What's the best mortgage length you all do?

9 Replies

A teacher I used to have has 38 properties and all 10/15 year mortgages which all have break even cash flow which in turn lowers his taxes from his full time job. After the 10/15 years he refinances and pulls out as much as he can from the properties which he puts Into retirement accounts plus all of the money is untaxed .
What do you all think of this and if anyone has another strategy I would like to hear about it

After the 10/15 years he refinances and pulls out as much as he can from the properties which he puts Into retirement accounts plus all of the money is untaxed .

Sort of, but not really.  You're right that loan proceeds are not taxable.  However, if you lose the house to foreclosure or a short sale after pulling out a bunch of cash you will have a tax bill.  Or, if you even just have to sell you could end up having a tax bill that you have to pay out of pocket if there's not enough cash from the sale to pay off the loan and cover the taxes.

Longer terms mean more cash flow. Shorter terms get you a paid off property sooner. Just a matter of your priorities. I think there is merit to this pay off then refi strategy, as long as you're at least break even cash flow wise. Or have the capacity to support negative cash flow. But it does increase your risk. You really want to be sure you're cash flow break even. And Rent = PITI on your loan is NOT cash flow.

Jon Holdman, Flying Phoenix LLC

One point to consider when it comes to cash out refinancing: if the proceeds are used for personal reasons, in your friends case to add to retirement savings, the interest expense on that portion of the proceeds are no longer tax deductible. This will certainly increase your tax bill and effect your future cash flow.

I thought Fannie/Freddie rules would not allow cash out refinance for investors who own more than four financed properties. How is this rule averted?

With portfolio financing or by obtaining private financing temporarily and then doing a rate and term refinance to payoff that private note with conventional financing (Fannie loans 5-10) it's what I utilize with my investor clients.

There is no time frame for the private lien with regards to title/time seasoning to do a rate term refinance.

Another option is to purchase with cash and cash out within under 6 months following your acquisition date.

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

I guess that is one way to do things. I don't know why he wouldn't just take the cash-flow from the property and invest that without having the debt hanging over his head.

If he needs more depreciation just do a 1031 into a more expensive property or multi family unit to increase the amount of depreciation.

I once had a finance professor, who I respect greatly, who made the comment "I never made an investment decision for tax purposes that I didn't latter regret". I think this is great advice, i.e. "don't let the tax tail wag the dog". Make sound investment decisions and you only pay taxes if you are making money, a high quality problem for sure.

Bob E. MBA, LD Funding, LLC | [email protected] | 909‑353‑3863 | http://www.LDFundingLLC.com

@bob estler i always wondered why he didnt use the income for rertirement instead

@Bob E. That's a great quote and great advice. So many people step over dollars to save pennies when it comes to taxes.

The other thing that comes to my mind is, with 38 houses, if he paid them off and didn't take out a new lone, WOW, he would have an amazing cash flow to buy more property or any other investments he wants whenever he wants.

Bob E. MBA, LD Funding, LLC | [email protected] | 909‑353‑3863 | http://www.LDFundingLLC.com

Originally posted by @Sean Kuhn :
@Bob E. That's a great quote and great advice. So many people step over dollars to save pennies when it comes to taxes.

I see this all the time working with clients who use turbo tax or have out grown their local HR block/mom and pop tax service in sophistication but, yet they cling on to these service providers trying to save what in retrospect is "pennies," while jumping over "dollars."

I break down the mechanics and to show how much money they are potentially leaving on the table and what value the more knowledgeable tax advisor can bring to see if it may make sense to upgrade or not.

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453