Author Topic: rental mortgages  (Read 5402 times)

bye-bye Ms. FancyPants

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rental mortgages
« on: December 08, 2014, 10:21:07 PM »
My husband bought several rentals before we met. The loans are crap - anywhere from 5-6%. I would really like to get one paid off then snowball the rest. I'm torn between paying off a rental first vs concentrating on paying off our own house @ 3.5% vs Vanguard investments. We have maxed out our 401K's, have a ER fund, and no other debt. Logic tells me to pay off a rental first, but my emotional side wants to split our extra income between our house and Vanguard and let the tenants pay for the rentals. Someone slap some sense into me.

monarda

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Re: rental mortgages
« Reply #1 on: December 08, 2014, 10:45:53 PM »
Planning on holding these rentals long-term?  How many is several?
How many years left on the 5-6% loans? Might a refi of one be worth it?
As you suggest I'd get rid of the highest interest loan or two, either by payoff or refi. Then reassess. You'll have more income to reallocate. No need to necessarily snowball to the rentals. Could send extra to Vanguard. If you can get a 4% refi, take extra cash out. Then use that to pay down one of the higher interest loans.
« Last Edit: December 08, 2014, 10:56:06 PM by monarda »

bye-bye Ms. FancyPants

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Re: rental mortgages
« Reply #2 on: December 08, 2014, 10:55:48 PM »
Several, as in 4. All should be paid off in about 7-10 years without any extra payments. Sorry I'm a little hazy on the details as I have always let my husband keep track of them. He is in the midst of refinancing the highest interest loan now.

You are right, I believe we should take the next highest interest and just go for it. It would only take about 2 years to pay off.

I know these rentals will pay off one day, but man, are they a pain...

iamlindoro

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Re: rental mortgages
« Reply #3 on: December 08, 2014, 11:09:14 PM »
I know these rentals will pay off one day, but man, are they a pain...

Are they not paying off now?  As in, are they cash flowing? 

5-6% may be bad compared to current interest rates, but they're not necessarily terrible in the grand scheme of things- investment property mortgages are always going to be higher than owner occupied mortgages, and even now 5% is only barely high for an investment property.  If the rentals were good investments in the first place, you should still be coming out ahead.  If the rentals are not cash flowing, then you have bigger problems than the interest rate.
« Last Edit: December 08, 2014, 11:11:08 PM by iamlindoro »

Overseas Stache

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Re: rental mortgages
« Reply #4 on: December 09, 2014, 12:23:17 AM »
I know these rentals will pay off one day, but man, are they a pain...

Are they not paying off now?  As in, are they cash flowing? 

5-6% may be bad compared to current interest rates, but they're not necessarily terrible in the grand scheme of things- investment property mortgages are always going to be higher than owner occupied mortgages, and even now 5% is only barely high for an investment property.  If the rentals were good investments in the first place, you should still be coming out ahead.  If the rentals are not cash flowing, then you have bigger problems than the interest rate.
^+1

mqtxc

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Re: rental mortgages
« Reply #5 on: December 09, 2014, 07:26:18 AM »
It might be wise to review the tax implications of paying off the mortgages. While the interest rates might be high, the real cost is actually lower because of the interest expense.

bye-bye Ms. FancyPants

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Re: rental mortgages
« Reply #6 on: December 09, 2014, 07:36:03 AM »
Thanks for sharing your thoughts everyone.

If I understand the world of real estate investing (its new to me), the rentals are + cash flow but certainly not at 50%.

tracylayton

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Re: rental mortgages
« Reply #7 on: December 09, 2014, 08:09:29 AM »
Our situation is eerily similar. I have 4 rentals...three with 5 to 10 years left on the 15 year mortgages (interest rates between 4.25 and 4.375 %) and one that is paid for. My home mortgage is 3.25% with 28 years left. I am afraid that if I start paying them all off, my income taxes will go way up. Also, it is convenient that the taxes and insurance are withheld and taken care of by the mortgage company. The 3 with mortgages cash flow $400 to $500/month each and the one that is paid for cash flows $950/month. Additionally, the principal paid down each month on the 4 mortgages totals about $1,150. I don't have a lot of money invested in stocks, so I think I should begin concentrating on investing in something such as a Vanguard account instead of paying down the mortgages.

ketchup

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Re: rental mortgages
« Reply #8 on: December 09, 2014, 11:12:06 AM »
Thanks for sharing your thoughts everyone.

If I understand the world of real estate investing (its new to me), the rentals are + cash flow but certainly not at 50%.
The 50% rule is related to expenses, not cashflow.

