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Wow, some great replies. Thank you everyone, this is helpful. It seems like there's a quite a mix based upon situations. To add a bit of flavor, I was looking to semi-retire in 18 months, but anticipate still doing occasional consulting gigs, but also wouldn't mine something completely different. I'll be retiring fairly young (in my 40's). My wife on the other hand has no intention of closing her store anytime soon. If can pull her out of there in her 60's I'll be shocked. Still, as it collects all of our business purchases, there's a fine difference between top line and bottom line. We pay every year of course (except 2020) but it's not going to be enough to support a Bay Area Loan.
My rents are all below market. One is to a group of Buddhist refugee ladies who lost their husbands in war who work at a temple close by. One is a family with the PC version of an extremely slow child with trouble walking who attends a special school nearby. One is to some grandparents tasked with raising grandchildren or the kids would go into foster care so they continue to work cash jobs at a restaurant 3 blocks away. (though the kids are nearly grown now). Anyway, that's the type of tenants I seek out. There's a problem, there's a support service nearby they need, they are a stable family. They pay market when they move in, but then I don't adjust rent. Cheapest one is a 2/1 with all utilities paid for $1500. Pretty good for San Jose. My highest is actually for a couple that wanted cooperation to go into Section 8 housing. They bumped the rent I had from $2000 to $2660. Go government affordable housing! I'm no saint. Anything related to a repair is getting written off. The depreciation is helpful in bringing down income. All loans were moved to our primary home, but I'll be putting that back to the group. Short story made long, the income stream isn't all that impressive, but the housing values have all tripled.
I had my first realization that it would be rougher when I was trying to buy a home for my sister in a suburb of Chicago. At $135K, I didn't think it would be that big of a deal, but at the time I was only consulting. So the banker would look at my wife's low profit business, our money losing (at the time as all were leveraged) rentals, and they would haircut 100% of my consulting income as it isn't repeating. They also didn't want stock gains or losses. As my credit score was terrific, I figured I would get a loan with my sister and let her take it from there and I'd pay if there was trouble. In the end, I resorted to getting 0% cash advances from various credit cards at the last minute (literally 2 days before closing) as the bank just couldn't get it through underwriting in time....with plenty of head start.
Of other concern, frankly, is some of the new rules the State is making on housing. I'm willing to carry these individuals for as long as they need these places, but I don't want anything that locks me in at these rates forever. Once they are done with them, I fully intend on getting market value for them again. But I would like, at some point in time, to possibly sell some of the properties here and SS1031 exchange them with properties elsewhere. My return on assets....with no leverage is a miserly 4% or so. Using a multiplier of 4 (for 25%) down, in theory I should be able to releverage and see a significant uptick in rental income.....if I can get the loans. However to get the loans for sure, you need the W-2.
About a year and half ago I returned to the regular person job market. I got a Controller job and it pays fine. The plan seemed simple. I thought market prices would drop and then I'd have the income to go reallocate assets. The market has not dropped though, but my company has supply issues so critical we may well lose our largest customer with 70% of our revenue. Which means I have to go scramble up another job to do for a few years....because once you get off the treadmill, you can't get back on.
Again, I don't intend on living a life of sloth, but old me promised young me a long time ago that we'd do this accounting crap until we were at a point where success didn't matter and then move on to what we really want to do. The young me is now conveying to the old me....remember those times you saw people had their money stuffed in places with no good exits? Don't be that guy.
I did talk to banks about this. This seems to be an almost easier option. I looked at a 9 unit near where I grew up. The numbers didn't make sense, but I took the meeting anyway where the banker agreed. He said he'd write the loan if I really wanted it, but that it would based upon my balance sheet, not the property prospects. It sounded like they would distinguish much better from personal and investment so long as it was a true multi-unit in an LLC.
Location: Was Midvalley Oregon; Now Eastside Seattle area
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Quote:
Originally Posted by artillery77
...snip...
The depreciation is helpful in bringing down income. All loans were moved to our primary home, but I'll be putting that back to the group. Short story made long, the income stream isn't all that impressive, but the housing values have all tripled.
...snip... My return on assets....with no leverage is a miserly 4% or so. Using a multiplier of 4 (for 25%) down, in theory I should be able to releverage and see a significant uptick in rental income.....if I can get the loans. However to get the loans for sure, you need the W-2.
...snip...
