To pay or not to pay off your primary residence

General Real Estate Investing
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To pay or not to pay off your primary residence

James H.
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes

This discussion was cropping up in another thread about a different topic, and I wanted to hear more feedback from other members about what they prefer. As a primer, I am going quote @Rich Weese contributed as I find it was very interesting - hope you don't mind Rich.

" Brian and Jon H- Here is my contrarian view to owning your OWN residence free and clear and why I don't do it. I like my contrarian view for the following reasons . I DO agree you should have A house free and clear.
1. I have at least a home free and clear.
2. I am able to obtain a better loan on OWNER OCCUPIED home.
2. I do have a sense of security with F&C home- and it doesn't have to be the residence.
3. I live in a nicer home, higher LTV, lower rate, etc and still have a F&C home if everything goes to pot.
4. If everything only goes PARTIALLY to pot, the lender probably won't want my highly leveraged home I live in. We all know people who are under water for over 3 years and lender hasn't taken the home.
5. I get interest deductions on my residence, which I wouldn't if it was F&C.
6. I still have the sense of security with other F&C home.
7. I have more $ to invest elsewhere because F&C home is not as expensive and only there for severe emergency.
8. The extra $$ to invest makes me more $$, more writeoff etc-which I wouldn't otherwise have.

Just a contrarian view for BP members to digest. Rich"

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Rich Weese
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
14y

Brian- I forgot to mention-you're ok reproducing anything I write. I stand by it, so feel free to share. This has the possibility of being a fun thread if it doesn't turn ugly. Speaking of ugly-today isn't. In Yellowstone waiting for kids and grand kids to arrive for reunion.This is TRULY what passive income is all about! REALLY Rich-(because of 6 kids and soon to be 12 grand kids!)

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y

    J Scott The main reason you leverage and borrow against a property is for access to equity to use as capital somewhere else. The tax deduction doesn't discount or reduce the cost of the borrowing. You'd probably borrow the capital even if the tax deduction wasn't available.

    That would be like saying if you bought all your paint for rehabs at retail instead of wholesale, you could deduct that much more!

    Leverage makes total sense when the equity is there and the rates are favorable, but It's not like you to be weird with numbers. :)

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by K. Marie Poe:

    The tax deduction doesn't discount or reduce the cost of the borrowing.

    Maybe I'm missing something, but why doesn't it?

    When I got the loan on my house, I was given a Truth in Lending statement that indicated my APR on the loan (interest rate + amortized rolled-in costs). That APR is my cost to borrow the money. That APR doesn't take into account that at the end of every year, I get back several thousand in tax savings.

    So, in reality, if you take into account my interest deduction, that APR is even lower than what the TIL indicates. In other words, my cost of borrowing is lower thanks to the interest deduction.

    What am I missing? Are we thinking about this differently in some way?


    You'd probably borrow the capital even if the tax deduction wasn't available.

    That is certainly true. Just like I'd buy the toilet paper without the coupon...but that doesn't mean the coupon is worthless to me... :)

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y
    Originally posted by J Scott:
    Originally posted by Ryan M.:
    We target 15% on rentals so I would be lend at that rate. Wait this will have fewer complications so I could reduce it to 13%, but crap if you go under I have to come after the money so I need a premium, 17%.

    Assuming no points on the loan, I'll borrow everything you have at 17%. My email is in my sig...looking forward to working with you!

    Ryan M. Ryan: I would also take what you have at 17% and no points. So as to not waste your time writing the check, I'll guarantee you a 4 month minimum. Lend me 100K secured by RE for four months and I'll gladly pay you $5700. I'm for real and so is my phone number. :)

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by K. Marie Poe:

    Ryan M. Ryan: I would also take what you have at 17% and no points. So as to not waste your time writing the check, I'll guarantee you a 4 month minimum. Lend me 100K secured by RE for four months and I'll gladly pay you $5700. I'm for real and so is my phone number. :)

    I'm for real too!!!

