Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
Most seasoned landlords don't borrow enough. Especially medium size landlords, they sit on a ton of equity, but they self manage and pinch pennies. They get so obsessed with paying down mortgages that this becomes the purpose and we forget we went into real estate for a better life. What's the point if you are 65 and you need 7 more years to pay everything off?
So what are better options? You could sell the property and pay the depreciation recapture. Once you fall below 50% LTV it's really time to look at your return on equity. You could sell a property and pay the capital gains tax and depreciation recapture, but that's IMO not a great solution. It just creates a one time windfall and you have lost a cash flow stream. Maybe a better way is to borrow more, at the very least you should stop using cash flow to pay for capex. Let equity handle capex and use that cash flow for what it was meant in the first place - profit. Careful not to compromise your interest write offs. Another option is of course to 1031 exchange into better assets, but that does not always solve the cash flow and ROE issue.
So what are you guys thinking? Better pay to the taxes and be done with it or something else?
Most seasoned landlords don't borrow enough. Especially medium size landlords, they sit on a ton of equity, but they self manage and pinch pennies. They get so obsessed with paying down mortgages that this becomes the purpose and we forget we went into real estate for a better life. What's the point if you are 65 and you need 7 more years to pay everything off?
So what are better options? You could sell the property and pay the depreciation recapture. Once you fall below 50% LTV it's really time to look at your return on equity. You could sell a property and pay the capital gains tax and depreciation recapture, but that's IMO not a great solution. It just creates a one time windfall and you have lost a cash flow stream. Maybe a better way is to borrow more, at the very least you should stop using cash flow to pay for capex. Let equity handle capex and use that cash flow for what it was meant in the first place - profit. Careful not to compromise your interest write offs. Another option is of course to 1031 exchange into better assets, but that does not always solve the cash flow and ROE issue.
So what are you guys thinking? Better pay to the taxes and be done with it or something else?
@Marcus Auerbach, I think you raise a good point about remembering why we invest in real estate in the first place. Paying off properties can provide peace of mind, but I also think it's worth looking at whether the equity could be working better elsewhere. Personally, I wouldn't make that decision based on taxes alone. I'd look at cash flow, borrowing costs, and long-term goals before deciding whether to sell, refinance, or hold.
I'm a real estate attorney and broker based in Maryland, and I've worked with investors and property owners on real estate transactions and contracts. I've seen how important it is to understand the terms and obligations involved before making major changes to property ownership or financing.
I appreciate you starting this discussion, @Marcus Auerbach! It's an interesting perspective on balancing financial growth with the lifestyle investors are working toward. Happy to stay connected!