ditch the bad debt VS. snap up deals

[knot22]

In this economic climate, with plenty of real estate investment deals to be had, I find myself in a dilemma...

In 9 months I will have enough money to pay off the loan on my personal residence. Paying off this loan would leave me debt free and with a healthy monthly cash flow from my job which I would plan to funnel into buying investment real estate. The downside of this idea is that I would probably have to wait 1 - 2 years until I built up enough cash again for a down payment on some real estate before being able to pursue building passive income.

On the other hand, there are some sweet deals in real estate right now for buyers who have cash. An alternative possibility would be to keep the loan on my personal residence (at 4.5% interest, balance would reach zero in 8 years) and buy a cash flowing property to start building passive income. The main reservation about this plan is I survive on one income only so if something were to happen to my job I would be in trouble making the mortgage payments on my personal residence.

Utimately, my goals are
1. to have enough passive income cover all my expenses (and to not have to be dependent on a job)
2. to pay off my personal residence (ditch the bad debt)
Note that being debt free is not a goal - I don't mind the idea of having loans on rental properties when they pay for themselves.

I am looking for others' insights into this situation. What would you recommend in this situation and why? Also, I may be experiencing a lack of creativity with what options are possible. For example, can anyone think of ways that it would be possible to pay off the personal residence loan and buy a rental property with very little money down in this financial climate where 20%-25% down is what the banks are after?

 

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[RealOG]

If you really are focusing on real estate investment, then you are missing the single most attractive item in RE... leaverage!

The basic rule is borrow money and make a higher return on it than the interest you are paying.

If RE is your focus, you would best off taking advantage of the opportunities out there.

 

[Dhappy]

I think it all comes down to your age and what you want out of life. I was told for years how great leverage is and I bought into it with a bunch of houses with small cashfow. It was a fulltime job and I hated it and was making about $100 a month each cashflow on 25 houses. I was broke.I know now for me that I would rather have 10 paid off houses then 30 leverage houses. I sold all them houses at a lost and starting flipping. I would take my profit from every 2nd or 3rd deal and buy a house for cash and rent it out. I now have a bunch of houses with no mortgages. I sleep at night like a baby because I don't have to worry about the economy or lower rents or foreclosures. Landlords around here are getting there a$$ handed to them because of leverage.

 

[Russ H]

Wow, both great points-- and perfect examples of how different things work for different people.

I'm not in your shoes-- I've leveraged myself to the hilt to get properties (have about $10M in commerical RE at this point, w/about $5-6M in loans).

It all started 7 years ago when I used $500K cash from the sale of a SFR to leverage into other RE.

We injected other cash over time-- about $900K.

So, $1,400K has gotten us to $4-5,000K in less than 7 years.

And that's w/this down market (add a cool mill if things pick up).

If I were doing SFRs right now, I'd be buying the deeply discounted foreclosures (around here they're selling for 20¢ on the dollar from their '06/07 prices-- that's right-- 80% discounts from the high!).

I'd probably put 50% down, and buy twice as many houses on 30 yr fixed rate mortgages. They cashflow like crazy when you buy them for such a low price (gotta make sure they do cashflow like crazy-- those are the only ones to look at, unless you have a different plan).

Then, once you have your houses, wait 2-3 years for the market to pick up, and sell ONE house. Pay off a few of the other houses w/the sale of that one.

So you get the best of both worlds-- buy something for 20¢ on the dollar, w/essentially 10¢ per dollar down. Then sell when prices go back to say, 60-70% of the highs.

Example:

If you had $240K to invest:

$380,000: What house sold for in 06/07 (comps selling for $250K now, 35% down)

$65,000: Asking price of bank repos/foreclosures that banks want to unload

$30,000: Your downpayment, get $35K loan. Rent is $800/mo, Mort = $190/mo + exp/taxes

$400/mo conservative cashflow after all expenses

*******

$290,000 Sell house in 3 years. Pay off $35K loan, have $255,000 left.

Use $255K to pay off 7 houses (7 x $35K = $245,000).

You now have 7 houses that are FREE AND CLEAR. Rent them for income, or live in one and sell it after 5 years and pocket the cash, TAX FREE (if the laws still allow this).

If Congress continues to allow the $250K tax exempt provision, you could live in each of those houses for free for the 35 years (7 houses x 5 years ea), and get up to $250K TAX FREE per house (7 x 250K = $1,750,000).

Invest the $$ into something that kicks off passive income, and you slowly exit from a very profitable endeavor.

(this is just an example, you could obviously do many other things)

-Russ H.

 

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