Pay Off Second Home or Leverage into New Property

OP

New to Real Estate · OR · Member since 2019 · 5 posts · 0 votes

1y

@Vince Scipione appreciate the reply and your thoughts. Townhouse is 4.5% so any heloc/cash out doesnt make sense on a new property. The slow and steady approach is fine for this property but it feels like a waste to sit on a low performing asset and assuming rent increase is a strong enough lever to pull on for FI. I totally recognize that is impatient and greedy.

My gut is saying your short picture idea is where we're heading since we are taking the same hit with brokerage account (I didnt even mention borrowing against 401k - yes its not advised but my wife and I have stable W2 income to pay ourselves back) Thanks again, this BP community / forum is awesome

OP

New to Real Estate · OR · Member since 2019 · 5 posts · 0 votes

1y

@Mark Updegraff guessing the upside of my stock portfolio is definitely the wild card, as its more discretionary investment we went heavy risk with AI / tech with large upsides but also wild swings. Hear your Buffett comment loud and clear and current administration is already making waves.

Thinking out loud - cashing out the brokerage account seems like it should be an all or nothing move, to maximize the reward from going all in on RE for FI. But I appreciate the speed check on possibly partial withdraws just enough to jump in the market.

We havent looking into Rochester much yet so I will put that on the list for research for the market. Buffalo is getting a lot of attention right now so it makes sense you guys are getting more eyes as well. Once I do some homework I may reach out but thank you for the comments and giving me something to work on

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

1y

1. I'm not sure your cash flow is accurate. You account for the mortgage and HOA fee. What about maintenance, taxes, insurance, or setting aside funds for capex?

2. Let's assume you accounted for all expenses and have a full $2,400 monthly cash flow. Your return would be 9.6%. That's pretty healthy. If you haven't fully accounted for all expenses, then your return may be closer to 5%. Be honest and do the math. If it's a strong return, then it may be worth paying off and keeping.

3. I don't ever recommend selling a property unless (a) you want to move the income to another investment that will perform better, or (b) selling moves you closer to your goals. I don't hear a goal in your question, so I assume you just want a better return, which means you should look for new investment properties that will perform better, then you can do a 1031 exchange to move your equity.

4. I don't think you're ready for any moves. If you were more experienced, I would consider shuffling the portfolio and being aggressive, but I don't feel you are there yet. I would keep the brokerage account and focus on the tried-and-true practice of saving up for a new investment. It's slower, but patient people tend to make wise investments.

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Michael SmytheBusiness Member

Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes

1y

@Anthony F. check your mortgage paperwork for the Truth-In-Lending form to find your APR.

APR is your effective interest rate including interest, MIP and closing costs.

If you can refinance the rental at a cheaper rate than the APR, then you should!

FYI: because APR includes closing costs, the above will be a little off. You can figure out current APR with only interest rate & MIP if you have the time.

Regarding the $300k, if you can find a property that offers a higher ROI than what your brokerage account is making, then buy another rental.

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Paul Novak

Rental Property Investor · WI · Member since 2023 · 192 posts · 143 votes

1y

For me I wouldn't use all that $300K to pay off your current property or for a down payment on your next property. I do plan to pay off all of my rentals to increase cash flow but not until doing so would generate enough cash flow to hit my FI goal. I personally would use some of that $300K for your next property but not all of it. My goal is to generate a minimum of $500 per month cashflow to keep the business going through maintenance requests and vacancy without having to tap into my personal income. Again that's just my advice, there isn't a right or a wrong answer, it depends on your future goals. Also while there is no guarantee rents will continue to increase in the future I believe there is a good chance they will. With that in mind your property that's not cash flow today has a chance to in the future without paying it off.

Jeremy Horton

Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes

1y

Honestly I'd keep the brokerage exactly as is - invest in an S&P 500 tracker and forget about it.

You have kids - do a 529 plan and max it out

You will retire one day - max out your 401k yearly, IRA, Roth IRA (or backdoor to Roth IRA)

You will have health expenses one day - max out your HSA

From here I'd invest in Real Estate. I'd personally sell the townhouse (doesn't sound like it cashflows or would make a good rental property) - you may have no capital gains if you have lived in it the past 2 out of 5 years - I believe the first 250k for single filers is exempt from taxes and the first 500k for married couples. You'd fall in this catgory.

Then take the 400k - 275k = 125k (that you will net from the sale) - invest a portion of it in your S&P 500 tracker. I'd pesonally do 75k-100k. Then the last 25-50k I'd diversify with - whether that be apple stock, nvidia, btc, or a rental properties. You know have a brokerage with 375-400k which will make you a millionaire in a few years

I am just wondering what the urge is to dump the brokerage account - are you doing all of the above? I would not touch the brokerage account until you are maxing out everything else you can.

That is just my personal opinion

OP

New to Real Estate · OR · Member since 2019 · 5 posts · 0 votes

1y

@Jeremy Horton thanks for the feedback. We haven't lived in the townhouse in the last 2/5 years so we would get hit with full capital gains. To 1031 it doesnt make a lot of sense IMO since $100k of equity going into a new property with 7-8% interest rates will force us to look into markets outside of Oregon, require a Property Mgr at 7-10% and we're almost back at square one unless its a MF with great cashflow.

The main considerations for liquidating the brokerage account are: capital gains + OR state income taxes will be brutal, I like the idea of tax advantaged real estate gains AND growing real wealth and assets, not paper wealth. I understand and appreciate the S&P tracker strategy but end of the day / career means big tax penalties.

HSA is a priority for us this year and we modestly contribute to 401ks, employer ESPP. We could be very agressive on this and lower our tax liability.

We might be romanticizing the real estate opportunity to fast track us to FIRE but we're looking at all these levers and trying to figure out what is the right one / right order to pull.

