Should o payoff rental mortgage?

Question

I owe 28k on my rental. If I paid it off, it would bring $800 in extra cash flow per month.

I want to purchase another property for vacation rental or another single family rental.

Advice? Payoff current, leverage it to buy another property?

I’m a novice a s appreciate the advice.

Kyle J. · Answer

@Keith Minick One of my rentals also has a mortgage with about 28k left on it. With that low of a balance, I’m guessing a very small portion of your payments (like mine) is actually still going towards interest.

I just looked at my last statement and only about $90 of the monthly payment is going towards interest, and all the rest is going towards principal. So that’s one of the reasons I choose not to pay mine off. What would I do with an extra $90 per month?

As for the rest of the money going towards principal, I don’t really see that as increasing cash flow if I were to pay off the mortgage since I already have that money. If I were to pay it off, I’d just be taking that big chunk of money that I already have (liquid and readily accessible), and tying it up in the property where it’s not liquid or readily accessible and having to now wait for it to come back to me in small chunks (in the form of monthly rent payments).

When I look at it that way, it’s just never made a lot of sense to pay it off.

(Not to mention I can make a better return with the money by investing it than I can by paying off the mortgage which is at a fairly low interest rate.)

John Morgan · Answer

@Keith Minick

I chose 15 year loans because I’m older (50 years old) and my goal was to have the least amount of rentals that would cash flow me 10-12k/month net when I’m retired at 65 years old. I’m at 10 rentals now and that will hit my goal perfectly because they will all be paid off a couple years before I retire. My cash flow is only $4,400/month now (if nothing breaks-lol), but I have a W2 job so I don’t need tons of cash flow now. I also self manage to save $1,300/month in PM fees. It’s easy to do. I just didn’t want to own dozens of homes in retirement with 30 year loans like almost everyone on BP tells me I should do. Lol. Real estate will be just a supplement to my 401k retirement so I’m good with only 10 that cash flow 10-12k/month. And it’s less headaches to deal with.

Steve Vaughan · Answer

Because you'll still have an opportunity fund after, I would pay it off.  You can put financing on it later if you find there are just too many good deals to scoop up. LOL

Who wouldn't spend $28k for a risk-free, hassle-free,  tax-free monthly net return of $800/mo? That's 33% per year with no new tenants, toilets, roofs, etc.

I did this but with a commercial loan. Those are more risk and a pain, but it was balance of $64k for a $1695/mo reduction in debt service.  No brainer.  And yours is even better.

People act like its 2010 and deals are falling into your lap if you have the cash. The market today has like a 1:200 search/reward ratio.  Doing a refi may make you a motivated buyer in the worst sellers market of our lifetimes.

John Morgan · Answer

@Keith Minick

I did 3 cash out refis on properties that have a lot of equity like yours last year. They were super easy to do. I had a ton of equity sitting in my first rental property that wasn’t doing anything for me. So I did a cash out refi and deplored that equity (140k cash) to buy another cash flowing property. Then I did another cash out refi on the new one I just bought after fixing it up to buy another one with the 132k cash the bank gave me to play with on a cash out refi. Then I did a cash out refi on that one and got 92k in cash from my bank to play with to snag another one!

So it all started from my first property that had too much equity sitting in it doing nothing like yours. That property was making about $1,000/month net before I did any cash outs. I used that cash out refi to buy three more properties with nothing out of pocket and now my cash flow is about $1,400/month for all four of these properties. I’m not getting rich off that extra $400/month, but I’ve got tenants paying down my three new 15 year mortgages, and now I’ve got four properties appreciating 5-10%/year vs just one. It starts to add up quickly when you deploy equity in one property to acquire more cash flowing properties. Good luck!

Lorenzo W. · Answer

@Keith Minick smart money says to buy more, but I would pay it off. I struggled with that decision years ago. Money stacks a lot faster when there is no debt. Of course this is only my opinion.

Frank Y. · Answer

@Keith Minick Depends on how much money you have on hand. If you have enough for next property's downpayemnt after this $28k paid off, then you can pay off the $28k. If you have no more cash left after paying off the $28k, then don't pay off. Keep the money for forward properties's down payment.  Thanks.

Timothy Hero · Answer

When rates are good, I always encourage to leverage the debt in real estate. However, the numbers have to make sense.

Sometimes people are so focused on the first cash flow, they forget the cash flow of the next unit. For example, if you own a rental that's $500/month cash flow, refinancing and getting the cash flow out might drop the cash flow to $350/month. However, you can use the cash to buy another property that'll add another $350/month. Now you're at $700/month.

John Fish · Answer

@Keith Minick if all this is just an investment for you then I would suggest you pay off your rental completely ASAP and either enjoy the 800+ in additional cash or use that to excellerate the save up process for your next property.

That would be the ‘safest’ way in uncertain times.

If you ‘need’ to buy another property ASAP then just use leverage to buy the new property but still attack the lowest remaining mortgage with any additional cash flow between the two properties.

Carl Millsap · Answer

@Keith Minick I'd refinance for 80% of the value.

Use the $ from the refi as downpayment on your next property.

Of course you should run the numbers and make sure when you refi the #s will work.

Cash flow will be less but you'll gain another property with cashflow and your tenants will pay down the mortgages on both.

Rinse and repeat

Brian G. · Answer

@Keith Minick if you are in growth mode cash out refi and borrow the cheapest money we will likely have access to for some time, provided you can redeploy that capital into some solid performing purchases.

Should o payoff rental mortgage?

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