Author Topic: Comparing Mortgage Options  (Read 12108 times)

arebelspy

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Comparing Mortgage Options
« on: May 29, 2014, 05:23:38 PM »
(Numbers rounded and situation simplified to keep things simple.)

Imagine a property with a loan balance of 280k.  4.5% 30-year fixed, about 27 years left.  P&I of $1475/mo.

Has lots of equity, so can be refi'd, but terms are much worse (due to the first parenthetical sentence, assume this is the best possible deal): 5.5%, 25-year amortization with 10 year balloon.  New P&I would be $2,285/month (mostly due to the higher loan balance, partly due to 25-year amortization, instead of 30).

Can cash out 93k. Would have to pay 3k in costs.

That 93k can buy 910/mo. net cash flow after expenses, so paying for the higher P&I plus 100/mo. extra cash.

I have no concerns about paying the mortgage when it balloons in 10 years, but is it worth giving up a long term fixed rate loan in order to own a few more properties, and slightly increase my cash flow?

(The higher interest rate doesn't matter, as that's paid for by the investments generated with the cashed out equity.)

Basically trading off long term fixed loan and that awesome inflation hedge for extra houses (and appreciation potential) and a little cash flow.

Would appreciate any thoughts on the scenario.
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Re: Comparing Mortgage Options
« Reply #1 on: May 29, 2014, 05:46:53 PM »
Thought about selling with a wrap mortgage owner financed?  Ie to someone who might normally be a good tenant but has cash and still can't get finance, ie self employed contractor.  You get the 10% deposit and a note on the rest (  perhaps above market price)  at say 8%, you pocket the delta on the different mortgage rates until the 30 years on the new note is up.

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Re: Comparing Mortgage Options
« Reply #2 on: May 29, 2014, 06:17:14 PM »
I assume you can't get a HELOC, correct?  Because I would probably get a HELOC and buy what I could with that.

arebelspy

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Re: Comparing Mortgage Options
« Reply #3 on: May 29, 2014, 06:37:51 PM »
Thought about selling with a wrap mortgage owner financed?  Ie to someone who might normally be a good tenant but has cash and still can't get finance, ie self employed contractor.  You get the 10% deposit and a note on the rest (  perhaps above market price)  at say 8%, you pocket the delta on the different mortgage rates until the 30 years on the new note is up.

That totally kills the inflation hedge.  At least with this option I lose the inflation hedge from the long term fixed debt, but I still have the inflation hedge of the properties increasing in value.

Not looking to sell.

I assume you can't get a HELOC, correct?  Because I would probably get a HELOC and buy what I could with that.

Correct.
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totoro

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Re: Comparing Mortgage Options
« Reply #4 on: May 29, 2014, 07:37:49 PM »
(Numbers rounded and situation simplified to keep things simple.)

Imagine a property with a loan balance of 280k.  4.5% 30-year fixed, about 27 years left.  P&I of $1475/mo.

Has lots of equity, so can be refi'd, but terms are much worse (due to the first parenthetical sentence, assume this is the best possible deal): 5.5%, 25-year amortization with 10 year balloon.  New P&I would be $2,285/month (mostly due to the higher loan balance, partly due to 25-year amortization, instead of 30).

Can cash out 93k. Would have to pay 3k in costs.

That 93k can buy 910/mo. net cash flow after expenses, so paying for the higher P&I plus 100/mo. extra cash.

I have no concerns about paying the mortgage when it balloons in 10 years, but is it worth giving up a long term fixed rate loan in order to own a few more properties, and slightly increase my cash flow?

(The higher interest rate doesn't matter, as that's paid for by the investments generated with the cashed out equity.)

Basically trading off long term fixed loan and that awesome inflation hedge for extra houses (and appreciation potential) and a little cash flow.

Would appreciate any thoughts on the scenario.

It amazes me that you can get a 30-year low-rate fixed mortgage in the US.

The fact that you end up covering all costs and having an extra $100 a month in cash flow plus benefiting from additional appreciation (if that is a factor) seems, on the surface, to favour buying the second place.   

That said, I would not do anything without filling in detailed analyzer spreadsheets for each scenario.

I would do this for scenario A status quo and project out ten years to point of balloon payment.

Then do the spreadsheet for scenario B using the new mortgage amount & amortization plus costs for the existing property, and the same analyzer spreadsheet for the next property and project out ten years or your window of ownership if it is less.

I would then look at the future and what matches your goals best.  More property is better if you are motivated by it and believe in the appreciation potential in whatever window of time you are considering.  Keeping what you have is easier and more secure.

Losing your long-term low-rate mortgage with and having a balloon payment means that in ten years you will pay it out or sell.  Correct? 

Are you planning to sell and, if not, what are your plans to minimize taxable income given that it will be paid off? 

Would you refinance again? 