OP

New to Real Estate · OR · Member since 2019 · 5 posts · 0 votes

1y

@Paul Novak thanks for the reply. Question to you then - how and when did you acquire the properties you have now?

My thoughts are current housing supply + high rates + high home prices in OR are restricting our options and liquidating the brokerage to pay off the townhouse = $400k asset + $2,400 cash flow that we could then use to leverage or save into buying another property outright or scale into 4 plex and use the rent to pay down that mortgage too.

Paul Novak

Rental Property Investor · WI · Member since 2023 · 192 posts · 143 votes

1y

Quote from @Anthony F.:

@Paul Novak thanks for the reply. Question to you then - how and when did you acquire the properties you have now?

My thoughts are current housing supply + high rates + high home prices in OR are restricting our options and liquidating the brokerage to pay off the townhouse = $400k asset + $2,400 cash flow that we could then use to leverage or save into buying another property outright or scale into 4 plex and use the rent to pay down that mortgage too.

My guess is that our situation is different; different end goals, W2 income, home prices, market conditions, strategies, etc... but I can share my journey and what I look for in my current market along with prices. As I go through my examples below know that I have a savings rate north of 50% on my W2 income which I invest into real estate to keep it growing. I also reinvest all cashflow back into the business to keep it growing.

I started investing in 2021. The first step I did to raise capital was refinance my primary residence. I went from a 15 year loan to a 30 year loan, locked in my interest rate at 2.85%, pulled out $111K in equity, and lowed my monthly mortgage by $20 per month. This was my seed money to start my business.

Aug 2021 - My first rental property was a side by side town house that required me to put down $55K and generated $950 per month in cashflow. I also stuck about $10K into renovations leaving me with $46K.

Feb 2023 - Our second property was an upper and lower that we had to put down around $50K on. It had tenants so we weren't able to do renovations. Those tenants are still there today and this property generates $890 per month in cashflow.

June 2023 - Our third property was a single family home that we put $85K down on and stuck another $20K into renovations. I pulled $35K from my wife's roth IRA principle and took out a $50K 401K loan for the remaining down payment. The $20K rehab we funded with income from our W2. The purchase price of this property was only $170K. I putdown as much as I did to generate cashflow. I also looked at the $401K loan as icing on the cake because I could afford to take the hit on my biweekly paycheck and besides if I wasn't paying back the loan I would be using the cash to invest in real estate anyways. While it would only take 5 years to pay the 401K loan back the increase in cashflow would be locked in for the next 30 years. While many in the real estate community would frown on locking more equity into a deal then required for me it gave me extra breathing room if the market flipped and my cashflow on this property was $920 per month. We paid back the 401K loan in 8 months and best yet paid all the interest back to myself vs. the bank.

Aug 2023 - I went to my local bank and got approved for a HELOC on my primary residence. Even though I just refinanced property values have increased so much over this time span that I was able to get approved for $90K.

Mar 2024 - My wife and I found another deal, single family home, but our original capital was gone. This time we put down $85K, $50K from a 401K loan in her account and the other $35K we borrowed from our HELOC. I hate using the HELOC because I am losing money on interest but I wanted to keep growing. This property generates $740 per month in cashflow.

Oct 2024 - This was the last deal we purchased. Because the IRS requires you to have no more than a $50K loan balance on your 401K over a rolling 12 month period I had to wait to do another loan even though I had mine paid back in full from when we took it out in 2023. Because of that I put this down payment on my HELOC. We put down $70K. I have been working to pay this back and it's now down to $46K as of writing this. By the end of March I will be able to take out another 401K loan from my account which I will to pay off the remaining balance. While I will be able to pull $50K I will only pull what I need to pay off the HELOC. At which time I will start paying the interest back to me vs. the bank. This property generates $580 per month cashflow.

For me when looking for new rentals I look at properties that I like and would be proud to add to my portfolio as the first step. Next I work with my wife on what we feel comfortable we could rent it out for. Then based on purchase price and escrow I back into how much money I would need to put down to reach my cashflow goal. At a minimum I want to generate $500 per month on every property I buy to keep the business afloat. If I feel the down payment requirements are too high for my liking based on the property I will pass. If not I will make the offer. While cashflow isn't my primary goal while I am growing I still want enough that the business sustains itself without requiring my W2 income to keep it afloat. This strategy has worked out really good for us and allowed us to borrow limited income from other people for down payments. I also have a taxable brokerage of about $50K that I try not to touch just incase of emergencies. We are now at a point that we can save about $10K a month for real estate. In our market we can purchase turn key single family homes for anywhere between $200K and $250K. Those properties are 3/2 properties with garages in B Class neighborhoods. We can rent these properties for anywhere between $1,800 to $2,000 per month. I know this doesn't crack the 1% rule but because we are putting more than the minimum down we still cashflow. While we are focus on saving right now we continue to try and purchase a minimum of 1 property a year. Hopefully this makes sense and helps. If you have more questions let me know.

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Ty CouttsBusiness Member

Lender · Denver, CO · Member since 2022 · 467 posts · 230 votes

1y

Sounds like you’re in a great position with multiple options. A key factor here is leveraging your equity efficiently while considering tax implications. Since your CPA isn’t a real estate specialist, it may be worth consulting a tax strategist who understands 1031 exchanges and real estate-focused wealth-building strategies.

If your goal is scalability, rather than cashing out the brokerage, you might explore a HELOC or cash-out refinance on the townhouse. This could unlock capital while keeping your investments diversified and avoiding immediate tax hits. Given today's rates, running the numbers with a lender to compare options is key.

I work with Aslan Mortgage Lending, and we often help investors structure financing to maximize both equity and future growth. Let me know if you’d like to explore creative lending options!

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