Want to increase cashflow - should I payoff mortgage or buy another property

[Joe Kato]

I have a SFR that was my primary residence until I moved out of the state. It has been a good rental for last 4 years, but I need advice what to do with it. I have about $30K equity in the SFR if I sold it now.. I have since bought 2 multi-families that cashflow ~$800/mo, and the out of state SFR yields about $30/mo. If I payoff the mortgage ($50K) on the SFR, I can increase that property cashflow to $600/mo. Or I can use $50k for another multi-family down payment..

I am a little leery about continuing to buy in my home area as the market is flat, not much job growth, high taxes, etc. So paying off an existing mortgage is a safe bet to increase cashflow, but then I read others suggest to hold more mortgages to reduce your risk if the house market tanks and you can't sell it, you can cut losses and run for less than if you own the home free and clear.

Thoughts?

Cheers

[Chris Clothier]

Hey Joe -

Welcome to BP! As someone who has faced your questions and I faced them when the economy was good and the real estate market was booming, I would pay off the mortgage of the existing property and increase the monthly dollar return you are getting. The percentage may not go up, but it sounds like you are not concerned with percentages - you are concerned with cash flow.

I would say the exact opposite of the advice to buy more with leverage as a hedge against future real estate properties. Properties with mortgages are not easier to sell nor are you able to cut and run for fewer dollars. The dollars you have invested are exactly the same. The difference will be that you own your home free and clear and are not worried about a financial issue if the market tanks. You will be concerned with can you keep the home rented for the same rent each month. You would have a free and clear performing asset that you could leverage for at some point in the future if you needed to or sell without the worry of a lein to pay off. You would have greater flexibility.

In my opinion, just based on what you wrote, I would pay off the existing mortgage, enjoy the cash flow and maybe start saving for another down payment on a second property in the future.

All the best to you -

Chris