All Forum Posts by: Account Closed

Gary,

What area are you looking to cover with vinyl? Without knowing the specifics, I would keep in mind the home its going in and the tenants your looking to attract. If you have a nice rental that attracts good tenants, you may want to invest in a more expensive flooring, like tile for kitchens and baths. You want your home to remain competitive with the other choices customers have when it comes to housing. Quality housing at affordable prices is what will give you a competitive advantage if the market becomes flooded with rentals in your area.

However, if it is a rental for low income families, you will want to consider something that will be inexpensive to replace, but durable enough to handle abuse. Therefore, I thinks its best to consider the type of home you own and the tenants your property attracts. Good paying tenants have a choice where they live and you want to make sure they choose to rent from you.

One point to consider when it comes to cash out refinancing: if the proceeds are used for personal reasons, in your friends case to add to retirement savings, the interest expense on that portion of the proceeds are no longer tax deductible. This will certainly increase your tax bill and effect your future cash flow.

Dylan,

When you say he has a breakeven cash flow, do you mean the rents just cover the mortgage. Or do you mean that the rents cover the mortgages and all repair & maintenance expenses? I would guess that with 10/15 yr mortgages, the rents are only covering the mortgages, which means he's pumping in additional equity into his real estate business to fund maintenance, repairs and vacancy expenses since he doesn't have sufficient cash flow to cover these additional cost in addition to making the mortgage payments.

There is nothing wrong with this strategy as long as you have additional free cash from your regular income to cover these additional costs that may not occur every single month, but do occur nonetheless.

Taking the 15 yr mortgage can reduce your cost of capital, thus increase your net income, but it comes at the expense of free cash flow. I would suggest using a combination of 30 and 15 yr mortgages if you have multiple properties. Creating the scenarios where you have sufficient cash flow to cover mortgages and repair and maintenance expenses while trying to achieve the lowest overall cost of borrowings.

Case in point: I have a 15 yr mortgage on a rental property that has negative cash flow of $50 a month not including any repair, maintenance and vacancies. However, each month the tenant make the $1K p/mo rental payment $600 goes toward principle or $7,200 in equity a year (which increases every year as the interest portion decreases each and every year). Let's say I have to come out of pocket $1,500 a year for repairs, which is high by the way, and an additional $600 to cover the mortgage payments not covered by the monthly rent. I'm basically trading $2,100 of out of pocket expenses for $7,200 in equity just by reducing the principle balance and does not include any appreciation. That's not a bad return. In fact, I've almost tripled my money. If I had taken the same $2,100 and invested it in a diversified stock mutual fund, I can almost gurantee you I would not have tripled my money in one year.

It's tough to do this with multiple properties, since it would become very expensive to come out of pocket for R&M on several properties. However, if you have other holdings that generate lots of good FCF, then using a mix of 15 and 30 yr mortages is a good balance.

One other point that is important to take into consideration is the ability to obtain additional financing in the future to grow your holdings. Lenders generally will only give you credit for 75% of the rents, so if you have a $1,000 mortage and you collect $1,000 dollars in rent. The lender will only count $750, which means $250 is being counted against your debt-to-income ratio.

Unless you have a super high paying job or extremely low living expenses, it will be difficult to continue taking that kind of hit if you're still trying to acquire more property using financing.

These are all factors you have to consider. Again, finding the right balance to achieve your objectives will be key.

If your taking the money out from you TSP for the purpose of buying your first home and you plan to occupy the property, you should be able to do so without incurring any penalties. 401(k)s and 403(b)s generally allow for this (check with your plan first). In this case, I find no fault with tapping this resource.

However, if your planning on withdrawing the money to purchase an investment property, there may be a significant penalty and tax consequence. Thereby, making it very expensive capital to use. If that is the case, I would highly recommend you reconsider. The high cost of using those funds may negate the returns you achieve in your real estate investment. I would try to find an alternative source of funding for your investment.

Start working with a lender and find out what their requirements are for obtaining a mortgage. You may find you don't need as large of a downpayment as you think. If you can't qualify right now with the amount you have available to for a downpayment (without taping your retirement funds), a good mortgage lender can at least provide you with a roadmap to get where you want to go. And that's what you need - a gameplan!

There are two components to investing in real estate: 1.) managing your current properties and 2.) making deals on new properties.

Managing your current properties: I've always been a do it yourself type. That doesn't mean I fix any repairs. It means I manage the properties myself by leveraging the efforts of others. By this, I don't mean I pay management fees to property managers. I only hire professionals for services I need when the need arises. As long as you have access to the internet, you should be able to coordinate any management level activity required while deployed such as coordinating repair and maintenance activities and filling vacancies - if any. If you should run into a problem with having to evict, you can hire a real estate agent to handle the process for you and even appear in court. If you have a trusted friend or relative in the area of the property, even better. Just make sure you and the person who will handle it are familiar with the process and paperwork. I recommend you stablish a relationship with professionals before you require their services. In otherwords, know who your going to call if you have an a/c problem or need a plumber. This will help to ensure you have a contingent plan in place should you require services.

It requires a lot of time and effort in making real estate deals, especially purchases. You may not want to purchase a property while deployed since you'll want to see it first before buying. However, deployments provide a great opportunity to stock pile cash for downpayments once you return stateside.

In short, I don't see how being deployed should hamper your investing and managing activities. In fact, it should help sharpen you management skills, increase your confidence that you don't have to be present to successfully manage your portfolio and provide you with the free cash to continue to build your portfolio.

Good luck and thank you for your service

Paul

John,

If your debt-to-income ratio prevents you from securing financing, you'll have no choice but to reduce your outstanding debt. However, if you qualify for a loan now, and have funds for the required downpayment, I would suggest you get into a property. This way you can convert the money your currently spending on rent into a built in saving plan by building equity. If you buy a mult-family home, your tenant will probably pay a substantial part of your mortgage, thereby reducing your cost of living and increase your free cash flow. Free cash is what will allow you to work towards saving for another downpayment on a new property, or accelerating repayment of debt.

Keep in mind, that if your debt is manageable and the after tax cost of the borrowed money is low, you will probably find better returns by using free cash to build up cash for downpayments on additional properties. Just be sure you maintain sufficient cash reserves (liquidity) for any unaticipated interruptions to your cashflow, i.e. loss of income from your primary occupation or vacancies.

All companies and investors looking to grow will have to find financing to grow their business. very few companies or individuals generate enough free cash to fund expansion using internal funds. Don't be afraid of debt, just manage it by getting the best rates and maintain sufficient working capital. Thus, you should be fine.

Paul, CPA and real estate investor