whole $1M. If appreciasion is around 10%. you will make $100k per year just in Equity. So in 2 years you would have a total of $400K in equity, that you can loan against to buy more properties... rinse and repeat.
- Real Estate Agent · Milwaukee, WI · Member since 2017 · 3 posts · 2 votes8y
Originally posted by @Robert Herrera:
@Brandon Bennett If you have a free and clear property, and lets say your kid gets in an accident. Lets say they hit someone on the HIGHWAY and its a bad accident. Your insurance covers medical expencses, etc. Then their lawyer does an Asset Search on YOU. Turns out you have a house with TONS of equity in it. There are no liens, so no one else to split the money with. Lets say its worth $250,000 free and clear. The lawyer decides to take a civil case against you, as you are loaded with cash that they want. You lose in court, the judge orders your house sold, and the proceeds awarded to the Lawyer and their client. You just lost $250,000.
Got it. That makes sense, thanks Robert!
- Flipper/Rehabber · Kansas City, MO · Member since 2011 · 2k+ posts · 712 votes8y
One asset protection strategy is to keep the property mortgaged and equity in the property low.
So first you buy in an entity to keep it not owned by you and to spread risk among entities.
Second - insure properly so if there is an issue, well insurance takes care of it.
Third - Have policies, procedures, and checklists to make sure you are doing everything correctly, not being negligent so no one would have a reason to sue you.
So you should be good with these three. However, there are a lot of people who are really scared of getting sued, not sure why. so they have 2 more steps.
Fourth - that entity that you buy the property in . . it will have a Trust between it and the property so that no one can find out who really owns the property - so no one to sue.
Fifth - mortgage it up so there is no equity, so if you are negligent, and insurance does not pay, and the attorney doing the lawsuit can figure out who really owns the property, they find that there is no equity so no reason to sue you, even if they win, ad could force you to sell the property to pay them off, well there would be no money to pay them off. So they back off and don't sue ...
Hope that helps.
Hope to see my KC folks at MAREI November 14th.
- Rental Property Investor · Dallas, TX · Member since 2015 · 501 posts · 504 votes8y
Originally posted by @Robert Herrera:
@Brandon Bennett If you have a free and clear property, and lets say your kid gets in an accident. Lets say they hit someone on the HIGHWAY
If you own a free and clear house of $250K, and took out a mortgage of $200K, you would have $200K in your bank account TAX FREE. You don't pay taxes on Debt. Now you can invest those moneys in Other properties. You could put 20% down on a $1M property. This would greatly increase your cashflow monthly, and you would make the Appreciation on the whole $1M. If appreciasion is around 10%. you will make $100k per year just in Equity. So in 2 years you would have a total of $400K in equity, that you can loan against to buy more properties... rinse and repeat.
Won't the lawyer doing an asset search on you notice that you have $200K equity in a much larger building? If the accident happens a few years after you bought it, you might have even more equity. If you put the money in a bank account instead, it can probably be discovered too. My question is, unless you bury the cash in your backyard, won't that money be found anyway?
- Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes8y
Unfortunately there is no central database that maintains bank account numbers. Prior to 1999, locating bank account information was the most controversial area in a search for assets, but new banking regulations have brought about significant changes in data availability. Prior to the banking changes, a variety of techniques such as use of credit reports, information subpoenas and pretext calling were used to uncover bank account information. Under the new law, pretext calls no longer are permitted when attempting to obtain account information. Bank customers now have greater protection from searches. However, once a bank account has been located and verified with either social security or tax ID numbers, it can be attached in payment of court ordered judgments.
On that note, we enter into LLC, and charging orders. If you own your properties in a proper LLC, and you are keeping separate accounts that don't co-mingle personal and business funds, you are in a good position to keep your money.
1st open an LLC that will act as your Real Estate Business and Management company for your other LLC's. Lets say it's XYZ LLC. Now use XYZ LLC to buy properties. Put these properties in LLC's that are owned and created by XYZ LLC. example: 124 main LLC and 445 Rodeo LLC Are formed by XYZ LLC and are used on title for properties.
We are talking about an OUTSIDE Attack here- I.E. the lawsuit is from outside the LLC's. Meaning they do an asset search on YOU and get XYZ LLC as an Asset. Since this is a BUSINESS and not Personal Property, there are new rules that take affect.
First, if you are sued and they win, you will be pursuant to a Charging Order, meaning they come after you as a SHAREHOLDER of the business. When you receive money as a shareholder, that money is transferred to Pay Your Debt First. Your business is not required to Sell IT'S ASSETS, as they are separate from your assets. Your assets are the SHARES of STOCK in the business.
