Author Topic: Buy More or Pay down what I have?  (Read 2860 times)

Basher51

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Buy More or Pay down what I have?
« on: July 03, 2014, 09:32:06 AM »
I'm sure this question has been asked a 1000 times, but I am new and will ask it again. :) I am looking for what others generally feel in hopes that I wont be that one guy in the marching band that makes the wrong turn.

So should I.....Buy More Properties or Pay down what I have?

We have 8 residential properties. All but one Cash Flow. (is the rent bigger than the payment + expenses ? then it cash flows to me.)

We bought several properties right at the height of the down turn. I about lost everything. I was a mess. Fortunately for me, I was able to work with the banks and have been told by numerous people that we are not the norm, and survived where others did not.  That said, my equity spreads on the portfolio are just about break even in Value to loan. Hence, I cannot sell these without losing money. I really don't want to sell anyway. ( I have never sold a property that I didn't regret later. )

Long term strategy is to pay off mortgages, live off rents, pass it on to children. The only issue I have with that is that 1. It will be boring, and 2. I will only be worth so much. I cant help but wonder if buying just 1 more property a year would not get me to a level of millionaire I would be comfortable with?

Thoughts?

arebelspy

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Re: Buy More or Pay down what I have?
« Reply #1 on: July 03, 2014, 10:04:08 AM »
It depends on a number of things, including your goals, risk tolerance, time to ER, etc.

It sounds like you're in a stable position now, with 7/8 properties cash flowing (though I don't know what you count in "expenses" in your cash flow explanation, so it may be less than you think, but either way it sounds like you're okay).

So based on that last paragraph (the comment about getting to a level you're comfortable with), it sounds like your goals are higher than than your current level, so that indicates to me that you may want to go ahead and buy that one (or more, or whatever) property a year for the next few years before you accelerate the payments on the rest.

Assuming your new property purchase has a higher return than the interest rate you're paying, of course.  Otherwise you'd want to pay down first before buying new ones, mathematically.

Start with your end goal (where do you want to be in, and in what time frame) and work backwards to what you have to do to get yourself there.

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jmoney

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Re: Buy More or Pay down what I have?
« Reply #2 on: July 04, 2014, 08:04:55 PM »
We bought several properties right at the height of the down turn. I about lost everything. I was a mess. Fortunately for me, I was able to work with the banks and have been told by numerous people that we are not the norm, and survived where others did not.  That said, my equity spreads on the portfolio are just about break even in Value to loan. Hence, I cannot sell these without losing money. I really don't want to sell anyway. ( I have never sold a property that I didn't regret later. )


First point is if you don't have 6 months reserves in the bank for your entire portfolio after you pay for a new property, you should pass. It sounds like your reserves may have been short at one point and its important to appreciate them as much as cashflow. There are whole threads on reserves and I argue you need 6 months expenses (mortgage, tax, insurance) plus enough for a few big repairs like roofs, HVAC, etc.

Second point is if you have financing of standard 30 year bank loans paying extra for a few months doesn't help your cashflow any until you either pay off the loan or refi. So yes its good to lower debt, but its not helping your cashflow on your one negative cashflow property. For that one it may be better to try and refi or just sell at a loss but you haven't told us much of your situation. If you include your principal paydown does it cashflow then?

Third I use this formula to cashflow:

Rent - mortgage - insurance - taxes - $100/$150 repairs - 10% vacancy

You have to include something for maintenance. Could be 100-150 in my market but this is just to save up for big repairs like roofs, HVAC, etc.

zinethstache

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Re: Buy More or Pay down what I have?
« Reply #3 on: July 04, 2014, 09:53:11 PM »
One more thought on reserves, you mention banks, and mortgages, I don't think you will qualify without 6 months in reserves for all properties, if you are going to finance the next x number of them. You already have 8. I have heard that there is a magic number max of 10 residential mortgages and then things change. You have to then go for commercial loans. This is what my own lender has discussed with me as I am in my buy phase myself.

I also use a similar cash flow formula, including vacancy and maintenance costs in my estimation. I have a high CF expectation since we need income to live on, not just break even.