If you are planning to sell both properties you will be ahead through the cash flow advantage and potentially appreciation.

arebelspy

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Re: Comparing Mortgage Options
« Reply #5 on: May 30, 2014, 10:41:38 AM »
In a decade refinancing or paying it off are both viable.  The whole thing wouldn't be sold.  Part of it could be sold to make the rest free and clear (it is actually a small bundle of properties, but was simplified into this one for ease of discussion).

Another way to look at it is a $100/mo (1200/yr) return on my 3k of fees, for a decent return.  There are a lot of factors to look at.

Ultimately it's a question of giving up a great inflation hedge in the 30-year mortgage for more properties and slightly better cash flow now.

I'm not quite sure how to value the former.
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Re: Comparing Mortgage Options
« Reply #6 on: May 30, 2014, 11:31:47 AM »
How many financed properties do you have and will doing this change anything?  That's something I would look at.  I don't like the risk of cross-collateralizing by bundling, but it can reduce the number of loans the lenders count. 

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Re: Comparing Mortgage Options
« Reply #7 on: May 30, 2014, 11:33:33 AM »
Since your main concern is the loss of an inflation hedge, the answer depends on what inflation and interest rates will be in 10 years.  Nobody knows.  People have been predicting higher rates for at least the past 8 years and so far they haven't been very right.  You also might have another opportunity to refinance it in the meantime before rates & inflation go up by very much, but obviously that's not something you can count on.

Also, does paying off the 30 Yr fixed open up the ability to get conventional financing for a future deal?  (I'm thinking you might be maxed out on the number of conventional loans that are allowable, so this would free up one slot.)

arebelspy

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Re: Comparing Mortgage Options
« Reply #8 on: May 30, 2014, 11:35:03 AM »
I am currently able to get financing on new purchases, and this will not affect that.
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totoro

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Re: Comparing Mortgage Options
« Reply #9 on: May 30, 2014, 11:45:13 AM »
In a decade refinancing or paying it off are both viable.  The whole thing wouldn't be sold.  Part of it could be sold to make the rest free and clear (it is actually a small bundle of properties, but was simplified into this one for ease of discussion).

Another way to look at it is a $100/mo (1200/yr) return on my 3k of fees, for a decent return.  There are a lot of factors to look at.

Ultimately it's a question of giving up a great inflation hedge in the 30-year mortgage for more properties and slightly better cash flow now.

I'm not quite sure how to value the former.

If you are refinancing the mortgage rate in ten years may be much higher.  It is a risk that needs to be factored in to the end of the estimated period of ownership.

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Re: Comparing Mortgage Options
« Reply #10 on: May 30, 2014, 12:08:24 PM »
one is a gamble, the other is a pretty set path toward equity growth.

with any possibility of interest rate spikes (lets not forget that interest rates were besting 20% not that long ago...the 1980s) there is the looming possibility of the property or properties becoming an alligator. If you're confident in your deal making skills to make it work, I would focus those skills on looking for homes people are looking to offload via loan assumption, especially if the loans were drafted in the past 2 years when interest rates were incredible.

arebelspy

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Re: Comparing Mortgage Options
« Reply #11 on: May 30, 2014, 12:19:58 PM »
If you are refinancing the mortgage rate in ten years may be much higher.  It is a risk that needs to be factored in to the end of the estimated period of ownership.

Of course.  How do you factor that in, totoro?

If they are high, I just won't refi, I'll pay it off when the balloon comes due.

with any possibility of interest rate spikes (lets not forget that interest rates were besting 20% not that long ago...the 1980s) there is the looming possibility of the property or properties becoming an alligator.

If interest rates are higher than I'd like, I'd pay it off.  I'm not worried about a property becoming cash flow negative due to high interest rates.

I will never be in a position where I have to have a loan.

Pay off when interest rates are high, leverage up when low.

Right now they're low, but cashing out means turning my 30-year to a 10-year, and then having to pay it off if they're high.  They more likely will be than not, but it will give me extra cash now to buy properties.
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Mr Mark

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Re: Comparing Mortgage Options
« Reply #12 on: May 30, 2014, 12:49:22 PM »
I like the way you can say, " hey, I'll pay it off" in the downside Arebelspy.  :-)

This inherent liquidity and flexibility is a wonderful thing about FI. It offers wonderful 'self insurance'  opportunities. 

The ability to keep promises, stay liquid, meet margin calls, complete deals cash, ... there's HUGE hidden value in that as a semi- active investor.  You'd be amazed how many people would struggle to write, say, a cheque for 80k. Once you get the ability to do that the doors that open are legion...

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Re: Comparing Mortgage Options
« Reply #13 on: May 30, 2014, 12:54:58 PM »
I think there are many factors here that I don't know - like what happens to your taxable income if you pay it off.  The reason I raise higher rates is you need to compare that risk and see what the bottom line is long term paid off with tied up capital making low returns and higher taxable income from rents vs lower rates and mortgage interest deduction against taxable income.