If you decide to take an Owner/Shareholder DISTRIBUTION then You will have to give that up to the Judgment. If you Decide not to take ANY DISTRIBUTIONS, and instead give yourself a salary that covers your profits, then you will not have to give that money up. You will pay higher taxes, as a salary has more taxes than a shareholder distributions, but you will get to keep the majority of the money.
On a Side Note. Most states protect Multi-Member LLC's and not Single Member LLC's. For this instance, look into Nevada and Wyoming to set up your LLC's as they have the best laws for Single Member LLC's. You can buy properties anywhere in America with LLC's setup in other states.
Your strategy has to happen BEFORE you are SUED. If you are Sued, and you take action afterword to try and cashout refi, this could be used as reason to get at those funds, as you are using this action illegally to stop money from being taken from you.
If you cashout refi before you were sued, odds are you are using that money to invest in other properties, and are probably buying said properties with these funds, so these won't be in your account for long.
Please talk to a Licensed Asset Protection Attorney, and CPA about these as I am not either one of these.
- Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes8y
I'm actually taking this sellers market as an opportunity to filter my portfolio. Selling some duds, since there are not any good deals anymore. Overall I am seeing things about $20k too high.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes8y
Ok when it comes to charging orders you are partially correct. Keep in mind very few states have charging order protection for solo LLCs. I don't know if charging order protection is available for LLCs in all states. A charging order will be effective even if you take a wage instead of a distribution, as the debt is owed by you. However if you are sued and lose the attorney simply has to do an interrogatory or deposition and you are required by law to answer questions about your assets. if you lie it is a felony. Taking the equity out of a property means you moved it somewhere, they simply ask where you moved it to. They see a mortgage on your property it has to be given to someone, they ask who owns the company that holds the mortgage and do you have an ownership interest in it. This idea about hiding assets is mostly garbage put out there by gurus who are selling asset protection. If you are making fake mortgages and get caught you are in big trouble, its called creditor fraud. The idea is to win the lawsuit, not commit a crime to hide money from a lawsuit that has never happened yet. There are ways to hide your identity but then you lose personal control over the assets as someone else has to act as the spokesman for the company.
- Custodian · Lander, WY · Member since 2017 · 59 posts · 29 votes8y
@Andrew K. You talking about a trust? (Land or grantor’s revocable or,Living trust)ect...
Or an LLC? holding first-lean
See a lawyer. The lean is a legal doc. has to be real. and noterized ect
- Rental Property Investor · Philadelphia, PA · Member since 2016 · 82 posts · 22 votes8y
Originally posted by @Frederick Kirk Wendel:
@Andrew K. You talking about a trust? (Land or grantor’s revocable or,Living trust)ect...
Or an LLC? holding first-lean
See a lawyer. The lean is a legal doc. has to be real. and noterized ect
LLC. Yes. What I assume makes my idea fishy is the note would basically require no payment. It's sole purpose would be to encumber the property for 100% of the value.
- Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes8y
@Jerry W. No one is saying to Hide Anything. You own XYZ LLC. You claim you own XYZ LLC. XYZ LLC is a business and has it's own assets. No GURU is telling me to HIDE anything. I know what instance you are talking about and everyone has read about the GURU telling them to lie and they got caught. This is not advise TO LIE! This is advise to setup your plan AHEAD OF TIME.
You are referring to moving your money around once you are in a lawsuit, to try and avoid it. I'm talking about asset protection plan BEFORE you are sued. - already addressed this if you read my previous response (which you didn't take the time to do).
OBVIOUSLY you didn't even take the time read before responding with a GENERIC response.
I already said NAVADA and WYOMING protect single member LLC's! Also, a charging order is going after a persons interest in an LLC, not their salary from a company. These are 2 different type of Incomes and are not the same. Maybe you should consult an attorney who can explain it better to you before putting out FALSE ADVISE
If you read PARAGRAPH 7 and not just read what you feel like.
No One Said ANYTHING about FAKE MORTGAGES, WOW i think you just like to post whatever you feel like.
No One Said ANYTHING ABOUT HIDING IDENTITY. What you are referring to is ILLEGAL and is NOT what i was talking about at all.
Also, how do you become a moderator and not read what people are posting?
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes8y
Wow @Robert Herrera, it appears I hit a nerve with you. First off the only reference i was making to your post was the idea that you could draw a wage from your LLC and avoid having the money taken. You are absolutely dead wrong about that. In your example you said you owed the debt personally so the charging order could only take it if you drew it out as a dividend or capital distribution. That is wrong. If you owe the debt personally you will be garnished and any wages you draw out will be attached up to a certain percentage. Any income going to you is not protected. You are confusing the types of protection. If the LLC owed the debt not you they could not keep the LLC from paying you nor could they collect money from you, but they could garnish the LLCs bank account or attach and sale the land. When I was talking about folks trying to hide assets or mortgages whether real or fake I was referring to posts like @Andrew K. who said
"If you really wanted to show a piece of real estate as heavily leveraged could you just write a note between the RE and another entity you control for 100%+ of the value. Never pay on it but it's first position?"