    K Marie -- I'll meet you in the parking lot and we can split it up... ;)

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  • Andy B.
    Real Estate Attorney · Dallas, TX · Member since 2011 · 124 posts · 29 votes
    14y

    I fall firmly on the fence on this one -- while I can understand the concept of borrowing to invest and get a bigger retrun than the cost of borrowing, I personally have an aversion to debt. I paid off my primary residence and it felt good and I really enjoy not having to make payments to the bank.

    Of course, I am now looking to see what sort of loan I can get on the place so I can go out and invest -- but I'm not sold on the idea yet.

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    From K Marie-

    "The main reason you leverage and borrow against a property is for access to equity to use as capital somewhere else. The tax deduction doesn't discount or reduce the cost of the borrowing. You'd probably borrow the capital even if the tax deduction wasn't ..."

    I'm going to disagree with you- but, remeber, I'm not normal investor. I'm in the process of selling a couple homes AND refinancing 1. I have zero plans to use the capital somewhere else at present. The rates are really low and I am hedging my bet. I already own a grundle of RE , over 800 total units consisting of sfrs, apts and storage units. I don't need more. I'm planning for the worst (not expecting it-just like auto insurance) and getting to cash in a big way. IF the recession goes double dip, I'm ready to buy a grundle more of RE. So for me, it is NOT to currently use somewhere else.

    JScott- no one is right or wrong. I also mentioned peace of mind having a value-it just happens to be a greater value to others than to me...

    Rich

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  • Ryan M.
    West, MI · Member since 2012 · 674 posts · 182 votes
    14y

    Man, we need a note guy to chime in because this is intriguing me. I'm out here showing rentals (3 in the last hour) but there is a easier way. I would like a year min.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by Ryan M.:
    Man, we need a note guy to chime in because this is intriguing me. I'm out here showing rentals (3 in the last hour) but there is a easier way. I would like a year min.

    I would need a 2-year minimum...so that's not a problem...

    Why do we need a note guy. The terms are simple -- 17% interest-only, paid monthly with a balloon for the full principal amount at the end of the term.

    Call me!

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  • Matt DuSold
    Lender · Phoenix, AZ · Member since 2008 · 351 posts · 40 votes
    14y

    Glad to see this thread pop up this is something I have been thinking about A LOT lately and even spoke to a member here on BP about it not too long ago.

    The only debt I have is my car and my condo. So I guess it is concerned "good debt" if there is such a thing. I can pay my car off today if I want to but I want to keep it towards flips right now. But the question is what do I do when they close and now that I have my license the properties I am a broker on close.

    I have a pretty decent corporate job and a roommate right now (who knows when he could leave) and I have figured it out that I could pay it off or come darn close to having it all paid off by the end of next year. The appeal of that is awesome, but then I think to my long term goal of passive income.

    For me, and I would like to hear from the experienced guys, the question is, do I pass up this great time to buy rentals and become debt free or do I buy rentals and worry about that later. I guess my worry of paying it off now is that we may not see a market like this for a long time, but I guess none of us can predict the future...

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y
    Originally posted by J Scott:
    Originally posted by Ryan M.:
    Man, we need a note guy to chime in because this is intriguing me. I'm out here showing rentals (3 in the last hour) but there is a easier way. I would like a year min.

    I would need a 2-year minimum...so that's not a problem...

    Why do we need a note guy. The terms are simple -- 17% interest-only, paid monthly with a balloon for the full principal amount at the end of the term.

    Call me!



    Ryan M. J Scott beat me to it. 17%, interest only, balloon note, but I only want to commit to a year min.
    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y
    Originally posted by Rich Weese:
    From K Marie-

    "The main reason you leverage and borrow against a property is for access to equity to use as capital somewhere else. The tax deduction doesn't discount or reduce the cost of the borrowing. You'd probably borrow the capital even if the tax deduction wasn't ..."

    I'm going to disagree with you- but, remeber, I'm not normal investor. I'm in the process of selling a couple homes AND refinancing 1. I have zero plans to use the capital somewhere else at present. The rates are really low and I am hedging my bet. I already own a grundle of RE , over 800 total units consisting of sfrs, apts and storage units. I don't need more. I'm planning for the worst (not expecting it-just like auto insurance) and getting to cash in a big way. IF the recession goes double dip, I'm ready to buy a grundle more of RE. So for me, it is NOT to currently use somewhere else.

