Question for landlords: what to do with profit? (tenants, real estate, poor)

[ppatrick2013]

Hi,

I'm a small time landlord who owns a few multifamily buildings in Chicago area. One question that I've always asked myself is what do to with the profit. In my opinion, it could be allocated to one of this three buckets:

(1) Pay down the loan. This is a nice way to build up equity. Also it gives you a peaceful mind knowing that when the balloon comes due, it easier to refi with sizable equity. You also save on interest payment over the life of the loan.

(2) Remodel the unit to get higher rent. I have a number of units that have below market rent because the they are out of date. Spending money to remodel and raise the rent is a good way to increase income.

(3) Save up for the next purchase. This is how we grow. Save and buy the next building.

It's always difficult for me to balance between these three. I wonder how other landlords handle this. What do you with the profit? Please share your thoughts/experience.


Thanks,
Patrick

[parentologist]

We don't have loans on our properties. We save up for the next purchase. We don't remodel units unless it's really necessary, because we usually remodel when we buy buildings, which are all cheap, beat up properties. Since they're in a poor town, there is a ceiling on how much rent they'll bring in, but the income to purchase price ratio is excellent.

[Galaxie Girl]

Originally Posted by ppatrick2013

Hi,

I'm a small time landlord who owns a few multifamily buildings in Chicago area. One question that I've always asked myself is what do to with the profit. In my opinion, it could be allocated to one of this three buckets:

(1) Pay down the loan. This is a nice way to build up equity. Also it gives you a peaceful mind knowing that when the balloon comes due, it easier to refi with sizable equity. You also save on interest payment over the life of the loan.

(2) Remodel the unit to get higher rent. I have a number of units that have below market rent because the they are out of date. Spending money to remodel and raise the rent is a good way to increase income.

(3) Save up for the next purchase. This is how we grow. Save and buy the next building.

It's always difficult for me to balance between these three. I wonder how other landlords handle this. What do you with the profit? Please share your thoughts/experience.


Thanks,
Patrick

My husband and I have only been landlords for a few years, so we have not had enough time to experience the various parts of the real estate cycle yet. That said, we have talked a lot with my parents, who have been landlords for decades, and here is their philosophy, which makes sense to me.

Regarding paying the loan down, this makes sense if the interest rate is high. Right now we have incredibly low rates, so it makes sense to leverage cash into buying more properties. Of course, we have never had a loan with a balloon, so perhaps that might affect the assessment somewhat.

My parents generally do the big rehabs and upgrades during the peaks of the cycle. That is when you are making the most money because rents are high and good tenants are easiest to find, so that is when you need the most tax write offs. Upgrades allow you to improve your properties and write it off against your profits.

Saving toward more properties is typically a great option, if interest rates are low. You want to pay off high interest loans that cannot be refied into low interest loans (when interest rates are high), because high inflation (which is common when interest rates are high) will eat away the value of your savings. You want to have access to loads of cash (in savings and equity that can be pulled out of your current properties) when the market crashes so you can buy more properties when prices are down.

That's my 2 cents. Curious what others have to say.

[ppatrick2013]

Guys, thanks for sharing your knowledge. Galaxie Girl, your parents' philosophy rocks!

Patrick