pay off mortgages or buy more rentals?

Question

what is the general consensus on maximizing cash flow on low cost rental houses? I have one in particular that just about breaks even after some capex costs just about every year. I don't owe a ton on it but the payoff could be used to purchase another property. I haven't seen any great deals where I'm looking in a long time that I was able to jump on so I am getting resentful that I have money but it's not really working for me. Paying off the rental mortgage would turn that house into a cash flow positive of about $500 per month after hold backs for capex and such. Buying another house potentially months and months down the road would maybe generate $200 per month but would obviously be paying down the mortgage.

My gut tells me to pay off one of the rentals and that will put me in much better long term position but my head says to buy another house and increase my portfolio which would be up to 4 houses at that point.

Sean Carroll · Answer

@Eric Even I would personally buy more rentals to increase my net worth as well as my monthly cash flow. Paying down your loan does not change your payments, it only decreases the overall number of payments. Another perspective is it increases my net worth not my cash flow where as buying another rental does both.

Bryan O. · Answer

@Eric Even why not just sell it and buy better in a different town? It sounds like it is in a losing area. Rather than refi, just get out of it.

If you have some attachment to it then I would go the route of adding more doors. If you have 2 doors, every month doubles the amount of equity and future rent increases double your returns.

If you have little time and do not care for managing more doors then just pay it off. Again though, I would not hold a property in a town that has no jobs and is declining unless you see something on the horizon.

Eric Even · Answer

It would be a pay off, not a pay down.  It would be an instant $500 a month cash flow.  I would need at least 2 possibly 3 more houses to get that type of guaranteed flow.

I would love to buy another rental but I'm just not seeing them around here.  I've been holding onto this cash for about a year now looking for a good opportunity but it hasn't happened yet.  Going into the winter months generally gives me more leverage buying the property I want but I said the same thing last year and nothing came out of it.

looking over everything and reading other threads on this I think I'm going to pay it off.  It will only set me back about 6 months of savings and I will still have more than enough to purchase another place if I see one, I just won't have as much money to play with if I need to rehab it which will of course reflects on which houses I would consider good investments.

Eric Even · Answer

Thanks for the advise @bryan o. I've tried selling it but the market just isn't in the town anymore.  Even when I was willing to take a loss it just wouldn't go so I'm stuck with it for a while longer.  I ran the numbers for an additoonal unit a couple years ago and they just didn't add up.  It was too much additional work to make it viable even with the additional cash flow.

Eric Even · Answer

The house is a bad town.  It was ok when I bought it several years ago but the recession pretty much killed the town eventually and any chances of higher rents.  The last big employer in area left a few years ago and that as they say was that.

I am pushing the rental price now as it is.  I had it renovated a couple years ago to increase the value as much as I could and I feel lucky to be getting the rents I do.  A lot of the landlords in the area have already abandoned what they have for the most part.  I can pay the mortgage but it only cash flows about $50 a month and that will pay to have utilities maintained with maybe a little left over at the end of the year.  The last 2 years I have needed to replace a parts on the furnace so that put me in the red.

The only way I can make this cash flow positive every year is to pay it off which isn't very much.  I still have plenty of money to buy another property if one comes up but I just won't have as much available if it needs a big rehab or additions.  I think the benefit of having this house produce a decent amount of cash per month outweighs the initial loss of capital by paying it off.  I can't seem to get the fact that that little house once paid off can cash flow as much as 2 or 3 houses in my area, if i can find any, out of my head.

It's a shame really.  I had high hopes for the town when I started buying there.  It was a really nice new England town with a lot of charm.  It now amazes me how cheaply houses can be bought here compared to towns just a few miles away.

Sara K. · Answer

If I have to choose a paid off rental vs cash to acquire another deal, I'm going to choose the cash every time.

That said, why is that rental not cash flowing? Is there room to increase the rent? I'd want to get that resolved before adding more properties.

James McCard · Answer

There are people here who will tell you one way or another is the best. Personally I would use that money for more deals but if it makes you feel better to pay it off just pay it off.

pay off mortgages or buy more rentals?

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