Pay down rental properties or buy another?

Question

What would you do in our shoes? We are in our early 30’s and own 2 very lucrative rental properties that we manage ourselves. One was purchased using a 15 year mortgage and the other a 30 year and we have about 13 and 28 years left respectively. We owe about $225,000 on the mortgages currently and have been considering paying them off over the next few years. Would be the most conservative use of our funds.

That being said, we are still young and I’ve always been relatively aggressive with our investments and it has paid off. We’ve been really considering getting into the vacation rental market. We have met people who tell us about earning $75,000+ /year on properties they spent $300,000-$400,000 on initially. That seems like really great income potential and perhaps a better (if not potentially riskier) use of funds.

If we went the vacation rental route, something near us would have its appeal (we live a few blocks from the beach in a nice little Florida beach community) because we could manage it ourselves much easier. But to me at least, part of the allure of a vacation rental is to have something my family can go spend time at when we want to as well. Markets we are familiar with and have considered are: Sanibel Island, Florida Keys (Sugarloaf it Key West most likely), and the USVI (specifically St Thomas and St John). Open to suggestions though! What would you do!?

Justin V. · Answer

@Chris HughesHi Chris,It sounds like you are making money and ready for more. I say leverage your existing properties and keep on rolling. I’m pretty green yet, but a big fan of the “leverage to quickly hit my freedom number” mentality. I’ve seen the power of a brrrr and hard work from my first property property rolling into the purchase of my second. My friends sometimes ask me if I plan to pay down my properties, so I put it probably a little too simply (without some factors). Let’s say I cashflow on 1 duplex property 1000 per month with a $1000 mortgage. I can pay that note down and cashflow $2000 per month. Or I can get 4 (25% down each) of that same duplex, cashflow $1000 each ($4000 total) and let the tenants pay down 4 mortgages in the same amount of time.I’ve played with the idea of doing a vacation rental, because I know they can earn 60% more per month, but I’ve stayed away from it figuring it’s more like 500% more work.Just my thoughts based on my very limited experience, but good luck in whatever route you decide!-Justin

Stephen Akindona · Answer

@Chris Hughes, You guys are young and have the element of time on your side! I would be aggressive in acquisitions too! One thing to consider is vacation rentals is for the most part unregulated and as it's popularity grows you can definitely expect the government to get involved and regulate. It is already happening in some our markets in the country. Just make sure any vacation rental property you buy you have an alternative hold or exit strategy in case vacation rentals are no longer a viable strategy. (For example, extreme taxation or rules about non-owner occupied properties being eligible for vacation rentals. Some of these rules will be changing in the future!)

Pat L. · Answer

In my younger years I paid down my mortgages hard. But I was dealing with double digit % rates. By the time interest rates subsided I had a lot of equity. Then I started to refi & seriously accumulate. If I was your age making what I did then with todays rates I'd be very aggressive.I have friends that have become chambermaids for their AIRNB's & complain that its a lot of work & a couple of them have had to deal with serious damages. BUT at our age everything is free & clear & direct deposit. Life is good !!!

Matt Adelman · Answer

@Justin VoegeleI like the approach!

Jerry W. · Answer

@Chris Hughes, what others would do is not what is always best for you. If it were me and I were young again, I would be prone to roll the dice and try a STR. However be smart about it. If they change the rules and you cannot short term rent it, have a safety net of being able to rent it as a long term rental and at least break even. If the area is appreciating in value as you mentioned you can make some money from appreciation. By break even I mean pay taxes, insurance, mortgage payment, and 5 to 10% for maintenance, and 5% for cap ex, and 8 percent for vacancy. While you want to grow your business don't be rash and risk it all by having the laws change. Good luck either way. By the way I have done both long term and STR. Str is a LOT more work.

Chris Hughes · Answer

That is a great point @Stephen Akindona ... I’ve already seen regulations “change the equation” for some in communities that went from zero to, “no less than 90 day leases”. That obviously can make a huge impact on the ability of a unit to be rented. I guess we’ve been doing the whole LTR thing for a while now and have been interested in something a little bit different with some upside potential. The market is grossly inflated right now as well so buying another LTR locally isn’t as appealing at the moment.

Alan Grobmeier · Answer

@Chris Hughes, str’s are very time consuming when compared to LTR.I’d add more LTR’s (slowly) and watch the positive cash flow roll in. Best of luck!