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Re: Comparing Mortgage Options
« Reply #14 on: May 31, 2014, 07:50:07 PM »
In this bundle scenario, are you taking a single 30 year financed property, and bundling it with say n number of paid for properties to get a commercial bundle loan? I ask because once you do that for tax purposes you cannot sell of a part of the bundle. Perhaps if this is the case you've already considered this and it is not an issue. My tax accountant was telling me a story with a client what wanted to unload a couple of problem properties because prices here have become very good, but they could not do so as the package is bundled and can only be sold as a whole entity.

I am in the buy phase so would definitely want to get that 90k out now for more buying power. Just as long as I know the impact and any restrictions if I were to do so.

Definitely a fun place for you to be in! I aspire to get there one day:)

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Re: Comparing Mortgage Options
« Reply #15 on: May 31, 2014, 09:13:43 PM »
They way I see it you are paying an additional $8500 in interest the first year and an additional $70,000 in interest over the 10 year life of the loan in order to gain access to $90,000 for 10 years (subtracting closing cost from loan amount.)  That seems like pretty expensive money to me.  Now it certainly helps to have investment that has Cap X rate that looks like 12% or so.  But remember that isn't risk free, it is real estate and lots can go wrong.

Look at the amortization schedule it appears you'll need to refi $280K after 10 years.  If say interest rates have risen 2-3% which in turn kept real estate price appreciating at the rate of inflation, you maybe looking at getting a 7.5-8% loan in 10 years.

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Re: Comparing Mortgage Options
« Reply #16 on: May 31, 2014, 09:47:26 PM »
(Numbers rounded and situation simplified to keep things simple.)

Imagine a property with a loan balance of 280k.  4.5% 30-year fixed, about 27 years left.  P&I of $1475/mo.

Has lots of equity, so can be refi'd, but terms are much worse (due to the first parenthetical sentence, assume this is the best possible deal): 5.5%, 25-year amortization with 10 year balloon.  New P&I would be $2,285/month (mostly due to the higher loan balance, partly due to 25-year amortization, instead of 30).

Can cash out 93k. Would have to pay 3k in costs.

That 93k can buy 910/mo. net cash flow after expenses, so paying for the higher P&I plus 100/mo. extra cash.

I have no concerns about paying the mortgage when it balloons in 10 years, but is it worth giving up a long term fixed rate loan in order to own a few more properties, and slightly increase my cash flow?

(The higher interest rate doesn't matter, as that's paid for by the investments generated with the cashed out equity.)

Basically trading off long term fixed loan and that awesome inflation hedge for extra houses (and appreciation potential) and a little cash flow.

Would appreciate any thoughts on the scenario.

Seems you are comfortable with real estate, and I'm assuming you have good feeling about the viability of the new property(ies). With that being the case, lever up bro!

We've been spoiled by low rates lately, but in the grand scheme of the past 30 years, 5.5% ain't bad. Plus, it allows you to get in at a time when credit is still tight in the market overall.

Right now, you have $93k in dead money... it's not earning anything (though it's not costing you anything either).

Your option to basically borrow against it will increase your annual interest (in yr 1... just for comparison sake) from $12.6k (4.5% @ 280k) to $20.5k (5.5% @ 373k). So additional "expenses" per yr of $7.9k interest/yr.

Think marginal earnings and marginal costs (not totals... since what you have now is "sunk"... i.e. you can't change it).

Marginal "revenues" of $10.9k (910 x 12) - Marginal "costs" of $7.9k = +$3k in yr 1.

Revenues will likely increase 1-3%/yr and interest will decrease slightly as you pay off the loan.

You are less "profitable" on the total rental property business, but you will be making more in total. Plus, you mentioned you are liquid enough to pay off the balance in 10 years. So, using flat numbers (which underestimates your spread), you will earn a net +$30k in 10 years (3k x 10 yrs).

Am I missing something?
« Last Edit: May 31, 2014, 09:50:56 PM by rmendpara »

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Re: Comparing Mortgage Options
« Reply #17 on: June 04, 2014, 01:08:57 PM »
Yes, its a good idea. 

1.  It diversifies your holdings.
2.  It increases your ROE (as positive leverage does - but remember it cuts both ways).
3.  It tax free way to take out equity.
4.  This is further proof that the 30 year mortgage is a fallacy - very few mortgages stay outstanding this long (or even a third this long) regardles of if its an owner or investor as so many things change over time - such as what you are contemplating or in five years you may have a bunch of small properties and decide to do a 1031x into a large multifamily property (for what its worth 30 year terms aren't available for commercial size multifamily.

arebelspy

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Re: Comparing Mortgage Options
« Reply #18 on: June 04, 2014, 10:53:25 PM »
They way I see it you are paying an additional $8500 in interest the first year and an additional $70,000 in interest over the 10 year life of the loan in order to gain access to $90,000 for 10 years (subtracting closing cost from loan amount.)

Hmm.. actually breaking it down like this gave me an interesting idea.  If I can find a private investor who wants 9% on their money, and I put that as a second on the properties, I'd come out ahead.

