Have you ever heard a self-employed, leveraged person make this statement,...." I could be saving for retirement right now if I just did not have all of this business debt to pay off".

In other words, your LL business is bringing in a ton of cash each month,....but there is not much left over after paying for your personal living expenses and that massive debt service,... mainly coming from 2 Helocs which you bought houses with!

My question is this: what is more important here,....paying yourself first or your debt service? Do you need to pay-off those 2 Helocs before you can save any 'real money' for yourself?

Roy in AL Where is this persons postion? are they just starting out -- mid career or winding down?

When we started out we had debt debt and more debt-- but we used the debt to finance new purchases- more new purchases and then more purchases. Mid career we refied to buy more and pay off some. Winding down now. we have paid off all but 5. (out of 63).

Funny thing is (good funny) we still have no income. We spend everything we make each month. WHY because the paid off houses are our 401 -- are our piggy bank. Many will say yea but what if you need cash? I say if i need cash quick i can hold up the deed on that 150K rental home and auction it off. So I don't get top dollar-- when you want to borrow money at the bank -- you don't get top money there either.

LurkingGirl,

Hypothetically, when income from a day job is used to pay personal living expenses and then rental income is used to pay-down or payoff the rental house(s),...that is an ideal situation to have. I envy anyone who uses this strategy.

Busy (WI)

Explain how 'compounding' works with RE assets. I am done with the stock market.

Well, if RE is the only investment you have available, then guess your best bet would be to follow MYOB s model. Get working towards a larger chunk of houses, where one could quickly be sold for cash if needed.

MYOB

In the last 60 days, I have tried to sell one of my piggy bank houses to get a lump sum of cash which would have paid off one of my 2 Helocs. The house did not sell which means getting cash from my RE piggy bank is not as easy you may think. RE is not liquid. So, I am back to where I started,..paying down debt with monthly rental income.

NE,

The reason I made this post is in hopes of finding someone at the convention who has a similar situation and can offer me some free advice on how to become debt free in this business. If you are that person, I wish you would introduce yourself to me at the St. Louis convention.

Another "Round Table Discussion".

Comparing the amount of Doors (Financed) Versus Money Owed

and how much it (Personally) Bothers Ya, to Carry a Load.

Kinda like a Packmule.

I may not be the one who has the answer you need, but I'll give you my take on it.

Roy, that's just the problem. RE is local. Liquid in some place, not so much in others. And, at a few key points in our history, 1979-1981 ( might be off on those dates,) , 2007-2009, people couldn't give it away in many areas.

I imagine the reason many are opposed to HELOC s is that would likely be taken on one's personal residence? Otherwise, if it's on the rental, then , I, personally, don't see much difference than any other type of debt used to finance rentals.

Paying off debt wouldn't be good if it reduces the income stream, in my never humble opinion. If you could use another HELOC ( or whatever means of financing you prefer,) to purchase and quickly rent out 3-4 more units, could that provide the cash flow to cover all expenses, and pay off a little more each month on those HELOCS?

That would be compounding in RE.

So, maybe the answer is to go bigger . More units. As has been discussed here lately, there is a need for simple, safe, but not fancy housing, keeping the inputs very minimal.

Once the portfolio has enough units to throw off enough to cover accelerated payments on the HELOCs, then maybe do a few more improvements, slowly over time.

That was my biggest mistake- 'guilding the turds' too much at the start. I spent too much time over-improving my rentals, and though I don't have much turnover, and have that list of applicants who want the next Busy property available, I do not have many units. A better use of my financing (credit cards, in my case,) probably would have been to buy more units, fix a lot less before renting, doing projects between the (more-frequent) turnovers. Eventually the units would be improved enough that the list of applicants wanting a Busy property would grow.

I still say putting some cash aside each month is essential. Retirement sometimes finds us, whether we are looking or not. A simple money market account will do. In an IRA, not in an IRA, I don't care. As long as there is a Roy Fund.

Roy, For more than 15 years I worked without pay in my rental business. Like Myob and others, I would roll the earnings into another rental.

But, with benefit of hindsight I believe that I should have always first paid myself from each and every rental payment.

RB,

This 'round table discussion' will be by 'invitation only' since it deals with personal financial issues. I have only provided the 'top of the iceberg' here. The other 80% is only discussed in private.

When I attend Mr. LL conventions, I usually have my 'own agenda' and that agenda involves seeking out other LL's or investors who I can connect with and discuss business issues with.

