He's wondering what to do now. He's says he's gotten advice to do the following:

1. Take out a mortgage on the (now) paid-off house. Build a new house and rent the existing dwelling. The tenant will pay the mortgage on the existing house while the new house is paid-off.

2. Take out a mortgage on existing house and buy a fixer-upper. Renovate it, and sell it at a profit. Repeat as necessary.

3. Work to pay off vehicle loan (5.9%) early (it is a business vehicle/expense).

What other things can this guy do? Would a revolving line of credit be better than a straight-up mortgage/loan?

1 and 2 sound good to me.

3 I would not do.

It is pretty good advice to build a new house, and let a tenant make the payments.


I don't think a revolving line of credit is the thing to do, unless he is going to quit work and become a builder full-time.

Using the equity in his home to build wealth is pretty good advice as long as he is careful with the investment.

Well if he has any substantial credit card debt he should pay that off before investing in real estate.  If not then he can use the equity in his new home to buy a new home to rent, which can be a real pain in the ass or used fixerupper to fix and sell.

I wouldnt rent out for more than 3 years, in fact I'd rent it out for 2.5 years and then put it up for sell which would give me 6 months to sell it.  If you lived in your house for any 2 out of the previous 5 years when you sell the house the capital gains is tax free!

You could also rent it out for 30 years in theory and move back in for 2, but who wants to live in their old house?

If he has enough $ for downpayment on a new house and the rent is equal to the new mtg payment then the renters are paying for him to live in his new house, but I only suggest renting out for 2.5 years.

ETA: it'd probably be wise to take a mtg out on the paid off house so you'll incur a mtg interest expense on that property, that expense can offset the rental income on that house.  Use the loan proceeds to plop down on the second house, make sure he puts down 20% mininum to avoid PMI

From a previous Thread:

Quoted: One other thing. People who pay off their mortgage are generally afraid of or don't understand investments. I find it odd that someone who would use their extra money for 15 years to get the house paid off would suddenly turn around and invest $20k a year.

It's time for your friend to learn about investments. He has already absorbed a huge opportunity cost by paying off his house instead of investing.

He should start to look at socks, bonds, mutual funds, real-estate, tax liens, etc.

What about the real estate idea (renovating a house and selling at a profit)?

Quoted: What about the real estate idea (renovating a house and selling at a profit)?

I didnt support that one.  People tend to underestimate the money, time, and skill it'll take to get that done.  You can get in a hole real fast.

Quoted: Quoted: What about the real estate idea (renovating a house and selling at a profit)? I didnt support that one.  People tend to underestimate the money, time, and skill it'll take to get that done.  You can get in a hole real fast.

It can be a good deal, but not if you are planning to DIY without the skills.

If you can find the right deal.....tons of cash can be made this way.

I am working on a deal that has an 11 acre estate with a 5500sq ft 3 story home.
I brought a partner on who is a home builder, not for his money but for his expertise, and his contacts with contractors.

We should make about $75,000 each.

Hard not to call that a good investment.

ugh buy lots of guns!  doy!

Depends on how much the house is actually worth.

I have clients with houses in the millions, most people I deal with have about 500k equity in their resident.

I highly suggest he approach a reputable commercial real estate company (Sperry Van Ness, Grubb Ellis, Marcus Millichap, CB Richard Ellis) and inquire about buying a property. There will be no cost upfront for anything since the brokers work strictly sell side commission. Of course that money will be paid by him, but only after a deal is done and escrow closes.

Most commercial real estate deal will need at leats 30% down (so just take the equity he has and times 3 and that's the price he can afford) and loan terms of 5-10 years with 30 years amortization.

It's better to buy an apartment complex, shopping center, NNN lease properties as they have a good capitalization rate and high cash-on-cash return. A good investment in the midwest will gross 10%+ cash on cash return per year. Add this with equity build up and debt reduction and your averaging 20%+ returns per year. Generally speaking an apartment building that makes 10% cash on cash return doubles the owner's equity once every 5 years.

If he wants something easy than look into NNN deals, basically the landlord does nothing but take care of the management. The tenant is responsible for the property, utilities, repairs, taxes, insurance, basically everything. This happens when a franchisee of say Arby's want to take his/her equity out of the real estate and invest in another store. You get a decent cash on cash return of usually around 8-10% and long (15+ years) leases.

There are alot of choies, if he is serious contact me and I will offer more advice.

1.  I won't rent a house here.  Rents are low, and I cannot make it worthwhile.  Wear tear, maintenance, and general Pain in the Ass problems are not worth it.  Nope.  

2. Depends on your market.  Are you 100% confident you can buy, fix, and resell at a profit in short order?  and if so, will the profit be large enough to offset renovation costs and labor?

3. Pay off business vehicle?  I wouln't muhc bother.  Its an expensible item


4>  You didn't mention this one.  I'm throwing it in.  Pay off credit cards.  ThenInvest the former monthly mortgage payment in a Roth IRA (if you are under 40), or, if you work for a company with a decent 401K, invest in the 401K to capture all matching dollars and then put surplus in roth ira.  It sounds like he's self employed, so consider a Keogh or one of the other 'self directed" retirement plans available to small businesses.

Quoted: 4>  You didn't mention this one.  I'm throwing it in.  Pay off credit cards.  ThenInvest the former monthly mortgage payment in a Roth IRA (if you are under 40), or, if you work for a company with a decent 401K, invest in the 401K to capture all matching dollars and then put surplus in roth ira.  It sounds like he's self employed, so consider a Keogh or one of the other 'self directed" retirement plans available to small businesses.

+1

Wait for the next correciton and jump in.

There is no way in hell I would remortgage for ANYTHING.

He OWNS his house, and cant anyone take that from him long as he pays his taxes.

He needs to learn how to invest. Put the equivelent of his mortgage payment into a RothIRA up to max, then go right for stocks baby.

There is no way in hell I would remortgage for ANYTHING.

The interest is tax deductable, so it makes sense from a financial point of view even if it doesn't from an emotional one.

You are right about Roth IRA's.  Everyone should put the maximum allowed amount in an IRA even if you have to borrow.z

Put every dollar you can in to a IRA or AR's

When the government gives up on trying to fund retirements, your need both.

Thanks for the replies, gents.

If this guy has CC debt, I don't know about it, so that's not an issue. As best as I can tell, I think he's going to pay off his business vehicle and max out his IRA contributions. He says his truck loan is 5.9% and between paying that off and dumping any surplus money into his IRA he'll be doing better than many people and avoiding undue risk.

no one has brought this up yet but i think some markets are saturated.in CA rents are going down!! and home prices up. but so many people have investment properties rented out. He needs to do a real cash flow analysis and figure out if this is a good idea. and real estate is not the only investment and it is NOT ALWAYS GOING TO GO UP. there have been and will be recessions of this market.

Quoted: There is no way in hell I would remortgage for ANYTHING. The interest is tax deductable, so it makes sense from a financial point of view even if it doesn't from an emotional one. You are right about Roth IRA's.  Everyone should put the maximum allowed amount in an IRA even if you have to borrow.z

As opposed to not paying interest at all?  Tell you what, you send me $1, I'll send you back $0.38.  I'll do this for you as many times as you want.  

I agree that the house is a source of cheap investment capital, but the interest deduction is a red herring.