Basher51

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Re: Buy More or Pay down what I have?
« Reply #4 on: July 04, 2014, 11:58:33 PM »
We bought several properties right at the height of the down turn. I about lost everything. I was a mess. Fortunately for me, I was able to work with the banks and have been told by numerous people that we are not the norm, and survived where others did not.  That said, my equity spreads on the portfolio are just about break even in Value to loan. Hence, I cannot sell these without losing money. I really don't want to sell anyway. ( I have never sold a property that I didn't regret later. )


First point is if you don't have 6 months reserves in the bank for your entire portfolio after you pay for a new property, you should pass. It sounds like your reserves may have been short at one point and its important to appreciate them as much as cashflow. There are whole threads on reserves and I argue you need 6 months expenses (mortgage, tax, insurance) plus enough for a few big repairs like roofs, HVAC, etc.

Second point is if you have financing of standard 30 year bank loans paying extra for a few months doesn't help your cashflow any until you either pay off the loan or refi. So yes its good to lower debt, but its not helping your cashflow on your one negative cashflow property. For that one it may be better to try and refi or just sell at a loss but you haven't told us much of your situation. If you include your principal paydown does it cashflow then?

Third I use this formula to cashflow:

Rent - mortgage - insurance - taxes - $100/$150 repairs - 10% vacancy

You have to include something for maintenance. Could be 100-150 in my market but this is just to save up for big repairs like roofs, HVAC, etc.

6 months of Reserves on my portfolio is around $75,000. I'm not going to keep 75K in the bank for the bank. If I cant get a loan then I will not get one. I will use 401k loan if I need too fix and flip.  From my 12+ years of doing this, I have never needed that large of money to do anything other than acquire property. I used to get really stupid and dump tons of money in houses, but no longer.
I always manage my own properties, and do my own repairs. The SWAG formula I use is about the same as yours, but I spread it over multiple properties Meaning, I really want each place to cover mortgage + insurance + taxes + $100.
 $100X8 properties =$800/month or $9600 a year. I find that to be doable for vacancies and general repairs. (I do better than this by the way)

I AM NOT SAYING I AM RIGHT HERE EITHER. But Generally this has worked for me in the past.

So far I have read a ton of posts where people are saying to sell at a loss. I completely disagree with this 100%. Sure, If your payment is $1000 and you only get $900 then you have stop loss issues. from my perspective, if it rents for 1000, and I only get 1000. I will wait for time to heal my wound. IT ALWAYS HAS.
Not to mention, tax breaks for losses, and real estate is difficult to get at a deal on a good day. 

arebelspy

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Re: Buy More or Pay down what I have?
« Reply #5 on: July 05, 2014, 01:23:56 AM »
But why buy ones that barely break even and wait for the eventual rent raises to finally make your cash flow when you could instead be cash flowing from day one?

Just find better opportunities, instead of buying mediocre ones.

That's what I don't understand.  Sure, eventually time will bail you out, but if you bought right to begin with, time just makes it even more amazing, instead of turning it from "meh" to "okay."
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Basher51

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Re: Buy More or Pay down what I have?
« Reply #6 on: July 05, 2014, 09:43:49 AM »
But why buy ones that barely break even and wait for the eventual rent raises to finally make your cash flow when you could instead be cash flowing from day one?

Just find better opportunities, instead of buying mediocre ones.

That's what I don't understand.  Sure, eventually time will bail you out, but if you bought right to begin with, time just makes it even more amazing, instead of turning it from "meh" to "okay."

You are absolutely correct. Why? Well, I have bought properties in the past that were over $100,000 less in value (supposedly)  than Par (what I call the going rate.) While some of them that I still currently own were great deals, others were not when it all came out in the wash. I was in 100% financing with just my repair cost, so why would I pay 30K just to sell a house? -Let it ride.

Three things are very expensive in real estate where I am from:

Buying
Selling
Refinancing.

Again, I'm not saying I am right. I am here to reflect,repent, and hopefully learn a better way of making money in real estate. The aforementioned are just thoughts.

arebelspy

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Re: Buy More or Pay down what I have?
« Reply #7 on: July 05, 2014, 10:27:52 AM »
Gotcha. Those sound like prime flip candidates to me, but not good buy and holds.  I'd be happy to pay 30k to sell if I'm making 70k on it in a short period of time. Then you take the profits and invest in buy and hold where it makes sense.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.