Not discussing compounding, etc ... although those would be part of calculations for a real numbers guy.

If I have $100 "extra" in my checking account at the end of the month and I pay it towards my HELOC, I've got $100 extra in assets via the earned equity .and $100 less in debt.

If I take that same $100 and put it in the coffee can, I've got $100 extra in assets but still have the same $100 debt.

as you stated above, that $100 in equity does you no good if you can't tap into it.

As I recall, you recently went through the terrible cancer ordeal ... and you are still here with us !!!!!!! So, while retirement is nice and we all need to think about it/plan for it, I truly feel everyone also needs to live for themselves, today. Doesn't mean go hog wild but why not split that $100 ... $50 towards the debt and $50 in a liquid fund ... that that if you are at the VFW Friday night and want to buy a beer for someone, you don't need to think about it ... no need to say "no" to something you want because you have a pile of bricks and dirt but nothing to jingle in your pocket.

Nicole (PA)

When a doctor drops the "C-word" on you, at any age, it will have Sobering affect on you. After the initial shock has subsided, you will begin to think about Retirement in ways you have NEVER thought before. Not just retirement from a day job, but retirement from this world as we know it! I am very lucky to be here.

I have leave here and go meet with my Stump Grinder (Monroe) at a rental property. I need to show him where the underground water and gas lines are!

"Invitation Only".

Aint that Special.

Roy if its the only house you have-- well that's not much of a piggy bank. My example is if I need cash say 50K I have a lake home on 2 ac.s thats worth 200K+ if I have a fire sale guess which one goes first?

I would suggest this may sound weird but i've seen it done on the court steps (by Auctions dot you know who).

If nobody else can help you at the convention, I am a number person.. (We met 2 years ago at the convention, with Sid and Brad and else)

I have over 1.4mil debt and it is going down every month.. I am lucky to have a decent paying W2 job and decent portfolio. I have 2 HELOCs, one is reserve, one is maxed out buying a property early this year.. (at a teaser rate of 1.95%, so I have to pay it off before it hits the market rate of 5+% 8 months later)

In a nutshell, like MYOB said, your rental should be your bank.. Figure out what's your monthly obligation (mortgage, tax, insurance) and quickly you should know how much you can net w/ vacancy etc.

I stopped dumping money back into the mortgage cos "why paying down 5% if you can net at least 8% from other avenue?". It has to be well thought out, controlled activities.. the 8% investment has to be liquid. Or HELOC can cover unexpected expenses.

In a way, this is all really semantics (word games). "Business debt v. personal debt", "business income v. W2 income", "business expenses v. personal expenses."

At the end of the day, it's all money in vs. money out. The source doesn't matter. If you fail to pay, the bank or whoever will foreclose or stop selling you groceries.

No money is no money. Having money is having money.

Like the old saying goes: "It's the same game, only the names have changed."

Knowing what I do about your situation, here are my thoughts for what they are worth, and I realize my situation is different from yours. It's hard to walk a mile in someone elses shoes, so forgive me if I make any bad assumptions. I'll do my best.

Always try to reduce risk. Having a large pile of cash to cover life's little (and big!) curve balls is critical. Yes, absolutely I am 100% in favor of reducing debt ASAP, but not to the point where you have no reserves to fall back on. My financial mentor Dave Ramsey agrees with this model, but that is neither here nor there.

So if I were you and didn't already having this in place, I would build an emergency fund called "Sleep Well at Night" fund. As a "self-employed" person, it should cover a minimum of 6 months of all normal expenses, living, business, debt service, etc. That way if Mr. Nasty-C-word ever comes knocking at the door again, we can focus on healing v. worrying about getting crushed. Money buys time...time to get organized to dealing with a new slice of reality, come up with a plan, and if needed...downsize without going into fire sale mode.

I do this exact thing, although I go closer to 3 months since I am A) married, spouse can have an income if mine fails B) I have a W-2 job in addition. More streams of income and having someone to care for me in times of sickness income = less risk. My goal is to go up an extra month once our house is paid off this year. After that, full speed ahead on rental debt pay-down!

Forgot to answer one of your questions.... pay down debt or pay yourself.

You always pay yourself first, unless by failing to do so you trigger an avalanche. In other words, if the credit cards are paid but you are starving and the utilities are shut off....not acceptable. Let them wait and howl. Same with the bank. Ramsey calls this the "4 Walls"...