If your gross rent was $1000, the 50% rule would dictate that your expenses (capex, repairs, taxes, insurance) would be $500 of that.  If you have say a $350/month mortgage on the property, you would then cashflow $150/month. 

Cashflow of $100/month per unit is generally viewed as a minimum acceptable in the cashflow real estate investment world.  If you're getting less than that, barring some other reason, the real solution is not to pay off the mortgage, but to sell the property or refi.

bye-bye Ms. FancyPants

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Re: rental mortgages
« Reply #9 on: December 09, 2014, 01:03:26 PM »
Our situation is eerily similar. I have 4 rentals...three with 5 to 10 years left on the 15 year mortgages (interest rates between 4.25 and 4.375 %) and one that is paid for. My home mortgage is 3.25% with 28 years left. I am afraid that if I start paying them all off, my income taxes will go way up. Also, it is convenient that the taxes and insurance are withheld and taken care of by the mortgage company. The 3 with mortgages cash flow $400 to $500/month each and the one that is paid for cash flows $950/month. Additionally, the principal paid down each month on the 4 mortgages totals about $1,150. I don't have a lot of money invested in stocks, so I think I should begin concentrating on investing in something such as a Vanguard account instead of paying down the mortgages.

Yes, it sounds like we are in the same boat tracylayton. Our portfolio is also heavy in real estate. Just started investing in Vanguard this year and have some catching up to do.  That's a good way to think about it. Thanks for chiming in. 


If your gross rent was $1000, the 50% rule would dictate that your expenses (capex, repairs, taxes, insurance) would be $500 of that.  If you have say a $350/month mortgage on the property, you would then cashflow $150/month. 

Cashflow of $100/month per unit is generally viewed as a minimum acceptable in the cashflow real estate investment world.  If you're getting less than that, barring some other reason, the real solution is not to pay off the mortgage, but to sell the property or refi.

Thanks for clarifying ketchup. I am going to start reading some of the recommended books on RE investments since I just sorta found myself in it. I have a lot of learning to do!

Bobberth

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Re: rental mortgages
« Reply #10 on: December 09, 2014, 01:19:19 PM »
Another viewpoint of paying off loans vs Vanguard is that when you pay off extra on the mortgages, that money is gone.  You have equity but you no longer have that money and it's not easy to turn that equity back into money.  If you invest with Vanguard,  the money is still gone but it is super easy and fast to convert mutual funds back into money.  Having the money invested at Vanguard would help you more than having more equity if you are looking to purchase more rentals.

So part of the decision will depend on your reserve/liquidity situation, part of which investment you expect to perform better (Vanguard funds vs cost of mortgages) and part of what makes you feel comfortable.  I am closing on refinancing my personal residence and an investment property tomorrow.  I always expected paying off all debt would be a part of FIRE but these new rates are so low that logically I shouldn't pay a penny extra on the loans.  That is something I'm going to struggle with as time goes on.

bye-bye Ms. FancyPants

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Re: rental mortgages
« Reply #11 on: December 10, 2014, 09:09:12 PM »
Another viewpoint of paying off loans vs Vanguard is that when you pay off extra on the mortgages, that money is gone.  You have equity but you no longer have that money and it's not easy to turn that equity back into money.  If you invest with Vanguard,  the money is still gone but it is super easy and fast to convert mutual funds back into money. 

As much as I would emotionally like to be completely "debt" free, I think the bottom line will come down to this ^^ - Even with our higher interest rates on the rentals, they are still decent.  Are available cash/stocks still need work.  You are right Bobberth, your comment makes perfect sense for us. Thanks for weighing in.

johnhenry

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Re: rental mortgages
« Reply #12 on: April 14, 2015, 09:43:21 AM »
Sorry for reviving an old post.  I didn't hear any discussion about how much equity you have in your current home and whether or not you itemize or take the standard deduction on your taxes. If you don't itemize then you aren't getting a tax benefit from the interest paid on your home's mortgage. (Although you are paying a lower rate.)  And even if you do itemize, the tax benefit isn't as great as the mortgage interest expense paid for mortgages on the rental properties.

If you have enough equity in your home, it may be possible to add a line of credit or 2nd mortgage to it.  Even though the collateral is your residence, if you use the proceeds to pay down/pay off the rental mortgage with the highest rate, the interest is fully deductible against that rental on your Schedule E.... meaning you realize the full tax benefit but get the benefit of the better terms because the collateral is your residence.

Some people don't like the idea of "giving up the equity" in their home.  But I'd happily be fully leveraged against my residence and instead have 100% equity in a rental property while enjoying the benefits of fully expensing the mortgage interest.

