Author Topic: Sell rental income to pay down debt faster?  (Read 945 times)

christal1882

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Sell rental income to pay down debt faster?
« on: June 13, 2017, 07:11:27 AM »
Hi Everyone,

I'm relatively new and looking for advice. My husband and I would like to retire by 50, we are currently 34/35. We have very little debt that we are working at paying off (a student loan that will be paid off in Oct and a car payment which we will pay down fast after the student loan is gone. The car loan is a 1.49% interest that is why we are prioritizing the student loan). I bought a condo in my early 20's that we now have as a rental property and we have a home that we live in that also has a mortgage. We are contemplating selling the rental property which will make us about 20K. We would use the money to pay down our own house/debt faster because we feel our mortgage is really whats holding us back from retirement. I estimate that it would take us around 5 years in rental income to make 20k, and that is assuming there are no condo assessments, so it could be even longer. What is everyone's thoughts? Am I being short sighted??? Do I hold on to the source of income even though it is going to take longer to get money from it?

kwarden13

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Re: Sell rental income to pay down debt faster?
« Reply #1 on: June 13, 2017, 07:51:17 AM »
I also just started reading this site 3 weeks ago so may not be the best person to ask. However, I too bought a rental property in 2013 and am now selling it for a $55k gain after realtors fees and such. I am using the money to pay off my student loans. Is the $20k after all fees and taxes?

I honestly was just breaking even monthly so I figured while the housing market went up I would just sell the property. Also, as you continue to hold the property there is more risk with repairs, etc.. I am happy to get rid of my rental as a reasonable gain. I put $0 down and am making $55k after fees and taxes.

SDH

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Re: Sell rental income to pay down debt faster?
« Reply #2 on: June 13, 2017, 08:07:35 AM »
We are in a similar situation.  We have no debt other than mortgages.  We have 2 rentals and 1 primary.  We have loads of equity in both rentals...BUT if we didn't have our own ridiculous mtg we could easily save more than 1/2 our income I feel.  I have too many questions surrounding the vanguard funds and how to pull money from those accounts etc to pull the trigger to do anything.  I feel paralyzed by uncertainty.  Does anyone know if there's a "senior mustachian" that is willing to actually talk to us about such issues?  I need to hash it out with someone!  LOL 

Gin1984

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Re: Sell rental income to pay down debt faster?
« Reply #3 on: June 13, 2017, 08:50:14 AM »
Is the rental profitable?  If so, don't sell it.  Find ways to cut expenses to pay your student loan.  Don't give up an income stream just to pay debt.

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christal1882

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Re: Sell rental income to pay down debt faster?
« Reply #4 on: June 13, 2017, 09:48:07 AM »
Hi Gin1984

Yes the condo is profitable on a monthly basis. If anything major goes wrong, I'm not so sure it would be that profitable anymore. The condo was built in 1889, so stuff going wrong is almost a guarantee.

I wouldn't use the money for student loan debt (that is almost paid off, just 4 more payments on that!). I would use the money to try to pay off big chunk of my own mortgage. I'm not sure how I can retire early without really make a huge dent in my current mortgage.

Is it worth it to have a small stream of income, or pay off a large chunk of my homes mortgage?

Gin1984

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Re: Sell rental income to pay down debt faster?
« Reply #5 on: June 13, 2017, 09:54:42 AM »
Personally, I'd rather have the income stream over the paid off house, but that is a personal choice.  That said, the age of the condo makes me reconsider.  Because you are right, that does equal more cost in the near future. 
But I still would not use it to pay off the mortgage, I'd invest in VTI and use normal funds to pay down the mortgage if I paid it down at all.  Have you considered refinancing to lower your mortgage?

christal1882

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Re: Sell rental income to pay down debt faster?
« Reply #6 on: June 13, 2017, 10:05:56 AM »
Hi Gin1984,

Yes we are in the process of refinancing right now, but this isn't going to lower our mortgage it is going to make the payment higher. We are going to a 15 year mortgage, by doing this we are eliminating pmi and losing 1/2 point on our interest rate. Plus the house will be paid off when we are 50, which is our retirement goal age.

Thanks for the advice! I hate to lose the income stream as well, but also know that there could be some major repairs in my future. Its been an internal debate for a long time!

PapaBear

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Re: Sell rental income to pay down debt faster?
« Reply #7 on: June 13, 2017, 10:08:02 AM »
I guess a bit of math would help a lot to assess this issue.
As an initial estimate, I would try to compare the "true" estimated yield of the rental to the mortgage interest. If the yield of the rental is higher, keep the rental, if not, sell it. Everything else might not make financial sense. With "true" estimated yield, I mean that you factor in things like potential vacancy, maintenance and repairs etc that seem realistic.

