Going to Refinance, but should I pay off my rental property?

Question

I own a rental property in Denver that is producing 12-13% Cap rate. I owe $165k on the property and I am in the process of refinancing my primary home to pay off the rental property. My initial reason for doing this is that I will save over $700 in interest per month. Sounds like a no brainer, but am I missing something?

My primary home value is $700k. I currently owe $335k and my new loan paying off my rental will be $500k. Payments go up on my primary $450 a month, but I’m still saving over $700 a month overall.

1)Refinance and pay off my rental?

2)Refinance cash out and buy another investment property?

3) Refinance pay off my rental, snowball my primary, and use some cash reserves to buy another investment property?

I really appreciate your thoughts and perspectives and thank you in advance.

Chris Seveney · Answer

I agree with @Joe Villeneuve. Refinance and take out a HELOC on your primary. If your rental is cash flowing keep it as is. When another good deals comes along, snatch it up with cash offer from HELOC then refinance into a conventional.

Rinse and Repeat.

This also depends on your age and tolerance for rentals. I would not pay off a rental with my primary.

Also think of if things ever go south for you. You have a primary residence with higher payment and an investment property (that maybe you could not sell). If you keep it as is, your primary home payment stays lower and you could negotiate potentially on the investment and lower risk of losing primary home

Jamaal Gibbs · Answer

I would refinance out cash and use that to buy another property. Someone else is paying your interest on rental property so that's not a big deal. Also, what will you be doing with that $700/mo extra compared to what else you can do with it by reinvesting the money?

Joe Villeneuve · Answer

Yes you're missing something. You're not the one paying the interest...your tenant is. Why would you take over the payments? If you're going to refi your current home, use the money as a DP on another income property

...and, steps 1 and 2 are redundant. Which in this case means you're paying twice for the same money. Then you want to repeat that same mistake again?

Matt Groth · Answer

What Joe said....he has a nose for these types of posts. Listen to him. The downside is, if things go poorly, you lose your primary. Loss of job, illness.....do you have the risk tolerance for it? It isn't a horrible idea, but don't pay off the rental, use it for a downpayment on another one. Just make sure it is a VERY good deal.

Joe Villeneuve · Answer

That depends entirely on the specifics of how/where you're going to use it,

Dusty Sylvanson · Answer

I am in the process of doing the same thing. I have read and received lots of feedback and caution to not do it. Here’s why I am. 1. I consulted my accountant and understand how to navigate the taxes to work for me. 2. I am lowering the interest rates significantly, therefore cash flowing double. 3. My goal with cash flow is to pay my primary down faster, or if times get tight, have more cash flow on hand. 3. I can easily pay the new mortgage amount, without the considerations of my rentals. 4. The big one - I am a contractor and I can open a business line of credit on my rental easier than my primary, rather than the heloc path. 5. My equaty position is really strong on both properties, even in a big down turn. This works for me because because I build a lot of houses and have strong relationship with a bank and have another build and hold project in the works. After lots of research, consulting with older real estate investors, accountants and knowing my personal goals and path forward, it made sense to me, in my situation. I should add, I am not looking to over leverage to gain more properties. Great luck, and keep researching and clarifying what is right for you!

Jamaal Gibbs · Answer

May be a little late now but still not a bad idea to stockpile funds for the times ahead. In the future though if you take cash out on a refi, put it towards another property. Even better get a HELOC so you only pay Interest on the funds you use.

John Edwards · Answer

@Aaron Rocha you’re also missing the tax implications of a cash-out refi. The interest on the amount taken out and added to the loan is no longer tax deductible.

Consult a tax professional, though. I am not one.

Aaron Rocha · Answer

@Jamaal Gibbs thanks for the reply, I would most likely be applying that extra $700 to stockpile cash in hand used on another investment property. Still not a good idea? I’m really lost and unfortunately I have until midnight to cancel my closing.

Aaron Rocha · Answer

@Joe Villeneuve thank you for the info. How much money would you pull out in a refinance? I was going to cash out $166k. Thanks!

Going to Refinance, but should I pay off my rental property?

Going to Refinance, but should I pay off my rental property?

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