If you are going through the trouble of shopping for refinancing you may also consider a combined business loan against more than one of the rental houses.  The closing costs may be some higher than refinancing just one, but your lender may be able to save you some money over refinancing each one individually.

waltworks

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Re: rental mortgages
« Reply #13 on: April 14, 2015, 10:35:52 AM »
JH - you do realize that the mortgage interest you pay on a rental property is deducted from your profits, right? So with no mortgage on a rental, you'll pay more taxes (more profit to tax) on that. Yes, you'll also save some money if you are itemizing on your home mortgage interest, but that just means it's basically a wash. I would *personally* rather have a paid off primary residence than a paid of rental, since in a worst case scenario I could walk away from the rental but the residence would be much more disruptive to my life.

-W

johnhenry

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Re: rental mortgages
« Reply #14 on: April 14, 2015, 01:43:58 PM »
JH - you do realize that the mortgage interest you pay on a rental property is deducted from your profits, right? So with no mortgage on a rental, you'll pay more taxes (more profit to tax) on that.

-W

Right, the interest paid towards a mortgage on a rental property is an expense on the Schedule E.  But so is the interest paid on a HELOC or 2nd mortgage on a primary residence, as long as the funds are directed towards "the business" (a rental property).  That's my understanding, anyway.

Yes, you'll also save some money if you are itemizing on your home mortgage interest, but that just means it's basically a wash.
My point was the opposite.  In this scenario the interest paid would be claimed on the Schedule E, but not (itemized on) the Schedule A.  The goal would not be to increase your Schedule A deductions to the point where itemizing is possible, but rather to use your residence as a way to fund your business cheaper.  I probably confused the issue by asking whether the OP itemized, bc it really doesn't matter much... except to point out what you did: you get the "FULL" tax benefit of any interest claimed on Sch E, but even if you itemize and claim interest on Sch A, it's only a benefit to the lesser extent that it moves you above the standard deduction you'd get anyway.

I would *personally* rather have a paid off primary residence than a paid of rental, since in a worst case scenario I could walk away from the rental but the residence would be much more disruptive to my life.
I can't argue with that. It's not for everyone, but it's a way to finance your business for 3-4% instead of 5-6% up to the value of your home.


waltworks

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Re: rental mortgages
« Reply #15 on: April 14, 2015, 01:56:47 PM »
Ah, ok, I understand you now. I thought you were trying to tell the OP to max out mortgage on primary in order to be *able* to itemize and deduct mortgage interest, which would (IMO) be a bad move.

Your logic is sound and I agree that if you have the stomach for it (and I *think* you are correct about deducting the interest from business income, but I'm far from an accountant) it could be a great way to save some interest.

-W

monarda

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Re: rental mortgages
« Reply #16 on: April 14, 2015, 02:43:51 PM »
Related to this discussion, I think...

I've got a rental that's financed on an interest-only ARM.  We bought it in 2006 when we lived there, the interest rate is now under 3%, so it costs us under $200 per month in interest payments. (Rent is $1000). In the fall of 2016 the loan balance ($80K) will come due. At that point we will need to sell or refinance. The tenants are great and there's no need to kick them out, we do want to sell but there's no real hurry except for this loan coming due.  I've thought about a HELOC or 2nd mortgage on another property rather than a refinance on this one. We have plenty of equity in our other two rentals, as well as our primary residence. This would save closing costs.  Any opinions?

johnhenry

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Re: rental mortgages
« Reply #17 on: April 14, 2015, 03:53:56 PM »
Related to this discussion, I think...

I've got a rental that's financed on an interest-only ARM.  We bought it in 2006 when we lived there, the interest rate is now under 3%, so it costs us under $200 per month in interest payments. (Rent is $1000). In the fall of 2016 the loan balance ($80K) will come due. At that point we will need to sell or refinance. The tenants are great and there's no need to kick them out, we do want to sell but there's no real hurry except for this loan coming due.  I've thought about a HELOC or 2nd mortgage on another property rather than a refinance on this one. We have plenty of equity in our other two rentals, as well as our primary residence. This would save closing costs.  Any opinions?

Why do you want to sell?  Because the loan will be due? Or it's not the best you can do with that money? 

If you've got enough equity in your primary residence AND you are OK with the lender having that(instead of the rental) as collateral, you should at least see what kind of rates/terms they will give you.  Note: I don't have the link handy but I think IRS Pub 535 is the one that discusses this.  That publication is referenced in the instructions for filling out the Schedule E.

