What to do now that I own two houses ?? - Posted by LeeJay

import · February 28, 2002, 4:50pm

Posted by RC on March 02, 2002 at 12:37:46:

You’re saying he can attain a 60k cash position by selling his rehabs - I think you overlooked the fact that one of them (the one with the high equity) is his primary residence. On that one he needs to establish a line of credit thus avoiding the need to pay inflated rates to HML. Refi on the other property with cash out of approx 20k should still allow a minimal positive cash flow and give him more reserves to do more deals. In this scenario he’ll have 20k in cash and another 30-35k in LOC - I can do a few deals with that kind of cash readily available. He still manages to keep both properties and move on to more deals at which time he can pay off the credit card debt.

import · February 28, 2002, 4:50pm

Posted by LeeJay on February 28, 2002 at 17:50:45:

I own two houses, they were both rehab houses, so the mortgages are minimal. One is ready to sell the other I live in. The one that I will sell should leave me with approx. $30,000. Due to prior debts that occurred before I purchased this property I will net approx. $10,000.

The other house (after rehab) is now valued at $85,000 and the mortgage is at $40,000. I like living in this house and would like to live here for at least two to three years.

Now what should I do ??

I am doing right by selling ?
Should I refinance the house I live in ?
Should I sell both ?
Should I rent or lease one or both ?

I am open to any and all suggestions / advice

import · March 1, 2002, 7:46am

I’m going to disagree with everyone… - Posted by Marcos

Posted by Marcos on March 01, 2002 at 08:46:48:

I see a few issues, let me see if I have this right.

$75,000 in equity.
$20,000 in high interest debt.
Poor Credit situation.
Interested in keeping going in real estate.

Personally I think paying off debt if it kills your ability to purchase more real estate is a BIG mistake. Look LeeJay you’ve already proven you can do this. You know it in your heart you can do this, so do it again. If you can afford your debt for now, just leave it until you have more cash to play with. As you continue paying you are increasing your credit score each and every month.

If you could refinance your home for 80% of FMV, and sell the other home to get $30,000 in cash. You’re talking about having almost $60,000 in cash. Trust me it’s easy to get a refinance, talk to a good mortgage broker in your area. Yes, your short term debt and your long term debt will still be high, but that’s ok because you now have a plan. What I would do is buy another home to rehab(or two), assuming you can duplicate yourself, buy a home for $40k, 10k repairs, $85k sale. Or something along those lines. You leave yourself a cash cushion just in case. And then when you’re done with that deal, you should be well over $100k in cash. Now at this point you have a large enough “nest egg” to keep the real estate machine going. If you wish to pay off your high interest consumer debt then feel free to. The point is, you have shown that you can double your money, which means you can get a 100% return. If you know you can get a 100% return on your cash, then why would you even consider paying off 18% debt. Wait until you have enough to where you can keep the machine rolling. If you pay off all your debt now, how are you going to get your next piece of property? Even better, hold on to your cash, get a hard money loan on the property. With your cash reserves($60k), you’d be a slam dunk. And then you can get much, much higher returns on your money.

Does this make sense?

I respect what these other gentlemen have told you especially Phil Fernadez and Tim Fierro as I always respect everything they say. I just tend to disagree in this instance. I think using the property as a rental is dead wrong. I think you first go for Cash, then Cash Flow, then Wealth Accumulation. Rentals fall into the last category. The reason why I disagree with using it as a rental is for this reason. In January I spent well over $8,000 in repairs on just two rentals. Where would you be, if you didn’t have the cash or the cash flow to cover this? I’ve seen many more real estate empires come crashing down because of inadequate cash reserves from inexperienced landlords. That’s why almost anyone will tell you to go for Cash first to protect yourself. If you kill all your cash, that kills your ability to do more deals. And you have to do deals if you wish to be successful.

This is just my take, and you are free to take it or leave it.

Marcos

import · February 28, 2002, 7:18pm

Re: What to do now that I own two houses ?? - Posted by RC

Posted by RC on February 28, 2002 at 20:18:47:

I would have to suggest that you look at your long term business plan and base your decision on that. Do you plan on accumulating many rental prop’s and creating a cash flow income or do you plan on flipping? Perhaps you want to do both (as I do). You could keep both of these prop’s and take a line of credit to on your house to aquire another to flip or if you want to sell one of the houses and pay off debt that would be ok too. Always keep in mind the tax consequences - your debts and interest from rehabbing the investment prop is 100% deductible thereby offsetting the positive cash flow you can get from renting. Additionally, the depreciation over 27.5 yrs gives you a substantial tax break. These are important considerations if RE is not your sole source of income. Good luck - take your time and think it through - look at the long term picture.

import · February 28, 2002, 6:00pm

Re: What to do now that I own two houses ?? - Posted by phil fernandez

Posted by phil fernandez on February 28, 2002 at 19:00:31:

I’m going against what the other two respondents said. If it were me, I’d keep the second house as a long term rental. You mention that carrying costs are minimal. So your cashflow will be good on the house. The house will be hopefully appreciating, you can take a tax break with depreciating the property and with the deduction expense for interest.