Even in Seattle, our rents barely beats 4% ROE (no mortgage) and falling. We did catch up on ROE when we sold a condo rental after 5 years of ownership. I see the remaining rental as just a storehouse of value and perhaps an Income inflation hedge. Hopefully DS will inherit with stepup value when we pass. Otherwise I think the rental is a bad Return on Risk.
I have some small MF holdings with dividend yields @+5.5%.
Before you retire sell one of the rentals. Use the equity for the down payment. Get a mortgage based on preretirement income. Or document your current yearly income and equity in the remaining rentals and try for an asset based mortgage. But you need to prove that you have that “income stream” and that it is durable for the life of your new mortgage. And have a large down payment.
Selling a rental is inevitable. But your new home will have the potential to appreciate just like the rentals.
But your own home doesn't have the ability to bring in a monthly income stream like the rentals. Vacation rentals can net thousands a month if they are paid off. One third of our retirement income is from vacation rental positive cash flow. And that cash flow (net after rental expenses) contributes twice the mortgage payments on our own home. Owning our vacation rental outright (which we paid much less for than our own home), pays our personal mortgage, property taxes, HO insurance, all expenses on the rental, and gives us extra income to do a lot of other things. And it's appreciating rapidly. Selling a profitable rental is like selling the cow to buy milk.
Vacation rentals can bring in thousands a month if they are paid off.
But you lost that cash when you basically stuffed it in your mattress. The most a paid off property will increase your cash flow is the monthly cost of a 30 year fixed rate mortgage.
But you lost that cash when you basically stuffed it in your mattress. The most a paid off property will increase your cash flow is the monthly cost of a 30 year fixed rate mortgage.
It was a 1031 exchange for a property in a distant state, so the money had to be spent on the new rental, or be taxed, and then pay interest on the new mortgage. For us the paid off rental was the way to go. For others, maybe not. In addition, it never shows up as a debt against us in any future financing deals, just an asset that increases in value every year.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by artillery77
Hello CD,
I'm calling upon your conventional wisdom. If I retire, I won't have any earned income. How hard is is to get a mortgage once you've retired? I will have rental income, but that will be net of expenses and depreciation. I won't be 59.5 for awhile yet, which is when I can take from IRAs. I really don't want to sell the properties as they have experience significant appreciation and thus will have considerable tax.
Will banks give loans to retirees that aren't working?
Yes there are lenders that will loan on your rental income. Over the last few years I’ve done over 9 loans and refinances to pull cash out instead of selling.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by luv4horses
Before you retire sell one of the rentals. Use the equity for the down payment. Get a mortgage based on preretirement income. Or document your current yearly income and equity in the remaining rentals and try for an asset based mortgage. But you need to prove that you have that “income stream” and that it is durable for the life of your new mortgage. And have a large down payment.
Selling a rental is inevitable. But your new home will have the potential to appreciate just like the rentals.
Why is selling inevitable? I don’t plan on selling mine , just cash out refinancing and then passing them on when I pass.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by Chas863
Banks that I have dealt with are interested in Net Worth statements and perhaps your recent tax returns. If your net worth is $10 million, who the heck cares if you have a job? They'll simply take a lien on one or more of your assets to secure the loan.
Could you discuss what banks do this? The banks I’ve worked with look at cash flow and in the absence of that would not considered the assets owned.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by adjusterjack
I was divorced when I was 50. My ex got the main home and I got two rentals. I kicked the tenants out of one rental and moved in. I lived in it for two years to avoid the capital gains on it. The tax on the other was minimal as there hadn't been much appreciation those years. I had a substantial IRA. I used the equity in the two houses plus part of my IRA and bought a house for cash. The tax bite was painful but a fraction of what I would have paid on mortgage interest for the next thirty years.
Having no mortgage payments allowed me to retire at 60. I took Social Security at 62. It covers all my expenses and then some.
I have been debt free for almost 24 years.
My vote: pay off your house as fast as possible no matter what it takes.
When you are in your 70s and don't have mortgage payments, you'll thank me.
Have to agree to disagree on this one. Already threads on pros and cons of paying off or carry mortgage. I’d rather pay a mortgage of 3.5% and use the money to invest and get a much higher return covering the mortgage and then making money on the difference.
The idea of a mortgage cAuses me no loss of sleep or worry.
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The young me is now conveying to the old me....remember those times you saw people had their money stuffed in places with no good exits? Don't be that guy.
