I agree that it is very beneficial to be able to offer cash for houses, but I wouldn’t discount debt on assets totally. If you own a $200K property free and clear, but take out $150K - you still have the $150K in cash to convert back to seller financing when you sell. But while you own it the return on equity in the house is a guaranteed 0% return. It just sits there. If you can take that $150K, turn around and invest it elsewhere and get a greater return than you are paying for it then the equity starts to work for you. That’s called arbitrage and it’s how the banks make money on the spread. The tax benefits only come into play to make the borrowed money cheaper.
I also understand that debt is a very personal thing and choice and you have to use a strategy you are comfortable with.
Scenario :
Own a property for 18 yrs lived there 14 yrs.
have it rented for past 4 yrs
App, Value ( tax rolls 83,5k comps 90k)
Mortg. bal. 43k monthly pymt. 755.00 (incl. PITI)
Renting for 925.00 mnth.
intention : hold as rental for many years
have been adding 75.00 dls. to rent and sending
1000.00 a month mortg. pymt.
amortization table shows paid off 5 yrs
Seeking best cash advantage and tax benefit:
Should I refinance or pay off in 5 years ??
Since I plan to hold this prop. indefinitely, would it be to my
advantage to refi and get as much cash out as possible
and keep taking advantage of tax and interest deducts.
or pay off and lose any interest and tax deducts?
figuring : 925 x 12 = $ 11100.00 taxed at 28% 3108.00
11100 minus 3108 = 7992.00
7992.00 minus prop. tax 2450.00 = 5542.00
5542.00 minus insurance 1000 = 4542.00 net yearly profit.
Well you need to figure out how much % you are GIVING away to the mortg. company. So many people think of the tax breaks and returns well if you GIVE the mortg. company more than you avg. return than pay the mortg. off. The avg. american GIVES a mortg. co. 4,000 a year in interest thats like throwing $4000.00 a year out the window! Pay it off and do improvements to increase the value of the home and alot of improvements to a rental are write offs.
It’s hard to give advice for an overall financial plan based on only one scenario. You mentioned that you are seeking the best cash advantage and tax benefit, so it would seem ideal to refi, get cash out (to invest) and use an interest only product to maximize cash flow.
The other factors are your age and what your future goals are. Have you written down what your investment and financial goals are for the next year, 5 years, 10 years, etc? When you write out your goals it helps to make it clear what the right course of action will be in order to achieve your set goals.
If you have lived in the property in two of the last five years, you can avoid paying capital gains tax when you sell. It appears you may have past that point unless you wanted to move in for another year, thus having lived there two of the last five. However, your intentions are to keep the property. It really depends on what you plan to do with the money once you take it out. The less money you have tied up in the property, the better your return on your investment.
Posted by dealmaker on March 23, 2005 at 21:25:17:
I’m not a “debt” guy, unless the debt is OWED to me! “Tax benefits” are WORTHLESS. You send the bank a dollar to save TWENTY EIGHT CENTS on your taxes. Not a good financial plan in my book.
I started paying off all my stuff in the mid 80’s. Started with the rental with the lowest balance, put every extra nickel on it, when it was free and clear I put every extra nickel (including the just retired P&I) on the next lowest loan balance.
The last mortgage I had I took out in '95 and paid off in '96. Owning free and clear let’s you offer seller financing at favorable terms (read, higher prices and interest rates), when you sell.
Buying for all cash means you offer low balls every time, no inspection, no survey, no loan approval, no underwriting problems for the seller. 3 day closings if the title company can swing it. Makes for low cost of acquisition, low carrying costs.