Paying them 9% on that 90k (secured by real estate - at the same equity level as the bank was doing, 65% LTV) and keeping my 4.5% loans would actually be cheaper for me than paying 5.5% on the whole thing (if your 8.5k interest yr 1 is right, as 9% on 90k is only 8.1k, saving me $400).

If getting a 9% loan SAVES me $400, I may just want to consider other loan options (Lending Club/Prosper being one example that springs to mind) if I can't find a private lender to do a mortgage note, rather than this whole refi option, right?

So all of those saying that this is a good idea - isn't this just an argument for getting any and all leverage I can that is under the cap rate/ROI I'm getting?
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Re: Comparing Mortgage Options
« Reply #19 on: June 04, 2014, 11:15:19 PM »
They way I see it you are paying an additional $8500 in interest the first year and an additional $70,000 in interest over the 10 year life of the loan in order to gain access to $90,000 for 10 years (subtracting closing cost from loan amount.)

Hmm.. actually breaking it down like this gave me an interesting idea.  If I can find a private investor who wants 9% on their money, and I put that as a second on the properties, I'd come out ahead.

Paying them 9% on that 90k (secured by real estate - at the same equity level as the bank was doing, 65% LTV) and keeping my 4.5% loans would actually be cheaper for me than paying 5.5% on the whole thing (if your 8.5k interest yr 1 is right, as 9% on 90k is only 8.1k, saving me $400).

If getting a 9% loan SAVES me $400, I may just want to consider other loan options (Lending Club/Prosper being one example that springs to mind) if I can't find a private lender to do a mortgage note, rather than this whole refi option, right?

So all of those saying that this is a good idea - isn't this just an argument for getting any and all leverage I can that is under the cap rate/ROI I'm getting?

What other assets do you have? There's got to be a way you can borrow some/all of the $90k in some other way for less than increasing the mortgage and mortgage rate to 5.5% will cost you over the life of the loan.

Maybe combine Prosper/Lending club, personal loan from friend/family, bank personal line of credit? Should probably be more cost effective than refinancing the mortgage... and you can prepay these other loans with your extra cash flow (thus lowering your total borrowing cost over the life of the loan(s)).

arebelspy

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Re: Comparing Mortgage Options
« Reply #20 on: June 04, 2014, 11:39:56 PM »
What other assets do you have? There's got to be a way you can borrow some/all of the $90k in some other way for less than increasing the mortgage and mortgage rate to 5.5% will cost you over the life of the loan.

Maybe combine Prosper/Lending club, personal loan from friend/family, bank personal line of credit? Should probably be more cost effective than refinancing the mortgage... and you can prepay these other loans with your extra cash flow (thus lowering your total borrowing cost over the life of the loan(s)).

Yeah, I do have all of those options - credit, DTI, income, etc. are all great.

It seems odd on one hand to be taking out personal lines of credit or unsecured loans when I'm sitting on a ton of equity (overall real estate portfolio is about 35% LTV, and even this refi will keep it under 50% LTV due to low limits from the banks combined with multiple free and clear properties), but on the other hand that keeps me from refinancing the entire balance at a higher rate and shorter term.

A second/HELOC on the rentals would be ideal, to keep the first mortgages in place, but that doesn't appear to be available in the lending markets right now.

Hmm.. I guess I'm leaning towards the private loan* over the refi over doing nothing, but still running some numbers.

Thanks for the thoughts everyone!


*And that will depend on the terms and rate, naturally.

EDIT: I may need to start a new thread to discover all my options for this idea.
« Last Edit: June 05, 2014, 12:14:06 AM by arebelspy »
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Re: Comparing Mortgage Options
« Reply #21 on: June 05, 2014, 02:22:51 PM »
If you are refinancing the mortgage rate in ten years may be much higher.  It is a risk that needs to be factored in to the end of the estimated period of ownership.

Of course.  How do you factor that in, totoro?

If they are high, I just won't refi, I'll pay it off when the balloon comes due.

with any possibility of interest rate spikes (lets not forget that interest rates were besting 20% not that long ago...the 1980s) there is the looming possibility of the property or properties becoming an alligator.

If interest rates are higher than I'd like, I'd pay it off.  I'm not worried about a property becoming cash flow negative due to high interest rates.

I will never be in a position where I have to have a loan.

Pay off when interest rates are high, leverage up when low.

Right now they're low, but cashing out means turning my 30-year to a 10-year, and then having to pay it off if they're high.  They more likely will be than not, but it will give me extra cash now to buy properties.

in that case the answer is pretty clear, go with the cheaper money!

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Re: Comparing Mortgage Options
« Reply #22 on: June 05, 2014, 03:33:18 PM »
Positive leverage means the loan interest rate (or to be accurate, the mortgage constant) is less than the overall cap rate for the property....

