Pay Off STR or Invest in Another Property?

Question

My husband and I are trying to decide whether or not to pay off our first (and only) STR in Palm Desert. We bought a 1 bedroom condo in July 2024. November has been our only cash flowing month (barely), but we anticpate cash flow from Jan-April '25. Interest rate is 7% and HOA is high ($760). We're trying to decide whether or not to pay it off or save to buy another property. My husband leans toward paying it off which will eventually provide passive income for re-investing. I'm torn and eager to dive into another investment that will cash flow year round.

Any and all advice or thoughts are much appreciated. Thanks!

Any and all advice or thoughts are much appreciated. Thanks!

Jorge Vazquez · Answer

Hi, Kiiley. Within my 20 years of experience, owning 30 properties and managing over 300, I've found that the question always comes down to this: Can you do better than the rate you're paying—either by saving more or making more? With a 7% interest rate and high HOA fees, the key is evaluating if your skills and investments can generate higher returns elsewhere. If you're confident you can find better cash-flowing deals or scale your portfolio with leverage, it could make more sense to reinvest rather than pay off the loan. Pick a lane based on your strengths and long-term goals.

Sean Barnebey · Answer

It sounds like you're at a crossroads between two strategies—both of which have valid points. Here's my take on the decision:

First, let’s look at the pros and cons of paying off your current short-term rental (STR):

Paying Off Your STR

Pros:

• -You Eliminates your largest fixed expense (the mortgage), which increases your cash flow significantly.
• -Provides peace of mind knowing you own the property outright, which can reduce stress, especially if income fluctuates during slower seasons.
• -Creates a solid foundation for passive income, allowing you to reinvest future cash flow into other opportunities without as much financial risk.

Cons:

• -Ties up a large amount of capital that could potentially be used to generate higher returns elsewhere (like another STR or other investments).
• -Your current STR seems seasonal, so even without a mortgage, you may not achieve year-round cash flow. This could limit reinvestment potential.
• -Opportunity cost: A 7% interest rate isn’t great, but if you think you can achieve returns higher than 7% by buying another cash-flowing property, paying off the mortgage might not be the best use of funds.

Now, let’s explore saving to buy another property:

Investing in a Second Property

Pros:

• -Diversifies your portfolio, reducing risk if your Palm Desert STR underperforms or faces challenges (e.g., stricter regulations or lower demand).
• -A second property in a more year-round market could stabilize your income and provide steady cash flow even when Palm Desert is in its off-season.
• -Leverages your current momentum and enthusiasm for investing, potentially accelerating your path to financial freedom.

Cons:

• -Requires managing two properties, which could add stress unless you already have a system in place (or plan to hire a property manager).
• -If your first STR continues to underperform or face seasonal challenges, it may stretch your finances too thin.
• -Higher interest rates and costs for the next property could reduce returns, especially if cash flow projections aren’t realistic.

Key Considerations

• Cash Flow vs. Wealth Building: Paying off the first STR focuses on cash flow and financial security, while buying another property focuses on scaling and wealth building. Which aligns better with your goals right now?
• Market Analysis: Palm Desert seems seasonal, so the cash flow challenge might not improve significantly without some adjustments. Before committing to paying off the property, analyze whether there are ways to optimize revenue, such as better marketing, adjusting pricing, or upgrading the property to attract higher-end guests.
• Return on Capital: If you pay off the mortgage, the “return” is essentially the 7% interest you’re saving. Ask yourself if you’re confident you can achieve a higher return by putting that money into another property or investment.
• Reserves: Do you have a strong emergency fund? If not, paying off the STR could leave you vulnerable to unexpected expenses or downturns. On the flip side, saving for another property could delay financial stability if unexpected costs arise.

A Balanced Approach

If you’re still torn, consider a hybrid strategy:

• -Focus on maximizing your current STR’s performance. Use the slower months to refine your operations and marketing strategy to boost occupancy and revenue.
• -Save for the next property but consider refinancing your current loan in the future if interest rates drop, potentially improving cash flow.
• -Allocate a portion of your funds toward extra payments on the current mortgage while also setting aside money for a new investment. This reduces your interest burden without fully tying up your cash.

Ultimately, the right decision depends on your risk tolerance, long-term goals, and current financial position. If your goal is financial freedom sooner, scaling may make more sense. If security and consistent cash flow matter most, paying off the STR could provide a strong foundation.