I'm not sure your terms/rates will be any better using the other 2 rentals as collateral instead of the property in question.  But I guess it doesn't hurt to get a quote from the lender and see what they'll do. I'm guessing you'll have to put up your home to get the rates/terms that are best.

What are the terms of the HELOC? As opposed to the 2nd mortgage?  If you go with HELOC, make sure you plan ahead enough to know that this property will provide adequate cash flow/return even if the interest rate goes up quickly.  I'd be looking for something with more certain terms to make sure I didn't get stuck needing/wanting to refinance again.

Would the proceeds from the sale of the property that needs refi'd be enough to pay off the mortgage on your residence?  If it's a questionable investment anyway, you could take this strategy to the MAX and pay off your current pri residence mortgage with the proceeds of that sale.  Then borrow as much as you can(need to) against it with another long term fixed rate mortgage against your home, but put the proceeds towards one or both of the rentals.


monarda

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Re: rental mortgages
« Reply #18 on: April 14, 2015, 04:34:42 PM »
Related to this discussion, I think...

I've got a rental that's financed on an interest-only ARM.  We bought it in 2006 when we lived there, the interest rate is now under 3%, so it costs us under $200 per month in interest payments. (Rent is $1000). In the fall of 2016 the loan balance ($80K) will come due. At that point we will need to sell or refinance. The tenants are great and there's no need to kick them out, we do want to sell but there's no real hurry except for this loan coming due.  I've thought about a HELOC or 2nd mortgage on another property rather than a refinance on this one. We have plenty of equity in our other two rentals, as well as our primary residence. This would save closing costs.  Any opinions?

Why do you want to sell?  Because the loan will be due? Or it's not the best you can do with that money? 

If you've got enough equity in your primary residence AND you are OK with the lender having that(instead of the rental) as collateral, you should at least see what kind of rates/terms they will give you.  Note: I don't have the link handy but I think IRS Pub 535 is the one that discusses this.  That publication is referenced in the instructions for filling out the Schedule E.

I'm not sure your terms/rates will be any better using the other 2 rentals as collateral instead of the property in question.  But I guess it doesn't hurt to get a quote from the lender and see what they'll do. I'm guessing you'll have to put up your home to get the rates/terms that are best.

What are the terms of the HELOC? As opposed to the 2nd mortgage?  If you go with HELOC, make sure you plan ahead enough to know that this property will provide adequate cash flow/return even if the interest rate goes up quickly.  I'd be looking for something with more certain terms to make sure I didn't get stuck needing/wanting to refinance again.

Would the proceeds from the sale of the property that needs refi'd be enough to pay off the mortgage on your residence?  If it's a questionable investment anyway, you could take this strategy to the MAX and pay off your current pri residence mortgage with the proceeds of that sale.  Then borrow as much as you can(need to) against it with another long term fixed rate mortgage against your home, but put the proceeds towards one or both of the rentals.



Thanks, JH. To answer your question why sell? Both of the reasons you suggest, in fact.

Yes, the timing is because the loan will be due.  The rental is a 3 hours' drive away, and we could be doing better with putting that money in our local properties. It's not terrible by the numbers, but it's really not that good either.  It's not a house we ever intended to keep for a very long time (hence our choice to go with this interest-only ARM back in 2006). If we wait a little longer to sell, the property values will recover a little more as they've been doing.

If I were starting out, I wouldn't buy this house as an investment, it's quite a ways under 1%  (value is about $140K, we're hoping for $150K if we wait a bit longer, and rent is $1000).  We bought it for $130K as a primary residence, then the value dipped, now it's back up again. We like these tenants, so if they want to live there several more years we can make it work and still make some money, but our decision will depend in part on how we deal with the financing deadline.

We don't know terms of any HELOC or 2nd mortgage yet. We really haven't started shopping yet. Just starting to think about what kinds of options we should be weighing, and I hadn't thought much about this approach until you mentioned it. The same bank holds all of our mortgages, I'll talk to Margaret my mortgage person about this and all our other options.  I agree, I'm not sure the rates would be any better if we use any of our other properties as collateral.  Our primary residence and one of our rentals have roughly $300K equity combined, so there's plenty of collateral available.

I really want to try and talk our tenants into buying it, but I think if they were actually interested they'd have responded to our gentle prods by now. 

We have until October 2016 to come up with the best solution.

on edit:
Oh, you had another question.  No, the proceeds from the sale would be something like $60K (or less), and we owe $130K on our primary (it's a 2.8% rate 15 year loan).  If we were to pay down anything with the proceeds, we'd put the cash toward one of our rentals with a 5%, 30 year loan (balance $120K).


« Last Edit: April 14, 2015, 04:45:15 PM by monarda »