There were several folks who posted about keeping liens on property and generally those liens are stupid. If you need the money and use it to invest in more properties that is legitimate, if you make a fake note or take a lien and improperly convert the money to your use you are very likely to get caught. you also never talked about anonymity. I brought that up because many others have. Being anonymous works great if someone else is running your business. It really doesn't work if you run it yourself. The person making the deals and talking to other folks and signing papers will be deposed and when he does he has to disclose all information pertaining to his authority and ownership. I get tired of the gurus selling packages for $5K, $10K, or more for protection plans that are only slightly better than a simple LLC or dual LLC like you outlined. They are so top heavy in yearly fees and time involved and general costs that the person investing has a hard time making a profit and works twice as hard as they should have to. Sorry to burst your bubble bud, but I only referred to your claim about charging orders and being exempt if it is a wage. if you owe a creditor a large amount and it has been reduced to judgement, the very FIRST thing the do is garnish wages. Then they attach property.
You might also check Nevada law, it was my understanding that Nevada did not limit collections on single member LLCs to charging orders. The last I had heard was that only Wyoming did that, but I honestly don't know for sure. It was told to me in a class I took. As to my need to consult with an asset protection lawyer, I am a lawyer and have helped prepare some companies and their protection plans, but it has been a few years and I am a bit rusty. Your basic plan you outlined looks good, but keep in mind that the law in the state you are sued in is the law that is applied to the charging order. Now it gets more complicated if they try to register it in a different state to do collections on.
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes8y
I probably shouldn't add this, but you earned this @Robert Herrera. How did I become a moderator? I don't know, but they asked me to. I see a lot of folks on here handing out advice they truly believe is true, but they are wrong. They read something that someone else posted or several folks posted and now they believe it is true, but they are wrong. They truly and honestly believe they are correct and they are being nice trying to help someone. One of your earlier posts in this thread you say don't pay your house off it is a huge mistake that makes lawyers want to sue you. it sounds great, and many others have said it, but it started with the GURU types and a bunch of hype. I cannot say what the laws are in every state. In my state there is a type of ownership called tenants by the Entireties. Gurus either don't know about it or ignore it because it hurts their sales pitches of buy this protection from me. If done right just this plan on your personal residence can protect the entire thing. Plus many states have unlimited exemptions in bankruptcy for your personal residence. Now Wyoming really stinks in it's homestead exemptions and bankruptcy protections, but is great with LLCs. I know you mean well, but is frustrating to me to hear folks get all snarky and indignant when they don't truly understand what they are talking about. There are a lot of misconceptions out there about asset protection. It really is not a one size fits all. It needs to be tailored to things like form of investing, total value of assets, the assets of the owner, the number and type of employees, even the tax status of the owner, the method they plan to use to pass assets to the next generation, etc. Some of these GURU types take some true facts and twist them so they sound good for them, but they never really show you the whole story. Don't get me wrong, some of the packages folks buy are very good, but are only needed by a tiny amount of investors, and often they are very over priced.
- Custodian · Lander, WY · Member since 2017 · 59 posts · 29 votes8y
@Andrew K. your post :
If you really wanted to show a piece of real estate as heavily leveraged could you just write a note between the RE and another entity you control for 100%+ of the value. Never pay on it but it's first position?
Answer. I think no. The way you state it.
Keep digging. I am still new at this too. There are ways to do things creatively, and not be 'fishy' as you put it, that protect the investment. To follow the rules you need to know them. I like the info from Jerry W. as I am in Wyoming so my holding LLC will be here of course.
@Jerry W. A quick Q. Two items I have seen:
1) Hypothetically: My wife and I own Ouch.LLC say, Ouch.LLC holds the asset.
Someone wins, through litigation, the judgement All the way. Wages first I think then dividend or capital distribution... But I never took wages before, (would have been recycling to grow) and I can simply not take any form of Distribution and just keep the equity in the Business?
Or is that the point they come to the LLC bank account or attach? This is what I thought the charging order stopped. That's why I ask the Q.
2) The other part of this was, Ouch.LLC's income tax (or portion covered in the judgement?) can be passed to the beneficiary of the judgement? not at all sure I am saying this well.
And one last Q., could you take moneys out of the LLC as a Loan? Legit with interest, so you can keep moving forward? (this would be AFTER the judgement.)
This all seems to me to be delaying tactics only. A judgement to pay needs to be paid, You just want to make sure it will not cripple you.
-
I will be asking my local legal experts. Good way to see what they know and maybe get a better fit for my team.
WHOOT BP! I got off work at 3am, its 7am now and I cant wait to get out the door! lol
Kirk
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