I know a lot of people that would consider taking second position at 9 percent, if total LTV made sense.  Cross-collateralize a group of properties, and you will likely have a line at your door.

arebelspy

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Re: Comparing Mortgage Options
« Reply #23 on: June 05, 2014, 03:58:37 PM »
Positive leverage means the loan interest rate (or to be accurate, the mortgage constant) is less than the overall cap rate for the property....

I know a lot of people that would consider taking second position at 9 percent, if total LTV made sense.  Cross-collateralize a group of properties, and you will likely have a line at your door.

Yeah, it benefits me quite a bit to keep the first mortgage in place and get a second - if I pay 9% on 90k, I'm actually saving money versus paying 5.5% on the entire amount.  How silly.

I'm thinking of trying to put together a simple one page PDF to send to a few people that might be interested, especially if I explain why it makes sense to borrow at that rate (that it's cheaper than refinancing a larger amount at 5.5%).

Any thoughts on that scenario is appreciated. I'm thinking something like 8-9% rate, no higher than 70-75% LTV (so I have 25-30% into it), scheduled as either 1) interest only payments with a 5 or 10-year balloon depending on when the investor needs the money back (could be shorter, I suppose, but probably not less than 3 years, otherwise it likely wouldn't be worth the cost of filing the liens with a title company), or 2) a fully amortized 15-year loan.

All of that is negotiable, but roughly in line with what would seem to hopefully work.

I think I may have to read on SEC rules about raising money though before I proceed.  Something I've very much avoided getting into thus far, since we cash flow and save so much already, we've done it all with our own money and conventional loans.  At this point though a 9% private second is cheaper than a 5.5% commercial loan, funnily enough.  Hmm..

Note/Disclaimer: all of the above is speculation/theory for discussion as well as a request for advice on how one might theoretically structure something like this - it is not an offering or solicitation for any security or otherwise.  :)
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Re: Comparing Mortgage Options
« Reply #24 on: June 05, 2014, 04:12:02 PM »
You are not raising equity, you are borrowing money secured by real estate.  Different rules apply.  Call your friend in San Diego, Mr. Brown.  I'm sure he would know how to do this.  Of course, he will tell you that you are crazy for buying cash flow in Michigan....

arebelspy

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Re: Comparing Mortgage Options
« Reply #25 on: June 05, 2014, 04:31:02 PM »
You are not raising equity, you are borrowing money secured by real estate.  Different rules apply.

Oh.  Duh.  Thanks. :P

Call your friend in San Diego, Mr. Brown.  I'm sure he would know how to do this.  Of course, he will tell you that you are crazy for buying cash flow in Michigan....

Hah, he sure will.  That's a good idea, I'll touch base with him.
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Mr Mark

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Re: Comparing Mortgage Options
« Reply #26 on: June 05, 2014, 06:10:32 PM »
Do it! Post photos.

totoro

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Re: Comparing Mortgage Options
« Reply #27 on: June 05, 2014, 06:21:04 PM »
You can get 9% on your money by lending privately with arebelspy??  Too bad you are a country and a bunch of red tape away or I would be very interested.

Mr Mark

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Re: Comparing Mortgage Options
« Reply #28 on: June 05, 2014, 07:24:30 PM »
Hard money could do even better...

totoro

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Re: Comparing Mortgage Options
« Reply #29 on: June 05, 2014, 08:21:18 PM »
Where is this hard money lending you speak of?  Can Canadians do it?

arebelspy

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Re: Comparing Mortgage Options
« Reply #30 on: June 05, 2014, 10:17:21 PM »
I've considered doing hard money lending myself, given my knowledge of real estate and ability to assess a "deal," but there are a few issues I've run into, the two biggest being:
1) Idle money.  Money sitting between jobs that needs to be kept liquid is such a drag on your portfolio.  That kills your return, but your risk isn't any lower, so your risk adjusted return is not good, IMO.
2) Finding reliable borrowers.

If you had a steady stream of borrowers who kept coming to you over and over consistently, that you've already vetted and it kept your money moving, it'd make sense to be doing hard money.

Trying to do one-off hard money loans just doesn't make sense to me due to the necessity of vetting the borrower and then getting the money back so quickly, so unless it's a regular business with regular customers (borrowers), I don't see it being worthwhile, personally.

I think someone lending at 8-9% full time will see more than someone who only does the occasional HML but lends out at 15% (in other words, I'm implying their money will likely be idle more than 40% of the time in that infrequent HML scenario).

But if you can build your HML lending into a regular business with regular customers and have a good knowledge of the market, it's a great way to go.
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arebelspy

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Re: Comparing Mortgage Options
« Reply #31 on: June 05, 2014, 10:20:34 PM »
You can get 9% on your money by lending privately with arebelspy??  Too bad you are a country and a bunch of red tape away or I would be very interested.

