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PonchoV8 · 10-05-2009, 09:06 AM

If you have a mortgage on your primary dwelling, and had some other property that you could borrow against in order to pay off your primary dwelling, would you do that? What benefits or disadvantages would there be in doing so? How would it impact your tax situation if your goal was to rent the other properties again? I've rented one duplex once in the past and intend to again. My primary dwelling mortgage is at 4.34% fixed and I just refied this spring--at a cost of about $3K because I don't intend to sell the house in the next 10 yrs.

TIA,

David Jones · 10-05-2009, 09:29 AM

Can you borrow money against the other properties at a better deal than your primary mortgage? Unless there is a tax advantage (and I don't think there would be) you'll just be spending money to do the deal. And still writing a check every month. 4.34% fixed is pretty strong. Use your rent money to build a rental repair fund and help towards your current mortgage. Or suck it up and pay the monthly out of your pocket and add additional principal every month with rental funds as available. The money saved in mortgage interest will be huge when compared to taking the full term to pay out the mortgage.

I stayed at a Holiday Inn Express on the way down here........

The Boss · 10-05-2009, 09:46 AM

Now is an excellent time to leverage that equity Doug. Use the financing on the rental to pick up another distressed property, fix that, rent it, borrow against it.

As long as the rental income in your area will cover your financing and taxes it's a home run.

PonchoV8 · 10-05-2009, 10:27 AM

I can borrow at a better rate (3.5%), but it's not fixed (5% fixed). Only bennie for me is having the primary domicile debt free again. My tin hat motivates me in that regard. I only live near a Holiday Inn Express (I really do).

Boss, the only thing holding me back from that is the time to do the work myself. That was always the goal, to continually build my property portfolio and use sweat equity. I'm out of time with day light savings coming to an end soon. Would you pay the price and hire a crew to do it instead? That would cost me 3 times what I could do it for.

ponjohn · 10-05-2009, 10:50 AM

Doug-

This is what i would do.

Create an LLC and move the rental property into that entity.
I would then refi the rental property, the cash out is NOT taxable.

Then pay off primary residence, put a line of credit on it just in case.

This creates a barrier between you and the debt owed on the llc. It is important to refi AFTER the property is under the umbrella of the llc. You will sign all documents as an officer of the llc not Doug the person.

This clearly illustrates that your primary is free and clear and the "business" is carrying the debt. You will then file taxes with a profit and loss for the LLC.

John

David Holmberg · 10-05-2009, 11:03 AM

Does TN have a Homestead exemption?

You'd lose the interest deduction of your primary home.

And having it paid off would really only matter if you defaulted on everything, what is the TN bankruptcy law on primary housing? In some states you only get a small flat amount and the house must be sold. Here in Florida they can't touch your main house.

Boss's suggestion is sound, if the market will support it.

69goatboy · 10-05-2009, 11:12 AM

A buddy of mine has about 5 homes. He used his primary residence to get a home equity loan to buy the rentals. He doesn't convert the loan for the rentals to a fixed, he just carries the rentals on the HEL and pays only interest. He bought most of his rentals well below half of their estimated worth and since he rents them, he doesn't really care about paying them off. He pays about $160 a month for a home that he rents for about $650 per. The goal is not to pay off the rentals, but to maximize the monthly income.

Add up what you owe total for all of your homes, if you borrow against the rentals to pay off your primary, the total hasn't changed, has it?

4.34% is darned hard to beat for your primary, and loans for rentals (business) will be higher than a loan for a private, primary residence.

I wouldn't do it.

The Boss · 10-05-2009, 11:32 AM

Interest rates will surely rise, unless you are just planning on flipping the property I would pick up a fixed rate loan.

As far as contractors go - sub the work out yourself, stop by the job in the morning then again after work, get subcontractors who are competent, and I think you will still be ahead.....+ you have somebody you can call on Christmas Eve to send over there when there is a warranty issue!

PonchoV8 · 10-05-2009, 01:12 PM

We don't have the protection in TN that FL does, or at least I've never heard about it.

