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-   -   Does a Mortgage Loan Make sense for me? (http://www.early-retirement.org/forums/f28/does-a-mortgage-loan-make-sense-for-me-43603.html)

outofratrace 04-06-2009 08:42 PM

Does a Mortgage Loan Make sense for me?
 
Ok so I'm 40 yo and I am basically retired with about 2X the amount of retirement income I need coming in from interest, dividends and rents. I currently own several properties all mortgage free. I currently can get a 4.375% 30 year fixed loan on my residence which is worth 500k. A loan would be in the 300-350k range. My thought were that we might be in for high inflation and this would be cheap money in the long run. Alternatively I could borrow on any of several investment properties but the interest rates would be in the 5.75% range. Am I crazy or does this make any sense. I would probably use the money to purchase a couple other investment properties or invest for inflation protection. My current portfolio is in the mid 7 figures. According to my analysis my no mortgage rental properties return 6-8% and a 50% leveraged property would boost that to 11-12%. I'd also get a mortgage interest deduction on my taxes but my tax rate is pretty low at 15% or so.

Animorph 04-06-2009 08:50 PM

I'm doing a significant cash out mortgage for equity investment, but they don't seem too popular on this forum. Clearly you don't need to do it. But that makes it less risky as well. I'd say whichever makes you happy.

HornedToad10 04-06-2009 09:40 PM

Quote:

Originally Posted by outofratrace (Post 804561)
Ok so I'm 40 yo and I am basically retired with about 2X the amount of retirement income I need coming in from interest, dividends and rents. I currently own several properties all mortgage free. I currently can get a 4.375% 30 year fixed loan on my residence which is worth 500k. A loan would be in the 300-350k range. My thought were that we might be in for high inflation and this would be cheap money in the long run. Alternatively I could borrow on any of several investment properties but the interest rates would be in the 5.75% range. Am I crazy or does this make any sense. I would probably use the money to purchase a couple other investment properties or invest for inflation protection. My current portfolio is in the mid 7 figures. According to my analysis my no mortgage rental properties return 6-8% and a 50% leveraged property would boost that to 11-12%. I'd also get a mortgage interest deduction on my taxes but my tax rate is pretty low at 15% or so.

It might make sense if there are investment properties available to buy that will cash flow for you and help pay off your mortgage.

It doesn't really make sense to do it just because it's a low rate and inflation might be coming.

The low rate makes the possibility of using the money to generate cash flow more feasible, but you still need something solid to invest in.

From a cost-benefits analysis, I'm not sure how much it's worth it since it is some(albeit low) risk and you are already getting 2x the income you need in rent. If you did refinance, I would be conservative.

haha 04-06-2009 11:14 PM

Quote:

Originally Posted by outofratrace (Post 804561)
Ok so I'm 40 yo and I am basically retired with about 2X the amount of retirement income I need coming in from interest, dividends and rents. I currently own several properties all mortgage free. I currently can get a 4.375% 30 year fixed loan on my residence which is worth 500k. A loan would be in the 300-350k range. My thought were that we might be in for high inflation and this would be cheap money in the long run. Alternatively I could borrow on any of several investment properties but the interest rates would be in the 5.75% range. Am I crazy or does this make any sense. I would probably use the money to purchase a couple other investment properties or invest for inflation protection. My current portfolio is in the mid 7 figures. According to my analysis my no mortgage rental properties return 6-8% and a 50% leveraged property would boost that to 11-12%. I'd also get a mortgage interest deduction on my taxes but my tax rate is pretty low at 15% or so.

How can the interest and dividends and rents off free and clear properties not put you into a higher tax bracket? Mid 7 figures is say $5,000,000. 5% on that is $250,000. That is not the 15% tax bracket.

Ha

HpRyder 04-07-2009 10:12 AM

I've just gone through a very similiar situation.

Quote:

Originally Posted by outofratrace (Post 804561)
I currently can get a 4.375% 30 year fixed loan on my residence which is worth 500k.

Where did you get this? Best I could do was 4.5 with 1/2 pt at BOA with 200K cash out.

Watch out for the purchase price + improvements + 100K interest limitation.

