Advice on my situation...

13 Replies

I say 'situation' because it's not exactly a strategy.  To make a long story short; I bought a house and rented it out to my family but at a deep discount which means I have negative cash flow from it.  I'm okay with that because I make enough with my current job.  My question is; should I pay off the mortgage ASAP or find other investment properties to cover the negative cash flow? 

Originally posted by @Ryan Valdez :

I say 'situation' because it's not exactly a strategy.  To make a long story short; I bought a house and rented it out to my family but at a deep discount which means I have negative cash flow from it.  I'm okay with that because I make enough with my current job.  My question is; should I pay off the mortgage ASAP or find other investment properties to cover the negative cash flow? 

 It all depends on what your goal is really. Do you plan on having family living in that property long term? Are you wanting to build your investments or have a second home paid in full? If you let us know your goals, we can help you build your strategy better.

- Patrick

@Patrick Daniel My bad, I suppose I should have mentioned my goals with REI. I'd like to reach a $10k monthly passive income doing buy and holds for small multi-family and SFRs. Since this is my first 'deal', I realize that I'm going in the opposite direction but the opportunity and ability to help family trumps my personal ambitions. Plus, I'll be building equity so it's not that much of a loss. I do plan on having my family living there long term so I was thinking I could pay off the mortgage quickly and get a HELOC for other investments. If I did that, I wouldn't have a negative cash flow but all my money is spent on one property. So, should I take the negative cash flow stigma but have other properties to minimize it?

Originally posted by @Ryan Valdez :

@Patrick Daniel My bad, I suppose I should have mentioned my goals with REI. I'd like to reach a $10k monthly passive income doing buy and holds for small multi-family and SFRs. Since this is my first 'deal', I realize that I'm going in the opposite direction but the opportunity and ability to help family trumps my personal ambitions. Plus, I'll be building equity so it's not that much of a loss. I do plan on having my family living there long term so I was thinking I could pay off the mortgage quickly and get a HELOC for other investments. If I did that, I wouldn't have a negative cash flow but all my money is spent on one property. So, should I take the negative cash flow stigma but have other properties to minimize it?

If your plan is to take a HELOC, why would you want to pay it down? I suppose right now you could get money at a better rate for a HELOC, but rates are on the rise and HELOCs are not fixed interest. Rather than paying it off quickly, you can utilize your extra monthly income to get more homes under contract. Maybe look for seller financing so you don't need to have a ton of money up front? $10k per month would be fantastic! when is your goal to have that by?

Best of luck!

Your long term goals are similar to mine. I actively use my HELOC to acquire new properties. BUT, the equity in my house is from appreciation. Not because I paid the mortgage down.

I'm going to pass down a word of advice from the loan officer I bought my last investment property with, "The cheapest money you will ever find is on the mortgage for your own home."

That's great you have extra money each month for your investment goals. But don't use it to pay down your mortgage. You are so much better off saving that same money for a DP on your next property. Does the property you are referring to have enough equity to get a HELOC without paying the mortgage down? If so, great! Get a HELOC and have even more funds available to you. Or do a cash-out refinance. But I personally like the flexibility of HELOC products.

Something else I want you to consider.  It's easy to say, "Oh, it's family, so I'm going to give them a $400/month discount on the rent (whatever the discount is)."  But it's really not much different than if you were literally giving them $400/month out of your pocket to subsidize their living expenses.  There is also an opportunity cost in that it will take you that much longer to reach your own goals because of that lost income.  Perhaps that is exactly how you think of it and you are fine with it.  That's fair enough!  But, for me, it would have to be an extremely close family member who had some kind of permanent issue for me to subsidize them like that long-term.

Oh! I should have also mentioned. HELOCs are typically only for owner-occupied properties. I've heard rumors they exist for investment properties, but are extremely hard to come by. But another good reason not to pay down the mortgage. You might have a hard time accessing the equity with a HELOC anyway.

You should check with a CPA> accepting well below FMV rents for a family member may affect your write-offs.

@Patrick Daniel I don't have any equity in the property because I just bought it.  Seller financed deals would be optimal but hard to come by in my areas of investing interest.  My $10k goal is going to be roughly a 15 year plan.

@Jennifer T. This mortgage is the only debt I have so I see it as a win-win as I personally don't have to pay as much on the mortgage and my family isn't living in a crowded space with rude neighbors. 

@John Thedford The family discount is at the very bottom of the FMV for that area and confirmed that with my CPA.

@Ryan Valdez

So you bought a house as your first “investment” and allow family to live there cheap. The result is that you lose money every month.

That is a poor investment. What happens when something expensive breaks? After losing hundreds of dollars a month for a few years imagine paying several thousand for a new roof.

You said you would hold it long term, why? Do you expect your family’s income to never increase and them to always need you to give them discounts? What happens if you lose your job?

This is a very bad idea.

I would not consider your first property purchase as investment. As long as family is living in it and you are supplementing their rent just consider it a gift to them. Do not allow any equity to grow in it. Dead equity in that property is only going to slow down your plans to invest.

@Anthony Gayden How do I find these properties where nothing breaks or needs to be replaced?  Looking at my standpoint, I just bought a brand new house for 1/3 of the price.  By helping my family to get back on their feet, I didn't have to find tenants or a property manager.  Thankfully I can afford to be a little riskier with this "investment" right now with my current job that I just started, and I don't plan on quitting anytime soon. 

@Thomas S. I think my plan of action will be to use the money on other investments rather than paying down the mortgage. 

Originally posted by @Ryan Valdez :

@Anthony Gayden How do I find these properties where nothing breaks or needs to be replaced?  Looking at my standpoint, I just bought a brand new house for 1/3 of the price.  By helping my family to get back on their feet, I didn't have to find tenants or a property manager.  Thankfully I can afford to be a little riskier with this "investment" right now with my current job that I just started, and I don't plan on quitting anytime soon. 

@Thomas S. I think my plan of action will be to use the money on other investments rather than paying down the mortgage. 

 Stop calling it an investment. It is charity plain and simple. That is fine since I would help my family as well. But whether it is cash pay outs or free rent, it is not an investment and treating it as such will not benefit you.

Instead I would look at it as merely an expense and start investing elsewhere like you are thinking.