Author Topic: Paying off Rental Property  (Read 3056 times)

MarBarZARVN

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Paying off Rental Property
« on: July 12, 2017, 12:26:05 AM »
Hi New to the forum.

I've searched the forum for similar posts with not much luck.  My question is:

Does it make sense to payoff loans on rental property vs investing in other assets.  My rental properties are in South Africa which has a high prime rate.  My interest rates are over 11%.  Currently cash flow is negative as rental income isn't covering all expenses.  As rental income increase on average 10% annually, it will be a few years before I am cash flow positive.

I'm currently in a position where I am able to save +70% of my income and could pay off a property in a few months.  Do I payoff loans quicker to gain positive cash flow and savings on loan interest or invest in other assets.

I did a quick IRR analysis just looking at the Cashflow from my rental properties and best scenario was only about 2.3% and generally the IRR went down if I made prepayments on the loan.  So with an IRR of 2.3% it looks like my investments were a bad decision, assuming I never sell (which was my intention).  I'm a bit confused if my analysis is correct and if I'm looking at it correctly. 

Any insight would be appreciated.
« Last Edit: July 12, 2017, 12:34:56 AM by MarBarZARVN »

Lan Mandragoran

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Re: Paying off Rental Property
« Reply #1 on: July 12, 2017, 07:33:37 AM »
I mean if I had a 11% interest rate I'd be freaking out to pay it down. If the terms of the loan are that bad, and your cashflowing negative...

The question is if your just going to rush to pay down the loan why even bother. Indexing is wayyyy easier to do, and generally as good or even better than an unleveraged rental.

Broad generalization incoming but with rental's most people are using the leverage of financing + the cashflow portion of rentals to achieve earlier FI than otherwise possible, to me it sounds like yours is doing the opposite.
« Last Edit: July 12, 2017, 07:36:36 AM by Lan Mandragoran »

srad

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Re: Paying off Rental Property
« Reply #2 on: July 12, 2017, 08:54:18 AM »
Well usually this is an easy question for me to answer.  I never tell people to pay off their mortgages for rentals, but we have 4% interest rates, not 11%.  11%, wow...  Banking on rent appreciation is dangerous what if you don't get it? How long do you want to feed this property?   Your deal sounds a lot like what got people into trouble here in the states a few years back,  feeding the property banking on appreciation, then the economy tanks, they lose their job, get sick or divorced, bye bye property and whatever money they had invested in it. 

If you are set on keeping the property, yes, pay it off.  Maybe rates will drop in the future, if they do, take a cashout refi to get some of your money back.

SeattleCPA

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Re: Paying off Rental Property
« Reply #3 on: July 12, 2017, 09:41:48 AM »
If I could get 11%, basically guaranteed, on some investment, I wouldn't even finishing typing this sent...

YttriumNitrate

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Re: Paying off Rental Property
« Reply #4 on: July 12, 2017, 11:53:06 AM »
Well usually this is an easy question for me to answer.  I never tell people to pay off their mortgages for rentals, but we have 4% interest rates, not 11%.  11%, wow...  Banking on rent appreciation is dangerous what if you don't get it?
One thing to remember is that South Africa has much higher inflation that the US, so the effective rates aren't that different. For example a 4% mortgage in the US might be viewed as 2% over inflation, while an 11% rate in South Africa might be viewed as 3% over the rate of inflation.

srad

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Re: Paying off Rental Property
« Reply #5 on: July 12, 2017, 12:04:31 PM »
With high inflation, then you should keep a mortgage.  In essence, each month you make a payment its costing you less and less money... 

Curious, what are your exact numbers for this deal?  It would help us get a better understanding of your situation.

MarBarZARVN

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Re: Paying off Rental Property
« Reply #6 on: July 13, 2017, 12:02:40 AM »
I have 3 properties

Property 1
100% Loan - $44.6k -20 years @ 10.55%
Repayment - $453p/m
Rental Income - $461p/m
Expenses (HOA,Taxes,etc) - $110p/m
Equity - $10k

Property 2
100% Loan - $34.6k -20 years @ 11.5%
Repayment - $372p/m
Rental Income - $353p/m
Expenses (HOA,Taxes,etc) - $90p/m
Equity - $11k

Property 3
90% Loan - $36.5k -20 years @ 10.15%
Repayment - $372p/m
Rental Income - $324p/m
Expenses (HOA,Taxes,etc) - $90p/m
Equity - $9k

So I'm sitting with a negative cash flow of about $300 a month.  Which will only be positive cash flow in about 3 to 4 years.  As a 10% annual rental income increase is generally excepted in the local rental market. 

