Pay off my house and buy smaller apartment deal, or keep loan on house and buy bigger apartment deal.

[Rob Brown]

I got into real estate investing at a young age (19) and have bought and sold primarily residential properties since then. I have owned commercial property before (office buildings, shopping centers) but I thought I was too highly leveraged and divested of the commercial property (in Las Vegas) prior to the market collapse (thank god). In 2010 I went all in buying single family homes in Vegas all cash and for around 50-65k each and they are all worth 110-135k today. I'm in the process of selling all the single family homes in Vegas and taking profits to get into a smaller number of larger deals in California where I live (San Diego). 

To buy more of the single family homes in Vegas, I took out a 500k HELOC on my residence in San Diego and fully invested all the money in the Vegas houses. Since I started selling all the Vegas houses, I have paid off the HELOC and have considerable cash reserves from the sale of those assets and other sources. I haven't been a big apartment investor in the past; however, I know the business well from being a broker and syndicator of this asset class.

Should I pay off my house fully (699k 1st mortgage, home is worth ~1.5M) and invest the balance in the best apartment deal I can find, or should I keep the 699k loan on the house and invest in a slightly smaller property. I know rates are low now, and I could get a 3.25% 15 year fixed...or a 4% 30 year fixed. My experience with leverage (seeing what would have happened if I still owned those shopping centers in Vegas through the real estate crash 2008-present) has scared me from highly leveraged in my 20s to a lot more conservative in my 30s. 

What does everybody think? Keep the loan, or pay it off? 

FYI the home is an ocean front condo that can generate 60-75k in NOI after expenses as a vacation rental if times were ever tough....so if I keep the loan I would be sure the loan amount has a 1.25 debt coverage ratio on projected NOI should I ever need to rent it out. I plan to put 25-35% down on a 3-5M apartment property for my first deal in San Diego. I haven't invested in stocks and bonds since 2008..but plan to take my savings from passive income and active income and invest 75% in real estate and 25% in stocks and bonds either way (the bigger prop, or paying the loan off with the smaller prop)

My only other debt is a 366k loan on an 800k rental property that brings in 48k per year in NOI after all expenses with a track record going back to 2009 so I feel that one is safely cash flow positive. No credit card debt, no payments on anything except the two real estate loans.

[Dave Savage]

Personally I would keep the leverage on your SFH as it should be cheap money and will allow you to leverage into a bigger apartment building or multiple buildings to diversify your risk using that capital. You can keep your down payments high on the apartment buildings to lower your risk.

Not using the equity in your house to leverage into greater income producing activities would be a losing proposition over the long term from a return prospective even if you are very conservative with your leverage as you are an experienced investor and should expect to make safe bets.