Author Topic: Pay off home or rentals first?  (Read 6130 times)

HAL9000

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Pay off home or rentals first?
« on: April 05, 2017, 09:51:58 AM »
I own 3 properties. Each has a mortgage. One is my primary residence, the other 2 are rentals.

I am aiming to pay all of them off, but am debating whether to pay off my primary residence first or the rentals. I like the idea of having my home payed off, but am leaning towards paying off the lowest mortgage first and then plying the net proceeds into paying off the next lowest one in line.

Mortgages:
Primary $250k
Rental 1 $150k
Rental 2 $100k

neo von retorch

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Re: Pay off home or rentals first?
« Reply #1 on: April 05, 2017, 09:58:32 AM »
I'll bite!

You have four options:
  • Debt snowball: pay off smallest first
  • Debt avalanche: pay off highest interest first
  • Cashflow business: pay off rental mortgages to make those more cashflow positive
  • Asset allocation: don't pay them off since you have lots of real estate and may want to increase holdings in other asset classes (which may earn more than the interest here)

Given those options, what do you think?

monarda

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Re: Pay off home or rentals first?
« Reply #2 on: April 05, 2017, 10:18:46 AM »
Before making decisions like these, I like to look at remaining interest due.

It takes into account interest rate and time.

How do these loans stand if you look at their terms (interest rate, and years remaining)? When would each be paid off on the normal payment schedule?

Without knowing more details, I'd tend to pay off (or refinance) the one with highest interest rate.

HAL9000

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Re: Pay off home or rentals first?
« Reply #3 on: April 05, 2017, 10:22:26 AM »
I am leaning towards debt snowball. Isn't that the general principle of paying off debt. Start with your smallest first and work your way up to the highest balance.

The interest rates are fairly close to each other for all the properties.

Primary $250k 15yr 3.3%
Rental 1 $150k 30yr 4.7%
Rental 2 $100k 30yr 4.1%

neo von retorch

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Re: Pay off home or rentals first?
« Reply #4 on: April 05, 2017, 10:46:03 AM »
Well, the interest rates are close enough that, depending on how quickly you pay them off, the order won't matter too much. But the "debt snowball" is the beginner's guide to debt payoff. Eliminating small debts eliminates monthly payments, and gives you a psychological boost to "keep going" because you hit a milestone. But it's not optimal; you pay more interest than if you always pay the highest interest debts first.

Personally, I'd probably pay off none of them; I'd invest more, because over a 30 year timeline, index investing will (be statistically likely to) pay more than 4.7% in returns. And your rental income is covering that mortgage payment. My second preference would be do to optimal debt payoff, and start with the 4.7% loan, then the 4.1% loan.

I am curious, though, how business expenses would affect taxes, given all that rental income. (I have one rental right now, and it took a relatively big loss last year, and a slightly loss this year, at least according to the tax man. Next year, it'll probably be profitable, damn it.)

HAL9000

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Re: Pay off home or rentals first?
« Reply #5 on: April 05, 2017, 11:24:46 AM »
I am curious, though, how business expenses would affect taxes, given all that rental income. (I have one rental right now, and it took a relatively big loss last year, and a slightly loss this year, at least according to the tax man. Next year, it'll probably be profitable, damn it.)

Your property depreciation should offset a significant amount of your rental income.

On my issue, having all the mortgages paid off translates to emotion. Peace of mind and income to achieve FIRE.

Mr Mark

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Re: Pay off home or rentals first?
« Reply #6 on: April 05, 2017, 11:36:37 AM »
It depends on your stash ... and look at it post tax. Your rental mortgage interest will always be tax deductible.  Your home mortgage maybe not.

If the rest of your stash is small I'd build a portfolio first with a mix of equities and maybe 15% bonds. Avoid REITs.  Also then you have some fallback for vacancies and capital items.

Bobberth

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Re: Pay off home or rentals first?
« Reply #7 on: April 05, 2017, 03:53:12 PM »
Something different to think about: obtaining a HELOC on your primary home would be much easier than getting one on the rental properties. Having access to a HELOC could be good in a worst case scenario, or even in a best case scenario if you choose to access your equity to purchase another rental or invest in a market downturn. Also, in a worst case scenario, I would rather let the banks take my rentals than my personal house.

You owe the same amount on your primary as your two rentals in total, $250k and $100k + $150k. Since it's the same amount of principal to pay off, what kind of no-payment benefit will you receive? If the PI on your primary is $2k/month and your combined PI on the rentals is $2.5k, for paying off the same $250k, you get a bigger benefit of not having to make a payment on the rentals every month. In your case, since your primary is a 15 year and the rentals are 30 years, your primary payment may be more than the two rentals combined. Remember to just look at PI as TI will be ongoing either way.

Also, don't neglect the value of 30-year, low fixed rate debt as an inflation hedge. It really does have a value.

clarkfan1979

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Re: Pay off home or rentals first?
« Reply #8 on: April 05, 2017, 05:23:49 PM »
I would pay off the primary house first for two reasons.

