So i was going to pay off my primary house mortgage of 150k in next 4 years then make it a rental property and pocket the whole cash flow. When i started researching and asking others i was told instead of tying whole money into one property, diversify that 150k into multiple properties with a down payment of 20% and use leverage of 80%. Then have renters pay off the mortgage over 30 years. Even though ill be in debt but the appreciation of real estate, tax benefits and renters paying off ur mortgage is much beneficial than paying it of myself. However i have heard this approach is risky and was the catalyst for 2007 housing crisis. I am not sure what to do? In the leverage approach im borrowing money to make higher returns such as an example, if i have 3 rental properties value at 200k each with 20% downpayment. That would make my debt to be 160k+160k+160k=480k, but with value of assets at 600k making my net worth 600-480k=120k. If the value of assets increase then my net worth will rise, however if the property takes a dive like 2007 and let say fromm 600 goes to 400k then that means my net worth is negative 80k? But i dont see the risk when i have the property rented out and the renter paying off the mortgage even when im negative 80k as the economy eventually will recover? Howveer if i go with first approach off paying of 150k mortgage then i have 100% equity in house but what if economy goes down again? And now my house if 200k is valued at 170k then that means i lost 30k of my own money
Are you able to handle all the debts if one of you losing job for 6 months?
No thats what i mean. Renters will be paying off the mortgage on the houses they rent
The problem is you can't preemptively count that rental income in your debt:income ratio, so the bank won't issue you a loan if you're relying on that
Consider having a emergency fund forward each mortgage for upto an year(in addition to your living expenses for 2 years). If you can build that within next 2 years, you will sail through any recession without worrying about the mortgage.
Im trying to understand the risk of not having an emergency fund in recession. If the value goes down and i owe more debt than value of assets, all i have to wait out the recession as value will go back up? Or am i missing something? Vacancies of rental properties happen but eventually they are rented out as everyone needs a place to live even in recession
Values don't have much effect on rental income (broadly speaking). As long as you can stay put with a property rented even half the time in a recession and you can pay mortgage, it doesn't matter. Long term, value catches up or rental income goes up. Selling or foreclosure would be the only outcome that will not be beneficial for you during recession, so cover your ass for that.
Really you just need to decide what you feel comfortable with. If you are in debt with 4 property's and you lose your job and can't make payments and can't rent them for enough to cash flow because the economy is down then the banks will for close and you will lose everything. If things mostly stay ok and you are able to make payments and never get into the situation where you lose everything then sure having 4 properties could work out well. What's your risk tolerance? If you own the house outright and worse comes to worse no one will forclose on you. If bad times come do you think you could make payments on the properties if you couldn't rent some of them? Do you want to be in a situation like 2008 where people couldn't make payments and couldn't rent them for enough to cover the mortgage? I wouldn't over leverage myself if it was me. Maybe get one rental and pay enough down that you could cover both mortgages if you had to.
So even if worst happens even then my renters will be paying off mortgage right? Everyone needs a place to live even in recession. Like i will still find people to rent my home.
Secondly if i tie all my money into the house and prices goes down then i lost my own money that i put in the house
Leverage is the key to wealth. Also, the gateway to penury. Use leverage, but use it wisely. Don’t over-extend yourself and always have a cushion of liquidity. Because isht will happen.
If cash flow works out, there is no benefit paying off your mortgage. Leverage is the way to go. Just make sure you factor in the worst case.
Paying off mortgage is a bad idea any day. Use the money to invest elsewhere either in stocks or real estate or something else. Mortgage you would have got at around 3-4% which is pretty much the lowest cost to capital you can get. Weather it is safe to do that is entirely depends on your risk acceptance criteria. Risk here is not in losing the money, but the consequence of losing that money. If you can handle the consequence of down time for few years then it is better to re-invest.
Great advice. (Also I responded you back on the other thread).
Cash flow is good but profit is bad, use leverage to grow faster and avoid taxes.
You should also have 6 months worth of payments for EACH property in case you lose your job if the economy takes a hit and the houses go underwater. Either way, I wouldn’t go from noob landlord to 4 properties. Do one with 20% and see how the landlord life suits you. Then go from there. Property is a good investment but so is the SP500 in the long run because you should (generally) always reinvest investment income somehow while you’re still working
Agreed but with rentals it doesn't matter if the houses loses value, your focus is cash floor and during down turns rents go up.
Since you keep asking questions I am going to guess that your risk tolerance is fairly low. With that in mind, pay off mortgage and rest easy. Without mortgage payments it will be easy to save up for down payment of rental property. However, without mortgage on primary residence you k ow that you always will have a home.
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If you want to buy multiple properties, how are you going to deal with debt:income ratio ? Banks require debt:income ratio to a min... I don’t know much about this myself hence asking
You offset that by having renters sign something in advance. Then the lender counts 75% of potential monthly rent as income. If the property has two years of steady rental income, you can count the whole thing.