Posted by michaela-CA on December 10, 2009 at 09:31:01:
Hey, James,
kinda cold here, too - 40’s at night, 50’s during the day - I guess that’s balmy for you 
Michaela
Pay off Rental or save the money?? - Posted by Tim Thomas
Posted by Tim Thomas on December 09, 2009 at 18:18:35:
Hello everyone, I have a quick question.
I’m making payments on a vacant rental property right now. I wanted to ask if it would be a good idea to continue making the same payment even after I find a new tenant? Is it better to continue doubling up on the payments to pay the property off quickly or should I invest the money somewhere else? Stocks, bonds, etc. I don’t think I want another rental right now. What would you all recommend? I really appreciate the help.
Thank you
Tim
Re: Pay off Rental or save the money?? - Posted by john
Posted by john on December 17, 2009 at 09:49:00:
In my post dated 12/16 I mentioned that generally speaking it doesn’t make sense to pay off the mortgage unless your rate of return on that investment is high. However even if your rate of return is high, you have to look at your short term and mid term needs in life. Maybe instead of paying off the loan you invest that extra money in your kids education or buy that new car that you always wanted, or save for a down payment on a dream home. My point is that it’s not always about the money when making these decisions. So don’t feel guilty about not paying off the loan. Use the leverage in your favor for whatever you want out of life.
Re: Pay off Rental or save the money?? - Posted by Frank Chin
Posted by Frank Chin on December 12, 2009 at 07:03:36:
Tim:
A real estate investor bought two 3 families next to me, and did that. My dad did that for a commercial property he owned.
Shortly after buying the properties next to me, I had a few long talks with this talkative investor about this issue. He is a contractor, doing rentals on the side.
According to him, he owns 15 houses at this point. He said his strategy was to put 50% or more down on each properties, plan on paying off the other 50% in 5 years.
According to the last owner whom I know, he put down almost $700K for the $1.1 million acquisition, so I know he’s not givng me any BS.
He said when he started, he paid off the first two properties in 5 years, and went on from there. Said he has 5 properties mortgage free at this point, soon to be 7, in another two. And that was two years ago. The cash flow is used to buy more properties, with 50% down payments.
My dad owned a property with several stores, and back in 1980, paid off his 5% mortgage early. He resisted my calls to cash out, buy more, and seeing the financial collapse, the mortgage meltdown, see the wisdom in it.
He collects several thousand dollars in rent, with the store tenants paying the taxes, and utilities. He didn’t need the money to live on, so instead of putting the money into more RE, he invested them into triple tax free (free of federal state, local) taxes. I never saw his bank statements, but I can imagine what putting a few thousand dollars away every month for 30 years, with tax free interest comes to.
He still owns the stores, and collects the rent on them.
I mention these two investors, the contractor and my dad, and I see that they don’t have all the issues many investors I know have. They have no problems when vacancies come up, no big reserves they have to set aside for major repairs.
For instance, with the rent my dad collects, if he had to put a whole new roof on, the rent for one month will cover it, with money to spare. One time, he had a store vacant for almost 9 months because he didn’t care for many of the people who came by wanting to open up businesses.
Having good cash flow means you can be as picky as you like to be.
And I’m talking about investing in areas with high apprecation, and low returns. Yes, there are war zones people could invest into where the cash flow is high, but I’m not talking about them.
However, I rarely see it discussed on this board because this about as UNCREATIVE as you can get with doing RE investing. But, I see nothing wrong in it, as my dad and this contractor couldn’t care less about banks going out of business, or tenants who can’t pay the rent, or if a new roof is needed. They just write some checks.
Re: Pay off Rental or save the money?? - Posted by john
Posted by john on December 11, 2009 at 19:01:54:
Here’s an example:
If you have a loan on the property of 6% for 30years, your after tax rate to carry that loan is about 4.5%. Where in the world can you borrow money at 4.5%?..answer is no where!! So the question is can you invest your extra money elsewhere and beat a 4.5% rate of return…and the answer is yes! You can do it in stocks (long term), other real estate properties etc.
The only reason I can see paying down your loan is if you are severly upside down on your property. You don’t want to have to bring a check to the table if you sell it in the short term.
Another reason might be that if you got a tenant in there, maybe your rate of return is high. Example: I have a current tenant that is providing an annualized rate of return on my investment of about 10%. That’s pretty good, so I would be comfortable paying down the mortgage because of the high rate of return. I hope this gives you some perspective.
Re: Pay off Rental or save the money?? - Posted by Dave T
Posted by Dave T on December 11, 2009 at 24:45:55:
Of course, this discussion assumes that you are not ever going to sell the property. Otherwise, if you plan to sell within the next five years or so, then save your money for some other investment. And any further discussion is moot.
If you keep doubling up on the payments, how long will it take before you own the property free and clear?
Do you have an adjustable rate mortgage?
If you have an adjustable, then keep doubling up on the payments as long as you can before the loan rate resets to a rate that could be five points higher than you are paying now.
I am all for paying off your mortgage quickly IF you can’t get a better rate of return in some other investment vehicle.
Re: Pay off Rental or save the money?? - Posted by Gene
Posted by Gene on December 09, 2009 at 23:44:00:
Depends on the interest rate your paying and the rate of return you can expect from other investments.