I've been thinking the LLC was a good idea in protecting us from a law suit above and beyond insurance coverage. D Ramsey doesn't recommend it until you have a lot of value, but he was wrong about the economic retraction relating the housing buble. Ben Stein was wrong too.

Quote:

He doesn't convert the loan for the rentals to a fixed, he just carries the rentals on the HEL and pays only interest. He bought most of his rentals well below half of their estimated worth and since he rents them, he doesn't really care about paying them off. He pays about $160 a month for a home that he rents for about $650 per. The goal is not to pay off the rentals, but to maximize the monthly income.

What does he do with the money? His house is at risk for the rentals. That probably really only matters if real estate goes to nothing in value, I guess.
The total owed hasn't changed, but if it came to losing a house, I don't want to lose the one I live in currently because the upside is greater. Quality of life is better here too.

69goatboy · 10-05-2009, 01:31 PM

Quote:

Originally Posted by PonchoV8

What does he do with the money? His house is at risk for the rentals. That probably really only matters if real estate goes to nothing in value, I guess.
The total owed hasn't changed, but if it came to losing a house, I don't want to lose the one I live in currently because the upside is greater. Quality of life is better here too.

Little risk considering the homes he normally buys. The last one appraised for $94K a couple of years ago, he bought it for $29k, sunk in around $6k and could probably sell for around $60k now if he had to. With the housing market/economy situation that exists now, he has no problems finding renters.

As far as what he does with what money he clears, I think he splits it between paying for the other houses, paying down the principal on his own home and a savings account. He currently has 5 homes, he estimates that if he had 10, he could retire. He's a 42 year old machinist.

The time is ripe for those with the capital for buy big dollar stuff at yard sale prices.

I only wish I was in a better situation to do what my buddy does.

Bjorn · 10-05-2009, 04:08 PM

if the new rate isnt fixed , I wouldnt do it...how do you know what the rate will be next year or following...if it would be an ARMs note, DONT!

PonchoV8 · 10-06-2009, 09:32 AM

Goatboy, are you a Robert Kiyosaki listener?

69goatboy · 10-06-2009, 09:44 AM

Quote:

Originally Posted by PonchoV8

Goatboy, are you a Robert Kiyosaki listener?

Nope. I've never even heard of the man.

Financial or real estate radio guy, I assume?

PonchoV8 · 10:40 AM

Listener in the EF Hutton usage of the word, but I listen to him sometimes on the Youtube; like today while I'm introducing electricity to the people of Tarrant Alabama.

Here's a sample.

http://www.youtube.com/watch?v=w82YhsFxItQ
Some of what you said I heard on one of his clips.
http://www.youtube.com/watch?v=IzZnk83pqOo&NR=1

EDIT: Robert says savers are losers. Debtors are winners. He's one of the guys that predicted the collapse and now predicts that higher paying jobs aren't ever coming back--unless you live in Pakistan.

69goatboy · 10-06-2009, 11:54 AM

I recognize that guy now. He also a columnist for Yahoo's financial page. I've read his stuff before. Smart guy.

I'm not sure where my buddy gets his financial advice from, but I know he really likes Jim Crammer.

PonchoV8 · 10-06-2009, 12:26 PM

Cramer? Eek. I guess he saw it coming too, but only after it started. Robert wrote RICH DAD, POOR DAD.

poncho-mike · 10-06-2009, 08:05 PM

There's only one direction for interest rates from here....

I was faced with a similar dilemna. My first home was turned into a rental, but I was carrying a 10% interest rate on it back in the early 90s. I bought my current home at 8% in 1992, and later refinanced it at 5% about six years ago.

I looked into refinancing the rental, but I wouldn't save much because the bank charged higher rates on a rental property. I decided to cash out some of the equity in my primary home and pay off the mortage on the rental.

It's always bothered me that I carry all the debt on my current home, but the rental was owned outright. A side effect of that decision was that I began paying down the principal on my current house as hard as I could.

For peace of mind, minimize the loan on your primary residence. For further piece of mind, consider buying an umbrella policy for something like $1 - 2 million if you own rental property. It is cheap for the peace of mind it provides.

Mike

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