Pay off mortgage, or buy another property?

Question

Hey, BP fam!

Would love to get everyone's two cents on my current situation.

I purchased my first property, a 2 bedroom canal-front condo in Pompano Beach FL, this past August. I bought it for $165k with 30% down, and am putting in another ~$20k to upgrade the kitchen, and both bathrooms. It's coming along really well.

I plan to live in this condo for the next two years before renting it out, per HOA policy. When rented, it will cash flow between $200-400/month.

If I can pay off my mortgage in the next two years, it will cash flow at $700-900/month.

I believe I can pay off the mortgage in the next two years by putting 100% of my husband's salary towards the mortgage. We currently live solely off my salary, so it's feasible for our lifestyle. (He's in full-time graduate school and graduates next month.)

OR I can continue paying our monthly mortgage payments and save up towards another down payment for a second property.

Here's where I get confused.

Why would I want two home loans, with each property cash flowing ~$300/monthly, when I can just pay off one home and the monthly income is greater?

Do I let tenants pay my mortgage and I get a smaller income, or do I pay off my mortgage and get a larger income?

I'm leaning towards paying off my mortgage... help a girl out, BP!!

Omar Khan · Answer

Account Closed

Before giving my two cents, I’d like to congratulate you on a job well done.

You are correct that 2 properties cash flowing $300/month < 1 property cash flowing $700-900. But you are not taking into account the risk you are taking by investing everything into one property. Furthermore, you should also take into account the opportunity cost of the funds you will use to pay down your existing mortgage. If you can get a better deal, it might work for you to acquire a new property. This is because you can have a renter pay down your mortgage and taxes i.e. even though the unit will cash flow $300, you are not paying a dime i.e. free money (after taking into account the “cost” of down payment).

To be honest, doing one property at a time will never give you a scale. Eventually, is a #s game. The more other people can pay your bills, the more you should acquire (all things being constant).

As a side note, by investing in a second property, you can also enjoy the capital appreciation which is often times the best part of being a long-term buy and hold investor.

Anthony Gayden · Answer

Account Closed

What kind of investment property could you buy if you had $165,000 cash? Undoubtedly a property that cash flows WAY more than $300, or even $700 a month. In fact if you were to get a 15% cash on cash return with a $165,000 investment, you would be making $2062 a month.

Why do I bring that up? Because it illustrates just how poor an investment it would be to have $165,000 invested in a condo that only pays you $700 a month. Your cash on cash return at that point would be only 5%. Not only that but you would only have 1 door. Meaning that if your tenant moves out, your income goes to $0.

Instead I would put that $165,000 into multifamily. If you are truly capable of saving up that much money in two years, why not go that route and then make a big investment that is worthwhile.

Aaron K. · Answer

Account Closed If you are living in the condo currently won't you have to move and most likely buy another property anyway (primary residence) to see any rental income, or am I missing something.

Brian Schmelzlen · Answer

I certainly understand your mindset, however I would go with the 2nd rental property rather than paying off the mortgage right away.

You might initially have less cash flow, but rental income should increase while your mortgage payment should only be decreasing (assuming you don't have an adjustable rate mortgage).

I also like the idea of having more than 1 rental property because, if each property is cash flowing like they should be, you have more of a financial cushion during periods in which one property is vacant.

Account Closed · Answer

Well the consensus is clear - I should definitely take the cash and invest in more properties! Thank you to @Omar Khan @Brian Schmelzlen @Aaron Klatt and @Anthony Gayden for sharing your insight. I had a feeling it was the 'right' decision to do so, but hearing it from multiple investors has helped clarify my confusion and concerns. I better understand and appreciate the concepts of diversifying our risk and scaling the growth of our real estate portfolio.

I would love our next property to be a multi-family so we can eventually live in one unit and rent out the other(s). Ideally we could buy this multi-family in late 2018/early 2019. I totally agree with you, Anthony, and it makes much more sense to me now after reading your response, so thanks again for sharing.

Another long-term goal of mine is to own and operate a vacation rental in Orlando/Kissimmee. My main concern there is around property management, but that's a topic for another day.

In the meantime, we've been renting our spare bedroom on AirBnB and have netted anywhere from $200-600 per month. While it's a modest monetary cushion, it's been great practice for landlord-ing and VRBO-ing one day.

Thanks again for taking the time to respond to my inquiry and share your two cents with a newbie. You're awesome.

Pay off mortgage, or buy another property?

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