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Updated about 10 years ago on . Most recent reply
Challenging Question for Experience Investors!
Hi I have a small portfolio of rental properties and notes and have a debate I am having with myself and wondering if anyone with experience in this area can shed some different light on the scenario.
I am debating on paying off a property that has a 15 year note, 5% rate (will be paid off in 7yrs). My cash flow is negative -$421.41 on this property. principle balance is $90k. is rented with a long term tenant.
I am thinking of paying the mortgage off. This would equal a 12.8% COC (962.67 per month after rental property expenses) return on the 90K.
Opportunity Cost: I also have opportunities to loan funds out at 16% to flippers, so I can use the 90K for that and generate $1200.00 a month
I am trying to factor in all elements and variables. Off the top the 12.8% return is guaranteed, and I have to keep turning the 16% money. The 16% money will generate more cash flow. I have a tax write off with the interest from the mortgage if I don't pay it off. I can always refi and pull the money out again(pain in the butt) to loan. Does any one have experience here where they would like to share? Thank you for your time.
Most Popular Reply
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Bear in mind I'm not a seasoned investor but rather a financial risk professional. I think a relatively low risk 12.8% return (did you account for future vacancies? long term costs?) is fantastic. Stock market investors make around 7% long term and they're constantly in short-term risk. Flipper investing is somewhat risky (why else would you get a 16% return...) and my fear would be that you'd lend that to -one- flipper and expose yourself to possible drastic loss.
Then again, why not use that capital to do another purchase? You're still building equity despite being cash flow negative. What is your total gain each month? (Equity and cash)
In other words: investing is a balance between risk, diversification, and reward. Carefully consider all three.