Author Topic: Should we pay off a rental or leverage it to buy another?  (Read 1225 times)

Stachetastic

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Should we pay off a rental or leverage it to buy another?
« on: February 28, 2018, 11:21:30 AM »
We currently own our primary residence and 2 single family rentals. We are kind of at a crossroads and are mulling over several options with regards to rental #1, whose payoff is currently 23k:

Option A: Pay the measly mortgage off and own this baby free and clear. Rate is 4.5% ARM
Pro: no mortgage, increasing cash flow. Con: Mortgage payment is only $178/mo anyway. (we pay 200)

Option B: Pull some equity (property likely worth 65k or so) and buy another SFR
Pro: expand our empire. Con: The market is up in our LCOL area, so now might not be a good time to buy, but there are a few deals to be had here and there. Could easily buy another property for 60k or a little less. (some as low as 30k but would need a bit of work)

We have often talked about buying another rental at some point. But seeing the teeny tiny balance on that mortgage statement every month has me tempted to just pay the darn thing off and bask in owning it free and clear. I KNOW THE MATH DOES NOT SUPPORT THIS at 4.5%, but the rate is adjustable and the balance is likely too small at this point to refi.
« Last Edit: February 28, 2018, 03:02:30 PM by Stachetastic »

clumlee

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #1 on: February 28, 2018, 01:21:57 PM »
I would say it depends (unfortunately). One consideration is how much is your current cashflow without the payoff and how much would it be after the payoff. If you're netting $1,000 before the payoff then I probably wouldn't do it. But if your net is like, $50, then yeah I'd say paying it off would be good.

I would also ask if you have any cash saved so far for a second place? If you do, then maybe you wouldn't need to leverage as much.

Just my two cents.


Stachetastic

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #2 on: February 28, 2018, 03:05:15 PM »
Good questions. It currently grosses $375/mo, and I need to raise the rent. Current tenants have lived there 2.5 years without an increase.

We have about 20k in savings, which we like to keep flush in case of repairs on any of the 3 properties.

Kay-Ell

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #3 on: March 04, 2018, 11:26:32 AM »
There's really no benefit to paying off the tiny mortgage, beyond that of the psychological joy of owning something outright.  With a mortgage payment of under $200/month, I wouldn't personally be finding a lot of joy in payin it off early.  So in my opinion, the real question I'd be asking; "Is now the right time to buy another rental property?"  If it is, great.  Figure out your budget and what kind of cash flow you're targeting and search for a property that can produce that.  If not, I'd probably still figure out your budget and what kind of cash flow you're targeting and just keep looking around until the time/market/opportunity is right. 

That said - if paying off the mortgage adds more benefit to your life (psychologically, or otherwise) than adding another property, then go for it and don't feel bad about your choice! 

SwordGuy

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #4 on: March 04, 2018, 12:42:32 PM »
Are you actually making money on this property?  If you subtract out PITI, plus vacancy and sinking fund set-asides, plus property management fees, what's your net profit?

(Even if you do the property management yourself, that's active income, not passive income, so you should be paid separately for that.  I.e., not include it in passive rental profits.)

Stachetastic

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #5 on: March 04, 2018, 03:15:27 PM »
Are you actually making money on this property?  If you subtract out PITI, plus vacancy and sinking fund set-asides, plus property management fees, what's your net profit?

(Even if you do the property management yourself, that's active income, not passive income, so you should be paid separately for that.  I.e., not include it in passive rental profits.)

PITI is 300, we do not count property management we provide ourselves. Hands on property management has averaged less than one hour per month for the past 3 years. Obviously that can change at any moment.

SwordGuy

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #6 on: March 04, 2018, 04:21:04 PM »
So, how much are you setting aside from your gross rent for repairs and upgrades? 
Stuff is wearing out every single day, you just don't have the bill yet...

How about set asides for when the property is vacant?  You'll have to cough up the mortgage payment, pay utilities, etc.

All that has to come out of the $85 left after PITI.   If you add it up you're probably not making any money.

waltworks

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #7 on: March 04, 2018, 06:12:22 PM »
Jeepers H Crackers! You are managing a rental and paying yourself only ~$85 a month *before* actual maintenance/SHTF/vacancy expenses? Am I understanding that right?

Even if the rental was paid off, ~$200 a month is barely worth it if you have to do the management yourself. And given that you're not setting anything aside for repairs/CapEx/etc, you are probably working for free (or quite possibly losing money for your efforts).

You might as well just go get a side job flipping burgers or walk around looking for spare change and cans to recycle. Sell the place immediately and never look back!

-W

Stachetastic

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #8 on: March 04, 2018, 06:40:29 PM »
 I donít think I was clear with the numbers. PITI is 300 and the property currently rents for 675. Market rate is closer to 750, so I obviously need to be increasing rent.

When I posted that it grosses 375, I meant 675 rent minus PITI equals 375.

waltworks

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #9 on: March 04, 2018, 06:56:29 PM »
That's still bad enough that I'd probably sell it. Low end rentals... ugh. Basic maintenance on a $50k 1000 sq foot house isn't that much different than on a $200k 1000 sq foot house. Overhead just kills you.

But that wasn't your question.

I would probably leave the mortgage alone. 4.5% is cheap debt, and the balance is so small that if the rate adjusts up a bunch you can just pay it off then.

-W

Lmoot

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #10 on: March 05, 2018, 05:40:37 AM »
In defense of low-end rentals, it's easier to get into if you don't earn a lot. And while the maintenance may *potentially* be the same between a low/high property of the same square footage...tenant expectation may most definitely not. I have a low-end rental that I've been renting out for 4 years, and other than standard maintenance, all of my tenants so far manage the property themselves (letting me know about major issues only), in exchange for a decent property at a decent price and good location.

I also like the sweat-equity opportunity of most low-end rentals. Rents trend to steadily increasing (and rarely decreasing, as a market). There's a huge benefit to having a small amount invested in a property, while riding the inflation/ market train. Not to mention lower insurance and tax costs.



Stachetastic

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #11 on: March 05, 2018, 06:19:28 AM »
How does everyone define "low end?"

We are in a very LCOL area, where it is always cheaper to buy than to rent. 700-800 is the higher end of rents around here, with larger executive rentals running around 1k-1200.

This particular property is a 3/2 with a detached garage in a B neighborhood. (We purchased it in 2002 for 38k, so I don't think the numbers are too bad.) We have another property 2 blocks away that is a 4/2 that rents for 825. Both properties attract professionals with young families.

Lmoot

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Re: Should we pay off a rental or leverage it to buy another?
« Reply #12 on: March 05, 2018, 08:11:40 AM »
I never thought about low end or high end of an individual property. I have certain criteria which is mainly low cost, rentability to quality tenants, no major crime statistics. I have a 1bed/1 bath I purchased for $79k 9 years ago (Zillow currently values at $150k).  Itís a small property, cheap carrying costs, located in the city. The median income in the neighborhood is not high but there are a lot of local amenities within walking distance. I have never had the house empty unless I needed it empty for renovations (and have several inquiries on it even when itís being rented out already. And Iíve been able to rent it out purely by word-of-mouth from employees at a nearby organization.

I have found my rental ďnicheĒ, and I hope to buy my second rental property in the same area. The value of the individual property itself is of less concern to me then all of the other factors, which is cost to maintain/carrying costs, ability to keep it rented, the standard of renters, and marketability.

Sometimes not seeking the most return on rent can save you or even earn you more money, from what Iíve read and possibly experienced. I probably could charge more, but of the three different tenants Iíve had living on the property nobody has stayed any less than two years. And theyíve all been quality tenants, attracted by the lower price.