100% debt free or Hold Assets?

Question

My wife and I are in a interesting position and are exploring 2 different options I would appreciate any help. We Currently have 2 income properties, one long term and the other is a Airbnb rental that has been a homerun for us, we also have a mortgage for our current residence.

Option 1

Sell our long term rental, and use the profit to pay off the Airbnb property. Which means the Airbnb will profit us about 20k - 30k. We would only have our mortgage payment remaining.

Option 2

Sell both the long term rental and the Airbnb and use the profits to pay of our current residence. Which would make us 100% debt free and very liquid. Within the next year or two we would be in position to purchase another Airbnb cash.

Any seasoned investors willing to weigh in on this, we would be very grateful. Thanks in advance.

Travis Timmons · Answer

My preference is to never sell a property, or any other long term investment for that matter, unless I have to. We're all biased by our own experience, but we sold a house in Nashville in 2012 only to watch it essentially triple in value over the last 10 years. Pain is the best educator. I think that you are more likely to regret selling than not selling. I would also second what @Joe Splitrock said. Money is more than just math and spreadsheets - it's dopamine, serotonin, and cortisol as well. Having a paid off house has some serious value even if it would make more mathematical sense to hold on to your other properties.

You have options, and options are a wonderful thing.

Keith Miller · Answer

I'm personally a buy and hold guy, so my advice would be to hang onto both, and just enjoy the cashflow, debt paydown, and appreciation. Paying off mortgages is nice, don't get me wrong, but by paying off a mortgage you're essentially making an investment with a 4% ROI, which is pretty poor. If you explained you goals I could give you better advice, but the greatest benefits of real estate come from a long-term buy and hold strategy, that's what many investors end up doing in the long run.

If you want you house paid off, you could always direct all of your real estate profit towards that mortgage and slowly pay it off.

John Clark · Answer

What do you think prices will do in your area over the next two years?

What are your family plans over the next 5 or so years (meaning -- might you lose wife's income due to pregnancy, etc.)

If the profit from the AirBnB is $20k - $30k a year (after paying its mortgage off), is that enough to pay your mortgage? If not, how much of a dent does it put in your mortgage?

Joe Splitrock · Answer

Option 1: Why would you pay off a rental property instead of paying of your primary residence first? Interest on a rental property is deductible as a business expense and it is reducing your tax liability.

Option 2: Selling both of your investment properties cuts off your investment income. It is a one time windfall. You are better off to hold the properties and profit from cash flow. You can still sell the properties in the future. Repurchasing later means buying at a higher price. You also have sunk costs when you sell, like the original loan costs  and selling costs. The longer you hold the property, the longer time line these expenses are spread out. For example, if you had $7000 in closing costs, held a property for 2 years and sold with $24,000 in sales expenses, that works out to $15,500 per year in expenses. If you held that same property for 20 years, those expenses are $1550 per year. Holding investments for shorter time periods burdens them with higher costs during that time. No problem if you are getting out of rentals, but if you just plan to buy again in the near future, it makes no sense to sell.

Paying off your mortgage to be debt free is an emotional decision, not a mathematical or financial decision in most cases. I don't have all your numbers, but based on what you provided, it seems by far the best mathematical and financial decision is not selling the properties. I can't answer whether emotional or financial is more important to you. It is a personal choice.

Celine Crestin · Answer

I agree with the above posters - hold both and enjoy the cash flow (which will increase over time as rents go up and debt goes down). If you insist on one of the options above I would go with option 1 and continue to enjoy the air bnb cash flow and allow the equity to grow more.

John Barrett · Answer

@Tyrone Lucas I understand the desire to payoff your mortgages and be completely debt free.  Based on your post it seems like you are looking to remove a large source of risk / uncertainty in your life.  My opinion is to keep the debt (fixed rater 30 year term) and have the cash flow pay down the debt overtime.

My view is that inflation will erode the value of the fixed debt and you will capture more of the gains and avoid some of the harmful impacts of inflation.  One way to feel more secure about this option would be to hold a sizeable (whatever amount allows you to sleep at night) of cash reserves.  While the return on the cash will be very low, it will be the buffer / insurance policy to mitigate any uncertainty you may experience in the future.  Having cash on hand to float you during a rough patch is the difference between a problem and a crisis.

John

Tyrone Lucas · Answer

Thanks for your response

1. So we are in Montana and everyone is moving here from Washington, California, Oregon, and Texas. Which has caused the housing market to skyrocket, due to bidding wars. So barring some type of shake up in the economy, I suspect that our housing market will continue to increase.

2. My wife is a real estate agent and does pretty well. My concern is that there will be either a market correction or an unrelated outside event that impacts our economy as a whole.

3. We owe about 400k on our current residence, our Airbnb would definitely help us in getting our house paid off in the next 5-10 years.

100% debt free or Hold Assets?

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