How do you like having paid off rentals?
Most Popular Reply
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7yPaid off rentals are great it gives you holding power. Regardless of economic conditions, you will be able to survive it. I am taking one variable out of the risk of investing by having it paid in cash.
I understand both sides of leveraging and owning houses outright. In the beginning, an investor needs equity and leveraging is the best way to attain it. Towards the middle (10yrs) of the investment career that need may not be as great and they want more cash flow. That is when an investor wants their units paid off and netting them more money per deal.
At some point, you have to evaluate your portfolio for risk and time. Do I want to own 30 houses netting me $200 a unit or do I want to own 7 houses cash that pays me the same? What has more risk 30 houses with loans or 7 houses paid off? How much time will I have saved owning 7 vs 30?
Having your money sit in your house is NOT DEAD EQUITY. I understand why someone would say that but if my house pays me every month it is not dead. It is being utilized as the exact tool that I planned. It's like saying someone who invests in treasury bonds is dead equity. But no one ever says that.
In the end, it depends on the investor and how they run their business and what's most important
153 Replies
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Maybe you should have read all the posts.Can already tell you are a type B person in my example by looking at the post below mine and "dead equity".
This is a common question here and the same people always dig their heals in. One side of the table may get caught with their pants down if we get another recession, the other side is making sure they don't get caught. I was fortunate to start investing in 2007 so picked up property on the back end. I have also worked with many individuals who weren't as fortunate, many realtors sold on the game of monopoly.
There is no correct approach to this, it depends on the individual's needs and goals. So that makes you wrong :)
Question: If the market turns down, and the property values decrease, and we are talking about a rental property with positive cash flow, how is the investor negatively impacted?
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
Originally posted by @Joe Villeneuve:
You're not paying any interest. The only thing you paid was the down payment. If you have positive cash flow, your tenant is making the payments for you.
Sure you are paying interest. Tenant pays you, you pay the bank interest. The exact dollar amount is itemized on your tax returns. My point is if you paid off your loan, you avoid that interest. Avoiding interest is the same as making interest. If you chose to put your cash into mortgage pay down, you avoid interest. Tenant still pays you, but now you don't give it to the bank. You pocket the difference.
I didn't say it was the best use of money, just that it is not dead.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes7y
Originally posted by @Joe Villeneuve:
You're not paying any interest. The only thing you paid was the down payment. If you have positive cash flow, your tenant is making the payments for you.
Joe , that is true . But there are many who rely on those payments from the tenant to cover the loan . And there are many with no cash reserves or very low reserves , because things are going well for them . They have 10 units all cash flowing and they have reserves to cover 2 vacant units for 2 months . then the perfect storm hits , Its November 1 and five tenants are late on the rent , 4 of them dont pay at all 1 gets caught up . So there are 4 evictions , it takes 3 months to get them out . 1 unit is trashed , another unit was due for carpet ,paint , and some other repairs , and 2 units are fine . So thats 12 months of rent gone , Its March 1 and the trashed unit costs $12,000 and the other unit costs $4000 to get ready , There is 3 more months total lost rent . ( now up to 15 months lost rent ) Now it takes 30 days to rent the 4 units . ( 19 months rent lost) . All while the loan payments must be made . If loan payment was $1000 a month thats $19K plus $12K plus $4K . Thats $35,000 . in the hole . Plus lost rent .
Possible ? Yes Probable ? Depends on the location .
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes7y
Originally posted by @Alan Grobmeier:
@JD Martin, what was ‘leveraging smartly’ in 2005-08? ;-) Hindsight is 20/20.
Leverage is good. Too much is a noose. Any hiccup and you’re done. Look at the ppl that lost it ALL during the downturn.
I know local landlords who did just fine, leveraged, in that time period. That recession didn't affect everyone equally, not did it have much impact on certain areas. I live in one state metro area and work in another. When the economy went down, the area I worked suffered pretty good, while where I live barely noticed the difference.