Heh, thanks.  That is too bad.  ;)

One of the benefits of being here is that US residents can roll their 401ks/IRAs into self directed IRAs (either Roth or traditional) and make the loan out of that account for tax advantaged returns.  There may be a Canadian equivalent, but that's a huge advantage for investing in certain types of real estate, provided you follow the IRS rules.
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.
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Nords

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Re: Comparing Mortgage Options
« Reply #32 on: June 05, 2014, 10:57:36 PM »
Yeah, it benefits me quite a bit to keep the first mortgage in place and get a second - if I pay 9% on 90k, I'm actually saving money versus paying 5.5% on the entire amount.  How silly.
I'm thinking of trying to put together a simple one page PDF to send to a few people that might be interested, especially if I explain why it makes sense to borrow at that rate (that it's cheaper than refinancing a larger amount at 5.5%).
If you're still seeking investors, please include me on your pitch. 
« Last Edit: June 05, 2014, 11:01:11 PM by Nords »

Another Reader

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Re: Comparing Mortgage Options
« Reply #33 on: June 05, 2014, 11:00:44 PM »
Heck, you could probably crowd fund your second mortgage here by dinnertime tomorrow.

totoro

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Re: Comparing Mortgage Options
« Reply #34 on: June 06, 2014, 04:30:04 AM »
You can get 9% on your money by lending privately with arebelspy??  Too bad you are a country and a bunch of red tape away or I would be very interested.

Heh, thanks.  That is too bad.  ;)

One of the benefits of being here is that US residents can roll their 401ks/IRAs into self directed IRAs (either Roth or traditional) and make the loan out of that account for tax advantaged returns.  There may be a Canadian equivalent, but that's a huge advantage for investing in certain types of real estate, provided you follow the IRS rules.

We have a similar option in lending through a self- directed rrsp but there are quite a few rules which I haven't looked at for a while.  You could hold your own mortgage for example - except rates are so low it doesn't make sense right now. 

What I am looking to invest is corporate retained earnings. They are just sitting right now as I am taxed at 47% on passive investment income in the corporation. The return needs to be high enough to make sense after tax or I need to invest in something that is active and gets taxed at 15%.   Buying a building to work out of and rent to others qualifies as active but price to rent for commercial is not very attractive where I am.

arebelspy

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Re: Comparing Mortgage Options
« Reply #35 on: June 24, 2014, 09:50:38 AM »
Found another option that lets me cash out more, but at a worse rate.  Again when I just compare the extra interest / yr. I'd pay it works out to paying 8-9% on that money, and locks me into a balloon payment at 5 or 10 years.

On the other hand, I can earn more than that rate, so it's still tempting to do.  Frustrating to pay that much though (5.5-6.5% on the whole thing, which is equivalent to 9% on just the cashed out amount).  Trapped equity is also frustrating though.  Dilemmas dilemmas...

Appreciate the thoughts everyone.
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.
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FrugalZony

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Re: Comparing Mortgage Options
« Reply #36 on: June 24, 2014, 10:26:08 AM »
Yeah, it benefits me quite a bit to keep the first mortgage in place and get a second - if I pay 9% on 90k, I'm actually saving money versus paying 5.5% on the entire amount.  How silly.
I'm thinking of trying to put together a simple one page PDF to send to a few people that might be interested, especially if I explain why it makes sense to borrow at that rate (that it's cheaper than refinancing a larger amount at 5.5%).
If you're still seeking investors, please include me on your pitch.
+1
I'm game!
;)

dragoncar

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Re: Comparing Mortgage Options
« Reply #37 on: June 24, 2014, 10:29:10 AM »
Commenting here, just in case this happens, but with the amount of interest I'm guessing we've got a reverse auction pending.

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Re: Comparing Mortgage Options
« Reply #38 on: June 24, 2014, 10:56:27 AM »
How about selling your less profitable properties and do a 1031 exchange to leverage up to more profitable properties. I'm sure you're much better at analyzing profitable properties then when you first started out which will enable you to liquidate the less desirable properties in your portfolio. At the same time you can qualify for a higher mortgage by just recycling your cash. So instead of having a $200k mortgage on a property worth $500k you buy a $1 million dollar property with a $700k mortgage. Of course, these are hypothetical numbers for illustrative purposes.

arebelspy

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Re: Comparing Mortgage Options
« Reply #39 on: June 24, 2014, 11:02:01 AM »
How about selling your less profitable properties and do a 1031 exchange to leverage up to more profitable properties. I'm sure you're much better at analyzing profitable properties then when you first started out which will enable you to liquidate the less desirable properties in your portfolio. At the same time you can qualify for a higher mortgage by just recycling your cash. So instead of having a $200k mortgage on a property worth $500k you buy a $1 million dollar property with a $700k mortgage. Of course, these are hypothetical numbers for illustrative purposes.

I had two properties like that (the first two I bought, actually).  One I sold a year ago on owner financing to turn it from a mediocre investment to one that cash flows really well.  The other is the condo I live in (which I'm underwater on, and plan to come out of pocket to pay when I sell it in a few years).

All my other properties I'd really like to keep, as they're great investments with good cash flow, good appreciation, good tenants, etc.

