Hello Bigger Pockets Supporters,

I'm in some need of financial advice. I'll attempt to be brief since there's a lot of info to provide. I recently received a loan (30 year, 3.5% for $235k cash out refi tied to a property in San Diego which was originally paid off) in order to pay off this annoying personal loan ($235k, based on LIBOR with 3% "discount" tied to my stocks (long story)). I don't like the idea of a variable loan but at the time I didn't have a choice.  Historically, LIBOR over the last 5+ years has varied from .2% - 4% so at times I'm only paying 3.2% (LIBOR plus discount rate) and other times I'm peaking at 7% which is tough to beat from an investment perspective but not impossible. My initial thought was to pay down the loan and be done with it but then I started thinking what else could I do with the cash. 

Option 1:

I'm thinking of purchasing a small 1BD unit in Scottsdale/Phoenix, AZ because I'm from there and familiar (granted I live in Washington, D.C. right now) but the waived eviction notice and COVID puts doubt in my mind that spreading myself thin right now is a good idea. (I have 5 properties in total - 2 in San Diego, 1 in Scottsdale, 1 in Strawberry, and my primary in Arlington, VA). I'll explain San Diego below, Scottsdale and Strawberry are paid off, and I recently purchased Arlington in January so owe $700k, 3.75%, 30 year).

Option 2:

San Diego property is paid off in 2027. I receive $4500/mo for 9 months for student rentals and varied in the summer up to $12k/mo. I have $250k left on this loan at 2.5% interest. I always thought the best thing to do was have the tenants pay the loan off but mathematically if I pay it off now I would be in the black almost $60k/yr give or take which seems like a good idea and then I could pay off the personal loan in ~4-5 years as there's no rush per se I just hate the idea of this varied loan which could crush me if it hits that 6%+ mark and it requires a minimum for my stock balance or there's a maintenance call. So basically I worry in this market there could be another drop in stocks which forces me to sell low to pay down the loan.

So do I purchase in Scottsdale, pay off the San Diego home, pay off the personal loan as originally thought, invest in stocks, retain some cash and pay off X amount of loans, mixture of everything, do something completely else I haven't thought of...? Cash is king and once I pay off the loan obviously it's gone...

What is the best decision? Thank you all!

You're over thinking it.  You need two things:

1. To have liquidity.  This gives you flexibility to react if things go haywire OR a great opportunity comes up.

2. To make sure your cash is ALWAYS working.

Dont pay off anything - your loans are fantastically cheap, including the margin loan.  Invest the cash you've got into something short term that makes you more than 3% in returns.  Go with whatever your best option is available to you.  Lend it to others if you have the contacts.  Buy a basket of bluechip dividend paying stocks.  Buy municipal bonds.  Whatever. 

As long as you're earning 3%+, you're coming out ahead.  And as long as it's short term lending or liquid, you keep your flexibility.

i wouldnt sink it into a long term asset unless the opportunity was ripe.

Thanks Justin! So as if I invest the funds, how do you propose I pay off the variable loan? I have to pay at least $1000/mo for interest alone so typically try to aim for $2500/mo. And of course the mortgages come due and for the most part my tenants' rent takes care of it. 

This is an incredibly personal decision.  How often do you think about that debt?  If it were me, it would drive me crazy...however, you may be comfortable with it.  Perhaps there's also a middle ground?  Pay off half or 3/4ths?  You may want to talk with an advisor or someone who can give you a holistic response based on your "comprehensive" personal situation.

Originally posted by @Breanna Green :

Thanks Justin! So as if I invest the funds, how do you propose I pay off the variable loan? I have to pay at least $1000/mo for interest alone so typically try to aim for $2500/mo. And of course the mortgages come due and for the most part my tenants' rent takes care of it. 

Unlearn how you think about debt.  Instead of seeing it as an oppressive and dangerous wild animal that you have to kill for your safety, think of it as an animal that you need to tame and then use.  Would you rather plow the field by hand or with an ox pulling your plow?  Make debt your ox.

Here's the thing: Someone invested some money into a 'margin lending' product.  You bought that product for $235k, and you're paying $587/m for it (assuming 3.2% interest rate).  How do we make money?  We buy low and sell high.  Sell that $235k at a higher price (meaning, more than 3.2% interest).  The difference is your profit.

The skill comes in figuring out how to sell it and what to charge.  

• Buy VZ stock - it'll pay you 4.3% in dividends right now. It'll pay you $10105 over the next year. You pay $7520 of that to your LOC. Your profit is $2585 over the next year.
• Invest in MogulReitI (no affiliation - just an example) - it'll pay you 6% annually.  You'll pocket $6580 over the next year.
• Lend that money to a real estate developer for a project - it'll pay you, say, 13% annually.  You'll pocket $23,030 over the next year.