If your leverage is structured well, it takes a real calamity to lose everything. If I have a house worth $100k, and I leverage $75k from it, at 5% I've got a note of about $400. If that place rents for $1000, and I have to reduce rents by 30% in a bad recession, I'm still pulling a profit.
The people that lost everything either had no liquid reserves, leveraged homes in marginal areas to begin with (C-D areas), leveraged marginally profitable homes to begin with, or some combination of all of the above. You don't lose anything if you're not forced to sell, and only lack or reserves combined with a property already on the bubble would force you to sell in a down market.
Skyline Properties - Flipper/Rehabber · Long Beach, CA · Member since 2017 · 155 posts · 118 votes7y
Originally posted by @Joe Splitrock:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
My theory is cash on cash return is the true barometer for a successful investment and if there’s is an opportunity to buy low, someone with a paid off property should use that equity to capitalize on the down market. Thus increasing their cash on cash return.
I don’t see why I need to pay off a car to say that. I leased a car. What am I to do. I only owe 150/month x 24 months. I think that’s okay. I don’t think that’s so bad Steve. Why have cash sitting in a depreciating asset?
This isn't the 'If you lease a car, tell me why' show.
This is a 'How do you like your paid off rentals?' show.
For some reason, you singled me out like I asked for your opinion, then you gave it to me. I found myself answering to you, then you gave me an attah boy. LOL
Patrick, how do you like having paid off rentals? Answer the title question.
I have a cash buyer for my kindney. I will be using that cash to pay off the $3600 I owe on my car. Thank you for telling me like it is. Most people would’ve let me continue down this destructive path of commenting on threads without having my car paid off. It wasn’t what I wanted to hear but it’s what I NEEDED to hear.
Patrick, in all seriousness, Steve could really help you and instead you think it is funny to crack jokes at his expense? Steve is a full time investor with a good size portfolio that he built it up from nothing. He is actually really laid back.
Patrick (by your own statements) you are a college student, you are a renter, own no property and have a low credit score, so low you can't get bank financing. And you lease cars.
Why don't you just listen and learn, instead of attacking people who are way more successful than you?
Ohhhhh buddy. This is gettin spicy. I admit I got a little silly with the kidney statement but I was just doing what I was told (Aaron planted the kidney idea in my head so take that up with him). I thought it was funny he brought up the car stuff and I admit again I was a bit of a silly goose. I do that when people say silly things to me. I thought we weren’t being silly. Now regarding your statements about me personally. Also I own property which is conventionally financed in Riverside CA. My credit score is decent like 700somethin. And i graduated college a couple years ago.
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
Originally posted by @Joe Villeneuve:
Answering your question directly - if their plan is to hold the property forever they may not be impacted.
From a practical approach though - you are assuming positive cash flow, you are assuming rents will stay the same, you are assuming stable financing, and you are assuming an investor wants to hold every piece of property forever. I work with a lot of investors and many are doing "smaller deals" with the plans to go into bigger deals. Many of these people have commercial loans with balloon payments, and some are levered up to near 100% through creative financing. A market downturn could wipe these people out as it did during the last recession.
This answer isn't as black and white as you make it seem - paying interest isn't always the answer. It is good to use leverage but in a smart way. I know people who will take on $100k of debt at 5% to get 7% and think they are a genius. To me that isn't worth it.
- Property Manager · High point, NC · Member since 2017 · 52 posts · 21 votes7y
Many people hate paying off their properties so they can leverage and find more deals. However, when you pay off your rental property off it takes a lot of pressure off. I enjoy having mine paid off to generate more money monthly I can throw in to deals without having to worry about debt. Even though I know if it is cash flowing debt is good in some cases.
- 7yScott WolfPro MemberLender · Boca Raton, FL · Member since 2014 · 1k+ posts · 958 votes
I'm staying outta this one.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Joe Splitrock:
Originally posted by @Joe Villeneuve:
You're not paying any interest. The only thing you paid was the down payment. If you have positive cash flow, your tenant is making the payments for you.
