Buy another Rental or Pay off Rentals

[Jorge Guadian]

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Like to hear what some of you BP members would do if you were in my shoes. Im almost 53 with basiclly mortgage debt, no car, credit card or school debt. Im retired with my pension and rental income I gross just over 107k yearly. I own 4 duplex's. Two are paid off. The other two I still owe 74k on each.  $4405 month cash flow after mortgages are paid. Like to know if I should buy another investment property or pay off the 2 remaining and my home. Im leaning towards paying off the mortgage loans.

I can pay these off  the 2 duplex's in approximately 18 months and increase cash flow to $5,575. The pro would be to save thousands on the interest. The con increase cash flow with another investment. What would be your move. Any input would be appreciated     

[Trent Honea]

I'm not going to tell you what to do or even what I would do as our situations are different.  I would suggest that you consider several things before making a decision:

Financial Goals - Have you reached them?  There are mixed blessings here that need to be considered.  Paying off the properties would reduce long-term risk.  You say you are retired, so that's something I would suggest considering, reducing debt risk.  However, having a higher monthly income is also a form of reduced risk, as is owning a larger portfolio which can more easily absorb temporary set-backs (like a large cap ex) from a single property.  (A side consideration here are other goals such as family, lifestyle, stress reduction, travel, or whatever apply to your situation.  I could probably write 10,000 words about goals alone and barely scratch the surface of the topic.)

Market Conditions - Are there opportunities in your target market that are appealing?  In my target market, for example, I have to really hunt to find a decent investment, at least that fit my criteria.  I will probably start paying down mortgages on mine until the market changes, until I find enticing opportunities, or until my goals change.  I am a few years younger than you, have 2 school-age children one of whom is approaching college age, and am not retired YET but am nearing that point myself.  I want to grow my portfolio larger, but am not finding deals as easily.  Your situation will of course be different than mine or anyone else's.  I also assume since you are from Killeen that your tenants may be military or support people from Fort Hood, or they are at least among your potential customers.  With that base being a major area employer, what's going on there would of course need to be taken into account.  I don't know what's up, but I'd bet with recent changes in Washington, the military will be impacted in some way.  Just something to keep in mind in your situation, of course. 

Opportunity Cost - Tying up the capital in paying off a property could make it more difficult to act on a great opportunity that comes along.  There are so many possibilities here that I'll leave the topic for others to really cover, but I'll just mention a little.  You stated that you are considering paying off both properties over 18 months.  Alternatives include buying another property or more than one, taking cash out, etc.  Another option to consider is paying off one of the two, then re-assess your situation and the market.  I'm assuming here that if you focus on paying off just one, it will only take about 9 months.  Then you can reconsider all of this from that point with a stronger monthly cash-flow and see if the situation has changed.  (This is probably the approach I am going to take with my own investments, at least unless a great opportunity comes along.)

Cash-out ReFi - You could always cash-out refi as already suggested even if you do pay mortgages down, but refi takes time.  And also being from Texas, having gone through a cash-out refi myself, we have challenges others don't in this area. Due to our poorly-worded homestead protection laws, many banks simply will not underwrite cash-out refi of non-primary residence properties in Texas.  It's a real challenge to consider.  If you are interested in this approach, talk to your bank or a mortgage specialist.  You may have to talk to several before you find one that will work with you on this - I did. It's not impossible, as some major lenders will claim, but it is not as easy as in other states.  I have actually had loan officers from more than one major lender (BoA, Wells Fargo, and others) tell me it's illegal to do in Texas, which is just not the case. It's difficult but not illegal. For example, there's an 80% LTV cap, mandatory appraisal, minimum credit score, and limits on what the funds can be used for, and the list goes on, all written into the state constitution.  You also cannot use cash-out refi funds from your primary residence to purchase investment property.  This is intended to apply specifically to homestead property (primary residence), but many lenders interpret the code to apply to all residential property in Texas.  The wording of Texas 50(a)(6) is just vague enough to make many lenders wary of these loans, which makes them harder to find, and the terms are not quite as favorable as in other states.  It can be done, but it's harder than I would have thought until I went through the process.  Pushing it through as fast as we could, it took over 2 months to do, and often takes longer according to my mortgage broker.  (Yes, I found one that was experienced with this process and knew how to get it done, finally.  And that 2+ months does not include the 3+ months I spent trying to find a lender that would do it.  I found several that started the process saying they could do it, only to have someone up the hierarchy from them turn it down.)

Time and Work (stress) - I'm assuming since you are retired and have 8 units that you self-manage your properties.  If your portfolio grows, so will the calls on your time to manage.  Again, only you know how much you want to take here.  If you are not self-managing, this consideration is not as large, of course.

I hope you find this helpful, although it's is quite a bit longer than I intended when I started writing.  I have been considering all of this myself with my portfolio, and have not come to a firm decision either.  Whatever you decide, I wish you the best.