Just some things to think about based on my opinion. Hope this helps! Best of luck!

V.G Jason · Answer

So first, I'll answer your question then I'll tell you what I would do if that matters or you care.

1) I don't see a need to choose one or the other. Which leads me to 2.2) I'd recast, not pay off the current position. I'd recast to get it to a min 1.5 DSCR. Then the rest of the time, the net income goes 50% reserves, 50% towards 2nd rental property. And the remaining income you have from not paying off, but recasting, goes towards 2nd rental property.3) On the second rental property, I would only buy with more down/intrinsic. Minimum 1.25x DSCR. This might change your timeline, but better to get in from a position of strength than have this conundrum. And last but not least, I would absolutely and totally avoid HOA-based properties. Which leads me to my final point, but not numbered.

If I was you, I'd sell this property and 1031 into a non-HOA property that is attractive to own and fits #3 profile-- 1.25 DSCR + healthy reserves. This may even get you closer to #2, and a whole lot of financial stress.  Keep the timeline to own minimum 7-8 years, ideally 12-15. Keep healthy reserves. This is a cold, and harsh world, and we're right at the start of it. Buy strategically, and if you do it right you may be able to get that 2nd one quicker than you originally thought and sit in a better position than you do as of today.

Mya Toohey · Answer

How is your market right now?  If you have any equity in the place, then try and sell it.  As long as you don't lose money.  The thing about condos is the HOA will go up and your mortgage stays the same so you will end up losing by the end of the mortgage.  I would reinvest in a another property and use a 1031 exchange to detour taxes.   Ask an expert of course but that is my idea for it!  Best of luck!!!

Theresa Harris · Answer

A HOA of $760 a month is what is likely killing your returns.  Does that include any utilities?  I agree with Jorge-can you do better than 7% with your money?  If you want to buy another rental, then saving your money for that (assuming you have room to borrow more money) is probably the better idea.

Zeona McIntyre · Answer

My vote is if you are going to continue to buy, you need to utilize leverage. I would not start paying off properties (if at all) until you are done buying as it will slow you way down.

A few things to consider. Can you invest that money that would be used to pay it off in places that earn more than 7%? Absolutely you can, I rolled over my IRA into a fund making double-digit returns.

Next, I tend to recommend that clients stay away from inflated HOA fees. I find that depending on the market $300-500/mo are fairly normal and if compared to what you would pay with a single family home on some utilities, maintenance, and management, it's a good deal. When I see ones much more than that like yours in the $700s to well over $1000, run. Those can indicate poor management, deferred maintenance, difficult and expensive upkeep like ocean front which will bring up issues with rising oceans, insurance, and hurricanes.

I'd wait this one out until rates lower and you can refi and learn from it to buy better the next time around.

Melissa Haworth · Answer

That’s a tough call, but a good problem to have—congrats on your first STR! Here’s my two cents:

Paying off the condo might make sense if your main goal is to reduce risk and enjoy the peace of mind that comes with no mortgage. With a 7% interest rate and a high HOA, it could definitely help your cash flow in the long run, especially if you’re looking for passive income to reinvest later. Plus, having a fully paid-off property could be a nice safety net if the STR market takes a hit or occupancy slows down.

On the flip side, if you’re eager to grow, saving for another property could be the better play. A second STR in a market with year-round cash flow potential might balance out your portfolio and give you more consistent income. It sounds like Palm Desert is seasonal, so diversifying into another area could help smooth out those slower months.

It really comes down to your risk tolerance and long-term goals. Are you looking for steady, low-risk passive income now, or are you comfortable taking on more leverage to scale faster? If it were me, I’d run the numbers for both scenarios—how much more cash flow would paying off the condo actually give you, versus how much another investment could potentially bring in?

Either way, sounds like you’re in a good position. Good luck deciding, and I’d love to hear what you end up doing! 😊

Raymond J. Rodrigues · Answer

@Kiley Costa I’m sorry to hear that you’re having a tough time with your first STR. If you’re ever looking to invest in Florida, @Josh Green has a successful STR operations going on in the Tampa Bay Area that is providing his clients with solid returns year round. There’s actually quite a few investors from California making purchases over here.

Pay Off STR or Invest in Another Property?

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