To pay off or not to pay off?

Question

Ok,  I have an 87K mortgage on a vacation property I currently rent.  I just started renting it last year and grossed about 4500 in total rent.  I think I will double that this year at the pace it is renting.

I have expenses for cleaning, sanitation and PITI of course.  So my net is somewhere south of that but not important to this question I do not believe.  I can write a check today and pay the entire balance or, keep the mortgage which is sub 5% on a 30yr fixed mortgage an invest that 87K in a few other cash flow properties.  I am leaning toward paying it off "one less thing"  Forest Gump.

I guess I am leaning toward just paying it off.  i already own 5 doors, and I plan on a 4 plex purchase shortly so, I have a nice nest egg of property to grow with, create the coveted passive income.  If I pay this off I am 100% out of debt except primary mortgage and the rental investments!  Opinions?

Neil Hauger · Answer

Thanks for the input.  It is a vacation rental that I use.  If you look at the 800/mo payment vs the 4000K I get in rent it does not look good.  But, I have already matched that income this year so I expect that the rent situation will change for the better going forward.  The land in fact has a much higher value to me than just the ROI I get from the rent.  I enjoy working on the land and enjoy the recreational use my kids get to experience.  Cant put a number to that.

My tax guy says the tax write offs I get don't over ride the mortgage payments annually so there is not an advantage there.  I get a lot of personal enjoyment out of managing  the woods so that is part of the my thought process so selling is not something I want to do.  At least at this point.  In fact, there is a iron ore mine that is likely to open 5 miles away so I expect a jump in the value of the property as development land in this city is limited.  The city sits between a state park and a national park.  Sell in 5 years may be a good idea once the mine goes in.

The ROE part makes sense but I it is not that simple to me.  The pure pride in ownership and pleasure factor is over riding my financial logic!  I have plenty of $ in the market, in savings and in earned income so this "spurge" is worth it in my opinion .  If anything, it is a safe place to park this equity.  I can always draw against it some day.

So the question still is pay off and not have the burden of debt or use that 87K to purchase cash flow props before the rates go up?  I will own 9 doors very shortly so I have a nice portfolio.  Enough for now at least-I am 50 after all.  I want to see them get paid off in the next 15 years as they will give me plenty of passive income.   Paying this debt off also free's me of my last debt (not including mortgages of course) so that is attractive.

Maybe I pay of 1/2, invest the other.  Not a bad idea.

II think I may have answered my own question.  I appreciate the opportunity to lay this out. I appreciate the input.

Samson Kay · Answer

With the recent recession and housing bubble, I think it best that you leverage your equity as much as possible.

From a money standpoint, how much Return on your equity are you getting each year from your cash flow on the rental. You might find that you are only earning less than 5%. Even though you no longer have a mortgage payment by paying it off, I feel that increasing your portfolio every few years by pulling out equity so that your ROE stays above 10%  is the best way to reach financial freedom.

Brant Richardson · Answer

Is this a vacation property you visit and enjoy often?  Or is it a vacation rental investment?  If it is a pure investment, presumably worth 100k or more, and you are only grossing $4500 then sell it.  Even 9k gross is pretty bad on a 100k property, especially if you are dealing with the hassle of short term vacation rentals.

If you want to grow your real estate business don't pay it off.  Either sell the vacation property or use your cash to buy more doors.

John K. · Answer

I'd suggest not paying it off, if you have it in a 30 year fixed there is no risk of it rising, I'd probably keep about 20k in reserves in case you ever have issues and invest the balance.  As long as you can get greater than 5% interest your ahead by not paying it off.  
	
	My other suggestion would be to pay the principal down a tad to lower your risk and look good to the bank.

The downside to paying it off is you lose your interest tax shield since it's tax deductible and off sets your taxable income.