Help! Which mortgage should I pay off?

Question

Hi Everyone,

I think I have my answer for myself, but I wanted to see if I could get any opinions and justifications from the Community.

I have two financed properties I own (amongst a few others) which I am considering doing some additional principal payment on in order to build up equity.

One property I am hoping to sell in the 3-5 year timeframe.  It is in Texas in an area expected to see heavy growth and at least moderate appreciation.  Before anybody jumps on me for investing for appreciation, the property Cashflows just fine (currently ~$180/mo)! haha

The other property is a long term hold in Indiana which I have no intent to sell in the short term.  It Cashflows wonderfully (~$200/mo on just over half the investment of the Texas property) and I havent had any problems with it to date.

So my question is, if you were going to do some additional principal payments (forget whether or not that makes sense and just assume it does and you are going to do it) which would you make additional payments on?  The Texas property would build equity for the time of the sale, the Indiana property would go towards owning the property free and clear.

All opinions and questions appreciated!

Thanks!

Justin

Adam Gerig · Answer

This is a tough one!!  I'd pay whichever one had the highest interest rate.  Although in Texas you'll see a higher appreciation than you will in Indiana it is always nice to own free and clear.  I don't think you can really lose if they are both cashflowing.  I'd know what I'd do though if i was you....buy another!!  You've got your financing in place and they are both cashflowing well it looks like why not roll that into another rental instead of taking all your liquid cash and putting it towards paydown.  Although this is assuming you've got good long-term loans at good rates.  I myself know I can't go and borrow from any private investor for less than 5% (maybe my mom lol) if you're locked in lower than that if I were you I'd be out looking for a land contract or save up enough that you can buy another with financing.  Don't think rates will go much lower they've gotta go up at somepoint.

Adam Gerig · Answer

Go to Allen County Public Tax Information

Type in 3415 Euclid which is a property I closed on Monday.  When it pulls up look at the taxes that's a year not a half $209.44.  I guess I was underselling that the taxes are low here.  Now granted there are properties that are a lot more expensive tax wise, but that's why I love Fort Wayne.....don't tell or do :)

Justin Joseph · Answer

@Aaron Montague and @Bob Hines I appreciate your input.  Texas is starting to sound like a better option.  If for some reason I have trouble selling it refinancing whatever balance I have and increasing my CF would be an option in the interim.  And you are correct that putting extra money into the Indiana property I wouldnt see that money back for several more years...

@Adam Gerig taxes in Indianapolis vary substantially.  I have some properties that are 300-400 per half and I have another where property taxes just jumped and are almost 800 per half.  I still make a very healthy return on that particular property but it was a major bummer to give up an extra $70/mo.  200-300 per year sounds unreal, but Ill take you at your word and add that that does sound great!

Aaron Montague · Answer

I'd vote Texas.

1. The rate is higher

2. You plan on selling it

3. It pays you less per month now

The money you pay off now is more room you have to work with if things go badly on any front.

Adam Gerig · Answer

What are you taxes like in Indianapolis??  I choose to sell all of mine outside of Fort Wayne because the taxes in Auburn(20 minutes North) were killing me.  I pay $220/year on 2 or 3 of them compared to like $600/half in some instances on the ones in Auburn.  That's why I love Fort Wayne.

Bob Hines · Answer

@Justin  Joseph  If you are set on using the cash flow to put toward paying down one of the loans, personally I would pay extra on the TX one.  I base this on the fact that you are planning on selling it in a few years and will see that cash again once you sell.  If you put it toward the one you're not going to sell, while you gain equity, that cash will not be coming back anytime soon.  I have some mortgages and some LOCs and I always pay the minimum on my mortgages and pay extra on the LOCs as that money will come back while any extra on the mortgage will not.

Add that the TX loan is 1% higher, and I say it's a sure thing.

Justin Joseph · Answer

@Matt Devincenzo both loans are in the same time period in their lives (4 months apart).  The Texas property interest rate is 1% higher than the Indiana property.  Guess I just need to do a tighter analysis of the numbers and see which provides better benefit and less risk.  I did like another users suggestion earlier of considering which property presents a greater risk in terms of potential for suit as a potential consideration as well.

@Adam Gerig that's an impressive management portfolio!  Indianapolis is similar in terms of purchase prices, would be interesting to compare the two cities more closely!

Matt Devincenzo · Answer

With this it also depends on where you are in the mortgage. If you've had one prop for say 15 years and the other only 2, then you'll be paying proportionally more interest on the 2 y/o loan than the 15. So if I already decided this was what I wanted to do, then let the numbers do the talking just make sure you compare them appropriately when you do.

Adam Gerig · Answer

We run a property management company and are investors ourselves.  Our portfolio is almost 1000 units(SFH, MFH, apartment complexes) managed and you can get a good cash flowing property here in Fort Wayne for $20-30k all the way up to $100k depending on what return and location of the property.  I've got several in the $15-50k range and the ones on the lower end of the spectrum have produced wonderfully for me.

Kyle Hipp · Answer

If you are going to pay one or the other off, then I would assume you have $80,000 cash in order to have the option of either. If that is your choice, being limited to those two options, then I would pay off the one that would increase your cashflow the most. So if you paid off the texas one for $80,000 and that gives you and extra $500/m cashflow whereas the indiana one would only bring $350/m that would be my path.

It sounds like you are planning to sell the texas one eventually but not that you are listing it tomorrow so for the time being planning to sell one or the other in the future would not get a lot of weight in my analysis. One thing to consider might be your legal liability depending on those state laws. That would be are you more likely to lose more money with a lawsuit in either texas or indiana. I don't know the answer to that but it wiuld be something to consider from a risk standpoint.

Lastly it sounds like you are interested in acquiring more properties but feel a wall with the 4 investment property loans with the underwriting guidelines of fannie and freddie. You should be able to get a commercial mortgage with decent terms (15 year ammortization, 5% with a rate adjustment to market or ballon acting as such in 5 years).

If you are just looking to pay down one mortgage or the other then I would runyou calculations through a mortgage calculator to see what a $20,000 (or whatever you would pay down) would save you interest wise. It would most likely make more sense on the texas property with the larger balance but it would depend on interest rate as well.

Help! Which mortgage should I pay off?

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