I'm just giving some easy-to-explain examples.  Of course they all have different things to consider, but the money you make at the end of the year is payment for your knowledge and skill in choosing and evaluating your strategy.  The more you know, the higher your net risk-adjusted returns will be.

So to answer your question, "how do you propose I pay off the variable loan?". I don't propose that you do. As long as you've tamed the debt beast and are using that beast to plow your fields faster, never pay off that loan. Sleep well knowing that if the loan is called or the interest rate spikes, or your spouse starts arguing with you because they're listening to too much Dave Ramsey and don't yet understand, you can sell your investment and pay off the LOC within a fairly short order.

Don't fear the beast.  Own the beast.

--Justin

Note: The numbers I'm seeing don't add up correctly, so I just made the following assumption:

• The "personal loan" is actual a margin LOC in the amount of $235k. Currently at 3.2%, variable. This is $587 in monthly interest.

Thank you all! You're correct, interest is $600/mo - not $1000, I just pay $1000 minimum as I'm trying to pay more than just the interest each month. Interesting POV and appreciate the insight with dividends options for Verizon. I have a very simplistic understanding of stocks to buy low and sell high, would like to know more about P/E, dividends, etc. that make a worthwhile purchase. 

I'm not afraid of debt but haven't quite mastered the beast either (~ $1.2M in mortgage debt: primary which I just purchased and live in now because I was tired of renting, beach house which pays for itself, and now the cash out refi against my other home in San Diego) which puts me at overall NW ~ $2.2M). I'm with you to have the money grow and work for me, I still have a little bit of the conservative mindset which is why I default to houses. I'm playing with $70k in Etrade right now hoping to have some short sells but this is an entirely new endeavor for me as I usually go with the Warren Buffet buy and hold strategy (maybe not the best considering I'm 35). I'd like to take some more risk but don't want to fall flat on my face and spread myself too thin. I was offered a 6 month forbearance plan on my current primary which I'm considering since I was crushed on taxes, owing $12k. (Long story). Separate topic but any negative consequences for taking the forbearance?

I've invested in Fundrise ($5k) over the last year but it's had fairly measly returns. I appreciate your examples and this forum is most helpful! I don't really have anyone to bounce ideas off of that's an expert and not bias (financial advisors who earn 1% of my portfolio).

Split up the money into four parts. 1. layered CD's you won't lose but little gain like 1.5-2% 2. buy 10 individual stocks of products that you understand and believe can grow in the coming economy- tiny houses, ADU's, bleach, beer can production, tents, cheap motor homes, grocery chains, you know the stuff... avoid retail, big box, restaurant chains, travel 3. use for down payment to buy AFTER Halloween another rental in different market - college town is good idea. 4. pay down with the remainder

I like @Justin r.' s idea not to fear the beast BUT Do not lend and let someone else be the general partner you can lose it all and get sued

Originally posted by @Breanna Green :

Thank you all! You're correct, interest is $600/mo - not $1000, I just pay $1000 minimum as I'm trying to pay more than just the interest each month. Interesting POV and appreciate the insight with dividends options for Verizon. I have a very simplistic understanding of stocks to buy low and sell high, would like to know more about P/E, dividends, etc. that make a worthwhile purchase. 

I'm not afraid of debt but haven't quite mastered the beast either (~ $1.2M in mortgage debt: primary which I just purchased and live in now because I was tired of renting, beach house which pays for itself, and now the cash out refi against my other home in San Diego) which puts me at overall NW ~ $2.2M). I'm with you to have the money grow and work for me, I still have a little bit of the conservative mindset which is why I default to houses. I'm playing with $70k in Etrade right now hoping to have some short sells but this is an entirely new endeavor for me as I usually go with the Warren Buffet buy and hold strategy (maybe not the best considering I'm 35). I'd like to take some more risk but don't want to fall flat on my face and spread myself too thin. I was offered a 6 month forbearance plan on my current primary which I'm considering since I was crushed on taxes, owing $12k. (Long story). Separate topic but any negative consequences for taking the forbearance?

I've invested in Fundrise ($5k) over the last year but it's had fairly measly returns. I appreciate your examples and this forum is most helpful! I don't really have anyone to bounce ideas off of that's an expert and not bias (financial advisors who earn 1% of my portfolio).

I hear you on the advice thing. Problem is anyone you talk to is going to favor whatever they know.  

Go to your local Chase Bank branch and that advisor will want to put you in a managed blended portfolio of stocks and bonds.  Nothing wrong with that.

Ask me and I'm going to tell you to invest in a real estate capital fund laddered with 30, 180, and 720 day access to capital.