    JScott- no one is right or wrong. I also mentioned peace of mind having a value-it just happens to be a greater value to others than to me...

    Rich

    Rich Weese There is a language disconnect here for me. You say you're refinancing, thereby leveraging, with no plans to use the capital. Then you say you are "hedging". IMO, you do have a plan. It's to have the option to use the capital in the future and to have it be cheaper than what will be available in the future. I like that plan.

    I'm not against leverage and know it works and grows businesses. For some people, leveraging the equity in their primary residence with a great loan rate can really be just the right thing. I just don't see the how the interest deduction makes any difference in making that decision. It's a cost. You get to deduct costs when running a business. Whoopee. :)

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  • Account Closed
    CA · Member since 2011 · 762 posts · 182 votes
    14y
    Originally posted by K. Marie Poe:
    Originally posted by J Scott:
    Originally posted by Ryan M.:
    Man, we need a note guy to chime in because this is intriguing me. I'm out here showing rentals (3 in the last hour) but there is a easier way. I would like a year min.

    I would need a 2-year minimum...so that's not a problem...

    Why do we need a note guy. The terms are simple -- 17% interest-only, paid monthly with a balloon for the full principal amount at the end of the term.

    Call me!



    Ryan M. J Scott beat me to it. 17%, interest only, balloon note, but I only want to commit to a year min.

    K. Marie,

    You can pretty easily find hard money in CA for one year at 12%, 3 pts. Over a one year period that is a total cost of 15%, 2% less than the 17% you are willing to pay to avoid points. Are points so objectionable that you are willing to pay more to avoid them?

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by David C.:

    You can pretty easily find hard money in CA for one year at 12%, 3 pts. Over a one year period that is a total cost of 15%, 2% less than the 17% you are willing to pay to avoid points. Are points so objectionable that you are willing to pay more to avoid them?

    I can't speak for K Marie, but I turn houses in about 100 days. So, that would be 3.6 transactions per year, with each incurring the 3 points.

    In total, if I kept that money working full-time, I'd be paying close to 23% per year with the terms you mentioned. When it comes to hard money for seasoned investors, it's the points that really makes those loans undesirable/unprofitable.

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    1Reply
  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    14y

    Matt- the key is your last sentence. What do you believe the future holds? Then , make your decision accordingly.

    K.- Just semantics. Your first sentence said use of capital somewhere else, and your inference was NOW. I replied that I have ZERO plans at present to use capital ANYWHERE and may never. That was the difference. The interest and writeoff is something I hold dear to my heart. My presentation at the recent Summitt went into that in detail. I'll do ANYTHING legal to avoid income taxes and have 2 apology letters in the midd le of my Book from the IRS to prove it. That #5 to me has always been an important factor and always will be. Rich

    2Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y

    Brian Hoyt Thanks for starting this thread. Lots of interesting takes on leverage being posted. Lots of interesting takes about the interest deduction as well.

    I remember some earlier threads where you mentioned the opportunity to refinance your home and that you were looking to upgrade to a better house (and thus have two rentals). I do have some observations, for what they are worth, about leverage against your primary residence.

    Most people will never have the opportunity to compare owning F/C with anything. But if there is a real possibility for you and your wife to own a primary residence free and clear, and since you call yourself a real estate "hobbyist", I want to chime in. For families with children at home, and two parents working day jobs: if you compare a F/C house with leverage it's a no brainer. If one spouse's income goes away from illness or death, the working and/or surviving spouse has children, a job and a mortgage. Just the children is enough. But a job and children and.... I'm sure you get the idea.

    My experience is being on the receiving end of LOTS of phone calls from people, many of whom are spouses, who inherited property with debt. Leverage against your primary residence is all well and good in the investment world for people experienced enough to get it to work for them and pay them back and/or grow their business in short order. But will the leverage create enough cash flow so that the working/surviving spouse isn't stressing out just to keep a roof over the kid's head. Are your savings so squared away that it doesn't matter if you're mortgaged to the max on all of your properties?