I always tell people that there are two reasons why I don’t sell my rental real estate. One it’s a taxable event and two, by selling you turn off the cashflow spigit plus when the property is gone there are no more tax benefits and absolutely no chance of future appreciation. So there is no upside.

At least that’s my take.

import · February 28, 2002, 5:35pm

Re: What to do now that I own two houses ?? - Posted by Robert (NC)

Posted by Robert (NC) on February 28, 2002 at 18:35:42:

Heres what I would do…

Sell 1 house… Pay off all debt, use 10k to start LLC and self directed Roth IRA… Use money from Roth IRA to invest in LLC… Use LLC to buy another house and rehab, then sell, use profits to do again and again and again… Pay yourself after each deal… Any ‘dividends’ paid go back to the Roth IRA tax free… course you can’t touch that money until your older than 59 and 1/2…

better yet… talk to a GOOD CPA and plan out everything… Decide where you want to GO then decide best way to get their…

Good job on your first 2 rehabs…

Robert

import · February 28, 2002, 4:58pm

Re: What to do now that I own two houses ?? - Posted by Tim Fierro (Tacoma, WA)

Posted by Tim Fierro (Tacoma, WA) on February 28, 2002 at 17:58:59:

You like living in the house you are in and want to stay for 2 or 3 more years; then do so. You have to live somewhere and this house has a minimal mortgage amount that you are already comfortable with.

The other house is investment. I like the idea of selling the house, paying off your debt, and still leave $10k to work with.

You can always refinance your home you live in sometime in the future if you want. Right now you have minimal payments. Wait until you need the money before pulling money out.

import · March 1, 2002, 9:35pm

Re: I’m going to disagree with everyone… - Posted by RC

Posted by RC on March 01, 2002 at 22:35:54:

I’m sorry you got hit with such expenses on your rentals - it may have been the result of poor screening, poor management or simply bad luck - but your advice seems a little flawed.

First of all - if your ultimate goal is to achieve a nice cash flow to live and prosper from why would you want to sell a cash cow?

60k in cash reserves a slam dunk for hard money? I don’t think so. This person does not have cash reserves - only the ability to convert equity into cash. When that is done no hard money lender would be interested in taking a third position to little or no equitable interest.

I have a number of rentals and have only one time had to do more than $1000 in repairs - which was covered by the renter insurance. A couple of times in the past year I had to make repairs on units where the excessive “wear and tear” was simply deducted from the security deposit of the vacating tenants.

If you refinance the property you can keep a minimal cash flow from the property and use the proceeds to build more wealth. That is one solution.

If you take out a line of credit secured by your equity then you have instant access to the same amount of cash at an even lower interest rate and you don’t have to pay any payments or interest on the unused portion of that line. Again, you have the ability to go out and purchase more properties to flip for cash reserve increase and high interest debt payoff (credit cards) and payoff of the line of credit used for this purpose. The next time around you reuse it as needed therefore minimizing any uneeded long term debt exposure on your personal residence.

In regards to the rental properties you aquire along the way - those you should want to keep leveraged and not pay down thus inreasing your tax write offs and decreasing your liability exposure.

In the above post it was also mentioned that you go for cash first (we’ve already established that position) cash flow second (rental property is the most common way to create cash flow) and last wealth accumulaion (if you have rental properties that are positive cash flow then you are building wealth in more ways than one - equity build up, appreciation, and rental income coupled with the leveraged assets providing tax shelters)

Need I say more? Yes, one more thing:
I myself started out with a bankruptcy, very little cash and was self employed “making a living” and yet I managed to buy over $2 million worth of real estate in my first two years. I now have a net worth in excess of a million and am exponentially growing my wealth.

Good luck to you.

import · February 28, 2002, 7:43pm

Re: What to do now that I own two houses ?? - Posted by LeeJay

Posted by LeeJay on February 28, 2002 at 20:43:21:

I am in my late 20’s and I am trying to look at the long term. I also plan on accumulating many properties and would like to do both rent and flip props. What would be the best way to pay off my debt (credit cards, auto, etc.)and still have money to invest in more properties ? My credit is not good and this is what I have to work with. Should I consider refinancing as an option ?

import · February 28, 2002, 7:19pm

Re: What to do now that I own two houses ?? - Posted by LeeJay

Posted by LeeJay on February 28, 2002 at 20:19:18:

I like the idea of renting the house and having a positive cash flow, but I the what should I do about my $20,000 debt and creating cash to purchase another house. Should I refinance one or both of the houses ?
My credit is not very good so this is what I have to work with.

