Life savings to pay off Only Rental house?

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Life savings to pay off Only Rental house?

Travis Fisher
Investor · Abilene, TX · Member since 2017 · 7 posts · 1 vote

Sanity Check.

Take $115,000 of $125,000 life savings to pay off a my only rental property in Abilene, TX.  Immediately take out a commercial line of credit (I'm pre approved) at 75%, which will be $150,000. Rents $1495, Cash flow after taxes, insurance, property management = $900 a month.

I retire in July and will take my family on a 1 year camping adventure. In 18 months I start my next career as multi-family BRRRR investor, and I'll have $150,000 line of credit, $16,200 minus any repairs/vacancy.

Pros: 1. Lock in credit line while I'm working, 2. optomize cash flow while I'm on adventure, 3. Money not sitting around doing nothing, 4. Wife isn't comfortable with long distance investing (live in Italy and Yes I've read David Greene's long distance investing book) 5. I can be more hands on

Cons: 1. Horrible cash on cash, 2. missed opportunity cost (I'd just buy 3-5 additional houses)

My real estate education consists of about 4,500 Real estate podcast episodes, read 10 real estate books.  

Thoughts?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
5y

You just stepped over a $1,000 bill to pick up a dime.

4Reply
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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    You just stepped over a $1,000 bill to pick up a dime.

    4Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    5y

    I'm not a fan of using all your liquidity to pay off debt, but if you are sure you can get the LOC, I would be more interested. I've just seen LOC's taken away from time to time (usually during deep recessions like 08), which would make me a bit nervous.

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    5y

    I wouldn't do it. The LOC or cashing out equity? I'd probably do that. Cash is king if you plan on buying any more properties, since you will need at least something for a down payment. You're taking liquid and turning it illiquid.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @JD Martin:

    I wouldn't do it. The LOC or cashing out equity? I'd probably do that. Cash is king if you plan on buying any more properties, since you will need at least something for a down payment. You're taking liquid and turning it illiquid.

     ...like taking free money and putting a cost on its use.  That money just "sitting around doing nothing" had part of the "nothing" including cost to use.

    0Reply
  • Travis Fisher
    OP
    Investor · Abilene, TX · Member since 2017 · 7 posts · 1 vote
    5y

    All your thoughts are great and hopefully the below can highlight my though process, and verify it's not the most idiotic of plans.

    Things I should have included. Current $115K loan is 3.75% 22 years remaining, the $150K LOC is 4.5% for 5 yrs, then 1.5 over prime adjusting every 5 yrs for 25. If prime in 5 years is bad, put it back on a mortgage.

    The marching orders I have is that money is not to be used until I'm boots on the ground.  Money will be sitting at .05% bank account for 18 months.

    @Andrew Syrios. Awaiting the documents outlining calling the note due, won't do it if it can be called due do on WHIM.  I heard the same thing about calling peforming notes due, because the bank didn't like the asset type in the crash.  

    @JD Martin I considered waiting until I'm on the ground and combining my savings with just the equity, but then I don't benefit from up to $16K in cash flow. Is the credit line illiquid or semi liquid as I have access to it and use it to BRRRR properties, and only pay while it's actively being used and cash flow when it's not.

    @Joe Villeneuve Points taken.  This is the best I could come up with to match family goals, short of just sitting on the money.  I'm open to any strategy suggestion to grab that $1,000 bill.  Right now I think I could be comfortable grabbing that dime instead getting pennies.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Travis Fisher:

    All your thoughts are great and hopefully the below can highlight my though process, and verify it's not the most idiotic of plans.

    Things I should have included. Current $115K loan is 3.75% 22 years remaining, the $150K LOC is 4.5% for 5 yrs, then 1.5 over prime adjusting every 5 yrs for 25. If prime in 5 years is bad, put it back on a mortgage.

    The marching orders I have is that money is not to be used until I'm boots on the ground.  Money will be sitting at .05% bank account for 18 months.

    @Andrew Syrios. Awaiting the documents outlining calling the note due, won't do it if it can be called due do on WHIM.  I heard the same thing about calling peforming notes due, because the bank didn't like the asset type in the crash.  

    @JD Martin I considered waiting until I'm on the ground and combining my savings with just the equity, but then I don't benefit from up to $16K in cash flow. Is the credit line illiquid or semi liquid as I have access to it and use it to BRRRR properties, and only pay while it's actively being used and cash flow when it's not.

    @Joe Villeneuve Points taken.  This is the best I could come up with to match family goals, short of just sitting on the money.  I'm open to any strategy suggestion to grab that $1,000 bill.  Right now I think I could be comfortable grabbing that dime instead getting pennies.

     Every decision you make now, out of impatience, will come back to haunt you down the road.  When you spend your money, it's gone, so spend it wisely...and not on a knee jerk reaction like this one.

    1Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y

    I wouldn't do it.  Your tenant is already paying your mortgage.  If you wanted to use some of that as a down payment for another rental, perhaps.

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    5y
    Originally posted by @Travis Fisher:

    All your thoughts are great and hopefully the below can highlight my though process, and verify it's not the most idiotic of plans.

    Things I should have included. Current $115K loan is 3.75% 22 years remaining, the $150K LOC is 4.5% for 5 yrs, then 1.5 over prime adjusting every 5 yrs for 25. If prime in 5 years is bad, put it back on a mortgage.

    The marching orders I have is that money is not to be used until I'm boots on the ground.  Money will be sitting at .05% bank account for 18 months.

    @Andrew Syrios. Awaiting the documents outlining calling the note due, won't do it if it can be called due do on WHIM.  I heard the same thing about calling peforming notes due, because the bank didn't like the asset type in the crash.  