Sure you are paying interest. Tenant pays you, you pay the bank interest. The exact dollar amount is itemized on your tax returns. My point is if you paid off your loan, you avoid that interest. Avoiding interest is the same as making interest. If you chose to put your cash into mortgage pay down, you avoid interest. Tenant still pays you, but now you don't give it to the bank. You pocket the difference.
I didn't say it was the best use of money, just that it is not dead.
Follow the money from the sources...not just from a spot on the path it takes.
The source of the funds paying the mortgage is the tenant.
The source of the funds paying the DP is the REI.
When the REI adds money from their bank account, to avoid paying interest on the loan, the tenant is no longer making all the payments.
If on a 100k buy, the REI pays all 100k, the total interest saved is around (5.5% int) $83k...over a 30 year period. The money used to acquire that 100% equity was paid for by the REI, thus it is the exact same money that was originally in the bank...just in a different location. The CF would be around $10,000/year without the mortgage payment...or $300k over that 30 year period.
If a different REI only paid the DP of $20k, an let the tenant "pay off" the house over that same 30 year period, the REI gained the spread (cash flow) off or the rent. In this case, it would be $5k/year, or $150k over that same 30 year period.
Total up the costs/incomes"
REI buys = $400k
Tenant buys: $430k...+...the compounded returns from taking the $80k not spent on this property, and investing it, and reinvesting it (including profits) for that same 30 year period, at a conservative rate of 5% per year =~ $450k...and still growing. For a total of $880k ...and still growing. Is it just me or do posts about free and clear rentals nearly always lead to this inane debate about "Dead Equity" that turns more into a shouting match than an honest to goodness conversation among professionals about investing styles?
1. We can have this debate about how the capital is dead (its not, it just earns the overall rate of appreciation of the underlying asset and its cash flow from operations. The equity in a house is no more "dead" than the equity in my Berkshire Hathaway stock), the funds are "trapped", and if you get a loan they can be put to use.
2. This is just a catchy way of saying, "leverage increases yield" Not exactly earth shattering stuff for anyone who has thought about investing in any asset class for more than two hours.
3. The dead equity camp likes to parade around the higher return of leverage, again... duh. What isn't mentioned so much is the risk. All of the talk focus around higher returns, but not risk-adjusted returns. It's a fact, leverage increase risk. Not having leverage decreases risk. Each investor has different risk profiles. Thus there is no "one size fits all answer". If someone has a high paying sales job, having free and clear properties hedges their risk against a bad quarter. Those that work for the government on the other hand and have a more stable pay check can take more leverage in their investments and still have the same overall risk.
4. The universe of people that have paid of rentals are, more likely than not, a bit savvier than the average bear when it comes to investing/financial matters, so telling them they are "investing wrong" seems foolish. They have enough capital to own an asset outright and the decision to have no mortgage is a choice.
@Joe Splitrock To take a guess at why people crack jokes at guys like Steve: Pointing out the "flaws" of those who have done better/have more makes them feel better about their own lack of success or prior mistakes. Envy can lead to sever cognitive dissonance. But who cares? It is his loss. Now anytime he asks a question here on BP he won't get the best possible answer.
- Member since 2019 · 1 post · 2 votes7y
hmmmmmmmmmmm, let me think, hmmmmmmmm
how do I like income with no mortgage?
hmmmmmmmmmmm
I'll have to think some more....
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Answering your question directly - if their plan is to hold the property forever they may not be impacted.
From a practical approach though - you are assuming positive cash flow, you are assuming rents will stay the same, you are assuming stable financing, and you are assuming an investor wants to hold every piece of property forever. I work with a lot of investors and many are doing "smaller deals" with the plans to go into bigger deals. Many of these people have commercial loans with balloon payments, and some are levered up to near 100% through creative financing. A market downturn could wipe these people out as it did during the last recession.