I

import · March 2, 2002, 6:57am

Re: I’m going to disagree with everyone… - Posted by Marcos

Posted by Marcos on March 02, 2002 at 07:57:53:

Yes, the expenses were a little out of the ordinary. But, they were unfortunately unavoidable. Which is what would have killed someone without any cash.

You say: “First of all - if your ultimate goal is to achieve a nice cash flow to live and prosper from why would you want to sell a cash cow?”

What Cash Cow are you speaking of? As far as I can tell, he can rent it out and probably get 300-400 cash a month. It’s not exactly my version of a cash cow. I think his ability to do deals is what presents him with a good cash cow. Should he just sit on his equity and wait for the rental income to make him rich? He doesn’t have any cash, and bad credit. How exactly does he do another deal if he doesn’t liquidate this property?

You Say:“60k in cash reserves a slam dunk for hard money? I don’t think so. This person does not have cash reserves - only the ability to convert equity into cash. When that is done no hard money lender would be interested in taking a third position to little or no equitable interest.”

I advised that he sell his rehab, and take the cash out. So, I don’t know what third position you’re talking about. He uses hard money to purchase another property. If he can show he has 60k in the bank and he’s borrowing 40k the hard money lender will find a way to get the deal done. He might require him to put a years worth of payments in reserve. But the truth is a HML would prefer experience coupled with cash. And can overlook some minor credit blemishes.

The excessive repair I had to do was to correct a slab leak. I had to have a house repiped that had no crawl space and no roof space either. I had to move the tenants to a motel, they had to jackhammer all the floors and lay new plumbing. It was not cheap. Not by any stretch of the imagination. No other way to do it unfortunately.

Now, one very good point you made was about getting the equity as a HELOC. Now that is right, I didn’t even think about that one when I posted yesterday. Seeing as how I just got a HELOC at prime, and an intro rate of 3% for one year. I should have.

I contend that he can generate cash from doing these rehabs, he has already proven himself capable of that. I secondly contend straight rentals of SFH’s are usually not very good at cash flow. Lease/Options, Wraps, etc are much better vehicles for that. And for Wealth Acumulation I think you can use SFH rentals combined with multis.

My point of my post was that this gentleman appeared to need primarily a good chunk of cash. Cash flow of 300-500 doesn’t help him at this stage in the game. But, if you put $60,000 of available cash in front of him, and position him to where he is assured of his next 3 deals, then he’s in a good position.

My question to you is, if he holds onto this property, and he doesn’t sell. And let’s assume he doesn’t have good credit. And he rents and pulls in $500 a month. How is he going to do his next deal? Where is he going to get the cash, and how is he going to get approved?

This is just my opinion, and I definitely respect yours even though I disagree.

Marcos

import · March 1, 2002, 12:28am

Re: What to do now that I own two houses ?? - Posted by Tim Fierro (Tacoma, WA)

Posted by Tim Fierro (Tacoma, WA) on March 01, 2002 at 01:28:24:

Of course refinancing is always as an option. Find out if you can get refinanced. Just because you say your credit is not good, have you checked lately to see?

My line of thinking is anything to get rid of high interest debt is a good thing. If you could get refinanced at 9% on the rental with enough cash to pay off that $20k debt, and your $20k debt is at 18%, you are going to come out ahead.

A higher monthly payment on the rental house will still be lower than the current payment on it and the credit card debt added together.

import · March 1, 2002, 12:23am

Re: What to do now that I own two houses ?? - Posted by Tim Fierro (Tacoma, WA)

Posted by Tim Fierro (Tacoma, WA) on March 01, 2002 at 01:23:03:

I like the idea of keeping the other house as a rental also, but the reason I suggest selling it for the proceeds is that you have $20k in debt. I don’t know what your debt is (Credit Cards, Cars, Boats, etc…) but the interest rate is probably high enough that you would save each month by not having those obligations.

If you are paying hundreds a month on debt service for that $20k, those dollars could be put in the bank just like the rental income would have done.

I suppose it is a trade off and a decision you will have to ultimately decide.

Keep the house with the cash flow, and use that cash flow to nibble away at the $20k debt. A wash.

Sell the house, pay the debt, have $10k left. A nice start and you are debt free except the house you live in.

Keep the house, refinance up to about 80% at a low rate to pay the high debt interest of the $20k debt. This way you get to keep the house, get cash flow (although smaller now), but you have the $20k gone. But this was a concern for you with the bad credit.

Call a mortgage broker and see what they say they can do. Don’t hurt to ask if you can get qualified for a refinance to pay off the higher debt while keeping the house as a rental.