Rental Property Investor · Panama City Beach, FL · Member since 2017 · 44 posts · 44 votes
I have 3 rental properties and trying to figure out which one I should pay off first. I want to accelerate the pay off and put any extra amount all towards one. Trying to figure out which makes the most sense. Can you guys help?
Here are the property specifics:
Property 1:
Property value $450K
Owe $185K @ 5.25%
Rental income gross revenue = $46K
Approximate net income (with zero mortgage) = $35K
Short term vacation rental
Property 2:
Property value $300K
Owe $171k @ 5.25%
Rental income gross revenue = $35K
Approximate net income (with zero mortgage) = $19K
Short term vacation rental
Property 3:
Property value $210K
Owe $100K @ 3.25%
Rental income gross revenue = $14K
Approximate net income (with zero mortgage) = $11K
LONG term rental (same renter for 5 years)
I know this is not what you are asking, but have you considered the benefits of not paying off your mortgage / the negative effects of paying off your mortgage?
We. The negative effect is that my wife doesn’t want me to purchase more until 1 is paid for. 😬
you're asking what the mathematically efficient answer is to a question that you don't want the mathematically correct answer to.
to find the best answer given your parameters, you would need to know which has the worst ROI. You'll need to know net income, depreciation schedules, future capex projections, vacancy, etc. An easier method would be to ask your wife which one to pay off first ;)
If it were me....None. Have your tenants pay them back for you. Have a life insurance policy to pay them off for your heirs just in case. Then use your equity and the money you were going to to use to pay them off for new investments (like a private money deal).
I just wrote an article for BP that's coming out next week about why you shouldn't use real estate as a savings account. Some of my points include:
- What if you paid off the properties and they fell in value?
- What if you paid off the properties and something in your personal situation changed, and you couldn't refinance and get the money out?
- It's controversial to admit, but there's no such thing as owning your properties outright. What happens if you can't pay the taxes? If you can't pay them, the government would end up owning your property.
I know these scenarios sound gloomy but they are possible. Just something to think about.
I should add, there are some scenarios where it makes sense to pay down or pay off properties. You just want to be sure you're doing it the right way at the right time. But no one says it has to be you paying them off.
@Marc Jackson I just happened to be listening to this podcast that talks about why you shouldn't pay off your mortgage. Here it is, and you can listen with your wife :-)
I’d lean towards paying off one of the vacation rentals first. Probably the one that is less popular. The economy is up right now and everyone is vacationing. When the economy slows so will the vacation rental market especially in VR saturated markets like PCB. Owning one of the vacation rentals out right is a smart idea. It will give you flexibility when the market slows. VR rental rates could drop drastically where as your long term rental income should stay relatively stable. If your going to do it I would do it with focused intensity. Pay it off in 2 years or less. Leverage is best all or nothing.