Cash Usage Conundrum

2 Replies

So, we recently came into some cash and are in a good position to make some additional real estate moves...trying to pick everyone's brains for some advice!

Quick background - bought first house using VA Loan back in 2009 (currently active duty Navy) and second home using FHA in 2012. We're renting both out. Last year, we realized that only investing in homes that we live in first just won't get us to where we want to be, so we bought a property last summer, another early this year, first duplex two months ago, and we should be closing today on our second duplex! It's all coming together quite nicely, and thanks to all the great insight from this site and from many books, my standards for cash flow have gotten extremely high, and we're killing it on our COC for the most recent three properties.

Where we are now is...we just got a very nice cash payout from some complicated circumstances surrounding my wife's company being bought out and all retained employees getting huge retention bonuses. Details there don't matter, however what does matter is that we're about to bring home a sizable chunk of change in the next month. The ever-present question on this forum comes up, and that is...what to do with this money?! It's enough to cover down payments on two more properties similar to the ones that we have been buying, however we are contemplating paying off one of our duplexes (about a $95k loan) and take a quick break from purchasing to let our finances calm down and deal with a bunch of repairs and other extremely busy life circumstances that we have going on. The goal with paying it off would be to jump the mental hurdle of owning a property free and clear, start an LLC and transfer the title into that LLC, and then to have a property that we can HELOC against in order to have the flexibility to make cash offers so that we can begin making LLC purchases more easily rather than titling in our own names.

I'm certain that plenty here would advise to continue rolling the money into new properties, rather than to pay one down, since owning the house free and clear would provide about half the cash flow that we could get from down payments on two new properties, however my wife (in particular) and I both like the idea of simply owning one property outright and then using the above strategy moving forward. I'm not looking to nit-pick the finer details of maximizing ROI so much as I am looking to hear from people who have used this strategy and to find out the up/down-sides of it.

Thanks for the thoughts!

The only comment I have for you at this time is that it may be difficult to impossible to get a HELOC on a free and clear property in the name of the LLC. HELOC'S are for personally held properties.

ROI on paying a mortgage down, after you spend 5 hours in spreadsheets to "prove" this to yourself, will be exactly equal to the interest rate (assuming no PMI).

How does your interest rate compare to the returns you could get putting the money to work for you elsewhere? I don't know the answer to that question, because I don't know what you could/would do, but that's the question. 

There is also the risk thing. If you're 2 years from retirement, you need the least risky thing possible, which would just be paying down that primary residence. 25 years from retirement, you've got some time and can take some risk, since any bumps in the road will smooth out over the long term.