What’s Better? Pay down rental properties or personal home?

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What’s Better? Pay down rental properties or personal home?

Todd Mason
Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes

I’d like to get some advice as to what would be a better strategy....

I am in the process of building a new home to be my personal residence.

I will turn the current home I'm living into a STR

I also have one other LTR which cash flows nicely at current numbers and the STR will cash flow at figured numbers as well.

My wife and my goal is to simply reduce debt between the three properties as we don’t plan on buying anymore. We do have the ability to start putting big chunks of money down toward principle.

My initial thought was to “re-cast” the loans on the rental properties so they would be cash flowing more as the payment would be reduced. Then use that money to pay on my personal home mortgage.

Is there any reason to do the opposite? Pay down personal home loan and keep the rentals where they are?

Any advice would be greatly appreciated!!

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
5y

Paydown personal residence using the cash flow from the two rentals.  Let the tenants paydown the rentals for you (positive CF).  This way, the tenants would be buying all three properties for you.

When you use your own money to paydown debt on rentals, it costs you money.  When you you let the tenants rent payments do it for you, it's income...and free money.

Also, don;t think about helping the tenants buy adding to making added payments on the rentals thinking it will increase your cash flow.  It won't.  All you would be doing is paying for that imaginary added cash flow upfront, and getting it back in small pieces.

Don't even think about getting a 15 year on the rentals thinking it will save you money...it doesn't.  All it does is substitute your money for the tenants money.  Why?  The tenant is doing a great job of buying the rentals for you.  Let them buy your own home too.  Don't help them.  They have one job, and one job only, and they don't complain about it.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    Paydown personal residence using the cash flow from the two rentals.  Let the tenants paydown the rentals for you (positive CF).  This way, the tenants would be buying all three properties for you.

    When you use your own money to paydown debt on rentals, it costs you money.  When you you let the tenants rent payments do it for you, it's income...and free money.

    Also, don;t think about helping the tenants buy adding to making added payments on the rentals thinking it will increase your cash flow.  It won't.  All you would be doing is paying for that imaginary added cash flow upfront, and getting it back in small pieces.

    Don't even think about getting a 15 year on the rentals thinking it will save you money...it doesn't.  All it does is substitute your money for the tenants money.  Why?  The tenant is doing a great job of buying the rentals for you.  Let them buy your own home too.  Don't help them.  They have one job, and one job only, and they don't complain about it.

    9Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Joe Villeneuve thank you so much Joe that helps a lot! I appreciate you taking the time to respond

    1Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    5y

    @Todd Mason... what Joe said.  Also there are clear tax benefits to having debt on your rentals (interest expense).  For many homeowners, the standard deduction on personal taxes is more than mortgage interest, so you may not be getting an tax benefits whether you have a mortgage on your primary or not.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    if you have substantial equity in your primary resi that you want to turn into a STR.. sell it and take the tax free gain and then buy a true investment STR.. the tax free gain is the best tax treatment there is.
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    4Reply
  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    5y

    @Todd Mason

    If you are committed to paying down debt I would advise 1 of 2 strategies:

    1. Pay off the higher interest loan 1st.

    2. Pay off the smaller balance first (snowball).

    1Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Evan Polaski thank you!

    0Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Jay Hinrichs thanks Jay! I have jumped the gun a little bit. By the time I move I still will only have lived in my current residence for 1 year. Although I do have substantial equity I'd have to 1031. Right now Boise ID is a hot STR rental market with all the folks coming to check it out for relocation though

    1Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Max T. That is a great strategy for paying down the debt. I like those options. All about how much leverage we’re comfortable with going forward. Thanks Max!

    0Reply
  • Chris Adler
    Rental Property Investor · Boise, ID · Member since 2020 · 7 posts · 3 votes
    5y

    @Evan Polaski I’ve heard the mortgage interest tax break knocked around a fair bit recently, but isn’t that an old rule? I thought the tax code changed in 2018 so you can only take it on your primary res. Thanks!

