I am new to this forum and I like it already by reading posts and answers in here.
My situation is:
I currently own a house in Virginia and have about 200k in cash. My current house has about 200k in mortgage. I am not sure if I should pay off my mortgage and GET A GOOD NIGHT SLEEP without thinking about the mortgage anymore or I should invest this money in another property and rent it out. I also think about paying it off and get a line of credit to purchase a new property but I still have to pay for the INTEREST only for the line of credit. My current mortgage is 15 years so I can pay it off in about 10 years without adding any principle to it.
Currently, the bank offers me up to 300k for another mortgage with 20% down.
Personally I wouldn’t pay off the house with that $200k. All your capital would then be tied up and your only financial reward would be the elimination of one bill that I assume you’re able to cover (your mortgage payment). And you’re right about the line of credit, you’d be paying interest to use the very same money you already have readily available to you.
I’d use it to acquire income-producing assets that could probably end up paying your home mortgage payments and then some each month without you having to work. To me that would indeed be real estate but I wouldn’t risk my credit buying a rental property…with $200k cash and good credit I’d almost certainly look into commercial land development and/or buying or developing a self storage facility.
Disclaimer: my risk tolerance is on the higher side (because risk and reward go hand in hand) but then again it’s not risky if you really learn what you’re doing.
I don’t have time to deal with that. Commercial land dev. and sel-storage facility require to hire someone to deal with it. It is out of my ability. Since English is not my first language to dealing with it is hard for me.
I heard someone in these forums mention about buying and flipping properties seem like what I want to do. Is that easy?
As I heard that I have to pay 6% for realtor company whenever I sell the house. So, If I buy a house for 180k and sell it out for 190k. 6% of 10k is 6k, the remain is 4k. Seems like a good deal, isn’t it?
No, you will loose money if you buy for 180 and sell for 190.
6% of 10K is 600, but you would need to take 6% of 190K in your scenario.
I suggest putting that money in the bank while you educate yourself.
To buy a $175k and sell for $275k??? It does not happen in my area. Even I cannot buy foreclosed houses and sell for that high money. Some realtors in Northern VA can sell for about $30k higher than the price they bought, but no more than that. The price for that kind of houses to make $30k is around 500k to 700k.
If you are planning to stay in your home forever, then pay off the mortgage which will free up the loan payment you are making right now to build up your emergency reserve and then to invest.
If you are planning to move anytime in the next five years, then definitely do not pay off the mortgage. Use your non-emergency capital to invest in income producing assets.
You may not be able to find cash flowing rental properties in Northern VA, but Frederick MD is just 50 miles north and is a military town with plenty of foreclosures under $100K that will generate a positive cash flow as rental properties (even with professional property management).
Get a low interest 30 year fixed loan, say your PITI is $1800. Take your cash and invest in cash flow properties, using leverage if you can. In my market I could end up with 4-5K of positive cash flow with 200K cash. Therefore you cash flow would improve $2200-3200 per month and you will have more net worth. Double bonus!!
Actually there are deals all over NoVA right now as I type this for 50 cents on the dollar, and some are right in the MLS. No you probably won’t find them in areas like Old Town waterfront, Crystal City, Rosslyn, McLean, or Tysons Corner, etc but they certainly can be found in Woodbridge, Dale City, Dumfries, Manassas, Ft. Belvoir, etc. And here in PG county MD we’re loaded with them. These houses will need work and you will absolutely need to know what you’re doing and how to buy them right.
Until you really know what you’re doing if I were you I’d stay away from buying houses right now because it takes substantial expertise and hard work to weed through the wood to get to the pearls. Based on what I’m seeing you’ll get whacked (no offense). It’s too easy to pay too much or not negotiate favorable terms.
What you may want to consider is becoming a private real estate lender. There are local, seasoned investors who would GLADLY pay you a high rate of return (I’m one of them, by the way, PM me :biggrin) in exchange for the use of your funds; funds which will be secured by income-producing real estate. Much better alternative than the stock market (where you have 0 control), and there’s no work involved; all you have to do is write a check and then sit back and wait to get a bigger check.
