Author Topic: Turning my mortgage payoff plan on its head with a million dollar debt  (Read 4761 times)

cheddarpie

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I have about $50k left on my mortgage at 3.65%. I've been paying it off rapidly and feel good about doing so for all the emotional (not math) reasons you all know about.

I'm now considering refinancing to take $350k out and buy a triplex for $1.1m in an excellent location with all but guaranteed occupancy.

The numbers seem to work out - my home mortgage monthly payment will only increase by a couple hundred and the triplex will rent at at least 6k/month. My lender is estimating a monthly payment on the triplex of around 5k. I will still have significant equity in my home.

I need a gut check (or alternatively face punch). Taking on a million dollars in debt is a good idea, right? :)

Thanks!

lakemom

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Have you run all the numbers on the triplex.  Income of 6k-payment of 5k only leaves you 1k per month for everything else like repairs, vacancies, utilities (there may be some covered by owner), etc.  Calculate your cash on cash return factoring in the additional payment on your house and see if it still looks like a good deal.  Seems rather tight to me.  One month of vacancy means 1k or more out of your pocket every time plus any costs associated with getting the unit rent ready (carpet, replace or clean, a good cleaning top to bottom, paint as needed, appliances as needed, new locks, etc.).  Can you negotiate the acquisition cost down?  Or have you already agreed to the 1.1M?

Another Reader

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My guess is you do not own rentals and you are not knowledgeable about real estate investing.  A multi-family property that costs $1.1M should produce close to $22,000 in gross per month to be really profitable.  One that rents for $6,000 is a guaranteed cash flow negative property.  You will, over time, feed this alligator a couple thousand dollars a month in expenses.  It looks like taxes and insurance might in the mortgage payment, but you have not allowed for any other expenses.  Vacancy and collection loss, utilities you pay, repairs and maintenance (including tenant turnover), capital improvements, etc all need to be deducted.

This is a situation where leverage can kill you.  Both your house and the triples will have mortgages with high payments.  Lose your job, have a tenant file bankruptcy, almost anything could bring down this house of cards.  There is some good information on evaluating rental property in the real estate thread.  Please take a look at that before you go any further.  Pick up the book that Sword Guy recommends.  I would not touch this property.


tobitonic

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This is actually the logical direction espoused by the "never pay off your mortgage" approach: if one mortgage is good, more mortgages are better; just keep investing the difference in the stock market! And the pro-mortgage approach doesn't even factor in rental income; you just silence detractors over and over again about how the math "wins" compared to paying it down. This is one of the many, many examples of why that approach isn't nearly as foolproof as its devotees insist.


SMCx3

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No way I would take on that much debt for 1k per month. 

Congratulations on getting your mortgage knocked out.  Enjoy the freedom and the rewards of being able to see some of those dollars rolling into your pocket.  I would take a vacation, think hard and long about the rental property, all after my mortgage was gone. 


kpd905

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I've always heard of the 1% rule for rental properties.  You should get at a minimum 1% of the purchase price per month as rent.  This isn't even close, so I would pass.

cheddarpie

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This is what I needed! Thanks, all. 

I haven't committed to anything yet and am still evaluating. My home that I live in is a duplex so I rent out half plus a roommate in my half. I get about twice the mortgage payment in rent so it would still be covered in this scenario. (Pending disasters, of course.)

You're right, though, that I don't have any experience with freestanding or multi unit rentals and am still a noob in this world ... which is why I value your advice!

One appeal of this property that I think is blinding me is that it's  super close to my house now. I can walk by on my way to work and I know the neighborhood well, and it's a great spot near a univerity and several hospitals. It *could* be really good, but as you all point out, it could also be a disaster...

Thank you!



Another Reader

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If you buy in Seattle today, you are competing with cash from Asia and cash-flush local tech folks.  They are buying for long term appreciation, not cash flow today.  Some folks will even carry cash-flow negative property using tax write offs as an excuse and hoping appreciation bails them out.  That's a recipe for disaster.  When the economy turns, a lot of these so-called investors will lose their properties.  If there is a time to buy in Seattle, that will be it.

boarder42

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IMO you need to start understanding math. Bc you paid down your mortgage quickly but didn't even do the small amount of research needed to determine if this apt was a good investment. I mean at least you asked the question here before making the move so bravo. But you yourself need to understand and learn the math behind finances to make competent life decisions based on math.  Some internet strangers saved you from one massively bad decision but math is a life skill you should take on especially if you want to get tinto the rental game.

tyort1

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Why not just do an REIT if you want to get into real estate?  It diversifies you away from just stocks and bonds, gives a decent return, and protects you from the potential loss of buying a single property.

randymarsh

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Re: Turning my mortgage payoff plan on its head with a million dollar debt
« Reply #10 on: March 26, 2016, 07:15:36 PM »
Why not just do an REIT if you want to get into real estate?  It diversifies you away from just stocks and bonds, gives a decent return, and protects you from the potential loss of buying a single property.

REITs don't provide the cashflow that direct rental properties do.

Real estate is such an attractive investment for average people because the availability of leverage is high. No bank will ever give a 50K earner 150K to put in stocks or REITs. They will provide a 150K mortgage.


SwordGuy

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Re: Turning my mortgage payoff plan on its head with a million dollar debt
« Reply #11 on: March 26, 2016, 07:38:57 PM »
My guess is you do not own rentals and you are not knowledgeable about real estate investing.  A multi-family property that costs $1.1M should produce close to $22,000 in gross per month to be really profitable.  One that rents for $6,000 is a guaranteed cash flow negative property.  You will, over time, feed this alligator a couple thousand dollars a month in expenses.  It looks like taxes and insurance might in the mortgage payment, but you have not allowed for any other expenses.  Vacancy and collection loss, utilities you pay, repairs and maintenance (including tenant turnover), capital improvements, etc all need to be deducted.

This is a situation where leverage can kill you.  Both your house and the triples will have mortgages with high payments.  Lose your job, have a tenant file bankruptcy, almost anything could bring down this house of cards.  There is some good information on evaluating rental property in the real estate thread.  Please take a look at that before you go any further.  Pick up the book that Sword Guy recommends.  I would not touch this property.

Run away!  Run away!


MickeyMoustache

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Re: Turning my mortgage payoff plan on its head with a million dollar debt
« Reply #12 on: March 26, 2016, 08:10:03 PM »
Just to point out the actual (basic) math... since no one explicitly stated it: if you were to apply the 1% rule, this property comes in at .5% which would be giant NO as everyone has already pointed out.