Maybe you also want to move this question to the Landlording subforum, because there might be more people with landlording experience there.
There is a specific format for sell or rent case studies there (see https://forum.mrmoneymustache.com/real-estate-and-landlording/how-to-real-estate-case-study-sell-or-rent/) as well as a sticky with more information about evaluating properties (https://forum.mrmoneymustache.com/real-estate-and-landlording/evaluating-a-rental-property/)

Cwadda

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Re: Sell rental income to pay down debt faster?
« Reply #8 on: June 13, 2017, 10:16:27 AM »
Hi Everyone,

I'm relatively new and looking for advice. My husband and I would like to retire by 50, we are currently 34/35. We have very little debt that we are working at paying off (a student loan that will be paid off in Oct and a car payment which we will pay down fast after the student loan is gone. The car loan is a 1.49% interest that is why we are prioritizing the student loan). I bought a condo in my early 20's that we now have as a rental property and we have a home that we live in that also has a mortgage. We are contemplating selling the rental property which will make us about 20K. We would use the money to pay down our own house/debt faster because we feel our mortgage is really whats holding us back from retirement. I estimate that it would take us around 5 years in rental income to make 20k, and that is assuming there are no condo assessments, so it could be even longer. What is everyone's thoughts? Am I being short sighted??? Do I hold on to the source of income even though it is going to take longer to get money from it?

Welcome to the forum. You'll quickly find there's been a development of two "factions". Those that choose to pay off their mortgage early and those who choose to pay the mortgage minimum and invest the difference. Please read into a few of these topics in making your decision. I've included a major one below.

https://forum.mrmoneymustache.com/welcome-to-the-forum/why-do-you-do-and-pay-off-your-mortgage-early/

Best of luck to you.

frugaliknowit

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Re: Sell rental income to pay down debt faster?
« Reply #9 on: June 13, 2017, 02:25:54 PM »
You bought the condo in your 20s (10+ years ago) and it will only bring 20K?  Why is that?

What is the cash on cash return on the condo (NET cash income per year/investment)?

Rowellen

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Re: Sell rental income to pay down debt faster?
« Reply #10 on: June 13, 2017, 06:35:44 PM »
Not really advice but my situation. We have decided to sell our rental property. The reasons for this decision is because the rental income is break even and possibly negative. Rents in the area are dropping due to a flood of new units being built are now being released to the rental market. The sales market has been reasonably flat for the last year or 2 and I don't see any significant increase in the mid term due to said flood of new units. I believe, and my research confirms that we can save more money by paying down our home mortgage with the equity than we would by holding the property for a few more years.  If we were actually making money on the rent, it might be a different story.

christal1882

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Re: Sell rental income to pay down debt faster?
« Reply #11 on: June 15, 2017, 11:11:48 AM »
Hi Frugaliknowit,

It will only bring 20k, because I bought the condo high, right before the whole market crash of 2007/2008. So for many years I was upside down on the condo. I also had a very bad loan with a ridiculous interest rate so I didn't make a dent in the principal. I'm finally above water now, but only by about 20k.

Jagnole

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Re: Sell rental income to pay down debt faster?
« Reply #12 on: July 16, 2017, 10:39:45 AM »
I am in a very similar situation. Bought a town house in 2005 with 0 down and bad mortgage. Went way underwater after the housing crash and am just now getting back to having some positive equity. I rent it out and probably break even after maintenance and repairs. I would probably only make around 10k on mine after repairs and real estate expenses so I plan on hanging on to it for a few more years. All in all the place has been a terrible investment but I have not lost much out of pocket, I feel like I have weathered the storm/crash and now I see a light where I could get a decent payoff in a couple of years.

So I guess if I were in your shoes I would hang on to it but don't see it as a big deal or a terrible decision if you decide to sell. Best of luck either way!

ShoulderThingThatGoesUp

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Re: Sell rental income to pay down debt faster?
« Reply #13 on: July 17, 2017, 05:13:48 AM »
If it's not clearly a moneymaker, you should sell it.

kwarden13

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Re: Sell rental income to pay down debt faster?
« Reply #14 on: July 17, 2017, 06:44:31 AM »
I just closed on my rental and am so happy I did it. It paid off all my existing debt and I no longer have to worry about it!

Villanelle

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Re: Sell rental income to pay down debt faster?
« Reply #15 on: July 17, 2017, 07:13:07 AM »
When you say that it makes money on a monthly basis, what does that mean?  After all expenses (including saving for projected major expenses and maintenance), does it make money?  If so, how much? 

If you don't know how to accurately figure expenses (again, including escrowing future maintenance), do some reading around here and some googling.  This is going to vary based on age of property, type of property (a condo where the HOA does most of the outside maintenance is going to be less than a SFH where it's all on the owner), the age and condition of some of the major parts of the home (appliances, outdoor paint, roof, etc.). 

Also, what is your rental market like?  Do you foresee rents rising much?  How long are places generally vacant?

Also, if you are considering selling, why are you refinancing?  If you aren't already committed to that, hold off until you decide whether to keep the place or not.

frugaliknowit

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Re: Sell rental income to pay down debt faster?
« Reply #16 on: July 18, 2017, 08:53:06 AM »
Hi Frugaliknowit,

It will only bring 20k, because I bought the condo high, right before the whole market crash of 2007/2008. So for many years I was upside down on the condo. I also had a very bad loan with a ridiculous interest rate so I didn't make a dent in the principal. I'm finally above water now, but only by about 20k.

Here's how I would look at it (Assuming no mortgage):

Proceeds after all costs upon sale = investment (opportunity cost of continuing to hold the property)
Annual rental income, less ALL expenses (including vacancy allowance, etc.) = net income

net income/investment = Capitalization rate (if this is like 3% or less, why bother?)