    There. I've said it. You don't know me so you can't know how I'm SO not into life insurance or preparing for the worst. But if you and your wife have the opportunity to create a safe, sound and F/C home for the part of your life when you are raising children (it's so short, trust me)...DO IT.

    Full disclosure: Parenting has been my best gig to date.

    1Reply
  • Account Closed
    CA · Member since 2011 · 762 posts · 182 votes
    14y
    Originally posted by J Scott:
    Originally posted by David C.:

    You can pretty easily find hard money in CA for one year at 12%, 3 pts. Over a one year period that is a total cost of 15%, 2% less than the 17% you are willing to pay to avoid points. Are points so objectionable that you are willing to pay more to avoid them?

    I can't speak for K Marie, but I turn houses in about 100 days. So, that would be 3.6 transactions per year, with each incurring the 3 points.

    In total, if I kept that money working full-time, I'd be paying close to 23% per year with the terms you mentioned. When it comes to hard money for seasoned investors, it's the points that really makes those loans undesirable/unprofitable.

    Point well taken. You are a little unusual however, most can't turn that fast. K. Marie was willing to guarantee 4 months, in one of her earlier posts. I'm sure for somebody with her experience it could be done for, let's stay, 2 pts, so, that's 18% (2pts*3/yr+12%). Done by a CA broker thus exempt from state usury.

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y
    Originally posted by J Scott:
    Originally posted by David C.:

    You can pretty easily find hard money in CA for one year at 12%, 3 pts. Over a one year period that is a total cost of 15%, 2% less than the 17% you are willing to pay to avoid points. Are points so objectionable that you are willing to pay more to avoid them?

    I can't speak for K Marie, but I turn houses in about 100 days. So, that would be 3.6 transactions per year, with each incurring the 3 points.

    In total, if I kept that money working full-time, I'd be paying close to 23% per year with the terms you mentioned. When it comes to hard money for seasoned investors, it's the points that really makes those loans undesirable/unprofitable.

    J Scott Actually, you can speak for me, because you can do the math. I know points are objectionable, even though I can't do the math. But I have paid more than 3 plenty of times in the past. To be honest, I currently have money at 10% (no points), but it's not limitless and I'm getting busy. I can't close everything I have in escrow today without upping my borrowing. My 10% guy is unsecured, so it's more like a small business loan and I'm aware that I won't be able to replicate that very easily

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by K. Marie Poe:
    For families with children at home, and two parents working day jobs: if you compare a F/C house with leverage it's a no brainer. If one spouse's income goes away from illness or death, the working and/or surviving spouse has children, a job and a mortgage. Just the children is enough. But a job and children and.... I'm sure you get the idea.

    This I agree with 100%. I'm a big fan of leverage when you have the cash reserves (or other liquid investments) to cushion any major downside pressure; normally we think about the market turning as the major cause of that downside pressure, but certainly loss of a job or death of a primary earner in a family is a much, much worse situation.

    If you're not financially prepared for that situation, DON'T LEVERAGE more than the remaining income can continue to service.


    Full disclosure: Parenting has been my best gig to date.

    This I agree with even more than I agree with the above... :)

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by K. Marie Poe:

    To be honest, I currently have money at 10% (no points), but it's not limitless and I'm getting busy.

    I'm in the exact same situation. I have a lot of my own cash invested in my business and a lot of private money that I'm paying 10-11% interest (secured by personal guaranty but not real estate).

    I have a feeling (and some data) that suggests the market is going to loosen up a good bit in the next couple months and banks are going to start releasing a good bit of inventory -- if that influx of properties materializes, I want to be prepared to take advantage of it. If I can't raise more private money, I'll be going with HML at 12/3 (like David mentioned)...but I'll be using the HML for the big projects where my hold times will be longer, just to reduce the impact of the points.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y
    Originally posted by David C.:
    Originally posted by J Scott:
    Originally posted by David C.:

    You can pretty easily find hard money in CA for one year at 12%, 3 pts. Over a one year period that is a total cost of 15%, 2% less than the 17% you are willing to pay to avoid points. Are points so objectionable that you are willing to pay more to avoid them?