This answer isn't as black and white as you make it seem - paying interest isn't always the answer. It is good to use leverage but in a smart way. I know people who will take on $100k of debt at 5% to get 7% and think they are a genius. To me that isn't worth it.
I'm not assuming Positive CAsh Flow, I'm not buying the property unless it has positive CF.
Question #2: If the Market has a downturn, and property values go down, is there a difference in that final value based on whether or not there is a loan on the property? In other words, is that new property value drop the same for both?
WHile I'm here, I'll pose Question #3: If the REI with a loan only put in the downpayment, and the 100% cash buyer put in 100% of the original cost, who is really losing money?
Original Cost = $100,000
New Value = $85,000 (represents a 15% drop)Formula: New Value - Original Cost = Net Gain/Loss
100% Buy ==> $85k - $100k = - $15k (as in lost $15k of their money)
20% Down==> $85k - $20k = +$65k - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
Originally posted by @Joe Villeneuve:
Originally posted by @Joe Splitrock:
Originally posted by @Joe Villeneuve:
You're not paying any interest. The only thing you paid was the down payment. If you have positive cash flow, your tenant is making the payments for you.
Sure you are paying interest. Tenant pays you, you pay the bank interest. The exact dollar amount is itemized on your tax returns. My point is if you paid off your loan, you avoid that interest. Avoiding interest is the same as making interest. If you chose to put your cash into mortgage pay down, you avoid interest. Tenant still pays you, but now you don't give it to the bank. You pocket the difference.
I didn't say it was the best use of money, just that it is not dead.
Follow the money from the sources...not just from a spot on the path it takes.
The source of the funds paying the mortgage is the tenant.
The source of the funds paying the DP is the REI.
When the REI adds money from their bank account, to avoid paying interest on the loan, the tenant is no longer making all the payments.
If on a 100k buy, the REI pays all 100k, the total interest saved is around (5.5% int) $83k...over a 30 year period. The money used to acquire that 100% equity was paid for by the REI, thus it is the exact same money that was originally in the bank...just in a different location. The CF would be around $10,000/year without the mortgage payment...or $300k over that 30 year period.
If a different REI only paid the DP of $20k, an let the tenant "pay off" the house over that same 30 year period, the REI gained the spread (cash flow) off or the rent. In this case, it would be $5k/year, or $150k over that same 30 year period.
Total up the costs/incomes"
REI buys = $400k
Tenant buys: $430k...+...the compounded returns from taking the $80k not spent on this property, and investing it, and reinvesting it (including profits) for that same 30 year period, at a conservative rate of 5% per year =~ $450k...and still growing. For a total of $880k ...and still growing.I am trying to follow what you are saying, but I get lost at how you total up the comparison. I am assuming on REI buys that the $400K is the $300K cash flow plus $100K property value. I don't follow on the tenant buys example how you get the $430K. Cash flow is $150K and property is $100K so you have $250K.
I do follow what you say after that about investing the $80K compounding at 5%. Valid point that the loan is a fixed 5.5% rate and not compounding. Versus investing $80K over 30 years compounding, you are making interest on interest. Although my math shows 5% annual return compounding to be more like $350K over 30 years. Maybe I am punching something wrong.
Of course the other thing to consider is that in the "REI buys" situation, the extra $5K cash flow each month could be reinvested so that needs to be figured in.
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Original Cost = $100,000
New Value = $85,000 (represents a 15% drop)Formula: New Value - Original Cost = Net Gain/Loss
100% Buy ==> $85k - $100k = - $15k (as in lost $15k of their money)
20% Down==> $85k - $20k = +$65kSo in this example Joe you are assuming the person who has a loan doesn't have to pay the loan???????? By my calculation, they both lost $15,000! The cash buyer owns a $85k house, the non-cash buyer owns a $85k house with a $80k mortgage.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Original Cost = $100,000
New Value = $85,000 (represents a 15% drop)Formula: New Value - Original Cost = Net Gain/Loss
100% Buy ==> $85k - $100k = - $15k (as in lost $15k of their money)
20% Down==> $85k - $20k = +$65kSo in this example Joe you are assuming the person who has a loan doesn't have to pay the loan???????? By my calculation, they both lost $15,000! The cash buyer owns a $85k house, the non-cash buyer owns a $85k house with a $80k mortgage.