Quote:

Originally Posted by outofratrace (Post 804561)
My thought were that we might be in for high inflation and this would be cheap money in the long run.

My thought exactly, but I don't believe "might" is the correct description. I think "will" is correct.

Quote:

Originally Posted by outofratrace (Post 804561)
Alternatively I could borrow on any of several investment properties but the interest rates would be in the 5.75% range.

While it will provide a better tax benefit, helping to reduce the profit each year, be careful that they still cash flow with a decent monthly reserve. This additionally does not have the purchase price + improvements + 100K interest limitation.

Run the numbers, you may be able to do both. Up to a certain point. My wife would not let me do both.

Quote:

Originally Posted by outofratrace (Post 804561)
Am I crazy or does this make any sense. I would probably use the money to purchase a couple other investment properties or invest for inflation protection.

I would not go for more rental property at this time. When things get worse, fewer renters will be able to afford rents. Right now I'm seeing more cars parked on the streets around my rentals because families are doubling up. Just recently I had double families trying to rent my SFH. And things are only bad now with 10% unemployment. Wait until they get worse.

I would put the borrowed funds in inflation hedges even though they pay no short term return and are higher preceived risk. Then when interest rates become high double digit because the Fed will fight inflation with high interest rates, I would switch into long term T bonds or muni's. When interest rates hit these values, property values will be bottoming out, so you can choose to split some of the funds into more rental property. This is just my risk tolerance level. Yours is probably different.

Quote:

Originally Posted by outofratrace (Post 804561)
My current portfolio is in the mid 7 figures. According to my analysis my no mortgage rental properties return 6-8% and a 50% leveraged property would boost that to 11-12%. I'd also get a mortgage interest deduction on my taxes but my tax rate is pretty low at 15% or so.

Additional interest, both home and rentals, will help keep your rate lower when the Fed tax rates increase to reduce the deficit.

Just my thoughts.

tryan 04-07-2009 10:37 AM

I'll be curious if you get approved ... I posted about a year n'half ago that I was rejected for a re-fi on a HELOC. Tried to drop my rate to prime -.5 ... was told: no income, no loan. Showed ~2M in rental assets and was only applying to re-fi 150k; the bank had no interest in lowering the rate. Doesn't help that 2 years of tax returns showed very little "income". Credit score was not an issue (DW and I average ~750).

So if you move forward, let us know what bank did the deal (TD BankNorth will not).

As for buying more property ... deals get better every day. Stumbled into a HUD home this week: foreclosed price ~250k; HUD asking $117k; I'll make a 50k "cash" offer. Been sitting for years, needs alot of TLC. No bank will finance these things either.

outofratrace 04-07-2009 06:33 PM

Quote:

Originally Posted by haha (Post 804593)
How can the interest and dividends and rents off free and clear properties not put you into a higher tax bracket? Mid 7 figures is say $5,000,000. 5% on that is $250,000. That is not the 15% tax bracket.

Ha

Sorry it was a effective tax rate not bracket. I get hit with about 40k taxes on 250-300k of adjusted income which has about 7k AMT.

outofratrace 04-07-2009 06:36 PM

Quote:

Originally Posted by HpRyder (Post 804748)
I've just gone through a very similiar situation.


Where did you get this? Best I could do was 4.5 with 1/2 pt at BOA with 200K cash out.

Watch out for the purchase price + improvements + 100K interest limitation.

Local bank quoted me 30 year 4.375 w/1 point buydown /no origination last week. 4.5x something was standard rate

Quote:

Originally Posted by tryan (Post 804761)
I'll be curious if you get approved ... I posted about a year n'half ago that I was rejected for a re-fi on a HELOC. Tried to drop my rate to prime -.5 ... was told: no income, no loan. Showed ~2M in rental assets and was only applying to re-fi 150k; the bank had no interest in lowering the rate. Doesn't help that 2 years of tax returns showed very little "income". Credit score was not an issue (DW and I average ~750).

So if you move forward, let us know what bank did the deal (TD BankNorth will not).

I have no earned income just rents/interest/dividends in the 300k range. Think they will hassle me? 800+ credit


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