Author Topic: Pay off rental mortgage early, or keep making payments?  (Read 1415 times)

Luv2Save

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Pay off rental mortgage early, or keep making payments?
« on: December 31, 2016, 08:04:36 AM »
Hi guys, brand new and happy to be here!  I'm admittedly a bit math-challenged, so I'm having a difficult time running numbers on which option will serve me better in 10 years, 15 years, and 20 years.   I tried making spreadsheets but I'm more confused now than when I started.

I'm 32 and own a single-family house which we originally lived in for a couple of years but now rent out.  We bought it 7 years ago for $340,000 with a 30-year mortgage at 4%.  Our current cash payoff is $240,000 if we were to pay off now.  We've already paid about $100,000 in mortgage payments, and if we keep making payments on it instead of paying it off now, we will pay another $360,000 total over the next 23 years.  Mortgage payments are $1200, and escrow for tax/insurance is another $1100, for a total of $2300/month.

Rental income from the house pays for ALL expenses - for round numbers, figure $2400/month - so overall the house doesn't cost us anything, but it also doesn't make us anything.    I'm basically trying to figure out if it's a better idea to:

a) pay off the mortgage now for $240,000, and take the extra $1300/month for income or invest (MMM recommends vanguard, etc.), or

b) keep paying the mortgage for the next 23 years, get no income from the property, but invest that $240,000 lump sum elsewhere (probably another rental property at 8-10% in this area)

What's the way to calculate which is the better option over the course of the next 5, 10, 15, 20 years?
« Last Edit: December 31, 2016, 08:15:57 AM by Luv2Save »

Another Reader

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Re: Pay off rental mortgage early, or keep making payments?
« Reply #1 on: December 31, 2016, 08:22:41 PM »
You have not accounted for vacancy and collection loss, repairs and maintenance, or your time in managing the property.  The $1,300 you think you will net will instead go into the costs you have not included.

What is the house worth today?  In many areas, you would have a large profit on a 2009-2010 purchase, having bought at the bottom of the market.  In your shoes, I would consider selling the property, especially if there were a decent profit to be made.

SwordGuy

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Re: Pay off rental mortgage early, or keep making payments?
« Reply #2 on: December 31, 2016, 11:53:49 PM »
You have not accounted for vacancy and collection loss, repairs and maintenance, or your time in managing the property.  The $1,300 you think you will net will instead go into the costs you have not included.

What is the house worth today?  In many areas, you would have a large profit on a 2009-2010 purchase, having bought at the bottom of the market.  In your shoes, I would consider selling the property, especially if there were a decent profit to be made.

Sell, for all the reasons mentioned above.   You are losing money now, you just didn't realize it because the repair bill hasn't arrived yet, or the mortgage payment without a corresponding rent check hasn't arrived yet.

A primary home is only a good rental property by happy accident (unless you bought one that had good rental numbers on purpose.)

Metric Mouse

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Re: Pay off rental mortgage early, or keep making payments?
« Reply #3 on: January 01, 2017, 05:11:27 AM »
You have not accounted for vacancy and collection loss, repairs and maintenance, or your time in managing the property.  The $1,300 you think you will net will instead go into the costs you have not included.

What is the house worth today?  In many areas, you would have a large profit on a 2009-2010 purchase, having bought at the bottom of the market.  In your shoes, I would consider selling the property, especially if there were a decent profit to be made.

Sell, for all the reasons mentioned above.   You are losing money now, you just didn't realize it because the repair bill hasn't arrived yet, or the mortgage payment without a corresponding rent check hasn't arrived yet.

A primary home is only a good rental property by happy accident (unless you bought one that had good rental numbers on purpose.)

Yes. I think the numbers most likely indicate selling as the best course of action.

NoNonsenseLandlord

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Re: Pay off rental mortgage early, or keep making payments?
« Reply #4 on: January 02, 2017, 10:47:18 AM »
Selling would be the best course.  If you are determined to keep it, only pay the mortgage payment.  Any extra you pay will only draw 4% return.

The other option is to pay the mortgage off, then get a HELOC and immediately cash it out.  Use that money for a rental property.  It will be an ARM, but will be more flexible loan. 

Once you get the HELOC, you can pay the HELOC down, take that same money back out a week later, and you will have saved money.