Pay off rental mortgage early, or keep making payments?

[Aaron K.]

Hi guys, I'm admittedly a bit math-challenged, so I'm having a difficult time running numbers on which option will serve me better in 10 years, 15 years, and 20 years. I tried making spreadsheets but I'm more confused now than when I started.

I'm 32 and own a single-family house which we originally lived in for a couple of years but now rent out. We bought it 7 years ago for $340,000 with a 30-year mortgage at 4%. Our current cash payoff is $240,000 if we were to pay off now. We've already paid about $100,000 in mortgage payments, and if we keep making payments on it instead of paying it off now, we will pay another $360,000 total over the next 23 years. Mortgage payments are $1200, and escrow for tax/insurance is another $1100, for a total of $2300/month.

Rental income from the house pays for ALL expenses - for round numbers, figure $2400/month - so overall the house doesn't cost us anything, but it also doesn't make us anything. I'm basically trying to figure out if it's a better idea to:

a) pay off the mortgage now for $240,000, and take the extra $1300/month for income (or invest in something like Vanguard for 5% each month), or

b) keep paying the mortgage for the next 23 years, get no income from the property, but invest that $240,000 lump sum elsewhere (probably another rental property at 8-10% in this area).

What's the way to calculate which is the better option over the course of the next 5, 10, 15, 20 years?