Investor · Berkeley, CA · Member since 2016 · 45 posts · 43 votes
Our LLC owns seven properties in St. Louis: 1 single, 2 duplexes, four 4-plexes. All have mortgages. We are selling our primary residence, located in California. We will be netting a lot of after-tax money from this sale. (1,200 sq ft 2+1s are currently going for $900K or more.) We want to keep the resulting nest egg liquid. One possible parking place that occurs to me is to pay off some of our St. Louis mortgages. I'm thinking, why chase deals in an uncertain -- and presently way overpriced -- marketplace, when we already own seven proven deals. Where I would like some experienced advice from the BP membership is to ballpark how much it would cost to pull that money back out again, using a Line of Credit or a re-fi? Part two is, how do these costs compare with the risks and rewards of other places to park money, like flips, hard money loans or non-performing notes?
It would be great if someone has already tried this formula -- to park money in one's own properties, then pull it out again when needed -- and could share the experience.
Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y
@Bill HenleyHere's one piece of advice: when you do this, pay off entire mortgages, property by property, preferably starting with the most valuable if you have enough to cover it all. If you paid down all your mortgages by 20% for example, you'd have a harder time getting that money back out than if you owned it free and clear.
Investor · Berkeley, CA · Member since 2016 · 45 posts · 43 votes
9y
@Jason Hirko: Oh, yes, this would be central to the money-parking strategy: to eliminate as many monthly payments as possible. Mortgages are like the honey badger, they just don't care how low is the principal balance, they still demand to be fed.
Lender · Newport Beach, CA · Member since 2013 · 264 posts · 97 votes
9y
@Bill Henley I'd like to offer a counter point. Your investment properties cost you a pretty penny in tax accounting due to schedule E deducting your property related deductions. Interest income is always your largest write-off.
Hypothetically, an average $200k property may have about $750 per month in interest or $9000 interest deduction on you schedule to offset your income. Most will carry about a 20% cashflow monthly, so lets say $300 per month or $3600 per year (per unit). Though you're pocketing more than that, your interest deduction puts you at a negative tax liability. With all the other deductions (property tax, insurance, etc) you have thousands in negative income to offset profits elsewhere.
Paying off the mortgage gets rid of that est. $9000 deduction and you go from a negative tax liability to a tax liability of about 80 to 90% of your annual rental revenue.
Paying off your primary residence makes perfect sense, but if you're in the business of real estate, use the tax laws to your benefit, and park your money where you'd get an equal amount of additional revenue, while you maintain your biggest tax deduction to offset your new additional income.
As far as what to do with parking that nest egg, all your suggestions are great if you have a passion for it and will follow through to mitigate each of their respective risks. Pick your poison and run with it. But I just suggest keeping a reasonable amount of debt and using the velocity of money to multiply your windfall into more, much faster with the help of that tax relief.
Sorry if long winded. Hope that makes sense (2 cents)
Investor · Berkeley, CA · Member since 2016 · 45 posts · 43 votes
9y
@Robert Sepulveda: There it is, the answer I was seeking. I did not think of the tax increase we would get without the interest deductions. I must remind myself that tax benefits and the availability of borrowed money are the two great advantages of real estate investing.