In my humble opinion, taking your whole nest egg to pay off a mortgage is akin to putting the cash in a safe, then losing the key when you need it most. I guess it’s fine for those with little financial sophistication or perhaps the elderly, and sure it’s great to have no house payment, but otherwise you get very little benefit:
Paying off a mortgage doesn’t increase the house’s value (capital is buried in a house effectively earning no interest, the house value will grow or fall with or without a mortgage).
Mortgages are cheap, tax deductable money. If you have a 5.75% fixed mortgage rate, paying it off only yields you a 5.75% yield on your money. Sure a money market won’t even pay that much, but at least you’ll still have the money!
Money tied up in your house in equity cannot be invested elsewhere unless you sell the house (now it’s gone) or unless you take out a mortgage or line of credit, which will diminish the profit on whatever you decide to invest it in because now you have to pay interest on that same money.
If you lose your job or otherwise can’t work it’s more difficult & expensive to access that equity because now you’re a poorer credit risk. But if you invest that money and are receiving passive income from it perhaps that income can support your entire lifestyle indefinitely, if you do it right. By keeping control over access to your money, you maintain liquidity. But when you give your money to your lender, you lose control of it. After giving money to your lender, the only way to get your money back is to sell the house or try to refi with no job (good luck with that in this lending climate).
I would invest it more wisely than paying off your mortgage. Generally speaking, mortgage money is relatively cheap right now and provides a small tax advantage to boot.
Make sure ALL of your consumer credit is paid off (credit cards, car loans, student loans, etc.)
Make sure your retirement accounts (IRAs, 401k, 403b, TSP, whatever) is fully funded to the maximum extent allowable
Make sure you have at least 20-25% equity in your residence
I have learned a lot from you guys. It looks like buying a new property to rent it out is the best way, instead of paying off my mortgage.
I will look for a foreclosed or short sale home around my neighborhood. Because I don’t have time to drive a long distance for home maintenance.
The average home price in my neighborhood is around 300k for a townhouse. I will down for about 20%. And, the monthlyt mortgage is around $2,250 (15 years fixed) and hope to rent it out for $1850 a month. I like 15 years fixed because I can pay off the mortgage in 15 years. I can can afford to add a few hundreds a month along with the rental income to pay for the mortgage monthly.
Personally, I would take the 30 year but insure that the lender allows accelerated payoff…you can always pay off a 30 year loan in 15 years but you can’t pay off a 15 year loan in 30 years.
I know those are hypothetical numbers you just provided but IMO that’s a terrible deal. #1 I would never pay anywhere near retail price for a house (because I know how to buy at steep discounts), #2 I’d never take out financing in my own name (I’d use private funds or buy subject-to or with seller financing) and #3 I’d never take a negative monthly cashflow unless there was another huge profit center in the deal somewhere that made the negative cashflow worth it.
As I stated earlier, until you really know what you’re doing if I were you I’d stay away from buying houses right now because it takes substantial expertise and hard work to weed through the wood to get to the pearls. That hypothetical deal is wood. You’ll just be hoping it’s worth more down the road, which is gambling. To paraphrase what AJ said you need to make your profit when you buy, not when you sell.
Seriously for now I’d consider private lending, and while you’re earning that high rate of return start reading books on creative real estate investing. Just my opinion.
#2 I’d never take out financing in my own name (I’d use private funds or buy subject-to or with seller financing
What does that mean?
The market in my area is at the bottom so It is a great time to buy a rental property. If I wait until I gained enough experience on real estate, the market is not as good for buyers as it is now.
I think I buy a property and go for 30 years in stead of 15 years mortgage so that I don’t loose money monthly. It is about $1650 a month for 30 years mortgage and the rent is about $1850. Looks good, isn’t?