I have considered selling one or two despite this fact, just to realize the gains and purchase more.  Tough though when I'd rather hold them forever.  :)
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.
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arebelspy

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Re: Comparing Mortgage Options
« Reply #40 on: June 24, 2014, 06:18:51 PM »
Also, as to all the people mentioning they'd be willing to look at a proposal to loan money on real estate, I haven't been ignoring you.  I've seriously considered it.

I'm just .. a bit uncomfortable with borrowing money from people.  :)

Big, giant banks?  Sure.  People I know and interact with..?  Not as fun of an idea.  Even though I'm completely confident in the investments (and my ability to pay it back even if a particular investment doesn't work out, and the ability of the lender to collect the collateral even in worst-case scenarios), it's still a weird idea to me, to owe people money. Maybe a partnership would work better than a straight loan?  I don't know.

So that's why I'm still pursuing other options (commercial loans) and trying to find something that works in that arena. (And/or considering personal loans, Lending Club loans, etc.)

It seems though that I've pretty much found what's available right now, and that of the loans available, I'll be paying an equivalent of 9% (even though it's at 5.5-6.5%, because it's raising the balance of the amount at 4.5%) on the cashed out amount.

So I'm still considering it, but that's why I haven't answered those posts.  :)
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.
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dragoncar

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Re: Comparing Mortgage Options
« Reply #41 on: June 24, 2014, 07:57:43 PM »
Also, as to all the people mentioning they'd be willing to look at a proposal to loan money on real estate, I haven't been ignoring you.  I've seriously considered it.

I'm just .. a bit uncomfortable with borrowing money from people.  :)

Big, giant banks?  Sure.  People I know and interact with..?  Not as fun of an idea.  Even though I'm completely confident in the investments (and my ability to pay it back even if a particular investment doesn't work out, and the ability of the lender to collect the collateral even in worst-case scenarios), it's still a weird idea to me, to owe people money. Maybe a partnership would work better than a straight loan?  I don't know.

So that's why I'm still pursuing other options (commercial loans) and trying to find something that works in that arena. (And/or considering personal loans, Lending Club loans, etc.)

It seems though that I've pretty much found what's available right now, and that of the loans available, I'll be paying an equivalent of 9% (even though it's at 5.5-6.5%, because it's raising the balance of the amount at 4.5%) on the cashed out amount.

So I'm still considering it, but that's why I haven't answered those posts.  :)

Does taking a junior mortgagee trigger the due on sale clause?

Nords

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Re: Comparing Mortgage Options
« Reply #42 on: June 24, 2014, 08:11:28 PM »
I'm just .. a bit uncomfortable with borrowing money from people.  :)

Big, giant banks?  Sure.  People I know and interact with..?  Not as fun of an idea.  Even though I'm completely confident in the investments (and my ability to pay it back even if a particular investment doesn't work out, and the ability of the lender to collect the collateral even in worst-case scenarios), it's still a weird idea to me, to owe people money. Maybe a partnership would work better than a straight loan?  I don't know.
"It's not personal, it's just business"...

arebelspy

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Re: Comparing Mortgage Options
« Reply #43 on: June 24, 2014, 11:12:19 PM »
Does taking a junior mortgagee trigger the due on sale clause?

No.  Not in the acceleration clauses I've read in my promissory notes.  I'll double check on that though for any property, it's a good point.  But generally banks don't care if you take on a second mortgage, because their lien is in a superior position.

And then there's the free and clear properties that don't have that issue.

I'm just .. a bit uncomfortable with borrowing money from people.  :)

Big, giant banks?  Sure.  People I know and interact with..?  Not as fun of an idea.  Even though I'm completely confident in the investments (and my ability to pay it back even if a particular investment doesn't work out, and the ability of the lender to collect the collateral even in worst-case scenarios), it's still a weird idea to me, to owe people money. Maybe a partnership would work better than a straight loan?  I don't know.
"It's not personal, it's just business"...

Yeah, I don't believe in that quote.  Integrity crosses over between personal and business.

Like how I handle my tenants - of course it's not personal if one has to be charged a late fee, or even evicted, but I can still treat them with dignity.

Though I'm not sure how you're applying that quote to this, so my response may not make sense towards what you were intending.  :)
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.
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Nords

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Re: Comparing Mortgage Options
« Reply #44 on: June 28, 2014, 02:47:35 PM »
Does taking a junior mortgagee trigger the due on sale clause?

No.  Not in the acceleration clauses I've read in my promissory notes.  I'll double check on that though for any property, it's a good point.  But generally banks don't care if you take on a second mortgage, because their lien is in a superior position.

And then there's the free and clear properties that don't have that issue.

I'm just .. a bit uncomfortable with borrowing money from people.  :)

Big, giant banks?  Sure.  People I know and interact with..?  Not as fun of an idea.  Even though I'm completely confident in the investments (and my ability to pay it back even if a particular investment doesn't work out, and the ability of the lender to collect the collateral even in worst-case scenarios), it's still a weird idea to me, to owe people money. Maybe a partnership would work better than a straight loan?  I don't know.
"It's not personal, it's just business"...