    0Reply
  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    5y

    @Chris Adler Mortgage interest on a rental property is a deduction against rental income for that property.  @Todd Mason I agree with @Joe Villeneuve in that your tenants are paying your rental mortgage for you and any excess cash flow can be used to pay down your personal home mortgage.  Your level of debt is a personal choice.  If you want to reduce overall debt, then I'd recommend paying down your residence before your rentals, as the cash flow from the rentals can take care of those mortgages.  You want to be a position where your personal cash outflow is lower in the future and paying off your personal mortgage will do that.  

    2Reply
  • Chris Adler
    Rental Property Investor · Boise, ID · Member since 2020 · 7 posts · 3 votes
    5y

    Ahh appreciate the clarification! @Bob Norton

    2Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    Your rental property interest is a tax deductible as a business expense. Your personal residence may also have certain protections from bankruptcy or litigation, plus you live there. For all these reasons I would pay off personal before rental properties. 

    2Reply
  • Alexander Szikla
    Real Estate Agent · New York City · Member since 2020 · 819 posts · 641 votes
    5y

    All depends...which has the higher rate of interest? Can't give you advice without the complete picture. 

    0Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Bob Norton thank you so much! That is such a clear and understandable way to put it. Great advice I really appreciate it 🙏

    1Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Joe Splitrock thank you Joe! I am really start to get a solid picture of what to do with all the help

    0Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Alexander Szikla the two rentals are at 3.25%. I haven’t been able to lock in my new house yet. We were hoping to get 2.85% but now as rates climb and we’re still not able to lock probably gonna be about 3% I’m figuring

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Max T.:

    @Todd Mason

    If you are committed to paying down debt I would advise 1 of 2 strategies:

    1. Pay off the higher interest loan 1st.

    2. Pay off the smaller balance first (snowball).

     Always pay off the smaller debt first.  EVery time you pay off a debt, you add the payments you were making on that debt towards other debt...which in turn will help pay off the next smallest debt, which,...as you said...snowballs.  This is the fastest way by far to get rid of personal debt.

    0Reply
  • Julie Sisnroy
    Realtor · Papillion, NE · Member since 2013 · 134 posts · 59 votes
    5y

    I would pay off your primary just from a debt/borrowing perspective. Of course, most lenders will look at your DTI, but having debt on a rental is "less risky." If you get into a hardship situation, you (and most people) would most likely sell off the investment properties before you sell or go into foreclosure with your primary. So if all your debt is in your rentals, you may be considered less risky as those are income properties, not where you sleep and eat.

    2Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Julie Sisnroy that’s a good thought thank you Julie!

    0Reply
  • Peter Pham
    New to Real Estate · Arvada, CO · Member since 2021 · 40 posts · 35 votes
    5y

    Personally, I would employ the strategies that Max T. suggested in paying either the highest interest loan first or the smallest payment, though I prefer the former to cut into the principal faster and reduce the overall interest you'll pay in the long run for all three properties by making extra payments.

    As a side note, none of us are privileged of knowing the specifics about your situation. I'd possibly advise talking to a CPA or a relevant professional to crunch the numbers and advise you better than all of us on the forum who are sort of giving our personal recommendation. There's a lot of money on the line in the long run so I think this would be best.

    1Reply
  • Allen Wu
    Rental Property Investor · Member since 2021 · 335 posts · 193 votes
    5y

    @Todd Mason

    Todd this is a great question. I own 5 rent units, but currently renting since it’s cheaper. My wife and I go back and forth all the time. We are on the verge of buying a new home, but always debate whether to pay off our rentals then snowball money to pay off rest of rentals.

    For me, I want to get to a number of real estate investment units where I’m “comfortable” or “done”. For me, it’s 5 investment units, so I’ll probably follow the other users approach, pay smallest mortgage and then snowball rest of rentals to get them paid off. This then, can be used to have tenants pay for your mortgage and you take the personal write offs.

    In short, I rather have my units paid off in 15 years as my “Sleep Insurance”. Then, start investing some more rental units, so if I screw up or market tanks, i always have my paid off 5 units paid in cash to take care of family etc.

    Of course, I recommend checking with actual experts.

    1Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Peter Pham thank you Peter!

    0Reply
  • Todd Mason
    OP
    Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
    5y

    @Allen Wu thanks Allen! Yeah that’s kind of the mind set we have. If down turn in market etc we have kind of a safety net where we’re not totally stressed about losing them. Definitely appreciate the advice!

    1Reply
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