Sell Rental, Pay off our primary home??

Question

Here is my situation...
We OWN a rental property...currently trying to sell it. 
The reason for trying to sell is that if we sell we can pay off our mortgage on our primary residence.
Can anyone tell me if there is any reason we should keep the rental and continue to pay on our primary home? Besides value of property value going up over MANY years?
Here are the #'s:
Rental: Get $500 a month after insurance.
Primary: Pay $400/month to bank. 
I just don't see the point in keeping the rental just to give that $$ to the bank for our primary mortgage! 
Appreciate any feedback!! I am fairly new to all this house stuff!

Account Closed · Answer

While it is true that the total paid out may be 2-3 times, what you are missing is that you are not the one paying, a tenant is and you have two homes instead of one.  Every payment means more equity is built up and your net worth over time will increase.

Brendan J. · Answer

Steve, I agree with you. But, isn't this business about mitigating risk? Sure you might miss 1 or 2 months of rent per year, but haven't we planned for that? We do our due diligence and buy properties correctly because we can afford to have a property cash flow 10-11 months a year and still come out ahead.

While I agree that someone who is too gung-ho about using others money can benefit from hearing about frugality, and planning for missed income, I somehow think that we don't need to warn a 500 lb person about anorexia.

If the man is REALLY focused on in the free and clear, why not expand his horizons just a tad? I don't think it could hurt.

Brendan J. · Answer

The reason..... leverage.

You say "OWN" in all caps so I'm assuming you're trying to distinguish that you own it in the free and clear. Good.

Josh, lets say your home is valued at $200,000 with $100,000 left on the note. Your rental property that you own free and clear is worth $100,000. You propose selling property B and paying off the $100K owed on property A there by owning only your primary free and clear.

Okay, well here is why that doesn't make sense. Leverage. If you only own your primary residence that has $200,000 in equity and there is a 5% appreciation in home value this year, you make 5% in equity gains because all of the money in the house is YOUR money. If you have $100,000 in your primary and $100,000 in your rental, you make 7.5% AND someone else is paying your mortgage for you.

Josh, if you're trying to grow your money, you can do MUCH better.

Refinance your primary to 25% equity and do a cash out re-fi on your rental to 25% equity as well. This frees up $125,000 for you to BUY MORE rentals with. You put down 25% on them and are able to buy 5 more properties worth $100,000 each.

Okay, where are we now? You own 6 rentals that pay their own bills and actually cashflow enough to pay your mortage as well. Let's say you're cash neutral. If you followed the same line of thinking that you demonstrated earlier, you might find that to be of no benefit to you, hench your reason for selling in the first place.

NOW, here is where it gets interesting. That same 5% appreciation in the housing market actually nets you 20% equity gains under this situation. If you owned your home outright, you'd make $10,000 in equity gain, if you owned your home and 6 rentals, you'd make $40,000!!!!!!

What do you think you should do?

Jeff S. · Answer

Josh-they say most people's biggest asset is their home. If you have 2 homes you just doubled your largest asset.

Adam B. · Answer

You could keep putting your mortgage payment (after you've paid off your house) into a savings account until you have enough to pay cash for a rental again.  Then snow ball that cash flow into another rental years down the road... and so on...

One thing to think about if you do sell your rental is the taxes you will have to pay.  I don't know how much gain you have in the property, but if it's enough that taxes might offset the interest you are trying to save on your mortgage.

Nick Henson · Answer

Although all the advice you recieved here is very good and valid, there are 2 differnet schools of thought and the difference is in motivation. It sounds like you are leaning towards becoming "debt free" while all us business oriented thinkers hear you walking away from more investment opportunity and building on what you already have. It's a matter of your desired end result. Good luck either way!

Josh Christians · Answer

I really appreciate all the feedback!! Yes, we do OWN our rental property free and clear. Another thing that also pushes us towards selling is that we are wanting to move closer to family...but, let's forget about that cause I like hearing the thoughts on this.
Thanks for explaining leverage...made it easy to understand.
Still don't quite understand what you all are saying..."having rental paying for our mortgage"...sure it is, but, you are also paying three times the value of the house in interest over the life of the loan!
Seems to me the simplicity of just having our primary paid off is the way to go for ME...at this time in our lives...2 little boys to take care of! I want to jump back in in the near future when we are in a more permanent location. Once again, Thanks!!

Account Closed · Answer

There are many disadvantages to selling the rental to pay off your personal residence mortgage.

Like Steve said the rental provides income that can be used to pay your home mortgage. Nothing like having someone else paying your mortgage.

You would be giving up some tax benefits.  You mortgage interest is deductible.  You would also lose the tax benefits of the rental property.

Good leverage allows you to put more of your money to work for you.

Steve Babiak · Answer

I look at it a little differently.  A tenant is paying off a house for you as long as they are renting.  Once that stops ... well, who else will pay off a house for you?

Just be sure that you aren't having to pull money out of your pockets to support a tenant living in your property (i.e., avoid negative cash flow).

Loc R. · Answer

What is the mortgage payment on your rental property?

Sell Rental, Pay off our primary home??

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