Ask my parents and they'll tell you CDs are best and spending 1/30th of your saved principal each year until you die is the way to go.

If no one taught you how money works at some point in your life, you need to watch someone who did learn.  It boils down to this: invest your money where you have an advantage.  If you know a lot about pharmaceuticals, look at pharma companies or participate in venture backed early stage companies.  If you are a lifestyle addict and voraciously follow People magazine or fashion, invest in companies where you know things before others do.  If you're an Engineer and appreciate AWS before everyone else understands, invest in Amazon.

The people on BP have chosen to get an advantage in real estate.  I'm about to buy a 2 bedroom house on a small lot with a parking lot in the back for $850k.  98% of real estate people here in SD will think I overpaid when they see it close. That's fine - they haven't taken the time to learn what I know. They don't have the advantage, so they won't get the income.

So, either pick something and build an advantage ... Or pay someone a management fee to use their advantage to make you money.

i know my abstract ramblings aren't prescriptive enough to act on.  So, assuming you want to build a RE advantage, take a little money (say, $50k) and invest it with someone who's flipping houses ... Or building daycare centers ... Or entitling land ... Or kicking people out of apartment buildings so they can jack up rents.  Use the access your investment gives you to watch and learn.  See what problems they run into. Look at the financial statements. See which contractors they use.

Let your first investment pave the road for #2 and #3.  Build your advantage.

Or... Don't stress about it, invest passively, and enjoy the returns (at LEAST 8% annual) so you can focus your life on whatever actually makes you happy.

Whatever you do, your money needs to he working every day.  It was born to do so.

@Breanna Green

@Justin R. has just given you something of a financier's nuanced understanding of debt. It all looks like pretty good advice, but I do not do what Justin does. I fix houses, manage tenants, and write about home improvement. I can't give you the same sort of understanding about debt.

I'll tell you plainly that being $2.2 million in real estate debt with what looks like two paying properties would do a number on my head. Justin has fabulous advice with "tame the beast." I used to believe I could make it apply to me. But very diligently, I've proved to myself over years that I can't. I'm not a child of the upper or middle class. I grew up in grinding poverty and it very clearly did a number on my head. I know I'll never be able to have that much debt with that kind of questionable return and variable rate of return from it in my life. At some point, debt panic would overwhelm my psychological ability to beat it back, and constant worrying about carrying that heavy load of debt would compromise my performance in other ways. I'm just an ordinary mortal, I'm not one of the gods throwing the dice, my mind as cold as ice. And I think a lot of people are just like me.

So here's what I'll tell you about your situation, and I'm pretty sure Justin would agree with me on most of it, and I believe has actually said most of it in his own way above.

• Focus on what you know and what you want to learn. You're in trading with Etrade with a comparatively tiny amount of money and playing around in Fundrise with a pittance. Why? Are you bored with real estate? Looking for something new? I would stop spreading my concentration around.
• NEVER go into debt from a position of weakness. You go into debt to MAKE MONEY OUT OF THE DEBT. There is no other reason worth doing it.
  
• Long-distance real estate investing takes time and effort and money to learn how to do well. You're trying to do it in three or four markets at once and in a precarious financial position. I don't think this is wise right now for you.
  
• Free advice on how to invest your money from strangers on the Interwebs should always be taken with a grain of salt. Justin sound knowledgeable in his field and like the kind of person I would want handling my money. I can also personally verify that in 2007, the Finance Minister of Greece...damn, he always sounded like he knew what he was talking about when it came to high finance. Told me repeatedly with the utmost projected confidence that the country was in an economic boom on multiple fronts that would last forever. Two years later, the country was the laughingstock of the developed world.
• Go big when you have the experience to go big. Otherwise go small to get that experience.
• I would like to believe the world is filled with capable people who can juggle business debt adroitly and always come out ahead. It is not. I have seen incautious real estate investing destroy marriages and break up families. While I have met people who are too paralyzed to move, I have met more who have done miserably stupid things out of greed, overconfidence, and just plain arrogance.
  

I think the next move you make should be to take careful stock of your financial situation and simplify what looks like a series of very complicated investments in a lot of places. Here's one thing I saw immediately. If I read correctly, you owe $1.2 dollars in mortgage debt on your primary residence because you "were tired of renting." I don't know if you have children, family, whatever, but there has to be a better way than going $1.2M into debt just to live. You have to be able to do better than that.

I don't have kids, so what I would do is to get a place with a locking garage near a police station somewhere in the slums where properties go for peanuts, put a fence around the place and a steel door front and back, put in an independent 8-16 security-camera setup, get a monitored door/window/glassbreak security system, put a 12-gauge home defense short-barrel shotgun in my closet, maybe a cuddly Doberman puppy, and I'd be fine.