Author Topic: Should I sell my Two Family to Payoff My Residential Mortgage?  (Read 635 times)

cryptoroger

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Should I sell my Two Family to Payoff My Residential Mortgage?
« on: November 21, 2019, 11:59:40 AM »
I own a two family in very good location in the suburbs close to Boston.  I've owned for about 13 years.  My wife and I paid off the principal on the mortgage thus own the house free and clear.  A sale of the house would net roughly $540K after taxes.   The two family provides about $2600 monthly after expenses. 

We currently have a single family home with about $450K left on our mortgage at a very good rate of 3.375%, mortgage is about $3100 per month.  My wife is very risk averse and would prefer to sell the two family and pay off the mortgage.   I lean either way, but get sort of frustrated whenever I have to rent the apartment, which isn't often, but averages once every two to three years.  The two family also will at point need updates, so future remodeling costs are definitely likely needed within ten years.  In addition, I've been forgoing flood insurance in order to save costs.

So the scenarios would be:

A) sell two family, net $540K, payoff $450K loan on single family.  Have no income from rental property but pay around $1000 per month in taxes and insurance on single family, and reinvest the remaining $90K.  The pros are that the headache and risks of the two family are gone, our primary mortgage is erases.  The cons are that we lose the rental asset and lose the income provided every month.

B) keep two family, continue to generate $2600 in monthly income and pay $3100 for mortgage...cost of $500 per month between two. 

what would you do?


neo von retorch

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Re: Should I sell my Two Family to Payoff My Residential Mortgage?
« Reply #1 on: November 21, 2019, 12:05:43 PM »
Assuming all bouncy, lumpy expenses are included in your estimate of $31,200 annual profit on your $540,000 asset, you're making 5.7% on that rental.

Paying off your mortgage will net you 3.375% which is lower.

Personally, I would likely lean towards selling the rental and investing the profits after taxes in a balance of stocks and bonds according to my asset allocation. (Unless you already have a very heavy stock allocation and wish to move those profits to something else in real estate or another asset class.)

But paying off the low interest mortgage would likely be the last thing I would do given those options.

Alternatepriorities

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Re: Should I sell my Two Family to Payoff My Residential Mortgage?
« Reply #2 on: November 21, 2019, 01:01:16 PM »
Do you have any children who are about to start college? If so... Your primary residence doesn't count as an asset for calculating family contribution but the paid off rental does.

cryptoroger

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Re: Should I sell my Two Family to Payoff My Residential Mortgage?
« Reply #3 on: November 21, 2019, 01:09:13 PM »
Assuming all bouncy, lumpy expenses are included in your estimate of $31,200 annual profit on your $540,000 asset, you're making 5.7% on that rental.

Paying off your mortgage will net you 3.375% which is lower.

Personally, I would likely lean towards selling the rental and investing the profits after taxes in a balance of stocks and bonds according to my asset allocation. (Unless you already have a very heavy stock allocation and wish to move those profits to something else in real estate or another asset class.)

But paying off the low interest mortgage would likely be the last thing I would do given those options.

Bouncy, lumpy expenses not included, although my yearly expenses are quite minimal.  The house is old (over 90 years) so there is normally something that goes wrong (water heater etc), so I could probably lump in another $2000 in annual costs, plus my efforts to go over occasionally to clean up etc.  Also not including potential vacancies, although it is quite rare to have any months vacant, as there is a lot of interest anytime i post the listing.

I agree with your theory yet my wife has different opinions and believes that all debt is bad.   

cryptoroger

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Re: Should I sell my Two Family to Payoff My Residential Mortgage?
« Reply #4 on: November 21, 2019, 01:09:57 PM »
Do you have any children who are about to start college? If so... Your primary residence doesn't count as an asset for calculating family contribution but the paid off rental does.

good to know that that, didn't realize.  my oldest is about 10 years from college, with another 3  years behind that. 

nancyfrank232

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Re: Should I sell my Two Family to Payoff My Residential Mortgage?
« Reply #5 on: November 21, 2019, 01:18:34 PM »
Sell the cash flow asset to buy a principle residence liability is low risk?

I wouldnít

Alternatepriorities

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Re: Should I sell my Two Family to Payoff My Residential Mortgage?
« Reply #6 on: November 21, 2019, 01:20:38 PM »
The government arbitrarily deciding which assets count and which don't drives me a little nuts but it also makes a fun game of trying to help my friends optimize their financial positions...

frugaldrummer

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Re: Should I sell my Two Family to Payoff My Residential Mortgage?
« Reply #7 on: November 21, 2019, 01:54:52 PM »
Things to consider:
The rental is old and so is a potential liability. Example - my brother-in-law just died. He owned a rental property that he'd bought before he married my sister. It had been rented to the same older woman for something like 14 years. There was a plan to rent the house to his daughter who wanted to move back to their city.

My sister discovered, after her husband died, that the house was in HORRIBLE condition. Apparently her husband had not been periodically inspecting the house, and the tenant didn't report any problems because she feared her rent would be raised. Houses in the neighborhood sell for $400k - 450k, but the house needed such expensive extensive repairs (including a complete septic system as the house had a cesspool that was well past it's useful life) that she ended up having to sell it to a flipper for just $250k, netting her only $85k after paying off the remaining mortgage.   So one risk of keeping the rental is it might decline in value with bad tenants.

On the other hand, paying off your primary residence is a very safe investment that may benefit you years from now when your children go to college.

Yet another plan is to take the $540 k (you ARE figuring in capital gains taxes, right?) and investing it, using a 4% withdrawal rate to augment your income (this would yield $21,600 a year, not that much less than what you are getting from your rental and with much less risk and effort).

I do understand your wife's preference for the bird in the hand of a paid off house however. In a worst case scenario (job losses, deaths etc) it would cost fairly little to live if the house is paid off. Money invested in the stock market could crash.

nancyfrank232

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Re: Should I sell my Two Family to Payoff My Residential Mortgage?
« Reply #8 on: November 21, 2019, 02:06:35 PM »
If OP is a slumlord thatís doesnít maintain their property for 14 years then he should sell

If he isnít a slumlord and regularly maintains his rental, then he should keep it