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Just got home under contract - pay in cash?
Posted on 5/11/23 at 10:51 pm
Posted on 5/11/23 at 10:51 pm
So I am moving and just entered a contract today. Home price is $249k. I recently sold two rentals and freed up about $225k after capital gains taxes. I have another $15k in savings so I cannot quite pay the whole thing in cash. My interest rate is looking to be about 6.5%. Is this a high enough rate that warrants paying it off in just maybe one year or would you still do the traditional mortgage?
I still will own three rentals: one of which is paid off and the other two combine for about $150k mortgages, both sub 3.0% rates. The cash return is $2,500/month. The only debt I have is my car loan at $80k at 0.9%. My new gig pays $78k (a pay cut, but I am excited for the new job and flexible hours - you cannot put a value on time).
The only options logical aside from a huge lump sum down payment are a) invest in the market or b) keep cash on hand. I have concerns of three rentals over five hours away from me and self-managing, so I am unsure if I keep them after my current leases expire next year, but, I feel foreclosures will skyrocket in the next few years for those who cannot afford their new homes and having cash to snipe those in 2025-26ish could be tremendously strong.
Any thoughts?
I still will own three rentals: one of which is paid off and the other two combine for about $150k mortgages, both sub 3.0% rates. The cash return is $2,500/month. The only debt I have is my car loan at $80k at 0.9%. My new gig pays $78k (a pay cut, but I am excited for the new job and flexible hours - you cannot put a value on time).
The only options logical aside from a huge lump sum down payment are a) invest in the market or b) keep cash on hand. I have concerns of three rentals over five hours away from me and self-managing, so I am unsure if I keep them after my current leases expire next year, but, I feel foreclosures will skyrocket in the next few years for those who cannot afford their new homes and having cash to snipe those in 2025-26ish could be tremendously strong.
Any thoughts?
This post was edited on 5/12/23 at 11:45 am
13
Posted on 5/12/23 at 4:49 am to rpg37
That’s a pretty damn good cash flow on 2-3 rentals so I would consider a property manager if you can’t handle it yourself.
Posted on 5/12/23 at 6:38 am to rpg37
For me personally, I would pay a huge chunk on the house. I would do 200k and have a 49k mortgage. With the mindset to pay it off in 2 years or so. 6.5% is more than you can get on any secure investment. Once paid off they you have a bunch of free cash monthly.
Posted on 5/12/23 at 7:10 am to BHTiger
I agree with paying off close to 200k and keeping that other cash on hand. Congrats!
Posted on 5/12/23 at 7:23 am to BHTiger
quote:
For me personally, I would pay a huge chunk on the house. I would do 200k and have a 49k mortgage. With the mindset to pay it off in 2 years or so. 6.5% is more than you can get on any secure investment. Once paid off they you have a bunch of free cash monthly.
And the return is actually better than 6.5% because he doesn’t pay taxes on it. So with an effective tax rate a little under a third it’s closer to an 8.5% return.
That said he doesn’t get to deduct the mortgage interest from his taxes.
Posted on 5/12/23 at 8:28 am to rpg37
You didn't just close on a house.
You put it under contract and will be closing....
You put it under contract and will be closing....
Posted on 5/12/23 at 9:03 am to rpg37
You are definitely in a good spot, I would probably keep a large chunk of it on hand as an emergency/liquid investment fund considering how many properties you have.
Posted on 5/12/23 at 10:24 am to SaintsTiger
quote:Standard deduction is so high now, he may not even itemize.
That said he doesn’t get to deduct the mortgage interest from his taxes.
Posted on 5/12/23 at 10:46 am to rpg37
Pay it off, enjoy the cashflow, and eventually refill your savings. Life is short; enjoy it.
Posted on 5/12/23 at 10:53 am to ItzMe1972
quote:
You didn't just close on a house.
You put it under contract and will be closing...
Apologies, misworded that statement. Yes, under contract.
Posted on 5/12/23 at 11:03 am to rpg37
Others have good advice, I just wanted to say congrats on putting yourself in a position that this is even an option. 
Posted on 5/12/23 at 11:10 am to rpg37
Life is good without debt on life's expenses--including houses.
Save your debt capacity for appreciating or income producing assets. Assets that pay for the debt themselves.
Save your debt capacity for appreciating or income producing assets. Assets that pay for the debt themselves.
Posted on 5/12/23 at 12:02 pm to rpg37
quote:
Just got home under contract - pay in cash?
So I am moving and just entered a contract today. Home price is $249k. I recently sold two rentals and freed up about $225k after capital gains taxes. I have another $15k in savings so I cannot quite pay the whole thing in cash. My interest rate is looking to be about 6.5%. Is this a high enough rate that warrants paying it off in just maybe one year or would you still do the traditional mortgage?
Here's what you should do:
Pay 100% cash for the house - do whatever you can to make sure it's 100% cash.
When the time comes to do a re-fi (this might be when you judge rates to be low enough, but I believe the minimum "seasoning period is 6 months"), you then can classify it as a "cash recapture" trade, whereby you take the loan proceeds (in this instance, let's say that's 70% of $249K = ~$175K) and use them to invest elsewhere. By doing so, you are allowed to deduct THE ENTIRE AMOUNT OF MORTGAGE INTEREST as "investment interest expense" for the life of the mortgage".
This works either way: for a little mortgage like this, it allows you to deduct interest that would otherwise be below whatever the standard deduction is now. If it were a big huge mortgage, it would allow one to exceed the current limit on mortgage interest deductions.
The important thing here is you actually have to use the loan proceeds for an "investment". In practice, that's a fairly broad requirement.
Posted on 5/13/23 at 11:44 am to BHTiger
quote:
I would do 200k and have a 49k mortgage. With the mindset to pay it off in 2 years or so. 6.5% is more than you can get on any secure investment.
I think I’m missing something here. What would be the advantage of carrying a 6.5% mortgage for +/- 2 years?
Posted on 5/13/23 at 12:02 pm to rpg37
Have you ever considered investing in new residential construction? Hire a builder, build a spec house in a nice neighborhood, and sell for a hefty profit. The amount of cash you have reduces a lot of the risk and potential stress. This has worked out nicely for me personally. I had large amounts of equity in a handful of rentals that I sold and did this. Have not regretted it.
Posted on 5/13/23 at 12:30 pm to Big Scrub TX
quote:
Pay 100% cash for the house - do whatever you can to make sure it's 100% cash.
When the time comes to do a re-fi
I'm missing something. If he's paying 100 percent cash and owns the house outright no mortgage then what's he re-fi?
Posted on 5/13/23 at 8:55 pm to rpg37
i am perplexed by you financial situation but good on you... make $78k, 5 rental homes, and 15k in savings.
Posted on 5/13/23 at 10:36 pm to PetroBabich
quote:He'll finance it 100% with equity and then re-finance it 65-80% with debt. Very common.
I'm missing something. If he's paying 100 percent cash and owns the house outright no mortgage then what's he re-fi?
Posted on 5/13/23 at 11:34 pm to rpg37
Your salary is $78k and you financed a car for $80k ?
Posted on 5/14/23 at 8:59 am to rpg37
quote:
I still will own three rentals: one of which is paid off and the other two combine for about $150k mortgages
quote:
I have another $15k in savings
You’re obviously in a good place financially. And your rentals are producing good positive cashflow (I’m assuming the $2500/mo is a net figure). One question I do have is about the $15K in savings. Does that represent your personal emergency account and also your cash reserve for the two rentals that aren’t paid off? Just curious.
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