Diversify - Posted by Chi Ming
Posted by Chi Ming on December 09, 2009 at 22:04:09:
I personally enjoy the investigating and finding of good stock purchases and the sale of options (stock not RE). It takes at least as much education to do this as to be an informed RE investor. So the real question would be what kind of investment do you have the self motivation to learn and stay on top of because there’s really no such thing as auto pilot income.
Re: Pay off Rental or save the money?? - Posted by Brent James
Posted by Brent James on December 09, 2009 at 18:25:48:
Why pay it off! Instead use the capital you save to go buy another property!
www.discountedREOBulk.com
Re: Pay off Rental or save the money?? - Posted by nancy
Posted by nancy on December 14, 2009 at 23:02:23:
thanks for sharing Frank!! I am going through the same issue now… I got 11 rentals 3 paid off, I am debating if I should pay off more or buy more rentals… I think I 'll be happy with 11 paid off properties, not too greedy…I am 34, and I am thinking of staring a new business (something I love doing) while living on my rental income… thanks for shining some lights on the subject… you are absolutly right about you can be picky once there’s good cash flow…
happy holiday!
Re: Pay off Rental or save the money?? - Posted by Frank Chin
Posted by Frank Chin on December 17, 2009 at 07:09:49:
Good analysis. Thought I throw in another perspective here.
I invest in NYC, a high appreciation, low return area. However, if you buy right, i.e. right time, right place, you can make a killing.
I bought a few rentals back in the early 80’s more or less, a buy and hold strategy. I invest mainly in 3 families, and in the early 80’s I could get them for around $150K to $200K.
Gone through a few RE cycles, these properties went up to $375K around 1987, crashed to around $275K in 1993 then back up to $450K about the year 2003.
Then, the RE market went crazy from 2003 to 2007, going up at $100K/year at a clip, and in my area, peaked at around $800K or more in spring 2007.
What should I do??
Well, the question is what type of returns I’m making?? On a mortgage free 3 family, I would net around $30K to $35K/year, after taxes, expenses, vacancies etc. My return on investment runs around 4.5% or a little less.
Now, if I refi, do a cash out refi, what does that mean?? Well, mortgage rates ran around 6% in mid 2007, and what I wind up with is I’m paying 6% money buying something making 4.5%.
Way back when I took finance, we’re taught that you only borrow to buy assets that earn a a higher return than the cost of borrowing. This is unless the chance of appreciation is high.
So is the chance of appreciation high??
Spoke to my CPA, and he agreed that if properties went up $100K/year four years in a row, and the chances of further appreciation is not high at all. In fact, from my experience in the early 90’s, the chance of a “bust” is most likely.
What did I do??
For something I bought as a buy and hold, I figured selling it is the wisest choice given the numbers. With the sale, I was able to pay off a few mortgage, and I’m mortgage free for the most part now.
By selling, and paying off the mortgages, I’m making 6% on my money, rather than 4.5% dealing with tenants. It’s a lot less stress, and more profitable.
And how about the tax effect?? Instead of focusing on the interest deduction, back in 2007, I figured the capital gains rate is the lowest it’s been in generations, and with the prospect of the Democrats coming into power, the best time to do it is to sell at the peak, and with the lowest capital gains rate.
Conclusions.
Get the “return on assets”, ie. how much the asset earns without a mortgage. Make sure the rate is at least equal, if not higher, than the rate of interest you are paying.
Re: Pay off Rental or save the money?? - Posted by Investor Bob
Posted by Investor Bob on December 12, 2009 at 07:19:53:
just got an investor mortgage for 4.5% fixed forr 30 yrs.
Re: Pay off Rental or save the money?? - Posted by Tim T
Posted by Tim T on December 13, 2009 at 11:41:52:
WOW!!! Thank you so much for the advice! I had no
idea I would get so much help. What a great forum.
I owe 82,000 on the property it appraised for 89,000
about two years ago so I have very little equity.
Total payment is $827 month. Was renting for 950
month. I originally thought it would be good to pay
the loan off early so I could have a great cash flow on
a free and clear property. I just couldn’t convince
myself it was the best place to put the money. I’m
going to invest the money elsewhere. Again, I want to
thank you all for your time and insight.
Thank you very much!!
Tim T.
He said he did not want another property - Posted by Chi Ming
Posted by Chi Ming on December 09, 2009 at 22:01:12:
so let’s be creative - what would be a good investment for a decent return on his money?
Re: Pay off Rental or save the money?? - Posted by john
Posted by john on December 16, 2009 at 17:48:34:
Congrats on the great rate but I never heard of such a rate for an investment property. Can you share with us who the mortgage company is who gave you such a deal??
Re: He said he did not want another property - Posted by michaela-CA
Posted by michaela-CA on December 09, 2009 at 22:57:11:
I’d pay him 12%, secured by a 1st position deed on fully owned rental property with tenants in it and rental income 2-3 times the interest only payments.
Only 12%. sheeeeet… - Posted by James - Michigan Investor
Posted by James - Michigan Investor on December 10, 2009 at 08:06:14:
That seems kinda low. 
I’ll give him 12.1% and a Christmas card too.
If only he would invest with others from this board…no, instead he’ll go stick it in something
that has a much higher failure rate.
James
PS - Michaela, it’s kinda cold here. It snowed yesterday and my toes got wet from shoveling.
How’s Cali?