Author Topic: Case Study: Pay Off Mortgage or Buy A Rental Cash  (Read 2805 times)


  • 5 O'Clock Shadow
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Case Study: Pay Off Mortgage or Buy A Rental Cash
« on: September 22, 2014, 09:16:29 AM »
Hi There,

I am in search of some advice as to whether I should pay off a condo I am currently buying (close on friday) with an inheritance I'm about to receive or if I should keep my mortgage and use that new cash to buy a rental property. If I pay off the mortgage now, I will not qualify for another year or two as I am self-employed, work part-time, and take a lot of deductions. I have been managing vacation rentals in my area for over two years so I have a fair amount of experience.

I have not received the inheritance yet and it is in the early stages, so I am not certain of the total. I suspect it is around $160k.

Here is my current mortgage:
30yr. interest only at 5%, with 5 year ARM
Prepay: no penalty $5,000 min, in $1,000 increments after
**I accepted an interest only loan at a high rate because it is from a Private Lender friend and I did not expect to keep it more than a year.

Down Payment: $17k
Loan: $144k
Updates needed: nothing, but will prob spend up to $500
Furnishings: I already have everything
Original Plan: completely pay off the debt and continue my simple, mustachian part-time working life (10-15hrs/wk. rental and massage businesses) as usual with more security and very low home expense (only HOA/taxes/insurance).

- OR -

If I purchase a fixer upper, 1bd/1ba:
cost: $125k
upgrades plus labor: $25k
craigslist furnishings: $1500 - 2,000
vacation rental income potential: $1500-3500/month (depends on season)
regular furnished apt. rent potential: $1150+ depending on location  (just in case vacation market changes)
monthly expenses: $500 (HOA, insurance, tax, utilities, cleaning supplies, toilet paper)
monthly repairs fund: $50

I would love to be able to pay off the mortgage in 5 years before it adjusts, but after running some numbers it looks like it could be 7, with my current income.

Other income/expenses:
Massage income - $1000/mo, before taxes (can grow, I have had it at $3k/mo before)
Rental management income: $1500-3000 before taxes
Mortgage (interest only) - $600
Taxes/insurance: $100
HOA: $240
Utilities (wifi plus electric): $100-125
Student loans: $110/mo. $1,010 at 2.3% and $1,721 3.15%
General Expense: $1000/mo.
Roth IRA savings: $450/mo., $9k total. I am 28years old. I could pour this into the mortgage debt instead if necessary.
Car: bought in cash
*Secured $10k LOC for emergencies, 2.6%*
« Last Edit: September 22, 2014, 05:33:14 PM by AdventurousZ »

Bob W

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Re: Case Study: Pay Off Mortgage or Buy A Rental Cash
« Reply #1 on: September 22, 2014, 09:55:43 AM »
This is a little confusing?  What is the total amount of the inheritance?   

Since you're in the biz you should be able to run the numbers?   I would look for a total return on equity on any rental property of 13% + not including anticipated appreciation.   Otherwise you are probably better off dumping money into the market or REITS.

Regarding the interest only loan.  Had one myself.  It was private as well.   They are a pretty good way to go and since your at 5% that is a great deal.   Your risk is not being able to refi.   So you want to amass some cash to cover that risk I would think.  A big risk in real estate is the illiquidity.  You can't sell when shit goes wrong and you don't want to sell when prices are rising.

You may want to rethink your tax avoidance strategies --- You can show income and divert a large chunk of it to Simple IRAs or another vehicle.   You can divert more to a HSA.   You should be able to deduct a huge chunk of mileage (20,000?) as you are in the real estate business.   So with all those deductions you should be able to show earnings of close to 50K with very little taxation going on.

I think in the real estate business bankers want to see income.   As you grow your money stash you may want to purchase some other leveraged real estate in the future.

Also,  there are millions of real estate deals ---  You're in the biz,  so I would wait for a property selling for well below market  -- distressed sales?  bank owned?  off season?  etc. 

Make your money going into the deal.  IMHO


  • Magnum Stache
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Re: Case Study: Pay Off Mortgage or Buy A Rental Cash
« Reply #2 on: September 22, 2014, 12:46:06 PM »
Wait, what's the question again? This is the most disorganized thing I've seen in a while, I'm getting a headache trying to figure it out but:
-Is this a good deal/place that will cashflow well? IE, is it a good investment in the first place?
-If the answer is yes, the second question is do you need to pursue this investment and complicate your life in exchange for the returns, or (as I understand it?) go with your original plan and buy your own place with the cash?

Sorry if I'm not understanding you, but it's not clear to me: how much money we're talking about, how much money you have now, how much you want/need for FI, etc.



  • 5 O'Clock Shadow
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Re: Case Study: Pay Off Mortgage or Buy A Rental Cash
« Reply #3 on: September 22, 2014, 05:36:28 PM »
Thank you for your input, I went back through trying to clarify and simplify the original post. My mother's memorial was today so I'm a little scattered.

I do not need to buy the rental, and see that it could complicate my life upfront, and yet it seems like a good opportunity. I will continue to research and await more input.


  • Magnum Stache
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Re: Case Study: Pay Off Mortgage or Buy A Rental Cash
« Reply #4 on: September 22, 2014, 05:47:39 PM »
I'd buy my primary with the cash assuming you're ok with the lack of liquidity. The rental doesn't sound great, IMO.