Should I be getting a mortgage when I own my home outright?

4 Replies

First time poster, long time lurker.

Quick recap:

I bought a studio co-op apartment 5 years ago in the NYC area for $58,000. I got a mortgage on it (I was 22) and paid off the mortgage 2 years ago, it's not worth about $100,000. It's been my primary residence from then up until next week.

I've since got married and quadrupled my income but my wife and I are not sure where we want to live in 5 years, so we've decided to a rent a 2 bedroom apartment in the area for a year to have flexibility.

I plan to rent out my studio for $1,200 a month (taxes and fees are $400/month so great cash flow).

I also have about $100k sitting in a savings account that I would like to put into another rental property, most likely a 2 family home in the NJ area. Looking at duplexes in my targeted area at $250k, with rents that total approximately $2,500 / month.

Would it be silly to put $50k down and get a conventional 20% mortgage on the property while I have so much equity in my studio?

I've heard people here refer to "buying cash flow", is that what I'm doing here and why is that not a good idea?

Any feedback or suggestions would be greatly appreciated!

@Jeff Laniado , it really depends on what stage of your investing career you are in and what your goals are. If you leverage your properties (properly) you can expand your empire much more quickly. Having cash (equity) locked up in a property is not the best use of the money in my opinion. Mortgage money is relatively inexpensive and can be invested for a much better return elsewhere. That is a riskier strategy, though, so if you are risk averse or just want maximum cash flow from your properties then it does make sense to buy down the mortgages as much as possible.

@Jeff Laniado

First off, congrats! Definitely jealous of the spot you are in which is great because it gives you options. I would define your goals and what you want to do (Buy and hold, flips, wholesales, etc). Leveraging money properly is a great idea, but you obviously don't want to overextend yourself. If you're interested in freedom of movement and want to buy duplexes, look into house hacking. You can put significantly less money down, as long as you plan on living in the duplex for a year. You will gain knowledge of being a landlord from your current residence, and a new duplex, and you could be potentially living for free! Hope this helps and good  luck!

There are pros and cons to both. Rates are rising, so cashing out on some equity now would make sense so you can lock in a low rate before rates rise too much. Also, waiting until after you vacate can make it a lot more difficult to obtain financing. investment co-op cash out refinances are VERY hard to come by. I know a couple of banks that would do it, but you would get hit with every hit to the rate in the book not to mention the fact that a 30 year fixed would be nearly impossible to get on an investment co-op. if you plan on only buying this two family and have no other immediate plans to purchase additional investment property then I would leave the co-op alone as there is no reason to add additional leverage if you have the cash. However, if you feel you are going to ramp things up it would make sense to stay living in your co-op for one additional month and cash out while it's still your primary residence so you can get a 30 year fixed conventional loan and to give yourself additional flexibility to buy more later on. 

You might consider a HELOC. Generally, the closing costs are next to nothing and you don't have to pay any interest until you draw. You could use the HELOC to acquire an investment property and either lock in at the current rate or cash out refi on your investment and pay off the HELOC. It offers a lot of flexibility and the money is about as cheap as it gets.

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