Choosing which mortgage to payoff

Board Topic: Paying off mortgage on rental prop
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Paying off mortgage on rental prop

Posted by: Mary Aug 4 2004, 11:10 AM
I have $100k in the bank. Was going to build bigger primary residence, plan has changed.

I owe $60k at 7% on my current residence, I own three rental units, one @ $38k 6 %, and a duplex @ $95k 6.5%. I'd like to invest in more rental properties and put off building my dream home.

I have no other debt, no credit cards, no car loans.

Should I pay off one of the property's mortgage? Which one, without depleting my entire cash cushion? Should I use the cash and purchase a new rental property with it and not touch the other mortgages? My first thought was to pay off the $38k mortgage, which would give me $560/month cash flow, then use the remaining cash to invest on a fourth rental unit. What do you recommend?


Posted by: loanuniverse Aug 4 2004, 12:33 PM
Mary:

You certainly have the kind of problem that most people like to have. While I would personally go after the loan with the highest interest rate, I can see why you would like to get rid of a payment completely to free the cash flow.

I guess the way I see things is that the rental properties are being financed at a reasonable rate, and that if the rental income is paying off the loans and giving you a little extra, you might as well leave those alone and concentrate in putting all of the $100,000 to work in other rental properties. The analysis could get a little complicated, but at its core the idea is:

”Does buying a bigger rental property or properties using the whole $100,000 as down payment will bring me a better return than paying off the existing debt and only investing part of the $100,000?"

You really can’t answer that until you have the numbers for the property to be purchased. But then again, you might not even have to worry about that if the property that you might be interested in does not need a down payment that large.

If anything, start looking for the best rental property in the market for the next month or two. You might find that the one with the best return requires the full $100,000 or you might find one that needs less and that kind of would make the choice for you.

Then again, I am thinking long-term with real estate investing as a side activity. If you need the cash flow now, paying off the small loan and having an extra $560 a month sounds mighty tempting.

Good luck

Posted by: The Fox Aug 4 2004, 03:08 PM
Like LU said, this is a very nice problem. I'll try to supplement the very good post already here.
QUOTE
My first thought was to pay off the $38k mortgage, which would give me $560/month cash flow, then use the remaining cash to invest on a fourth rental unit.

My question would be, "what do YOU want to accomplish?" Certainly the less leverage you utilize, the less you'll sweat meeting debt service or your lifestyle. But as LU said, putting the entire $100 into another facility would make your money work harder for you. Do you want to manage more units? Or do you want to eliminate your debt and continue your cash cows? That choice is ultimately yours. I hope this was somewhat helpful! smile.gif
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