No, what I'm saying as that the money to pay the mortgage is coming from the rent...not the REI's bank account.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Joe Splitrock:
Originally posted by @Joe Villeneuve:
Originally posted by @Joe Splitrock:
Originally posted by @Joe Villeneuve:
You're not paying any interest. The only thing you paid was the down payment. If you have positive cash flow, your tenant is making the payments for you.
Sure you are paying interest. Tenant pays you, you pay the bank interest. The exact dollar amount is itemized on your tax returns. My point is if you paid off your loan, you avoid that interest. Avoiding interest is the same as making interest. If you chose to put your cash into mortgage pay down, you avoid interest. Tenant still pays you, but now you don't give it to the bank. You pocket the difference.
I didn't say it was the best use of money, just that it is not dead.
Follow the money from the sources...not just from a spot on the path it takes.
The source of the funds paying the mortgage is the tenant.
The source of the funds paying the DP is the REI.
When the REI adds money from their bank account, to avoid paying interest on the loan, the tenant is no longer making all the payments.
If on a 100k buy, the REI pays all 100k, the total interest saved is around (5.5% int) $83k...over a 30 year period. The money used to acquire that 100% equity was paid for by the REI, thus it is the exact same money that was originally in the bank...just in a different location. The CF would be around $10,000/year without the mortgage payment...or $300k over that 30 year period.
If a different REI only paid the DP of $20k, an let the tenant "pay off" the house over that same 30 year period, the REI gained the spread (cash flow) off or the rent. In this case, it would be $5k/year, or $150k over that same 30 year period.
Total up the costs/incomes"
REI buys = $400k
Tenant buys: $430k...+...the compounded returns from taking the $80k not spent on this property, and investing it, and reinvesting it (including profits) for that same 30 year period, at a conservative rate of 5% per year =~ $450k...and still growing. For a total of $880k ...and still growing.I am trying to follow what you are saying, but I get lost at how you total up the comparison. I am assuming on REI buys that the $400K is the $300K cash flow plus $100K property value. I don't follow on the tenant buys example how you get the $430K. Cash flow is $150K and property is $100K so you have $250K.
I do follow what you say after that about investing the $80K compounding at 5%. Valid point that the loan is a fixed 5.5% rate and not compounding. Versus investing $80K over 30 years compounding, you are making interest on interest. Although my math shows 5% annual return compounding to be more like $350K over 30 years. Maybe I am punching something wrong.
Of course the other thing to consider is that in the "REI buys" situation, the extra $5K cash flow each month could be reinvested so that needs to be figured in.
Tenant REI only comes up with $20k out of pocket, the DP, so theat REI only pays $20k...the rest is coming from the rent (tenant). That also means that instead of using the full $100k at the start (like the other REI), the "tenant" REI gets to keep that $80k...plus the $20k from the DP (now equity) = $430k
...and you're correct about the $350k...(can I blame spell checker...LOL) typo. Which would make the total return = $780k.
I'm not reinvesting either of the CF's, but the extra $5k CF that the 100% buyer gets, reinvested and compounded over that same 30 year period gets them an added $21k. I didn't reinvest either REI's cash flow because I assumed they would keep that as income...or why bother?
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Original Cost = $100,000
New Value = $85,000 (represents a 15% drop)Formula: New Value - Original Cost = Net Gain/Loss
100% Buy ==> $85k - $100k = - $15k (as in lost $15k of their money)
20% Down==> $85k - $20k = +$65kSo in this example Joe you are assuming the person who has a loan doesn't have to pay the loan???????? By my calculation, they both lost $15,000! The cash buyer owns a $85k house, the non-cash buyer owns a $85k house with a $80k mortgage.