This is quite the normal approach in south Africa as typically you have to hold for at least 5 years before seeing positive cash flow and buying property which is cash flow positive day 1 is vary scares as this is only really possible on repossessed auction properties but then you need deep pockets to get   Probably should have done better research before going into these deals. 

I've converted from Rands to USD so values are approximate.  The loans are structured as Flexible loans giving me access to any cash prepaid on the loan.   

smallstache

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Re: Paying off Rental Property
« Reply #7 on: July 13, 2017, 04:58:51 AM »
Wow. I say re following without having seen anything other than OP's post on numbers:  I might be interested in bringing low-cost US dollars into South Africa to invest in rental properties there.

Of course, I do not know the housing or job market there. Nor do I know the exchange rate history or he feasibility of a foreigner bringing more bey into the country. Finally, I do not know the legal protections for landlords.

Sounds like a lot of work so I guess I won't anytime soon.

srad

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Re: Paying off Rental Property
« Reply #8 on: July 13, 2017, 09:15:18 AM »
Interesting numbers.  You owe about 115k, if you paid them off you go from losing 3600 a year to netting around 10k  a year (i roughly added some capex and vacancy to your numbers).  Not to mention the return you make on that 115k is 9%. I like making 9%.

I don't say this often, but paying these off early makes sense.  Granted, I don't invest in lower value properties, i'd be curious to hear from the investors who buy sub 50k homes and how they'd finance this

leesplbg

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Re: Paying off Rental Property
« Reply #9 on: July 13, 2017, 04:23:03 PM »
Would it save to sell the property after a couple years of renting to pay off the loans? 11% interest rate is huge and being in negative cashflow for years would worry me. Would it be a better option to sell?

MarBarZARVN

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Re: Paying off Rental Property
« Reply #10 on: July 14, 2017, 12:05:01 AM »
My investment strategy is to buy and hold with rental income to supplement income for retirement.  So this was my reason for going into these deals.  With very little down payment required on the loans (as I didn't have the cash then) taking negative cash flow for a few years is maybe the trade-off.  Not sure if this is a way to look at it.

I've recently married and taken an expat job in Vietnam, with much lower cost of living and two income we're able to put a lot of cash away.  I'm trying to determine what is the best course of action from here. Dump into an index fund or pay off a loan to get Net positive cash flow.

srad

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Re: Paying off Rental Property
« Reply #11 on: July 14, 2017, 11:37:51 AM »
One of the reasons i usually say don't pay off your mortgage is because the interest rates are low here, like 4%.  And even as corrupt as Wall Street is, getting a return over 4% is doable.  So it makes sense to keep a mortgage and invest your money elsewhere.  Your rate is 11%, that's a hard return to hit anywhere...  So i'd pay your mortgages off, start making positive cashflow and invest that into your index funds (or more rentals).

NoNonsenseLandlord

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Re: Paying off Rental Property
« Reply #12 on: July 16, 2017, 12:03:52 AM »
Most of my rentals are paid off.  Paying off a rental is generally more cash flow than buying another one.

Here is a post about why I paid mine off.

http://www.nononsenselandlord.com/2016/08/pay-off-rental-mortgage-debt/

srad

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Re: Paying off Rental Property
« Reply #13 on: July 17, 2017, 10:01:51 AM »
NononsenseLL...  i agree, more cash flow when the loan is paid off, problem is, its hard to get 10+ rentals without taking on debt.  Which is where leverage comes in.  I have 30 year mortgages on all but one of my properties.  The one on a 15 year mortgage has 9 years left, when it does payoff I should be in a good position to start paying down my other properties.  I'll take 10 paid off properties to 40 leveraged properties any day during retirement.  There is a limit of the amount of work i plan to do in my retirement.  Managing a massive rental portfolio is not one of them. 

I checked out your blog too,  you have some nice material in there for LL's to use.  I downloaded all of your forms and will be adding a few thing from them to my current forms.. 
The new criminal record section in the lease
What the tenant received at move in (keys, shower curtain, etc)
The move out form, This one's my favorite. 

Thanks!