* Food

* Utilities

* Shelter & basic clothing

* Basic Transportation

Those 4 come first, always. If money is tight, pay yourself enough to cover those four. Then deal with debts and other expenses.

Great answer(s) Sid - You are right about the semantics,...at the end of day,..it is all about money coming in and money going out!

Yes, you are the person I need to talk with at the convention. I may be buying you drinks at the bar,...LOL.

Elliot - 1.4 mil in debt? How do you sleep at night? Will you be in St. Louis in May?

Roy AL -- see Roy-- your thinking is wrong on debt by your last statement. Elliott owes 1.4 mil-- let's say you owe 50K to the same bank. You get into financing trouble-- who is the bank more likely to work with? we turned 25 foreclosures into 16 free and clearly owned properties using this exact technique. I also help some of my fellow homeowners do the same thing.

MYOB

I do know that difference between $50,000 and $500,000 is just one ZERO. I realize that all debt is relative.

Roy,

Glad your health is good.

God said it better than I can:

The borrower is slave to the lender.

As long as we have debt we will be in bondage.

-sell off an asset

-increase the rents with Brad’s crazy ideas.

-come to Convention and get energized.

1st - YOU are not paying down debt - YOUR TENANTS rents are paying down your debt.

2nd - the paying down of debt IS a retirement plan

3rd - Real Estate is a game in which you always play with other peoples (bank) money

Roy,

Glad to hear that you don't really have a problem or need to sell that cash cow.

I will be at the convention.. we can talk in detail then..

I have to take issue with nhsailmaker's comments regarding item 1 and 3.

YOU are paying down the debt...with rent money you EARNED from your tenant. Think for just a minute: if you had 2 properties that each netted $500/month after all expenses paid...one had $500/month payment and one was owned free and clear....why would the $500 sent to the bank be the tenants money vs. the $500 staying in your pocket from the free and clear property not be the tenant's money? The answer is simple: the full $1000 is your money because you earned it by providing housing. The money you pay to mechanic to fix your car isn't still your money: it's the mechanic's money. So on and so forth for every transaction. Money earned from labor or investment is always YOUR money...until some or all of it becomes the bank's money or goes to pay for something else.

No tenant = you pay with money from your W2 job or somewhere else.

Money is money. As I said earlier, it's money in vs. money out...only the names have changed.

Hi Roy-

I personally focus on the ratio of monthly debt to monthly income (rent). So, 1.4 mil in debt (I have close to that) is fine if the margin of income is high. I sleep fine at night BC my rentals are making a large margin of income.

I have the mortgage payments set up to auto-pay every month, so that way I don’t have to focus on the debt.

-***I focus on the income. ***.

Also, there’s something to be said for debt, especially when tax time rolls around.

I also do have some properties paid off which helps with the entire income picture, but I won’t be paying any more loans off, BC the tax break, and I also don’t need more income.

If more income is needed, then I would pay down some debt to get to a comfortable position. Or I would flip a few houses and take the profit to pay down debt.

Or look into raising rents, $25/mo extra rent for a w/d in to unit, or rent out the garages separately, turn a house into a roommate situation where you rent out the rooms (more work, but maybe worth it) add a third bedroom in a basement or addition if it bumps up the rent by enough to make it worth it.

Everyone who answers financial questions like this should first state their AGE! Because time of life does dictate investment vs. income decisions.

When you are young, healthy and statistically time is on your side it means you can take more risk - as you should have time to recover from any mistakes (and we all make them.)

So as MYOB said, back in the day he used OPM's to buy enough houses to take care of him in his "old age." We did too. We also had W-2 jobs that helped cover cash flow issues.

But now we ARE in our "old age" and Roy is approaching his...it changes the way the game is played. OPM's money becomes YOUR risk because you have fewer and fewer ways of paying them back.

Roy, in our world we have one mortgage left. We could pay it off but it would take much of our reserves, so it's not worth the risk of having less money in the bank, and all that equity in a house. It pays for itself and then some, so to me, that debt is meaningless. It's like the light bill - it won't go away in our lifetime LOL! We are absolutely not in danger of not being able to pay it in any given month, and if it blows down, insurance will cover it.

None of us are 'debt-free.' We all have monthly / annual expenses that will be there forever. What's the difference if it's the grocery bill or taxes or insurance or a mortgage payment? If your income is sufficient to make the payments without pain, who cares what form the debt takes?