This one is going to be quick ’n dirty – just because I want to make a point and share a lesson I just learned (even though I technically ‘knew’ already, it hadn’t sunk in until this point).
I was recently at a staff meeting with the entire team at my real estate brokerage and we had a very interesting and knowledgeable guest speaker who was a mortgage agent.
I say ‘interesting’ because I found their talk of particular relevance to me on a personal level. And that’s rare. Made me question and re-think my own choices, strategy and assumptions.
Essentially, their thesis was this: If you own more than one property (i.e. principle residence and [at least] one rental property), don’t pay off the rental.
That’s right. Do NOT pay off the rental.
… but I thought paying off debt was the ‘right’ thing to do?!
Well, it’s all a numbers game. And as soon as you’ve got a couple of properties on the go, such simplistic advice is just that… too simplistic to be optimal. That’s not intuitive to most people – and wasn’t to me at first. Tough stuff. Lesson learned. Alternative perspective considered.
Ask your accountant about how to maximize the relevant tax advantages of property ownership, cost allocations and mortgage repayment. If you do not work with an accountant, find one immediately. Need a referral? Let me know and I’ll be pleased to introduce you to a few.
The reality is that with how much properties have appreciated in value, there’s often lots of equity to pull from – even if you’ve owned only for a couple of years. And with interest rates still so low, it might be worth considering a refinance to pull from that equity.
… but don’t take my word for it – consult an accountant or a mortgage broker.
Again, if you do not work with a mortgage professional, I’d be happy to make a referral. Build your team. It’s important to collaborate with someone who is familiar with the unique challenges and opportunities of working with those who are self-employed and/or serial real estate investors (i.e. anyone who doesn’t fit neatly into the typical ‘1-job and 1-property’ box). It’s always a numbers game; the devil is in the details. Let the data guide your decision.
So let’s say you’ve got (lots) of equity to pull from. In fact, even more than you realized (some mortgage brokers will be able to fund more than 80% loan-to-value of a property – and as much as 95%). What do you do? Well, some say that the smart money will either buy another income property (i.e. “Refi & Buy”) or pay off the principle residence.
That second option was new to me because of my myopic focus on debt reduction (even secured debt). But, paying off the mortgage on your primary residence (i.e. where you live) will free up cash flow, better utilize the tax advantages of an income property and stand you in good stead to invest in another property in the future.
Fascinating. I guess the smart move can really be the least intuitive.