    I can't speak for K Marie, but I turn houses in about 100 days. So, that would be 3.6 transactions per year, with each incurring the 3 points.

    In total, if I kept that money working full-time, I'd be paying close to 23% per year with the terms you mentioned. When it comes to hard money for seasoned investors, it's the points that really makes those loans undesirable/unprofitable.

    Point well taken. You are a little unusual however, most can't turn that fast. K. Marie was willing to guarantee 4 months, in one of her earlier posts. I'm sure for somebody with her experience it could be done for, let's stay, 2 pts, so, that's 18% (2pts*3/yr+12%). Done by a CA broker thus exempt from state usury.

    @David C. Well, woo me then. Yeah, I'm pretty experienced but not too many lenders have been lining up to offer me point and fee free money.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y
    Originally posted by Ryan M.:
    Man, we need a note guy to chime in because this is intriguing me. I'm out here showing rentals (3 in the last hour) but there is a easier way. I would like a year min.
    I already did. if you get 15% return on your rentals, you are doing well, but I bet you are managing them to get that return. Even if you are not, you have some managerial responsibilities so you are not all passive.

    I get 20%+ returns on almost all my notes and I dare the borrower to not pay, I will take back the asset with 50%+ equity and be just fine, bossting my returns much higher, not lower. Oh yeah, and I am 100% passive from point of purchase on too!

    This conversation has moved away a bit from topic, however, you seem to miss the points and advantages of using leverage in your personal residence as well as investment property. Leverage is good if applied responsibly, accurately, and efficiently.

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  • Account Closed
    Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    Nothing wrong with using your home as a piggy bank if you are able to reinvest the money well, have the necessary reserves, your situation supports it and you have given careful thought to any other potential problems.

    There are a number of things to consider though. Not the least of which is your family situation. Someone with a young family needs to be a lot more cautious because there are many more potential surprises that should be covered. A young single person can take far more risk.

    I think as someone nears retirement it is well worth considering paying off your mortgage debt.

    Personally I use debt whenever it makes sense. I wouldn't advocate using credit cards either, but personally I use them everyday for nearly all my purchases. In my situation though I never build a credit card debt because regardless how much I spend on my card it is paid off when it is due usually the last day of the grace period.

    1Reply
  • Ossamah S.
    Real Estate Investor · Atlanta, GA · Member since 2012 · 5 posts · 2 votes
    14y

    wow great discussion here for newbies like me. Thanks folks!

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  • James Park
    Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes
    14y

    Here is the way i see it. If you have $2 million in cash and have a debt service of $2M, this is the same as owning all your properties free and clear and you can pay off $2M any day.

    If you can take out a 80% loan from your primary at a fixed rate of 3.75% for 30 years and invest that money and get a return of 15-20% why wouldn't you do it? The smart thing to do is lock in $2M of mortgages at 4% for 30 years and arbritrage that money to beat the bank. Any return you can get greater than 4% is your profit.

    If i see my track record for the past 5 years it looks like this.

    1) Investing in my own business (eCommerce) - 35 - 50% Annual return
    report card : A

    2) My personal hedge fund - 25 - 30% annual return: Report card : B+

    3) Real estate - 5 % - this is the sector that i am the weakest at, but read bigger pockets every day to improve my returns and improve my grade. Report card : D

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Andy B.:
    I fall firmly on the fence on this one -- while I can understand the concept of borrowing to invest and get a bigger retrun than the cost of borrowing, I personally have an aversion to debt. I paid off my primary residence and it felt good and I really enjoy not having to make payments to the bank.

    Of course, I am now looking to see what sort of loan I can get on the place so I can go out and invest -- but I'm not sold on the idea yet.

    This post is very telling. Your equity is just bricks and sticks and metal and glass. In order to get "access" to that equity, you will end up asking "permission" from a bank in the form of a loan application. That bank could say "no" ... How do you think hearing "no" in those circumstance will sound?

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