No, what I'm saying as that the money to pay the mortgage is coming from the rent...not the REI's bank account.
And that doesn't matter... The tenant can pay the bank $85k and payoff your mortgage, or that same $85k can go in the investor's pocket as additional cash flow each month. Doesn't affect the gain/loss you mentioned above.
- Realtor · Albuquerque, NM · Member since 2017 · 121 posts · 68 votes7y
I purchased my first property with cash and financed the next 3 doors. I didn't think I'd enjoy real estate investing as much as I do and wish I had used my money to buy more properties. With that being said, my rental was empty for 2 weeks and I didn't have to worry about dipping into my contingency funds to pay for a mortgage. There are certainly pros and cons to each investing method. Your choice should be made based on your personal situation and your comfort level. I prefer having fewer properties and higher cash flows.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Original Cost = $100,000
New Value = $85,000 (represents a 15% drop)Formula: New Value - Original Cost = Net Gain/Loss
100% Buy ==> $85k - $100k = - $15k (as in lost $15k of their money)
20% Down==> $85k - $20k = +$65kSo in this example Joe you are assuming the person who has a loan doesn't have to pay the loan???????? By my calculation, they both lost $15,000! The cash buyer owns a $85k house, the non-cash buyer owns a $85k house with a $80k mortgage.
No, what I'm saying as that the money to pay the mortgage is coming from the rent...not the REI's bank account.
And that doesn't matter... The tenant can pay the bank $85k and payoff your mortgage, or that same $85k can go in the investor's pocket as additional cash flow each month. Doesn't affect the gain/loss you mentioned above.
But it "does".
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Splitrock:
Originally posted by @Joe Villeneuve:
Originally posted by @Kyler Cook:
@Joe Villeneuve The term in my mind isn’t dead money, but rather inactive money. It’s a good way to store capital in the event of a market correction so you can buy as well. I plan to pay off my first five units quickly and then leverage them when foreclosures start wrecking the market again in 5-10 years. It’s not dead money because it sill has value and potential, but that’s my own definitions/take on the situation.
It's dead. Here's why.
That "inactivity" isn't accessible, unless you sell the property or refi. If you refi, it now costs you to use your own money...again.
Also, the "value and potential" you speak of is exactly the same in the bank...but liquid. If invested, along with the returns on that investment, it compounds its value for as many times as you "use it"...and, there's no cost to use it.
It is not totally dead from the standpoint, that you are avoiding interest. Let's say I took out a loan for $100,000 and was paying 5.5% interest. If I pay off that loan, I am now avoiding 5.5% interest, which is similar to making 5.5% interest. Arguably 5.5% interest isn't great, so you could put that money to work to make higher return.
Joe Rock i agree its just like taking your highest interest rate credit card and pay those first.. those 15 to 30% ones your making/saving that money by paying that debt off.. problem with the max debt rental cash flow ideology is you simply have bad days or weeks or months with the average C/D for sure and some B .. along with what if you have a life event that you need to liquidate.. you have too much debt and you want to buy something else or start a business that is more profitable than rentals or any number of things. paid for real estate gives you far more maneuvering power. and rentals with 75 to 80% LTV debt especially in low value areas. have NO equity.. by the time you have to so some fix up pay sales costs and seller closing costs etc etc.. so you lost cash flow and you lost your CASH.. ( in the event you need or want to pivot.).. Also if you want to do other things that involve bank debt they look at contingent liabilities and balance sheet equity.. I know its helped me scale to be able to build whole housing tracks.. if i still had all my rentals with no real equity in stead of a balance sheet very heavy to assets and very light to debt. would not have happened
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Original Cost = $100,000
New Value = $85,000 (represents a 15% drop)Formula: New Value - Original Cost = Net Gain/Loss
100% Buy ==> $85k - $100k = - $15k (as in lost $15k of their money)
20% Down==> $85k - $20k = +$65kSo in this example Joe you are assuming the person who has a loan doesn't have to pay the loan???????? By my calculation, they both lost $15,000! The cash buyer owns a $85k house, the non-cash buyer owns a $85k house with a $80k mortgage.
