Pay off current mortgate in full before buying another home ?

[Omar Luna]

Hi everyone, my wife and I are looking to turn our current residence into a rental property. We have about a year and half before the mortgate is paid in full. We will be putting 20% for our next home, we would like for our rental property to cover 80%-100% of the new mortgate payment. This could help us to save another 20% for the next rental property much faster. We would love to get some feedback if this would be a good route or not, any ideas, suggestions, recommendations would be greatly appreacited. 

[Nathan Gesner]

Before you pay off your primary home, you should research the benefits of having a mortgage.

When I buy $10,000 worth of stock, I reap the benefits of that $10,000. When I invest $10,000 in a $100,000 rental property, I reap the benefits of $100,000 and not just the $10,000 I invested. I also get to deduct mortgage interest from my taxes, reducing my taxable income.

I only recommend paying off property when you're done investing and want 100% security. As long as you are considering growth - even slow, steady growth - there are great benefits to keeping a mortgage.

[Nathan Gesner]

Before you pay off your primary home, you should research the benefits of having a mortgage.

When I buy $10,000 worth of stock, I reap the benefits of that $10,000. When I invest $10,000 in a $100,000 rental property, I reap the benefits of $100,000 and not just the $10,000 I invested. I also get to deduct mortgage interest from my taxes, reducing my taxable income.

I only recommend paying off property when you're done investing and want 100% security. As long as you are considering growth - even slow, steady growth - there are great benefits to keeping a mortgage.

[Theresa Harris]

Part of it depends on your goals and comfort levels.  For me the benefits of having a mortgage on a rental are the tenant is paying down the mortgage for you, you can write off the interest, it frees up money to buy more places.  My primary is paid off and as I have less than 10 years before retirement, I will have some of the rentals mortgage free by then.  The latter is because it will provide me more income during retirement without a mortgage and I'm already at my borrowing limit.  And if I want a lump sum payment, I can sell one.

Everyone has different goals, so make sure you do what is right for you.

[Ali Boone]

Have you run the numbers on your primary home to know whether it will cash flow at all, or meet your desire for it to cover some part of your new mortgage? I assume you are talking about when the mortgage is paid in full, so the rental income would not be less the mortgage payment. The other option is that if that mortgage is about to be paid in full, you could refinance it, pull out all of that equity, and split it between several rental properties and not just one. I would run the numbers on both the scenarios--the scenario you mention and figure out the path to that next 20% down, and then the scenario of pulling out that equity and getting several rental properties initially- would that income cover that refinance.

[Susana McIntosh]

Aloha Omar,

I hope all is well. I'm a STR investor here in Hawaii. I own vacation rentals on both the Maui Island and the Big Island of Hawaii. Have you looked at taking equity out of your current residence property to work for you? It's sitting there doing nothing.

I started as a W2 worker. I used my first W2 ever to purchase my first short term rental on the big island. The first property zone as STR, but the previous owner rented to a long-term tenant for $1600 per month. After I took title, I turn it back to STR and monthly I'm grossing $6-7k per month. After 6 months later I took my ROI together with my W2 and purchase my second STR. I did the same thing after another 6 months went by.

A year and a half later in 2020, I took the two short term rental income I received from those rentals, combined it together with W2 once again to purchase my third one. I was working on ships at this time when Covid came along and became unemployed. What happened then?

I called the bank up and let them know that our ship is stopped sailing and therefore will have to hold on the loan. But guess what I did next to that same third property I was under contract with? I proposed a seller finance with the seller for a one-year contingency upon financing. The seller really liked my deal because I'm only financing it for one year, and she has the first lien on the property. I was then buying myself time to still finance this property.

Next- I came off the ship and took a W2 job here on Maui and refinance this same property within a year, and the deal was done. This third STR I purchased during covid was closed at $275k. It was the lowest sold at this Big Island condominium ever. Few months later the market took off, and the last sold here was at 600k with only one for sale on the market right now asking $747k. I gross last year $96k at this same condo.

With this new W2 I picked up, I purchased my last condo here on Maui and I can't wait to share its return by the end of this year. Afterwards, I let the W2 go and now living out of my cashflow and became a full time Real Estate Agent. I'm working on taking equity out of my properties to purchase my next vacation rental.

I wish you luck and I hope these ideas will help you to create different ways of investing. God is great. He will provide you with all the strength you need to proceed with your goals in life. I don't want an easy life, but the strength to fight through each day. 

Mindset is the most import part of your everyday life. Stay positive and you can do this!

[Ruth Blue]

@Omar Luna

Hi Omar

I understand your want to pay off before buying and moving forward with new investment. Have you read Robert Kiyosaki 'Rich Dad Poor Dad'. It was eye opening for me on how to use other people's money to pay for the lifestyle I wanted to live. Your in an amazing position having so much equity in your home. I wish you luck.

[Erik Browning]

@Omar Luna congrats on the approaching payoff! You are in a great position to achieve your goal. Without knowing specifics on your scenario, it’s difficult to know exactly your best option. Please check your inbox :)

[Bill B.]

You want your maximum debt on your primary where you will save at least 1/2% on the interest rate. What ever amount you were going to pay on your home, borrow that much less at the higher rate on the rental. This will save you at least $1,000/year per $200k borrowed. 

When you’re done buying you can pay them off 1 at a time with the highest interest rate (to save the most money) or the lowest balance a(to increase your cashflow the fastest.) you’ll find that 5 paid off properties cover your “needs” and 10 paid off properties are way more than enough to live comfortably on if you’re not living the lifestyles of the rich and famous. 

Especially if you buy the ones you’re going to keep in states without income tax. That’s worth another $15-$20k/year. 

[Rodney Sums]

Quote from @Omar Luna:

Hi everyone, my wife and I are looking to turn our current residence into a rental property. We have about a year and half before the mortgate is paid in full. We will be putting 20% for our next home, we would like for our rental property to cover 80%-100% of the new mortgate payment. This could help us to save another 20% for the next rental property much faster. We would love to get some feedback if this would be a good route or not, any ideas, suggestions, recommendations would be greatly appreacited. 

 Your approach would be the way to go if for example you wanted to work less and didn't plan to invest more.

You expressed wanting to invest in more properties. Share the following so everyone can give you more specifics to consider and show what option would be best:

How much do you owe on the property?

what is it worth? 

How much can it rent for?

How much do you need to put in to it for it to be rent ready?

You may be able to use equity in your home to buy multiple investment properties vs risking home prices and inflation going up as you're saving down payment for one property.

[Omar Luna]

Hello Rodney,

How much do you owe on the property? $10,629what is it worth?

How much can it rent for? $1,700 - $1,950 

How much do you need to put in to it for it to be rent ready? $10k - $15k 

[Erik Estrada]

@Omar Luna 

Instead of putting 20-25% down on the next property, it might be a better idea to put 5% for another primary and leverage out your rental property and buy a third rental. Use the additional 15% to renovate both properties and now you have two cash flowing properties. 

[John McKee]

If you are trying to grow your wealth then paying off your home is the wrong strategy. Get the heloc on your home as it will be cheaper than refinancing. This will give you about 75% access to your equity for which you can invest. Once you have the heloc secured, then use it as a rental. Buy that second home with 5% down, and then use your heloc to buy more properties. I would advise getting that HELOC ASAP as the market may start to decline, so you want to maximize the highest equity you can get now.