Mortgage Paid- Off Rental Properties-- Good strategy?

Question

We have 2 single family rental homes in California which have no mortgages.  Cash flow is relatively high since only property taxes and insurance are outgoing payments (and necessary maintenance/repairs).

The properties have been owned for about 5 years and have appreciated significantly (about 35%).

The question is, should we mortgage these properties and use the cash to purchase additional investments?  A mortgage would lower our cashflow, but potentially allow for additional rental properties.  We are both retired and mainly use the cash flow for international travel.  Additional properties would mean even more time invested (or a management company).

What is the general thought on mortgaging a paid-off rental property?  Good investment idea?

Chris Mason · Answer

If you guys are retired, and the cash flow is already enough for you and your wife to travel the world, why do anything that involves risking the sweet setup you already have?

I'm a mortgage guy, and my license is good in all of CA, so I'm supposed to look at every problem as something a mortgage can solve... but I don't actually see a problem here or any need for any mortgages (don't tell my management I said that :P ).

If you were younger and not already set for life, I might have a different opinion. But it sounds like you guys are 100% all set to enjoy your golden years stress free. You're exactly where a lot folks around here WANT to be in a decade or two, completely financially independent, etc, and I don't see why you'd want to risk that (& any investment property is a risk). Unless you just WANT more properties to manage or something, which it sounds like you don't.

But, yeah, I'm going to suggest that you actually DON'T need any more mortgages or complications in your lives.

Go enjoy your golden years with your wife, never talk to anyone in my profession again, and I tip my hat to you sir for your success!

Michael Davis · Answer

In answer to question about remainder of portfolio - about $500K in 60-40 bond/equities fund + 2  retirement pensions.  At the end of the year, after taxes, we have about $50K of vacation funds (without pulling from the portfolio which we consider our last resort savings).  We'd use any additional cash flow to increase the vacation fund amount, which in my view could never be too large. No primary home mortgage, nor any mortgages on the 2 rental properties.  Yes, we'd be able to qualify for additional mortgages.  We have a $100K HELOC against one of the rental homes, but have never used it, nor do I expect we would use that, so it could easily be eliminated.

James Paine · Answer

@Michael Davis -

What are your goals?  What does the rest of your retirement portfolio look like?

What would the additional cash flow do for you?  Are you able to qualify for additional mortgages?

Michael Davis · Answer

Thanks for this input.  I will search the forum for other similar questions and see which answers best fit our circumstances.  I didn't mean to ask a question that had been answered many times before.

Account Closed · Answer

Why not trade the cash flow for a lump sum mortgage?  No need to reinvest.  In a few years rents will increase enough to repeat and appreciation will keep your loan to value the same or better.

Brit Foshee · Answer

@Michael Davis

If you search the BP forums you'll find this particular topic 100's of times and there are strong beliefs on either side of this debate.

I think each person is unique and their situation is unique.

For me and my situation, I wouldn't hesitate. I would leverage those in a heartbeat or potentially 1031 them if that makes better sense.

Mortgage Paid- Off Rental Properties-- Good strategy?

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