No, what I'm saying as that the money to pay the mortgage is coming from the rent...not the REI's bank account.
And that doesn't matter... The tenant can pay the bank $85k and payoff your mortgage, or that same $85k can go in the investor's pocket as additional cash flow each month. Doesn't affect the gain/loss you mentioned above.
But it "does".
What's the ROI of each investment?
Full Cash: -15% (85k-100k)/100k
Levered: -75% (85k-20k-80k)/20k
This is a clear demonstration of the downside of leverage. Small changes in the underlying asset value magnify the impacts on returns, both for good and ill.
Who pays the mortgage (it's not the tenant, the transitive property doesn't apply to accounting) is of no consequence.
@Frank Wong
Well said/explained!
That’s my way of thinking, while I’m still working don’t need extra income,
When I will decide to take it easy/retire and need that income to enjoy my time, that’s when I don’t want to chase 20-30 properties full time still mortgaged but 7 free and clear really well managed with happy tenants.
Also all my mortgages are around 5% so I’m feeling like I’m investing money back.
Frank what is your strategy for paying off?
Currently I’m adding my cash flow from each property to each mortgage. Should I concentrate on paying one and snowball next?
I would like to pay them off in the next 10-12 years. Some are currently 50% LTV some recently purchased 70%LTV
Currently got a duplex, single family home and two condos, single family homes don’t cash flow in Chicago N/W suburbs anymore, multi units (4-6) are in some cases more per door then condos! In this market I rather use extra cash to keep paying off rather than buying property that don’t make decent cash flow.
Looking forward for your take. Thanks!
I have one paid off, one half way done with a 15 year mortgage, and another with 27 years left on a 30 year mortgage and I like each of these properties because they bring different benefits.
The paid off one brings a nice return each month.
The 15 year mortgage has the least cashflow but about 10K is being shed off the principal each year and I have a line of credit on it which I used to buy the one that is now paid off.
The 30 year has very good cashflow and each year that loan becomes less and less significant each year because of inflation/appreciation.That being said, I think every investor sees the great value in having access to immediate cash/credit. You need to be able to strike when the deals come your way regardless of what asset it is. I just bought a skidsteer for 10K under value because I had the cash ready to go, and this will be a dream to sell compared to real estate...no title, no taxes. Dumping every penny into real estate is a good way to lose sleep at night.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Bill F.:
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Originally posted by @Joe Villeneuve:
Originally posted by @John Woodrich:
Original Cost = $100,000
New Value = $85,000 (represents a 15% drop)Formula: New Value - Original Cost = Net Gain/Loss
100% Buy ==> $85k - $100k = - $15k (as in lost $15k of their money)
20% Down==> $85k - $20k = +$65kSo in this example Joe you are assuming the person who has a loan doesn't have to pay the loan???????? By my calculation, they both lost $15,000! The cash buyer owns a $85k house, the non-cash buyer owns a $85k house with a $80k mortgage.
No, what I'm saying as that the money to pay the mortgage is coming from the rent...not the REI's bank account.
And that doesn't matter... The tenant can pay the bank $85k and payoff your mortgage, or that same $85k can go in the investor's pocket as additional cash flow each month. Doesn't affect the gain/loss you mentioned above.
But it "does".
What's the ROI of each investment?
Full Cash: -15% (85k-100k)/100k
Levered: -75% (85k-20k-80k)/20k
This is a clear demonstration of the downside of leverage. Small changes in the underlying asset value magnify the impacts on returns, both for good and ill.
Who pays the mortgage (it's not the tenant, the transitive property doesn't apply to accounting) is of no consequence.
Explain your formulas
Join the conversationCreate a free account to reply, vote on answers and follow this thread.