Should I leverage property to fund another?

General Real Estate Investing
1

We have a 4 unit multi-family property that is paid off and generates good cash flow. It’s value is around 300K-350K.

My question is should we take an equity loan out on it and fund another multi-family propery gtting a mortgage in the second?

Any recomendations or experiences are appreciated.

Thanks,
Keith

2

My default opinion used to be borrow to control more…

However, it depends on at least one or more of the following factors… in no particular order…

  1. Rate of appreciation (how much natural market growth will there be during the holding period?).
  2. Opportunity cost (how much will it cost you to take money from one place and leverage it into something else [taxes, interest paid, etc.].
  3. Rate of forced appreciation (can you accelerate the appreciation on the new project with a change in use, upgrade, and/or increase rents?).
  4. Value-added equity (how much below market are you able to buy, regardless of the reason?)
  5. Income tax treatment (will you pay more taxes, or less after leveraging your dead equity into a new project?).
  6. Mortgage pay-down (how fast will you be able to pay off the new mortgage?).

If the combined ROI outpaces the existing ROI on your old project alone, then I would go ahead and buy more property by leveraging your dead equity.

Otherwise, you should keep the dead equity in place, and enjoy the cash flow on your current project (and continue paying income taxes).

Meantime, just creating more debt is a way to increase your wealth. Somebody once said, “You’re as wealthy as what you can borrow.”

In this case, if you could borrow $1M using your dead equity as leverage, and then let someone else pay that $1M off (in rental income). Eventually you’ll have your dead equity back, plus another $1M, plus the natural appreciation on BOTH projects during your hold time.

So my question would be, “Is your return greater by borrowing and paying off $1M, using dead equity leverage, or not?”

Hope that gives you some help. I’m sure I’ve forgotten something here, but maybe someone else can shed more light.

Congratulations on your free and clear property. Not everyone has your “problems.” :biggrin :beer

3

I have been investing for about twenty years and the motto has always been leverage, leverage , leverage. That was until the downturn. Now I have completely changed my thinking and I have to put a value on peace of mind. Free and clear properties offer that peace of mind.

4

I’ve been thinking about this for some SF property I own. I want to own more property, so I’d leverage my existing to some point (what is that point?) If I can buy cheap and the time is now, I have to make the buy - even with leverage - to justify making more money.

So if the deal is too good to pass up, don’t pass it up. If it’s so/so, you can have ‘peace of mind’ that you didn’t jump on a risky deal.

5

We’ve been in “build mode” for our business thus far. I think we’re finally at the point where we could stop buying and just pay down extra on what we’ve got. My goal is free and clear properties for that same peace of mind you’re talking about. We’ve got good cash flow, so I don’t feel we’re in over our heads. I’m glad things have happened during this down turn. If prices go back up, I don’t feel compelled to buy a ton more property.
I wouldn’t overleverage yourself if I were you, but if your equity presents some great opportunities during this market - I would strongly consider using that to get more while the buying is good.
For example, we just used two free and clear properties (combined appraised at 57k…yes we deal with low income properties) as a down payment for 1 duplex, 12 houses, and a bungalow. Payment on the new bundle is $2700. Rent once I get one move in ready house filled and one of the other houses rehabbed will be $7025.