1) As previously mentioned, the interest on the rental houses will always be tax deductible. The interest on the primary house, probably not.

2) You can always use a HELOC to access equity from your primary. However, you typically can't get a HELOC for a rental.

Capt j-rod

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Re: Pay off home or rentals first?
« Reply #9 on: April 05, 2017, 06:22:14 PM »
I would look at when you plan to FIRE... I plan to FIRE in 10 years. Therefore I make a 10 year payment on a 30 year mortgage. I then keep the remaining money to build more wealth. The interest is deductible, so that isn't hurting you as badly as you think. With interest rates rising, we can assume inflation is to follow. Wages should increase and payments stay fixed. Rents will increase as housing becomes less affordable. I expect and plan to pay cash for my future rentals. The cheap and easy houses have dried up and now I will have more extensive project homes that I will be dealing with. Once you FIRE that rent becomes income and your annual income drops to nil. You will still have deductions to preserve your cash.
I made an assumption that these are fixed rate long term 15-30 year loan products... I they are flexible then you might consider a different path.

Drifterrider

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Re: Pay off home or rentals first?
« Reply #10 on: April 06, 2017, 06:14:24 AM »
How large is your emergency fund?

If all of your income stops, which house would you rather be able to keep?  Renters DO stop paying sometimes.  Depending on where you, it could take a long time to evict them.

Would you be willing to move into one of your rentals if you had to?

How large is your emergency fund?


When looking at mixed debt, ALWAYS pay against the higher interest rate first.  Your goal is to extinguish debt but also to extinguish debt for the lowest cost, not in the shortest time frame.

AND, are you likely to lose your deduction of your residence interest paid?

How large is your emergency fund?  By emergency fund I mean money you can access in an emergency.  Right now.  Not in months (that isn't an emergency).

Capt j-rod

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Re: Pay off home or rentals first?
« Reply #11 on: April 06, 2017, 08:23:52 AM »
I agree to some extent but not all debt is bad debt. Debt is like a superpower... When used for good it is awesome. When used for stupid it will destroy you. Without debt we would be losing out on opportunities like the OP's rentals. The interest is deductible. I know its not the same as getting all the money back, but it enables you to accomplish more asset gains early on. I am very careful when "using the banks money to make me money" the previous post is a very valid point. I only have a lien on one of my units... It is a tri-plex. The redundancy of having three units helps me to cover the payment even with a vacant unit. My single family properties are all bought with cash. I am considering another multi unit right now, but I haven't pulled the trigger. My reason being that they are a less fluid form of capital. Only another landlord is interested in the purchase. Single family homes are more desirable on the open market. I also find myself playing match maker when selecting tenants. Pick the wrong "one" and you lose two. Long story short or in this case short story long, The OP needs to give us a little more insight into his or hers long term goals, such as FIRE date and emergency fund amount. I also would consider the condition of major elements of the property such as age of roof, furnace, and overall condition. I keep a $10,000 rental emergency fund available to keep the properties in production.
I never take any income away from my properties. They are treated as my retirement. After I FIRE I will then keep the rent as income. Until then it is used to purchase more property.

SeattleCPA

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Re: Pay off home or rentals first?
« Reply #12 on: April 08, 2017, 04:00:01 PM »
I would pay off the primary house first for two reasons.

1) As previously mentioned, the interest on the rental houses will always be tax deductible. The interest on the primary house, probably not.

2) You can always use a HELOC to access equity from your primary. However, you typically can't get a HELOC for a rental.

This is probably nitpicking... but interest on a rental house isn't deductible if the passive loss limitation rules apply.

Further there are lots of situations where mortgage interest on your primary residence isn't deductible. The mortgage interest needs to qualified mortgage indebtedness (google that phrase), you are limited in the mortgage you can deduct interest on, and high income taxpayers lose some or all of their mortgage interest deduction because they lose itemized deductions.

SeattleCPA

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Re: Pay off home or rentals first?
« Reply #13 on: April 08, 2017, 04:02:20 PM »
Before making decisions like these, I like to look at remaining interest due.

It takes into account interest rate and time.

How do these loans stand if you look at their terms (interest rate, and years remaining)? When would each be paid off on the normal payment schedule?

Without knowing more details, I'd tend to pay off (or refinance) the one with highest interest rate.

I'd also say look at the highest interest rate loan... but look at the after-tax cost of the rate... i.e., think about whether you're getting a tax savings from the interest.

Dicey

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Re: Pay off home or rentals first?
« Reply #14 on: April 09, 2017, 10:22:18 AM »
On my issue, having all the mortgages paid off translates to emotion. Peace of mind and income to achieve FIRE.
I say the opposite. Get to FIRE first, then worry about peace of mind. It's less expensive to do it that way. I want(ed) FIRE more than I needed to coddle myself. It worked.