Yeah, I don't believe in that quote.  Integrity crosses over between personal and business.

Like how I handle my tenants - of course it's not personal if one has to be charged a late fee, or even evicted, but I can still treat them with dignity.

Though I'm not sure how you're applying that quote to this, so my response may not make sense towards what you were intending.  :)
Well said!

You're absolutely right, it was sarcasm.  Even the Godfather can't find the dividing line between "personal" and "business". 

The reality, though, is that you seem to have the ability to make money.  You've clearly developed more credibility (and trust) with the posters on this forum (and other real estate investors) than with some of the lending institutions who could make money from you.  We posters here all share an affinity (financial independence) and you're a likeable guy (even for a moderator).  Some of us are interested in helping out a pro who's clearly earned the privilege while making all of us a little money.

It's interest rate arbitrage, and the people who are willing to lend the money should be keenly aware of the risks without asking you to personally guarantee a loan that already has collateral.  The people from whom you'd want to borrow money will understand that there's no FDIC or CFPB involved.

It's not much different than hard-money lending, although you're probably getting a much lower rate.  I'm sure hard-money lenders could invest in partnerships, too, but for whatever reason they seem more comfortable with making money from debt than from equity.

dragoncar

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Re: Comparing Mortgage Options
« Reply #45 on: June 29, 2014, 12:17:04 AM »
Does taking a junior mortgagee trigger the due on sale clause?

No.  Not in the acceleration clauses I've read in my promissory notes.  I'll double check on that though for any property, it's a good point.  But generally banks don't care if you take on a second mortgage, because their lien is in a superior position.

And then there's the free and clear properties that don't have that issue.

I'm just .. a bit uncomfortable with borrowing money from people.  :)

Big, giant banks?  Sure.  People I know and interact with..?  Not as fun of an idea.  Even though I'm completely confident in the investments (and my ability to pay it back even if a particular investment doesn't work out, and the ability of the lender to collect the collateral even in worst-case scenarios), it's still a weird idea to me, to owe people money. Maybe a partnership would work better than a straight loan?  I don't know.
"It's not personal, it's just business"...

Yeah, I don't believe in that quote.  Integrity crosses over between personal and business.

Like how I handle my tenants - of course it's not personal if one has to be charged a late fee, or even evicted, but I can still treat them with dignity.

Though I'm not sure how you're applying that quote to this, so my response may not make sense towards what you were intending.  :)
Well said!

You're absolutely right, it was sarcasm.  Even the Godfather can't find the dividing line between "personal" and "business". 

The reality, though, is that you seem to have the ability to make money.  You've clearly developed more credibility (and trust) with the posters on this forum (and other real estate investors) than with some of the lending institutions who could make money from you.  We posters here all share an affinity (financial independence) and you're a likeable guy (even for a moderator).  Some of us are interested in helping out a pro who's clearly earned the privilege while making all of us a little money.

It's interest rate arbitrage, and the people who are willing to lend the money should be keenly aware of the risks without asking you to personally guarantee a loan that already has collateral.  The people from whom you'd want to borrow money will understand that there's no FDIC or CFPB involved.

It's not much different than hard-money lending, although you're probably getting a much lower rate.  I'm sure hard-money lenders could invest in partnerships, too, but for whatever reason they seem more comfortable with making money from debt than from equity.

Lets just say that this particular random internet dude is more convincing than people on Lending Tree or wherever.  If he's going to run with the money, it's a REALLY long con.

arebelspy

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Re: Comparing Mortgage Options
« Reply #46 on: June 29, 2014, 10:22:06 AM »
Lets just say that this particular random internet dude is more convincing than people on Lending Tree or wherever.  If he's going to run with the money, it's a REALLY long con.

Heh.  Well I've never used LendingTree, so I don't know how convincing their borrowers are.  I was under the impression it was more like a traditional mortgage company, but online, so their borrowers wouldn't need to be "convincing" - it'd just be showing their docs, like with a typical mortgage broker.  But if I'm wrong, and it's like LendingClub, where borrowers make a pitch and you lend to them, well, even if I'm not more convincing, at least it's a loan secured by real estate, instead of an unsecured loan, backed by.. nothing?

For me to "run" with the money it'd first go from you to the title company, who would confirm the current lien status on the houses (or if they're free and clear) and then record a lien on the house(s) with you as the lender, before disbursing the money.  So you'd have some recourse if I went "whee! Mexico!"  :P

Also I googled for a good image to reply to your post, and found this.



I don't know why, but it both intrigues and dismays me.
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.
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SunshineGirl

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Re: Comparing Mortgage Options
« Reply #47 on: July 02, 2014, 10:13:30 AM »
A lot of times, the right answer is to just keep doing what you're doing and not complicate things. The model you've used thus far is working well for you.