Lump Sum Investing or Pay off Rental Home

[Will Costello]

I have a rental home with approx. $87k remaining on the mortgage (6% rate, 20yr, currently at month 57 of 240). I will be receiving approx. $91,500 tax free; more than enough to pay off the mortgage immediately.

I want some advice/thoughts around the options:

KEEP INVESTING MONEY - Assuming a 6.6% return on investment over the next 5 years, invested in Total Stock Market Index, this value would be worth an additional $38,915 in growth or original capital ($91,000) and $18,000 from cashflow. This is assuming I continue to invest the $300 per month cash flow from this rental. TOTAL = $56,915 Additional dollars.

PAY OFF RENTAL + INVEST CASH FLOW - By paying off the mortgage, I will increase the cash flow to approximately $1000 per month. Assuming the remaining amount of cash I have from windfall ($4,500) plus the monthly cash flow ($1,000) in the same investments over 5 years; I have Gained a total of $60,000 from my renters, and $12,610 in growth in the same stock. Net $72,610 just from rental income and growth. This does not include the $23,480 in interest savings as well by not paying bank. Total = $96,090

Is the math as simple as looking at the two numbers($56,915 and $96,090) and seeing which is higher? Would I need to subtract the interest savings from the second number cause it isn't an actual gain? So $72,610?

This is all considering no vacancy or capital expenses....but I just want to leave those out for this exercise. We also don't need to think about tax implications at least for the next 5 years. Just trust me on this one. 

Thanks ahead for helping me think through this one.

[Zen Lenon]

Quote from @Will Costello:

I have a rental home with approx. $87k remaining on the mortgage (6% rate, 20yr, currently at month 57 of 240). I will be receiving approx. $91,500 tax free; more than enough to pay off the mortgage immediately.

I want some advice/thoughts around the options:

KEEP INVESTING MONEY - Assuming a 6.6% return on investment over the next 5 years, invested in Total Stock Market Index, this value would be worth an additional $38,915 in growth or original capital ($91,000) and $18,000 from cashflow. This is assuming I continue to invest the $300 per month cash flow from this rental. TOTAL = $56,915 Additional dollars.

PAY OFF RENTAL + INVEST CASH FLOW - By paying off the mortgage, I will increase the cash flow to approximately $1000 per month. Assuming the remaining amount of cash I have from windfall ($4,500) plus the monthly cash flow ($1,000) in the same investments over 5 years; I have Gained a total of $60,000 from my renters, and $12,610 in growth in the same stock. Net $72,610 just from rental income and growth. This does not include the $23,480 in interest savings as well by not paying bank. Total = $96,090

Is the math as simple as looking at the two numbers($56,915 and $96,090) and seeing which is higher? Would I need to subtract the interest savings from the second number cause it isn't an actual gain? So $72,610?

This is all considering no vacancy or capital expenses....but I just want to leave those out for this exercise. We also don't need to think about tax implications at least for the next 5 years. Just trust me on this one. 

Thanks ahead for helping me think through this one.

Hi there @Will Costello, Pleasure to meet you on BP. 

Let's dig into some numbers to give you a clearer picture. I think this is how I understand your situation to be...

Cash Flow Analysis: 

Option 1: Total cash flow from stock growth: $38,915

Option 2: Total cash flow from rental income and stock growth: $72,610

Return on Investment (ROI): 

Option 1: Initial investment: $100,000 Gain: $56,915 ROI: ($56,915 / $100,000) x 100% = 56.9%

Option 2: Initial investment: $100,000 Gain: $72,610 ROI: ($72,610 / $100,000) x 100% = 72.6%

Break-Even Point: 

I don't have the numbers for growth rate, rental income growth rates, I do know your cash investment per month so I'll reverse engineer and pretend you get $300 cash flow per month instead :) oh and I don't have the timeframe so I'll just use your 5 year timeline, I'll also use the 22.7% growth rate in Las Vegas Rental market :) You can always plug in your actual growth based on your data points.

Option 1: Keep Investing Money Assuming an initial investment of $10,000 and a monthly cash flow of $300, after 5 years with a 6.6% annual growth rate, the total money from Option 1 would be approximately $16,605.

Option 2: Pay Off Rental + Invest Cash Flow With an increased monthly cash flow of $1,000 and assuming a steady annual rental income growth rate of 22.7%, after 5 years, the total money from Option 2 would be approximately $18,899.

Therefore, based on these calculations, Option 2 would catch up to Option 1 by the end of the 5th year.

Okay I am not a financial advisor/lender but that was a fun exercise. Please don't take my word for it and consult with a CPA/a financial expert :) Thanks for sharing. Always consider your risk tolerance- everyone is different-, your long-term goals, and the impact of those costs we intentionally removed and risks as well.

So if I had to make this decision today, I would focus on option 2. Choose the strategy and find ways to iterate and make it even better. Good luck and again nice to meet you!