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Real Estate Cash flow: expand or pay down debt

Discussion in 'Real Estate Investing' started by MrPink, Mar 7, 2008.

  1. MrPink
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    MrPink Contributor

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    I was curious what the opinion on here of what to do with cash flow.

    I think most on here would be for expanding, but I currently have not found any good properties and was considering paying down the mortgage. Thoughts?

    Thanks,

    Mr. Pink
     
  2. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Just my opinion, but I would allocate as follows:

    - First, ensure that you have enough bank reserves to cover any unforeseen issues with your existing properties (what if rents drop 10% next year and vacancy rises to 20%, do you have enough in reserve to cover yourself);

    - Second, pay down each of your properties to a fixed point where you are comfortable that any significant drop in your local market wouldn't put you upside-down on the properties. Depending your risk tolerance, this could be a 10% equity in each property, a 20% equity, or even a 50% equity. For me, I'd want each of my properties to have 20% equity at a minimum at all times;

    - Third, figure out what your opportunities are with the cash you have on hand. Do you (or will you likely soon) have an ROI opportunity of 20%? 15%? 10%? 8%? If you can't make at least 8% on the money, then paying down your mortgages (that you're likely paying 6-8% on) is probably a good use for it. If you can reasonably make more than 8% elsewhere (or will be able to shortly), use it for other opportunities.

    Again, this is just in line my personal comfort level...others may disagree...
     
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  3. Jeffs07
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    Jeffs07 New Contributor

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    I would assume this as an internal question of risk tolerance. As JScott pointed out there are several what ifs that could occur at any moment. Consider your long term goals in relation to the risks expansion might include, epically in this market.
     
  4. LAbull
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    LAbull PARKED

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    What kind of debt are we talking.

    Kiyosaki talks about good debt and bad debt.
    Many people share that belief. I would imagine getting rid of debt not only helps save money in the long run but adds that extra buffer for a "what if" in the future.
     
  5. jimculler
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    jimculler New Contributor

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    I would use it for building reserves, if you dont already have an adequate supply.

    Of course if you have built up liquid reserves, and a smoking deal comes along, you are in a prime position to pull the trigger.
     
  6. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    Keep cash in hand.
    Right now, given current circumstances, having the ability to get properties without going through the financial system is better than ever.

    If you pay down your mortgage and then that "great" property shows up, how can you access your funds? Once you pay down your mortgage you need to refi to get it out, and that has a cost.

    Put your money in a CD making 4% if you are really actively looking for properties. The opportunity cost is too high if you have no access to your cash.
     
  7. Sid23
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    Sid23 Bronze Contributor

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    I agree 100% with this entire post.
     
  8. ^eagle^
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    ^eagle^ Contributor Read Millionaire Fastlane

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    By holding a cash reserve couldn't you borrow against this CD you hold thereby leveraging your reserve to buy that next "golden nugget" and still have the reserve for emergencies?
     
  9. unicon
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    unicon Contributor

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    assuming you have positive cash flows

    the general rule is that paying down debt and giving up liquidity is foolish and does not make any sense in that increases your tax liability

    liquidity is needed to grow

    I actually have the opposite problem of to much equity in properties which in the true sense should be refinanced

    Your cash pool should be rising in taking all moneys out as soon after purchase as possible in essence a no money down deal - the ideal

    throw the cash flowing property in inventory, this is optimum in simplicity
     
  10. MrPink
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    MrPink Contributor

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    I think not paying down debt to expand makes sense.

    Not paying down debt to save on taxes does not make sense to me. I would rather not pay taxes on the property by owning it than put off owning it so I could get a tax right off.

    Mr. Pink
     

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