I Would Like To Pay OFF 2 of my homes

[Nicholas Dillon]

Hey guys,

I own 3 homes in the Atlanta GA area.  I spend half the year in Indonesia where me and my wife rent a home.  We have started talking about trying to pay off 2 of our homes in Atlanta, and semi-retire here in Indonesia.  If we pay off Home 1, we can live pretty comfortably off the rent of that home here in Indonesia. But, if we pay off Home 2 as well, life would be especially sweet!  To do that, I was intending to sell some stock (75k to completely pay of home 1).  But then with home 2, I need to get creative.  I was thinking about cash out refinancing Home 3 in hopes of using that money to pay off a significant chunk of Home 2.   I just wanted to see if I could get some input on this as we continue to brainstorm about how to make our dreams a reality as quickly as possible.  Thanks very much for the input!

Home 1-

Bought at $166,000

Year Bought- 2015

Interest Rate: 4.375

Remaining balance: $75,000

Value- $321,000

Home 2-

Bought at $197,000

Year Bought- 2020

Interest rate 3.625

Remaining Balance: $163,379.25

Value-$283,000

Home 3-

Bought at $247,000

Year Bought: 2022

Interest Rate: 4.875

Remaining balance: 226,434

Value-$325,000

[Chris Seveney]

Quote from @Nicholas Dillon:

Hey guys,

I own 3 homes in the Atlanta GA area.  I spend half the year in Indonesia where me and my wife rent a home.  We have started talking about trying to pay off 2 of our homes in Atlanta, and semi-retire here in Indonesia.  If we pay off Home 1, we can live pretty comfortably off the rent of that home here in Indonesia. But, if we pay off Home 2 as well, life would be especially sweet!  To do that, I was intending to sell some stock (75k to completely pay of home 1).  But then with home 2, I need to get creative.  I was thinking about cash out refinancing Home 3 in hopes of using that money to pay off a significant chunk of Home 2.   I just wanted to see if I could get some input on this as we continue to brainstorm about how to make our dreams a reality as quickly as possible.  Thanks very much for the input!

Home 1-

Bought at $166,000

Year Bought- 2015

Interest Rate: 4.375

Remaining balance: $75,000

Value- $321,000

Home 2-

Bought at $197,000

Year Bought- 2020

Interest rate 3.625

Remaining Balance: $163,379.25

Value-$283,000

Home 3-

Bought at $247,000

Year Bought: 2022

Interest Rate: 4.875

Remaining balance: 226,434

Value-$325,000

 Few things:

1. If you were to seek a LOC against #3, you would not get much as an investment property its very difficult to get a LOC and they typically will not go above 75-80% LTV which is where you are at.

2. Why payoff #1 with a rate of 4.375%? If anything I would consider paying down #3 by $75k and recast the loan to lower the payment. 

Also if your stock portfolio after taxes is netting you more than 5% you are going into a losing scenario as you are taking money that is earning more and investing it in something earning less. While there is the risk to consider, is that the right move?

[John Clark]

Quote from @Nicholas Dillon:

Hey guys,

I own 3 homes in the Atlanta GA area.  I spend half the year in Indonesia where me and my wife rent a home.  We have started talking about trying to pay off 2 of our homes in Atlanta, and semi-retire here in Indonesia.  If we pay off Home 1, we can live pretty comfortably off the rent of that home here in Indonesia. But, if we pay off Home 2 as well, life would be especially sweet!  To do that, I was intending to sell some stock (75k to completely pay of home 1).  But then with home 2, I need to get creative.  I was thinking about cash out refinancing Home 3 in hopes of using that money to pay off a significant chunk of Home 2.   I just wanted to see if I could get some input on this as we continue to brainstorm about how to make our dreams a reality as quickly as possible.  Thanks very much for the input!

Home 1-

Bought at $166,000

Year Bought- 2015

Interest Rate: 4.375

Remaining balance: $75,000

Value- $321,000

Home 2-

Bought at $197,000

Year Bought- 2020

Interest rate 3.625

Remaining Balance: $163,379.25

Value-$283,000

Home 3-

Bought at $247,000

Year Bought: 2022

Interest Rate: 4.875

Remaining balance: 226,434

Value-$325,000

Based on the numbers you gave, sell home three, pay off home 1 entirely. As was noted, you don’t have enough equity in #3 to tap, so it’s just a financial self-supporting carry. Is there an appreciation angle to consider? . Depending on how the stock market is doing and rentals, pay down/off home 2. Can you rent out home 2? 

[Nicholas Dillon]

I can rent home 1 for $2100 a month and rent home 2 for $2000 a month.  Just to give further data to the equation.  Thanks for the help guys!

[Tim Delaney]

The key piece of information missing here is what your rents, monthly P&I payments are and what you are actually cash flowing? As @Chris Seveney mentioned there is not really enough equity in house 3 to get a meaningful LOC. even if you were able to leverage enough to pay off House 2 the new rate you would be paying would be higher than the existing mortgage, so you would still be behind overall.

Your ROI on those payoffs vs keeping money in index funds is not very good either.

Lastly, remember that cash flow from rentals can seem good until it’s not. House 1 you’ve owned for 9 years, how are your cash reserves? What big expenses are you going to have coming up soon? Roof? Furnace? HWT? Bathroom/kitchen update? Personally I’d be cautious about trying to live off the cash flow from one or two rentals even if they are paid off.

[Bill Hampton]

@Nicholas Dillon

I wouldn't pay off any of the houses. The S&P 500 is up over 20% this year. Your mortgages are all less than 5%. You can earn more by keeping your money invested in the market and letting your tenants pay off your mortgages. 

You should speak with a financial advisor about your complete financial picture before retiring overseas. A financial advisor can help you  create a comprehensive financial plan to make sure you cover all your bases before you move forward. 

Good luck and let me know if you have any questions. 

[John Clark]

Quote from @Bill Hampton:

@Nicholas Dillon

I wouldn't pay off any of the houses. The S&P 500 is up over 20% this year. Your mortgages are all less than 5%. You can earn more by keeping your money invested in the market and letting your tenants pay off your mortgages. 

You should speak with a financial advisor about your complete financial picture before retiring overseas. A financial advisor can help you  create a comprehensive financial plan to make sure you cover all your bases before you move forward. 

Good luck and let me know if you have any questions. 

You forget that he’s going to be out of country for substantial periods of time. Stock market he can watch and adjust from afar. Property is much more hands on. He needs to account for property appreciation, but overall needs to reduce property exposure. Hence my advice to sell #3. In fact, a good argument can be made to sell #s 3 and 2, pay off #1, keep some reserves, and hire a property manager.

[Alan Asriants]

Hey Nicholas, sounds like a pretty sweet situation you are in!

I think that paying off Home one with the stocks could be a good idea, depending on the returns that you get on those stocks. As far as home two, don't know if it makes sense to use equity from another home, especially with higher rates now to pay off that property. Technically, you're using equity which is better to pay off in debt so restructuring could be good, but you need to really look at the returns. The rate that you'll get now for a home equity loan might be too high, and you might actually crush your cash flow. But you have to run the numbers and really see if it makes sense. But my guess is that it won't. 

[Jeremy H.]

What's your monthly budget to live how you want to in Indonesia? 

What's the cashflow from each house?

I would be very hesitant to pay off anything with such a low rate - the sub 4% rate I wouldn't touch.