    @JD Martin I considered waiting until I'm on the ground and combining my savings with just the equity, but then I don't benefit from up to $16K in cash flow. Is the credit line illiquid or semi liquid as I have access to it and use it to BRRRR properties, and only pay while it's actively being used and cash flow when it's not.

    @Joe Villeneuve Points taken.  This is the best I could come up with to match family goals, short of just sitting on the money.  I'm open to any strategy suggestion to grab that $1,000 bill.  Right now I think I could be comfortable grabbing that dime instead getting pennies.

     18 months is a really short timeline. I wouldn't take liquidity and freeze it on that kind of timeline. At best you're looking at picking up a couple of thousand in interest savings, with the hope that the credit line doesn't disappear or become otherwise untenable - and when you do use it, you're paying more interest than what you're saving now on the mortgage. 

    You can't always think of money sitting in the bank as just wasted, as if you have to optimize 100% of all funds 100% of the time. If you said you were going to leave that money sitting there for 18 years and this was your only other option, then I'd probably be on board with your plan as a 2% return is better than no return - but what you are planning to do here is earn about a 2% return for a year and then take out loans at 4.5%. That doesn't make any financial sense, frankly speaking. 

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  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    5y
    Originally posted by @Travis Fisher:

    All your thoughts are great and hopefully the below can highlight my though process, and verify it's not the most idiotic of plans.

    Things I should have included. Current $115K loan is 3.75% 22 years remaining, the $150K LOC is 4.5% for 5 yrs, then 1.5 over prime adjusting every 5 yrs for 25. If prime in 5 years is bad, put it back on a mortgage.

    The marching orders I have is that money is not to be used until I'm boots on the ground.  Money will be sitting at .05% bank account for 18 months.

    @Andrew Syrios. Awaiting the documents outlining calling the note due, won't do it if it can be called due do on WHIM.  I heard the same thing about calling peforming notes due, because the bank didn't like the asset type in the crash.  

    That's the best course of action. I heard plenty (and experienced one) bank calling a LOC due during the crash. That being said, that's the only time I've heard of them doing such a thing.

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    0Reply
  • Zachary Beach
    Specialist · Los Angeles, CA · Member since 2018 · 291 posts · 231 votes
    5y

    @Travis Fisher couldn't you just get the 35k as line of credit. I feel like this plan is a pretty short sided way to save a few thousand and then pay an extra 1.2k a year after your camping trip so you break even in a few years then start lossing on this idea. Plus As others have said LOC's get pulled all the time I know someone that had one pulled less than two years ago. The banks can pull them just because they are having liquidity problem or your credit or job status changes. Plus you are missing out on the money that the 115K could bring in. There are tons of people myself included that would pay way more than you are saving for a loan if you didn't want to go the stock market way I wouldn't blame you with a 18 month hold time. Or you could buy another that needs a rehab bit would be able to rent now and Brrrr it later and get paid the rent now. Paying off the house to spend more to get a LOC seems counter productive. With 4,500 podcast surely you have heard of better ideas. Least risky options is probably a CD and you break even in 4 years from the extra cost of the LOC. Do you have another income source like a pension or something? Are you going to be traveling the world or staying in one area? I would go travel if I was doing this I have been to 24 countries now but would love to do more. We two small sons it a bit of a challenge at the moment for me. Good luck in whatever you decide.

    0Reply
  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y

    Bad idea don’t do that ! Poor use of your cash bro

    0Reply
  • Travis Fisher
    OP
    Investor · Abilene, TX · Member since 2017 · 7 posts · 1 vote
    5y

    Sanity Check fail

    Appreciate you all taking the time for feed back.  Not doing it based on feedback, the below was going to kill it anyways.

    While contacting the Bank somethings started not sounding/feeling correct.  When filling out the Initial loan application, I didn't complete it as I had a question.  Instead of answering the question he sent back the terms and next step being ordering an appraisal.  The terms seemed acceptable so I asked for the conditions.  The response was I'd get the loan documents closer to closing but I needed to order the appraisal. (This was the ending point)  My response was I'll need all the conditions before moving any money.  He currently agreed to provide them.  I won't be seeing those as I told them I'm not going to do the loan.  

    @Zachary Beach I thought of this because my family goal said its the only way she would be comfortable using the savings.  I've spent 5 years pitching long distance investing.  Then I started the what if thing, and then maybe it's possible and not as idiotic as initially thought.  Glad we have BP for a sounding board. To your questions, Yes I will have a decent pension starting immediately. Staying in North America, setting up the camper for off grid camping. (boon docking). Impressive on the 24 countries, I'm pretty close to that and I've lived in Europe for 11 years. 

    0Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 13k+ posts · 9k+ votes
    5y

    A lot of information missing here, so some questions:

    1) Where is your long-term investing plan?

    2) What is the interest rate on your current mortgage?

    3) Can you get the same or better rate on a cashout refinance?

    4) How can you invest those funds and your savings to make a higher rate of return than the cost of the funds?

    There are many more questions you should be investigating, but you can start with these:)

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    0Reply
  • Travis Fisher
    OP
    Investor · Abilene, TX · Member since 2017 · 7 posts · 1 vote
    5y

    @Drew Sygit 1. Brrrr multi family, 2. 3.75%, 3. Maybe, 4. Locking in low 4.5% financing I would consider cheap, if you can cycle that money at higher return. But as this discussion allowed me to reflect this would be a good idea if I wasn't buying my equity. Paying 60% of 75% and then paying 4.5%. Now if it was paid off by residents or additional cashflow from other sources with none of my W2 money, having LOC on it would not be a bad idea.

    0Reply
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